Southwest Airlines manages to make a 1Q profit

Southwest Airlines earnings report

  1Q 2011 1Q 2010 % Change 4Q 2010
Revenue $3.10 billion $2.63 billion 18% $3.11 billion
Earnings $5 million $11 million (-54.5%) $131 million
Earnings per share 1 cent 1 cent -- 18 cents

The highlights

+ By passenger volume, Southwest is the No. 1 carrier at McCarran International Airport.

+ In March, Southwest began serving Charleston and Greenville-Spartanburg, S.C., and Newark, N.J. From Las Vegas, there are one-stop or direct service, but no nonstop flights.

- Southwest announced a major overhaul of its frequent-flier program, Rapid Rewards. Changes took effect in March.

+ CRT Capital upgraded Southwest from “hold” to “buy” on March 11.

+ Southwest paid a half-cent dividend to shareholders on March 11.

+ April 20 stock price: $11.63. ($52-week high $14.29 on Nov. 8)

+ Southwest earnings missed analysts’ projections of 3 cents a share.

* * * * * * *

Soaring fuel costs, bad winter weather, more advertising and the additional expense of consultants hired to manage the purchase of AirTran Holdings dinged first-quarter earnings of Dallas-based Southwest Airlines.

But the market leader at McCarran International Airport still managed to be profitable for the quarter that ended March 31.

Southwest, which flies about 45 percent of the commercial flights to and from Las Vegas, reported earnings of $5 million, 1 cent per share, on revenue of $3.1 billion compared with earnings of $11 million, 1 cent per share, on revenue of $2.63 billion in the same quarter a year ago.

Analysts had projected earnings of 3 cents a share. Not counting additional one-time costs, earnings were in line with projections.

The airline saw its fuel costs per gallon escalate 26.5 percent over last year and a fuel-hedging program to protect the company from higher prices added $13 million to the expense.

Southwest kept pace with rising fuel prices by increasing fares seven times since December. Officials said on average, ticket prices are $30 more now than they were three months ago.

Southwest stayed profitable with its sixth consecutive quarter of record passenger revenue. Since the first quarter of 2007, the airline’s passenger unit revenue has increased by 34 percent and operating revenue grew 26.7 percent over last year largely due to revenue from its EarlyBird advanced check-in program, which saw revenue double over the year.

The EarlyBird program enables passengers to pay an extra $10 per flight to move ahead in the line for boarding pass distribution.

Company officials said March and May bookings were better than expected, but April was softer, attributed to Easter being later than usual this year with fewer tickets sold as a result of spring break not lining up with the holiday. Southwest is targeting a 6 percent increase in capacity in the second quarter through flying its planes more each day.

“While escalating jet fuel prices and inclement weather challenged our first quarter profitability, our people prevailed,” Gary Kelly, Southwest’s chairman, president and CEO, said in a statement released with the announcement of earnings.

“The one blight on our financial results was fuel,” Kelly added in today’s conference call with analysts.

In addition to fuel costs, Southwest paid higher advertising costs to promote its revamped Rapid Rewards frequent-flier loyalty program. Southwest chief financial officer Laura Wright said the company had overwhelmingly positive response to the new Rapid Rewards program with a strong increase in applications for Southwest-branded credit cards.

Southwest also had greater expenses due to a tax settlement with the IRS and a tax increase in Illinois. The company also had higher costs for consultants in the bid to acquire Mirimar, Fla.-based AirTran for $1.4 billion.

Kelly said Southwest is targeting May 2 for the completion of the merger and the start of integration of employees and resources after AirTran shareholders overwhelmingly approved the deal last month.

The acquisition, announced in September, would enable Southwest to enter the largest market it currently doesn’t serve: Atlanta. It also would give the company more gates at New York’s LaGuardia International Airport and a new presence at Ronald Reagan National Airport near the Capitol in Washington, D.C.

Although Southwest will pick up 37 cities on AirTran’s route map and add 138 aircraft, it’s too early to tell how the blending of the airlines would affect Las Vegas.

Prospective cities on the AirTran route map for Las Vegas include Wichita, Kan.; Des Moines, Iowa; Moline-Quad Cities, Ill.; Bloomington-Normal, Ill.; and Memphis, Tenn.

Southwest and AirTran are operating independently until details are worked out and they work under one operating certificate. The airline has estimated that the acquisition of AirTran would net annual synergies of more than $400 million by 2013.

The company also dealt with bad winter weather throughout the quarter with an estimated 3,000 flights canceled along Southwest’s extensive network.

This month, Southwest grounded 79 of its older Boeing 737 jets – about one-seventh of its fleet – and canceled nearly 700 flights after a 5-foot hole opened in the roof after takeoff. Five other planes were found to have metal fatigue cracks and were repaired.

During the call, Kelly addressed the April 1 incident in which a plane bound from Phoenix to San Jose, Calif., made an emergency landing in Yuma, Ariz.

“Safety is our duty and our top priority,” Kelly said. “No airline has a better safety record than Southwest Airlines. The 737 is one of the most popular and successful aircraft and we are working closely with the (Federal Aviation Administration), the (National Transportation Safety Board) and Boeing on the investigation into what happened and why.”

Kelly said the revenue impact of the incident was minimal and the fleet is fully up to date and compliant with FAA standards.

Three new destinations were added to the Southwest map in the first quarter. On March 13, the airline began offering seven flights a day to and from Charleston International Airport and Greenville-Spartanburg Airport.

Las Vegas is not among the nonstop routes to be served, but the airline offers one-stop flights connecting from Baltimore, Chicago’s Midway Airport, Nashville and Houston’s Hobby International Airport.

The company also began service to Newark, N.J.’s Liberty International Airport March 27. The airline rolled out nonstop flights between Newark and Chicago’s Midway Airport and St. Louis. On June 5, Southwest will add nonstop flights to and from Newark from Baltimore, Houston’s Hobby Airport, Denver and Phoenix. Those flights will enable one-stop service to Newark from Las Vegas.

With the addition of those flights, Southwest will operate in 72 destinations in 37 states.

Rival JetBlue reported a small profit of $3 million today. United Continental posted a $213 million loss. American Airlines reported a $436 million loss on Wednesday. Delta Air Lines and US Airways and Las Vegas-based Allegiant Air are scheduled to report quarterly earnings next week.

Among the five largest U.S. air carriers, analysts expected only Southwest to be profitable for the quarter.

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