Southwest reports 69th straight quarter of profits – net income up $321 million

With adverse winds blowing across the industry, Dallas,Texas-based low cost carrier, Southwest Airlines (SWA) has once again trumped competition and reported second-quarter net income of $321 million, up 15.5% from a $278 million profit in the year-ago quarter. The airline has already assumed legendary status as one of the most profitable airlines or businesses ever, reporting 69 straight profitable quarters.

It has not reported a losing quarter since early 1991 and has seen through two major industry downturns over the past seven years. This has been mostly attributable to its fuel hedging policies, along with other innovative policies.

The airline credited fuel hedging policies as reasons for its positive performance for this quarter as well, along with fare increases and capacity reductions by competitors. It's Q2  result is in sharp contrast to other competitors reporting big losses.

SWA said it realized $511 million in savings thanks to its fuel hedging programme. "Of course our fuel hedging was huge," chairman, president and CEO, Gary Kelly said. He also described the quarter as  "very gratifying."

According to Kelly, a "burning cauldron of issues. . .including a weak economy and soaring operating costs. . .is being offset by huge seat reductions by our competitors in most markets. . .We're continuing to see reduced competition and it's pretty broad. In some markets we've seen competitors exit completely."

Though Q2 revenue was up 11%, to $2.87 billion, expenses shot up 18.1% to $2.66 billion. This resulted in an operating income of $205 million, down 37.5% from $328 million last year.

Rising operating costs and a slow US economy have already forced SWA to raise fares four times this quarter. "We know that we've got to get our average fares up and we've got to get them up substantially," Kelly said. He clarified though that the hikes would come "gradually."

It had also clamped down on growth with aircraft deliveries ranging from zero to 14 next year. "We're already in a mode where we're essentially not growing [for the remainder of the year] and it's not hard to believe that will continue through 2009," Kelly said. "We're not real bullish about adding flights at all" but may do so if competitors significantly reduce capacity in key markets.

"Our competitors are in full retreat mode and we don't know what kind of benefit that will bring to us," he said.

Kelly emphasized that it is "not consistent with our philosophy" to charge for checked bags and other services and not imposing add-on fees gives "us a sweet advantage. . .we can differentiate Southwest substantially from the pack."

Q2 traffic rose 4.2% to 19.81 billion RPMs on a 5.4% boost in capacity to 26.34 billion ASMs, producing a load factor of 75.2%, down 0.9 point. Net income for the year's first half was $355 million, down 4.3% year-over-year, on a 12.9% rise in revenue to $5.4 billion.

Half-year operating profit fell 28.9% to $293 million.