Southwest, Continental post fourth-quarter profits, boosting hopes for industry recovery

Southwest, Continental profits raise recovery hope

DALLAS — Southwest Airlines made money in the fourth quarter, which was expected, and so did Continental, which was not.

Both reports on Thursday boosted hopes that the airline industry is climbing back after a steep nosedive.

Southwest said booking trends looked good through March, and Continental officials said an important group of customers — business travelers — are starting to return.

Those developments would be good news for airlines but could lead to higher fares for passengers.

American Airlines launched the first widespread fare hike of the new year this week, up to $16 per roundtrip on thousands of flights in the U.S. The airlines pushed through four major increases last year and 15 in 2008.

“The days of the annual fare increases are long gone,” said Gary C. Kelly, the chairman and CEO of Southwest Airlines, which built its business around low fares.

Now, Southwest is raising fares “as aggressively as we dare” to cover higher costs for fuel and other items, Kelly said. “We’ll continue to look for fare increase opportunities because we’re not hitting our profit targets yet.”

Rick Seaney, CEO of travel company FareCompany.com, said Southwest fare increases are important because they let the bigger, so-called legacy airlines raise prices on routes where they compete against Southwest.

“When Southwest hikes domestic prices, legacy airlines break out in a sly grin,” he said.

On Thursday, it was Southwest that was grinning. Flying against the headwinds of recession and volatile fuel prices, Southwest earned $116 million in the fourth quarter, enough to salvage the company’s string of consecutive profitable years, which now stands at 37.

Traffic on Southwest has risen for several months compared to late 2008, when the recession was deepening and businesses cut travel budgets.

Continental Airlines Inc. also saw heavier traffic in the fourth quarter, but analysts had expected the company to post a fourth-quarter loss. That’s because Continental — which relies more than Southwest on business travelers — was still absorbing declines in passenger revenue per available seat mile. In other words, there were more passengers, but they were paying lower fares on average.

“We are seeing some signs that business travel is beginning to head in the right direction,” said Continental Chairman and CEO Jeff Smisek, although he gave no figures.

A rebound in business travel can’t come soon enough for the airlines, which have been battered by a travel slump caused by the recession. Thursday’s reports, plus comments by American Airlines officials on Wednesday that international bookings and tickets bought by high-paying customers were picking up, raised hopes for a travel-industry rebound.

Smisek cautioned, however, that airlines “are a long way from being out of the woods.” He predicted “a long and slow recovery.”

Airlines are worried about fuel costs. They benefited when pump prices fell after hitting records in 2008, but spot prices for jet fuel have roughly doubled since last March. Southwest, Continental and other carriers took out fuel-hedging contracts to insulate themselves from price spikes.

JPMorgan analyst Jamie Baker called Thursday’s Continental and Southwest reports encouraging. Not only did they beat analysts’ expectations, he noted, but they promised to avoid adding a lot of new flights that could undermine price increases.

Continental, based in Houston, said it earned $85 million in the fourth quarter. Without some special items, including an income tax gain, the gain would have been $4 million.

Continental’s spending on fuel plummeted by nearly one-third — a savings of $388 million compared with a year ago.

Shares of Continental fell 31 cents to $20.31 in afternoon trading after earlier hitting a new 52-week high of $21.58.

Southwest Airlines Co. earned $116 million in the quarter. Without gains from fuel-hedging contracts, the Dallas company would have made $74 million.

The fourth-quarter earnings lifted Southwest to a full-year gain of $99 million, continuing an annual-profit streak that started in 1973.

While revenue fell 7 percent at American, which reported earnings Wednesday, and 8 percent at Continental, it dipped less than 1 percent at Southwest. Southwest’s spending on fuel declined 13.5 percent.

Throughout its history, Southwest has grown rapidly and pushed into new markets. Last year, however, it eliminated many unprofitable flights and reduced passenger-carrying capacity fell 5.1 percent compared with 2008. CEO Kelly said the company has no plans for growth in 2010.

Southwest shares rose 35 cents, or 3.1 percent, to $11.68 in afternoon trading.