Southwest posts profit, plans to cut costs

Thu Oct 18, 2012 2:57pm EDT

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(Reuters) - Rising costs and limited growth kept quarterly profit under pressure at Southwest Airlines Co (LUV.N), the carrier said on Thursday, adding that it plans to watch employment closely next year in an aggressive bid to cut costs.

Southwest is not planning layoffs, but will control its hiring so that headcount does not increase, Chief Executive Gary Kelly said during the company's earnings call. He declined to discuss planned employment levels, but said the airline hopes to cut corporate overhead by $100 million.

"We'll be pursuing aggressive cost control efforts for all of 2013," Kelly said. "There's no real fat at Southwest but clearly I think there are opportunities for us to streamline and focus."

The carrier faces more pressure to cut expenses to maintain its dwindling cost advantage against U.S. rivals that have restructured. Last year's Chapter 11 filing by AMR Corp's American Airlines (AAMRQ.PK) leaves Southwest as the only major U.S. carrier that has not reorganized in bankruptcy.

Kelly also said Dallas-based Southwest would pursue new initiatives to boost revenue but said that for now, the carrier has no plans to abandon its popular no-baggage-fee policy.

Excluding one-time items, third-quarter profit beat analysts' average forecast but was down from a year earlier, the airline said. Revenue was flat and average ticket prices edged down.

Dallas-based Southwest said passenger revenue per available seat mile, a key measure of pricing power, was trending about 4 percent stronger in October compared with a year earlier. That metric rose by 1 percent in the third quarter and Southwest noted weak demand in September.

Net income was $16 million, or 2 cents a share, in the third quarter, compared with a loss of $140 million, or 18 cents a share, a year earlier.

The latest quarter included one-time charges of $81 million tied to fuel contracts and other items. Excluding those charges, profit was 13 cents a share, a penny above analysts' average forecast, according to Thomson Reuters I/B/E/S. Year-earlier adjusted profit was 15 cents a share.

In the 2011 third quarter, Southwest recorded $227 million in write-downs tied to the way it accounts for the value of its hedges, or contracts intended to blunt the impact of sharp rises in fuel prices.

SOFTER REVENUE

Third-quarter revenue was flat at $4.3 billion, a bit softer than analysts expected. Southwest's average fare in the period eased to $142.86 from $143.03.

"Business travelers were there, but it felt like we needed a little bit more of aggressive pricing to entice them," Kelly told CNBC-TV.

Southwest, the traditional discounter, acquired AirTran last year, gaining entry to big U.S. markets such as Atlanta.

"Not only are there macroeconomic challenges with the weak economy, but there's micro-company challenges related to the integration of AirTran and re-doing their model," said Ray Neidl, an aerospace analyst with Maxim Group.

In the third quarter, operating expenses rose 4.2 percent even as fuel and oil costs fell 3.7 percent. Costs for maintenance materials and repairs rose 10 percent, and expenses tied to salaries and wages grew nearly 4 percent.

Fred Lowrance, an airline analyst with Avondale Partners, said Southwest's biggest cost struggle is likely to be with salaries, and he expects the carrier to push its workers to increase efficiency. Southwest has about 46,000 workers, and 87 percent of them are represented by unions.

"Its pilots and flight attendants have some of, if not the highest pay rates in the industry," Lowrance said. "Just the way they go about doing business is going to put pressure on that labor line."

Southwest shares were up 0.2 percent to $8.97 in the afternoon, as other major airlines moved higher. US Airways LCC.N was up 2 percent at $11.85 and United Continental (UAL.N) rose 0.3 percent to $20.68.

(Reporting by Karen Jacobs; Editing by Jeffrey Benkoe, Maureen Bavdek, John Wallace and Dan Grebler)

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