Southwest Airlines Co (LUV.N) beat analysts' estimates with a 42 percent rise in quarterly profit on Thursday, helped by higher fares and robust demand despite a fragile U.S. economy.
Analysts said Southwest, which is looking to maintain its dwindling low-cost advantage against rivals that have restructured, made progress in controlling costs.
"While we remain cautious about the domestic economy, our business seems to be holding up well," Chief Executive Gary Kelly said during a conference call, nothing that current fuel prices are no higher than they were in the second quarter.
Still, Southwest shares were down 2.5 percent in afternoon trading as oil prices hit an eight-week high on Middle East tensions, with U.S. crude up 3 percent [ID:nL6E8IJ7G6]. Fuel typically makes up a third of an airline's costs.
"The wild card is going to be fuel. That's for the most part outside of their control," said Logan Purk, an analyst with Edward Jones.
Over the past two years, in a bid to return to stability, U.S. airlines have merged, raised ticket prices and shown discipline in cutting back flights to match demand.
"Southwest and the rest of the airlines are really focusing in on the routes that are higher-yielding and more profitable, and as a whole that has helped the industry," said Matthew Jacob, an airline analyst with ITG Investment Research.
Southwest, which acquired discount rival AirTran Holdings last year, said it plans to keep 2012 seat capacity flat with 2011 levels. The carrier cautioned that growth in unit revenue - passenger revenue per available seat mile, an important airline measure - would be solid in the current quarter but would likely not exceed the second quarter's 6 percent rise.
Second-quarter net income was $228 million, or 30 cents a share, compared with $161 million, or 21 cents a share, a year earlier. Excluding one-time items, profit was 36 cents a share, topping analysts' average forecast by 4 cents, according to Thomson Reuters I/B/E/S.
Operating revenue grew nearly 12 percent to $4.62 billion, outpacing an increase of about 6 percent in operating expenses. Southwest's average fare rose about 5 percent in the quarter to $150.31.
Fuel costs were $3.22 a gallon in the quarter, compared with $3.28 a year earlier. For the third quarter, Southwest projected fuel costs at $3.05 to $3.10 a gallon.
The second quarter is typically one of the strongest for airlines as travel picks up during warm months. Bankrupt American Airlines parent AMR Corp AAMRQ.PK reported a second-quarter profit before one-time items this week as increased business travel helped it report record quarterly revenue.
Airlines' outlook could become more uncertain once travel slows down in the fall.
"Southwest and others will readily admit that the economic backdrop is tenuous at best, but at this point they are not seeing any impact on business," said Fred Lowrance, senior research analyst with Avondale Partners.
"The challenge is they can't really give a good read on what it's (demand) going to look like three or four months from now," he added.
Shares of Southwest were down 2.5 percent at $9.18 in afternoon trading, and other airline stocks also sold off. Delta Air Lines (DAL.N) fell 2.2 percent to $10, United Continental (UAL.N) was down 3.6 percent to $22.01, and US Airways Group LCC.N shed 6.3 percent to $12.58.
(Reporting by Karen Jacobs; Editing by Sofina Mirza-Reid, Bernadette Baum and John Wallace)