UPDATE 4-Southwest Airlines results top estimates

* Q3 adj EPS 15 cents vs. estimate 14 cents

* CEO says business is good despite hedging write-down

* Shares up 4.5 pct

By Karen Jacobs

Oct 20 (Reuters) - Discount carrier Southwest Airlines Co posted a higher-than-expected quarterly profit, excluding special items, and said bookings look strong, sending its shares up over 4 percent.

Dallas-based Southwest, which acquired AirTran Holdings this year to gain entry to new U.S. East Coast markets such as Atlanta, said it expects "solid" growth in passenger unit revenues during the current quarter as business travel is showing no signs of softening.

"Our business is quite good," Chief Executive Gary Kelly said during a conference call on Thursday. Still, he said the company is planning cautiously.

U.S. carriers are reducing service, retiring less-efficient airplanes and boosting fares to cover rising fuel costs as an uncertain economy threatens to sap demand for travel.

"The airlines have to be aggressive in managing their business and they need to report consistent profitability," said Helane Becker, an analyst with Dahlman Rose & Co.

Southwest reported a third-quarter net loss because of the way it accounts for the value of its hedges, or contracts intended to blunt the impact of sharp rises in fuel prices.

The loss of $140 million, or 18 cents a share, compared with profit of $205 million, or 27 cents a share, a year earlier.

The latest results included unrealized, non-cash markdowns of $227 million tied to some of the carrier's fuel hedges for future periods. Southwest marked down the value of some hedge positions that had deteriorated as oil prices fell during the third quarter. It added that rebounding oil prices since then meant that its hedges have recouped some of those losses.

Excluding one-time items, profit came to $122 million, or 15 cents per share, down from a year-earlier profit of $195 million, or 26 cents a share. Analysts had expected 14 cents a share, according to Thomson Reuters I/B/E/S.

Quarterly revenue rose 35 percent to $4.3 billion, compared with $4.23 billion expected by analysts. Average fares grew 10.4 percent.

Operating expenses rose 44 percent as fuel and oil costs were up 71 percent from the year-earlier period.

"The planes are full, passengers are paying the higher fares, and the AirTran acquisition remains on track," said Matt Collins, an analyst with Edward Jones. "Fuel was the only thing getting in the way of a stellar quarter."

Southwest shares were up 4.5 percent to $9.10 in afternoon trading and airline peers such as US Airways Group Inc and industry leader United Continental Holdings Inc rose. American parent AMR Corp , which posted a quarterly loss on Wednesday, was down 2.7 percent to $2.54.