Southwest Airlines Co (LUV.N) reported a quarterly profit that topped estimates as higher airfares helped blunt rising fuel costs, and its shares rose nearly 3 percent on Thursday.
Service cuts, fare increases and the retirement of less fuel-efficient planes have aided airline profits even as high oil costs and economic uncertainty threaten demand for flying.
Dallas-based Southwest said its strong passenger revenue momentum was continuing into the current quarter.
"The industry has set itself up to continue to grow in 2012 but the wild card here is the general economy," said Matthew Jacob, an airline analyst with ITG Investment Research. "We're not seeing any indication that demand for air travel is slowing at this point."
Southwest, the traditional low-fare leader among major U.S. airlines, acquired AirTran last year and gained entry to East Coast cities such as Atlanta, which it had not previously served. Southwest-branded flights will start in Atlanta next month.
The carrier is also upgrading its planes, having reached a deal late last year to buy 208 Boeing 737s, including 150 of the upcoming 737 MAX planes that will have new engines. Southwest announced this week that it will upgrade cabin interiors and add six seats to more than 350 existing planes.
The AirTran purchase "is going to be a major game changer for them," said Helane Becker, an analyst with Dahlman Rose & Co.
Still, she said Southwest will face major challenges managing merger expenses and higher energy costs and making sure worker productivity stays at a high level to maintain a competitive cost structure against rivals that have restructured.
"Our plan for 2012 calls for a significant increase in revenues and profits, and that assumes that our revenue plans work and that we contain cost increases to manageable levels," Chief Executive Gary Kelly said during a conference call.
Fourth-quarter net income at Southwest was $152 million, or 20 cents per share, compared with $131 million, or 18 cents a share, a year earlier.
Excluding items tied to fuel contracts and acquisition costs, the airline reported net income of $66 million, or 9 cents a share. Analysts expected 8 cents, according to Thomson Reuters I/B/E/S.
Revenue rose 32 percent to $4.1 billion. Average fares were up 10 percent. Passenger unit revenue was up 8.2 percent in the quarter and Southwest said it expected a 7 percent to 8 percent rise in that metric for the first quarter.
Operating expenses rose 37 percent in the a gallon for the current quarter, compared with $2.95 a year earlier.
Southwest's shares were up 2.9 percent at $9.28 in afternoon trading as major U.S. carriers such as Delta Air Lines Inc (DAL.N) and United Continental Holdings (UAL.N) also rose. The Arca Airline index .XAL gained 1.9 percent.
(Reporting by Karen Jacobs in Atlanta; Editing by Maureen Bavdek and Steve Orlofsky)