Southwest Airlines reported a third-quarter loss of $140 million because its fuel-hedging bets turned sour when the price of oil dropped over the summer.
Fuel-hedging is like insurance against a spike in oil prices, and airlines use the technique to smooth out volatile prices.
But Southwest's hedges lost value when crude prices fell by one-fifth during the quarter. They have since regained some of those losses.
Excluding the hedging losses and other one-time expenses, Southwest said Thursday it would have earned $122 million, or 15 cents per share -- a penny better than analysts expected.
With the addition of AirTran Airways, which Southwest bought in May, revenue rose 35 percent to $4.31 billion, beating the $4.17 billion forecast by analysts surveyed by FactSet. Southwest boosted the average fare 7.4 percent, to $142.31, but still packed more people into its planes. The average flight was 82 percent full.
Southwest spent $1.59 billion on fuel in three months, a 71 percent jump from a year ago -- the addition of AirTran exaggerated the impact.
Southwest said fourth-quarter costs for each mile it flies will rise slightly in the fourth quarter. That forecast doesn't include fuel spending.
The airline said that bookings, including business travel, have remained strong despite the weak economy.
It predicted that revenue trends will continue to improve in the fourth quarter.
Travel drops off during the fall and winter months, but the real key for Southwest and its competitors is whether that decline will be worse than usual this year because of the stubbornly weak economy.
Southwest indicated that those fears might not come true. Based on October sales and booking, the company said it expects "solid" growth in revenue for each mile that passengers fly in the fourth quarter. That number is a closely watched measurement of demand in the airline industry.
Yet, Southwest also launched a broad and deep airfare sale this week, which could indicate that it has more empty seats than it would like during the dead weeks between Thanksgiving and Christmas, and after the New Year's holiday.
AirTran Airways joined in the sale. Southwest completed the $1 billion purchase of AirTran in May and gained a valuable foothold in Atlanta.
Southwest CEO Gary Kelly said Thursday that the company has already saved $60 million in annual costs by renegotiating AirTran contracts and cutting overhead and expects to eventually save $400 million a year. But Southwest has run into unexpected roadblocks in merging the two carriers, including opposition among union leaders at AirTran to a plan for combining pilot workforces.
Pilots at both airlines are now voting on a new plan for combining the groups. Southwest has raised the possibility of operating AirTran separately if the deal is voted down.