Southwest Posts Loss; Sees Softness Ahead

Southwest Airlines reported a quarterly net loss Thursday due to accounting charges related to its fuel hedges, but shares rallied more than 16 percent on a rosy per-seat revenue outlook and plans for capacity cuts.

AP

The largest U.S. low-cost carrier is the third major airline to report fourth-quarter earnings. It is also the third to report a net loss and warn of weaker travel demand amid economic recession. American Airlines parent AMR and United Airlines parent UAL reported losses Wednesday.

Dallas-based Southwest's shares gained 16.5 percent to $9.78 on the New York Stock Exchange on the news that the company expects its revenue per available seat mile (RASM) to increase about 7 percent in January, one analyst said.

"The January guidance is fairly strong at a point in time where you would expect the guidance to be cautionary," said Helane Becker, an airline analyst at Jesup & Lamont. "So you're looking at January RASM up 7 percent. That's enormous."

She also noted the benefits Southwest may see from trimming two aircraft from its fleet in 2009 as it takes delivery of 13 Boeing Co 737-700's while retiring 15 planes.

The U.S. airline industry slashed capacity in 2008 to offset fuel costs and bolster fares amid sagging demand.

Looking forward, Southwest said it has seen "notable softness" in post-January bookings, as the global economic recession takes its toll on business and leisure travel.

Results

Southwest reported a net loss of $56 million, or 8 cents per share, compared with a profit of $111 million, or 15 cents per share, a year earlier. That loss included $117 million in charges for adjusting the market value of its fuel hedging portfolio.

Excluding those charges, the company said it made a profit of $61 million, or 8 cents per share for the quarter, compared with $87 million, or 12 cents, a year ago.

On that basis, Wall Street was expecting 5 cents per share profit, on average, according to Reuters Estimates.

The hedging losses plagued Southwest last year as well. The airline, which has benefited from its fuel-hedging program over the last few years, has been caught out by the rapid fall in oil prices.

Crude oil, which directly impacts the price of jet fuel, fell about 75 percent from a record high in the second half of 2008.

Southwest said it has now scaled back its hedges to cover only about 10 percent of its fuel needs over the next five years, to counter the effects of current relatively low oil prices.

Despite the recent rapid drop in fuel prices, Southwest said it still expects to pay 16 to 17 cents per gallon more than market prices over the next three years because of its aggressive hedges.

"Even so, we currently expect our 2009 economic jet fuel costs per gallon to substantially decline from 2008 based on current market prices," Southwest Chief Executive Gary Kelly said in a statement.

Southwest said its quarterly operating revenue rose 9.7 percent to $2.7 billion. The carrier ended the quarter with $1.8 billion in cash and short-term investments.

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