April 20, 2006

Southwest, Continental Revenue Soars but Fuel Looms

By Christian Plumb

NEW YORK - Southwest Airlines Co. and Continental Airlines on Thursday both reported double-digit quarterly revenue gains as planes flew full of passengers paying higher fares.

But Continental, the No. 4 U.S. carrier, still lost money in the period and leading discounter Southwest eked out just a modest increase in first-quarter profit, falling short of its full-year 15 percent earnings growth target.

The culprit in both cases was soaring prices for fuel, which now threatens to spoil what many investors had hoped would be a recovery year for a U.S. airline industry that has lost some $30 billion since the September 11, 2001 attacks.

The improved results don't "make me feel that much better because the fuel prices are still up," said Ray Neidl, an analyst with Calyon Securities. "It's going to hit in the second quarter."

The only hope for airlines such as Continental and American Airlines to reverse their losses this year and for Southwest to meet its earnings target, is to raise fares further, he said.

Southwest doesn't like to raise fares "but they have to put through price increases and if that happens the rest of the industry will match them," Neidl said.

In the latest sign that the rest of the industry is eager to raise prices, American, a unit of AMR Corp., earlier this week raised domestic round-trip ticket prices by $10. The move has been matched by most of its major rivals.

In the first quarter, both Southwest and Continental reported identical 5.4 percent increases in average ticket prices, fare hikes that fell far short of surging fuel prices.

Using financial hedging contracts, Southwest locked in fuel at below market prices, making it the industry's most profitable airline. Nevertheless, it saw its jet fuel costs soar 63 percent in the period to $1.46 a gallon.

Still, it reaped a $133 million benefit from the hedges, more than twice the $61 million profit it reported for the period.

"They're wearing off, but anybody else would kill to have these fuel hedges," Neidl said.

Continental said its fuel costs were $191 million higher than in the year-earlier period, dragging it to a $66 million loss. The quarterly loss was still less than half that in the year-ago period, thanks to higher revenues and lower costs.

All of its major unions agreed last year on some $500 million in annual wage and benefit cuts which the Houston-based airline said were crucial to its survival.

Continental's loss beat analysts' forecasts, while Southwest's profit was in line with expectations.

A third airline, Alaska Air Group, parent of Alaska Airlines, substantially beat analysts' forecasts, reporting a small net profit excluding a charges mostly related to the retirement of its MD-80 aircraft.