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Earnings Preview: Southwest seen posting profit

DAVID KOENIG, AP Airlines Writer
Tuesday, 16 Oct 2012 | 6:58 AM ET

DALLAS -- Traffic and average prices both weakened in September, but analysts believe Southwest Airlines still made money in the third quarter.

Southwest, which carries the most passengers within the U.S. of any airline, is scheduled to report financial results on Thursday. The report will cover the last two months of the summer vacation season, when airlines make much of their money, and the beginning of autumn, when business travelers replace vacationers in the sky.

WHAT TO WATCH FOR: Investors want to know if the September slowdown continued into October, and what Southwest expects to see in the months ahead.

Traffic, measured in how many miles passengers fly, was flat in July and August, but fell 2.1 percent in September, compared with the same months last year. American Airlines, United Airlines and Delta Air Lines also saw a drop in domestic traffic last month.

Southwest reported a September decline in revenue for every mile times available seats _ an important measure of pricing power and full planes in the airline business. The statistic rose by between 2 percent and 3 percent in July and August, but declined 2.1 percent in September, compared with a year earlier.

Hunter Keay, an analyst for Wolfe Trahan & Co., said Southwest couldn't land lucrative business travelers toward the end of September. He added that the revenue ratio could get even worse for Southwest in the fourth quarter.

WHY IT MATTERS: The softness in traffic and revenue could be a sign of weakening demand for air travel amid a sluggish economy. That could make Southwest reluctant to raise prices unless fuel costs spike. Last week, Southwest declined to go along with a United Airlines fare hike of up to $10 per round trip, and that helped force United to roll back the increase.

Airlines boosted revenue last year with about eight broad price increases and healthy sales of higher-priced, last-minute tickets usually bought by business travelers. That helped them cover the rising cost of fuel.

This year, airlines have imposed only half as many fare increases. Southwest added that it saw weaker average pricing starting in August.

Southwest's pricing strategy can be baffling. Because consumers perceive it to be a low-fare airline, it wields great influence over prices. When other airlines raise prices, sometimes Southwest goes along, but other times it balks, and then sometimes it undercuts increases by running sales.

Keay, the analyst, wondered if Southwest will spell out how it thinks about pricing and demand. Airline executives usually blanch when asked about pricing decisions, saying that antitrust regulators could accuse them of publicly signaling price moves to competitors.

WHAT'S EXPECTED: On average, analysts surveyed by FactSet expect Southwest to report third quarter earnings of 13 cents per share, not including special items that for Southwest often cover adjusting the value of its fuel-hedging contracts. The analysts expect revenue of $4.37 billion.

LAST YEAR'S QUARTER: Southwest reported a loss of $140 million, or 18 cents per share, a year ago, when the results were weighed down because Southwest's fuel-hedging contracts fell in value. Excluding special items, which is the measure that analysts use, the company would have earned $122 million, or 15 cents per share. Revenue was $4.31 billion.

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