Despite higher fares, Southwest Airlines 4Q profit drops to $78 million on increased costs

DALLAS – Southwest Airlines Co. said Thursday that fourth-quarter earnings fell by nearly half as costs rose for fuel, labour and maintenance.

The airline’s revenue climbed slightly, however, as the average fare increased almost $8 from a year ago.

Southwest said that bookings for the first three months of 2013 look strong. It said that based on bookings and ticket prices so far, a key revenue measure should rise by between 2 and 3 per cent in January compared with the same month last year.

Although the rate of airfare increases has slowed since 2011, fares are still going up partly because airlines are limiting the number of flights, making seats more scarce. Southwest expects the industry as a whole to run about 1 to 2 per cent fewer flights in early 2013 than in the same period last year.

Southwest, the nation’s fourth-biggest airline, will consider cramming more flights into the busier middle of the day and reducing daily flights on some routes that aren’t profitable enough.

“I hope what we have less of is eliminating nonstop service between city pairs but … that is a possibility,” said CEO Gary Kelly. He didn’t name the routes that could be affected.

On a conference call, analysts pressed Kelly on whether he might reverse Southwest’s “bags-fly-free” policy. Kelly said the policy helps his airline draw customers away from competitors — more than offsetting money lost by not charging fees — and that charging for bags now would damage the company’s image.

“Customers hate bag fees, so I think by definition there would be an impact to the brand,” he said.

Southwest reported fourth-quarter net income of $78 million, or 11 cents per share. That’s down from $152 million, or 20 cents per share, a year earlier.

Excluding items such as fuel contracts, the net income would have been 9 cents per share, beating the 7-cents-per-share forecast among analysts surveyed by FactSet.

Revenue ticked up 1.6 per cent to $4.17 billion but fell short of the $4.20 billion that analysts expected.

Expenses rose faster, however, by 3.1 per cent. Labor costs rose and maintenance costs jumped significantly as the airline continued to overhaul the cabins inside many of its planes.

Spending on fuel, the airline’s biggest expense, rose a modest 0.7 per cent. Southwest is forecasting a welcome drop in its first-quarter fuel bill, to $3.30 per gallon from $3.44.

The cost increases were still less than some analysts expected. Standard & Poor’s analyst Jim Corridore said he expects revenue to rise faster than most costs in 2013.

The average fourth-quarter fare on Southwest and its AirTran Airways subsidiary was $148.02, up 5.4 per cent from $140.38 a year earlier.

Passengers flew 1.4 per cent fewer miles on Southwest than a year earlier, and planes were less full — 79.6 per cent occupancy, down from 80.5 per cent.

Southwest earned $421 million in 2012, its 40th straight profitable year, a streak that Kelly called “a remarkable feat and a record unmatched in the airline industry.”

Southwest shares rose 3 cents to $11.39 in afternoon trading. They have gained about 50 per cent since last August, rising along with other airline stocks. Investors have been encouraged by stronger financial performance at the airlines and the possibility that a potential merger of American Airlines and US Airways would increase the industry’s ability to raise fares.