Big Slick
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Southwest Airlines' fuel hedging pushes profits
DALLAS (AP) - Southwest Airlines Co. said Thursday its first-quarter profit rose by half on record revenues, but income would have fallen by 4 cents per share without gains from derivatives that hedge future fuel costs.
The low-cost carrier said it earned $93 million, or 12 cents per share, compared to $61 million, or 7 cents per share, a year earlier.
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Excluding the derivatives gains, the company said its "economic net income" was $33 million, or 4 cents per share, down from $64 million, or 8 cents per share, a year ago.
The most recent results matched the forecast of analysts surveyed by Thomson Financial.
Revenue rose 8.9 percent, to $2.2 billion from $2.02 billion.
Chief Executive Gary C. Kelly said he was disappointed that the company's adjusted income fell from a year ago, largely because of higher fuel costs.
"Based on the strength of last year's overall revenue growth, we had hoped this year's revenue growth would surmount these cost pressures," Kelly said. Instead, revenue gains were limited by winter storms, a slowing economy and also by travelers who balked at higher ticket prices, he said.
Revenue per miles flown by passengers grew 1.4 percent, which Kelly called "solid, but slower compared to last year's growth rate."
Kelly said Southwest expects revenue per miles flown by passengers in the second quarter to fall from year-ago levels based on the first-quarter trends, April traffic so far, and future bookings.
Jamie Baker, an analyst with J.P. Morgan Securities, said he was "discouraged" by Southwest's comments, which he said raised doubts about the domestic air-travel market.
"Let's not stick our heads in the sand. There is a growing body of evidence that domestic demand is deteriorating, further calling into question the likelihood of 2008 results anywhere near the level implied" by Wall Street's consensus forecasts, Baker wrote in a note to clients.
Baker said Southwest's willingness to forgo fare increases and the falling prospects for airline mergers that would reduce the supply of seats cast further doubt on the industry outlook.
Southwest has long benefited from derivative contracts that locked in lower fuel prices than its competitors, but that advantage is dwindling.
Southwest said it has contracts covering more 95 percent of its expected fuel needs for the second quarter at the equivalent price of $50 per barrel for oil. That's higher than the $36 per barrel price it locked in for most of its fuel in last year's second quarter.
On Wednesday, analyst Roger King of CreditSights wrote that growth prospects and low debt made Southwest a candidate for a leveraged buyout. Kelly said he doubted that such a deal could work.
"I don't think it makes any sense to leverage $9 billion of additional debt on an airline like Southwest Airlines," Kelly said Thursday on CNBC. "It would have to be done in a way that it preserves the special and unique culture that we have at Southwest Airlines, and I doubt that it could."
DALLAS (AP) - Southwest Airlines Co. said Thursday its first-quarter profit rose by half on record revenues, but income would have fallen by 4 cents per share without gains from derivatives that hedge future fuel costs.
The low-cost carrier said it earned $93 million, or 12 cents per share, compared to $61 million, or 7 cents per share, a year earlier.
Related news
Excluding the derivatives gains, the company said its "economic net income" was $33 million, or 4 cents per share, down from $64 million, or 8 cents per share, a year ago.
The most recent results matched the forecast of analysts surveyed by Thomson Financial.
Revenue rose 8.9 percent, to $2.2 billion from $2.02 billion.
Chief Executive Gary C. Kelly said he was disappointed that the company's adjusted income fell from a year ago, largely because of higher fuel costs.
"Based on the strength of last year's overall revenue growth, we had hoped this year's revenue growth would surmount these cost pressures," Kelly said. Instead, revenue gains were limited by winter storms, a slowing economy and also by travelers who balked at higher ticket prices, he said.
Revenue per miles flown by passengers grew 1.4 percent, which Kelly called "solid, but slower compared to last year's growth rate."
Kelly said Southwest expects revenue per miles flown by passengers in the second quarter to fall from year-ago levels based on the first-quarter trends, April traffic so far, and future bookings.
Jamie Baker, an analyst with J.P. Morgan Securities, said he was "discouraged" by Southwest's comments, which he said raised doubts about the domestic air-travel market.
"Let's not stick our heads in the sand. There is a growing body of evidence that domestic demand is deteriorating, further calling into question the likelihood of 2008 results anywhere near the level implied" by Wall Street's consensus forecasts, Baker wrote in a note to clients.
Baker said Southwest's willingness to forgo fare increases and the falling prospects for airline mergers that would reduce the supply of seats cast further doubt on the industry outlook.
Southwest has long benefited from derivative contracts that locked in lower fuel prices than its competitors, but that advantage is dwindling.
Southwest said it has contracts covering more 95 percent of its expected fuel needs for the second quarter at the equivalent price of $50 per barrel for oil. That's higher than the $36 per barrel price it locked in for most of its fuel in last year's second quarter.
On Wednesday, analyst Roger King of CreditSights wrote that growth prospects and low debt made Southwest a candidate for a leveraged buyout. Kelly said he doubted that such a deal could work.
"I don't think it makes any sense to leverage $9 billion of additional debt on an airline like Southwest Airlines," Kelly said Thursday on CNBC. "It would have to be done in a way that it preserves the special and unique culture that we have at Southwest Airlines, and I doubt that it could."
