Southwest completes solid quarter for airlines by posting $112 profit, revenue up 21 percent

Southwest reports $112 million 2Q profit

DALLAS — Southwest Airlines Co. added an upbeat note to a strong quarter for the airline industry by reporting a $112 million profit for spring and early summer.

The nation’s biggest discount airline also said Thursday that it sees no evidence travel demand is weakening, despite persistently high unemployment and consumer jitters about the economy.

Southwest said its adjusted earnings were 29 cents per share in the second quarter, enough to beat analysts’ expectations. Revenue rose 21 percent thanks to a 15 percent increase in average fares during the start of the summer vacation period.

The Dallas-based airline said business travel has strengthened but not fully recovered from pre-recession levels. But its core customer — the leisure traveler — has been packing planes.

July traffic “looks really good,” and Southwest could set a company record for the percentage of seats filled this month, said CEO Gary C. Kelly. He said the airline expects revenue per passenger to keep rising in the third quarter, which began July 1.

Southwest was the last of the big six carriers to report second-quarter results. All except American Airlines parent AMR Corp. made money.

The other big carriers — Delta, UAL Corp.’s United, Continental and US Airways — all earned bigger profits than Southwest, led by Delta at $467 million. Those airlines alao raised fares while likely benefiting more from the improvement in business travel.

The other airlines also brought in hundreds of millions of dollars with new fees on passengers. Although it has imposed several new fees in the last two years, Southwest alone among the largest airlines doesn’t charge customers to check one or two bags. Kelly said that policy was attracting new passengers.

Airline revenue trailed only the second quarter of 2008, when airlines were imposing huge fuel surcharges to cope with record-high fuel prices.

“Business and vacation travelers put off a lot of trips the last two years and decided they were going to do them this year,” said Bob Herbst, a financial analyst who tracks the airline industry.

Southwest’s net income equaled 15 cents per share, compared with $91 million, or 12 cents per share, a year earlier. The gain was 29 cents per share after excluding what Southwest called special items. Analysts, who also exclude those items from their forecasts, expected 27 cents per share.

Revenue climbed to $3.17 billion, slightly above the analysts’ forecast of $3.15 billion. Kelly said the airline expects third-quarter revenue will rise from the $2.67 billion recorded last year.

Southwest boasts about offering low fares, but that’s not how it hit its financial targets. Traffic rose a modest 2.2 percent over the same quarter last year, while the average fare rose to $128.60 from $112.13 in the same quarter last year.

Analyst Michael Linenberg of Deutsche Bank said the fares were high for Southwest, and he questioned whether consumers worried about unemployment and debt could pay them.

Kelly pointed out that Southwest planes were more full this year than they were last summer.

“We had these kinds of revenue increases and more passengers,” he said. “It’s not like we’re raising fares and losing business.”

Airlines have pushed fares up by tightly controlling the number of flights. Southwest said it had no plans to expand its fleet, and other large airlines have said they too will be cautious about growth.

Southwest has continued to add new cities — Panama City, Fla., this spring, and two destinations in South Carolina next year — where it thinks it can undercut rivals’ high fares, but it’s paring flights elsewhere, including Las Vegas.

Southwest’s cost of carrying each passenger one mile, a closely watched measurement in the industry, jumped 6.4 percent not counting fuel. Airline officials said the increase was due to higher labor costs — it recently signed new union contracts that included raises — and airport fees.

Southwest said it expects a similar increase in costs in the third quarter.

Southwest shares rose 2 cents to $12.03. Over the long haul, Southwest’s stock has outperformed most other airlines, but in the last year the shares of United, Continental, Delta and US Airways have done better because they’ve rebounded from extremely low levels.