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American Reverses Losses, Southwest Earns Slightly Lower

AMR, parent of the largest U.S. carrier American Airlines, and Southwest Airlines, the discount carrier, posted fourth quarter profits, helped by higher ticket prices and fuller planes.

AMR reversed a year-ago quarterly loss and recorded its first profitable year since 2000, as reduced capacity and surging demand for air travel finally allowed most carriers to raise prices. That helped them out of the slump they suffered since the attacks of Sept. 11, 2001.

Shares of AMR and Southwest fell.

Southwest notched its 34th straight annual profit, but the pioneer of low-cost air travel reported a slight decline in quarterly profit because of its higher fuel costs. The carrier,
whose fuel hedges have long been the envy of the airline industry, paid more for fuel than it did a year ago because some of its 2006 hedges were less profitable.

AMR, which has been less aggressive in hedging, paid less for fuel in the quarter than it did the year before.

"A lot of that has to do with Southwest's very strong hedge position, which began to diminish in 2006," said Bill Warlick, an analyst at Fitch Ratings. "In a low energy market environment, their (Southwest's) cost advantage is less compelling. AMR, which was much less hedged, was really benefiting from the year-ago change in spot prices."

Jet fuel, which vies with labor as airlines' greatest cost, averaged about $1.77 per gallon in the fourth quarter, compared with about $1.97 in the same period last year.

Southwest paid $1.56 per gallon for jet fuel, 28% more than last year because of its worsening hedging position.

Meanwhile, AMR, which was less hedged, paid $1.88 per gallon, 8% less than the previous year as it benefited from lower market rates, saving $120 million in fuel expenses.

FULL PLANES HIT RECORD

Both airlines boasted record load factors -- the percentage of seats filled by paying passengers -- for the fourth quarter. AMR said its load factor was 78.8%, while Southwest's load factor was 70.2%.

The airline industry, battered in recent years by low-fare competition and rising costs,managed to initiate several lasting fare hikes recently. AMR said its fares were 4% higher in the quarter than they were a year earlier. Southwest said its fares rose 4.2%.

AMR and Southwest are the first two U.S. airlines to post their 2006 fourth-quarter results. Their profits may be a good sign for other airlines that have yet to report: Continental is expected to post results on Thursday.

AMR said fourth-quarter profit amounted to $17 million, or 7 cents per share, compared with a loss of $600 million, or $3.46 per share, a year earlier. Analysts had expected the company to lose 8 cents per share, according to Reuters Estimates.

"This is a great kickoff," said Ray Neidl, airline analyst at Calyon Securities.

The company said quarterly revenue was $5.4 billion, up from $5.2 billion a year earlier. Analysts were expecting $5.45 billion.

Southwest's fourth quarter net profit fell to $57 million, or 7 cents a share, from $70 million, or 9 cents a share, in the same period last year.

Excluding charges for revaluing its hedging position and other items, earnings rose to 12 cents per share from 10 cents, in line with analyst expectations.

The earnings come amid a background of merger frenzy among traditional airlines. US Airways Group has made hostile bid for larger, bankrupt rival Delta Air Lines. Analysts and industry observers expect the deal to spark other mergers if it succeeds.

Neither AMR nor Southwest have been the target of any serious merger speculation, although Southwest has repeatedly said it would be interested in buying up assets shed in the
event of a US Airways-Delta merger.

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