Fare increases and a winning bet on the direction of fuel prices continued to pay off for Southwest Airlines, which reported yesterday that...

Share story

DALLAS — Fare increases and a winning bet on the direction of fuel prices continued to pay off for Southwest Airlines, which reported yesterday that its second-quarter profit rose a bigger-than-expected 41 percent.

Southwest has raised fares three times this year, the most since 1998, and has pushed more travelers into higher-priced tickets.

But the key to Southwest’s success — 57 straight profitable quarters while other U.S. carriers have gone through a boom-and-bust cycle — remains its ability to control costs.

Southwest earned $159 million, or 20 cents a share, in the April-June quarter, up from $113 million, or 14 cents a share, a year earlier. The results beat analysts’ expectations of 18 cents a share, according to the average estimate of analysts surveyed by Thomson Financial.

Most Read Stories

Unlimited Digital Access. $1 for 4 weeks

Revenue rose 13.3 percent to $1.94 billion, slightly higher than analysts had expected.

Southwest’s most successful cost-saving step has been jet-fuel options. Back when oil cost less than $30 a barrel, Southwest bought options that locked in the price of jet fuel for the next four years.

Southwest holds options for 85 percent of its 2005 fuel needs at the equivalent of $26 a barrel, less than half of oil’s current price of about $60 a barrel. Other airlines made smaller bets or were too weak financially to buy options.

This hedging worked wonders for Southwest’s bottom line. It saved the company $196 million in the second quarter — more than Southwest’s earnings for the period but less than its pretax profit.

“We have four years of coverage that is dramatically better than any other competitor. It gives us some financial security, and it gives us a tremendous competitive advantage,” said Chief Executive Gary Kelly.

But the king of hedging can’t hide forever if oil remains at $60 a barrel. Its fuel spending jumped 25 percent in the second quarter even with the options. And Southwest is only 65 percent hedged next year, dropping to 45 percent in 2007, 30 percent in 2008 and 25 percent in 2009.

For now, Southwest isn’t buying more options. Kelly is worried the airline would be stuck if it locked in and oil prices fell. He even suggested that Southwest might sell some of its options.

Kelly said Southwest would continue cutting other expenses by, for example, getting half its passengers to use self-check-in instead of going through an agent. It expects labor costs to ease next year, although it will begin negotiations on a new contract with its 4,750 pilots in April.

Other carriers have forced concessions from their employees, but Kelly said Southwest wouldn’t do that if it remains profitable.

Southwest aims to raise earnings 15 percent next year, but Kelly conceded that can’t be done unless it can increase revenue, possibly by expanding in Dallas — it is lobbying to overturn a 1979 law limiting long flights there — and in Baltimore.

“The only way he can get 15 percent earnings growth is on the revenue side because he has cut his costs all he can,” said Helane Becker, an analyst with Benchmark. “In markets where he can raise fares, he will.”

Southwest raised average fares 6 percent and carried 6.5 percent more paying customers than a year ago. The difference helped the airline offset a 13.7 percent increase in available seats — Southwest is increasing its fleet of Boeing 737s by 7 percent this year, to 446 planes. The average plane was less full than a year ago.

The airline’s strong results pushed its stock higher yesterday: up 44 cents, or 3.2 percent, to $14.42.

Southwest has the biggest stock-market value of any airline in the world at $11 billion. That’s more than the combined market capitalization of the other 10 largest U.S. airlines ranked in terms of miles flown by paying passengers, Bloomberg News reported.