Southwest Airlines Profit Slips on Lower Fares, Higher Costs

Southwest Airlines Co.'s fourth-quarter profit slipped on lower average fares and higher fuel spending, but the results still topped Wall Street expectations.

CEO Gary Kelly said Thursday that travel demand has picked up since the November election on an increase in business travel and higher average prices for last-minute tickets.

Southwest shares rose 7 percent in morning trading.

Like other airlines, Southwest sees a possible end to the two-year trend of lower average fares. It predicts a key measure of revenue per mile will be flat to down 1 percent in the first quarter, an improvement over the 2.9 percent decline in the fourth quarter.

The average fare on Southwest fell more than $5, or 4 percent, to $144.43 in the fourth quarter. It was $158 two years ago.

The airlines are trying to push prices higher by slowing the growth of new flights. Southwest expects to shrink its fleet of planes this year by retiring its oldest Boeing 737 jets, although the number of seats will rise because of the addition of newer, larger 737s.

The Dallas-based airline said it earned $522 million in the fourth quarter, down 3 percent or $14 million from a year earlier. Excluding losses on fuel-hedging contracts, the company said it would have earned 75 cents per share, beating Wall Street forecasts.

The 16 analysts surveyed by FactSet expected 70 cents per share; nine surveyed by Zacks Investment Research predicted 69 cents per share.

Revenue rose 2 percent to $5.08 billion, also beating Wall Street forecasts.

Operating costs climbed 7 percent, led by a 19 percent increase in fuel spending.

For many years, Southwest has hedged as insurance against sharp increases in fuel. That strategy has worked brilliantly at times but backfired when oil prices are lower than the airline expected, as happened in the fourth quarter. Fuel-hedging losses added 50 cents a gallon to Southwest's fuel bill and resulted in far higher cost per gallon than at Delta Air Lines and United Airlines.

Southwest expects higher costs to continue in 2017, partly the result of pay raises for union workers covered by new contracts.

For all of 2016, Southwest earned a record $2.24 billion. For those who keep track -- and Southwest does -- that is its 44th straight profitable year, a streak unmatched by any other U.S. airline. Southwest carries more passengers in the U.S. than anyone, although its smaller international network places it behind American, Delta and United in total size.

Southwest shares rose $3.48 to $52.95 in morning trading Thursday. Through Wednesday, the shares had dropped nearly 1 percent in the new year but gained 29 percent in the past 12 months.

Copyright AP - Associated Press
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