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Southwest sees 3Q profit on higher fares and traffic

Southwest Airlines Co. is making money as more people travel on the nation’s largest discount airline.

Southwest said Thursday it earned $205 million in the July-through-September quarter.

Traffic was up about 5 percent, which along with higher average fares pushed revenue up 20 percent.

CEO Gary Kelly said the outlook for October is excellent too. He predicted revenue per passenger will rise in the fourth quarter even though that’s usually a slow period for travel, other than the December holidays.

Dallas-based Southwest, the largest carrier at Baltimore-Washington International Thurgood Marshall Airport, joined United, Continental, Delta, American, US Airways and JetBlue in posting third-quarter profits as the airlines benefited from higher fares and growing travel demand coming out of the recession. Combined, the leading U.S. airlines earned more than $2 billion in the quarter.

The airlines have helped themselves by limiting available seats, which makes flights more crowded and drives up fares. Southwest has set monthly records for high occupancy in 14 of the last 15 months.

After shrinking last year, Southwest has been adding flights in recent months, and it laid out plans Thursday to grow aggressively early next year. It figures to operate about 8 percent more flights in the first quarter of 2011 than it did in the corresponding period this year.

Kelly said travel demand is growing fast enough to fill up the extra seats.

“We see very strong demand for the next 60 to 90 days, which we think will carry through to the first quarter of next year,” Kelly said. He added that many of the new flights announced by other U.S. airlines are on international routes that Southwest doesn’t serve.

Southwest said it earned 27 cents per share compared with a loss of $16 million, or 2 cents per share, in last year’s third quarter.

Not counting specials items such as changes in the value of fuel hedges, Southwest would have earned 26 cents per share, a penny better than analysts expected, according to a Thomson Reuters survey.

Revenue rose to $3.19 billion from $2.67 billion a year ago, slightly higher than the $3.17 billion that analysts expected.

Southwest shares rose 46 cents, or 3.5 percent, Thursday to close at $13.627 in afternoon trading.

While revenue is rising, Southwest faces a challenge in controlling costs. Its cost for each mile flown rose more than 7 percent in the third quarter, partly due to losses from fuel-hedging contracts, and the company expects fourth-quarter costs to rise too.

Southwest flies only within the lower 48 states, which means it isn’t benefiting from the sharp increase in international travel.

That could start to change with the deal it announced last month to buy rival low-fare airline AirTran for $1.4 billion, as AirTran flies to Mexico and the Caribbean. The deal would increase Southwest’s size by 25 percent and put it in direct competition with Delta in Atlanta, the biggest U.S. city that Southwest doesn’t serve already.