Southwest posts 3Q loss on fuel hedges

DALLAS — Southwest Airlines Co. suffered its first losing quarter in two years because its fuel-hedging bets turned sour when oil prices fell this summer.

But its fares rose and planes were packed. That helped the company’s airline business make money in the third quarter

Southwest’s results suggest that air travel is holding up despite nervousness that consumers and companies will cut back because of the weak economy.

The discount airline, which flies more U.S. passengers than anyone, said Thursday that bookings, including business travel, have remained strong into October. It predicted that revenue per passenger will keep rising in the last three months of the year.

Investors seemed to focus on travel demand and shrug off the hedging losses. The company’s stock price rose 23 cents, or 2.6 percent, to $8.94 in morning trading.

Southwest reported a third-quarter loss of $140 million, or 18 cents per share, compared with a profit of $205 million, or 27 cents per share, a year earlier.

The loss included $262 million in special items, including costs related to the purchase of AirTran Airways but mostly tied to fuel hedges that fell in value. Southwest’s last losing quarter, in 2009, was also marked by fuel-hedging setbacks. Hedging is like insurance against a spike in oil prices; airlines use it to smooth out volatile energy prices.

Airlines must recalculate their hedges every quarter, and Southwest’s lost value when crude prices fell by about one-sixth during the period. Southwest didn’t lose cash, but must report the lower value on its books. With oil swinging up in recent weeks, Southwest said its hedges have regained some of the lost value.

Excluding those items, Southwest would have earned $122 million, or 15 cents per share — a penny better than analysts expected.

With the addition of AirTran, which Southwest bought in May, revenue rose 35 percent to $4.31 billion, beating the $4.17 billion forecast among analysts surveyed by FactSet. Southwest boosted the average fare 7.4 percent, to $142.31, and still packed more people into its planes.

The performance beat that of American Airlines parent AMR Corp., which lost $162 million in the third quarter — its fourth straight loss and 14th in the last 16 quarters.

United Continental Holdings Inc. and Delta Air Lines Inc. are scheduled to report results next week.

Travel demand outlook positive

Even with hedging, Southwest spent $1.59 billion on fuel, a 71 percent jump from a year earlier. The addition of AirTran inflated the figure, but the airline also paid more at the pump — $3.23 a gallon, up from $2.47 a year ago.

Southwest said fourth-quarter costs for each mile it flies will rise slightly in the fourth quarter. That forecast doesn’t include fuel.

Southwest gave a relatively upbeat view about current travel demand.

Travel usually drops off during the fall and winter months, But the key for the airline industry is whether that decline will be worse than usual this year because of the stubbornly weak economy.

Southwest indicated that those fears might not come true. Based on October sales and booking, the company said it expects “solid” growth in revenue for each mile that passengers fly in the fourth quarter. That number is a closely watched measurement of demand in the airline industry.

Yet, Southwest also launched a broad and deep airfare sale this week. That indicates it has more empty seats than it would like during the dead weeks between Thanksgiving and Christmas, and after the New Year’s holiday.

AirTran Airways joined in the sale. Southwest completed the $1 billion purchase of AirTran in May and gained a valuable foothold in Atlanta.

Southwest CEO Gary Kelly said Thursday that the company has already saved $60 million in annual costs by renegotiating AirTran contracts and cutting overhead and expects to eventually save $400 million a year. But Southwest has run into unexpected roadblocks in merging the two carriers, including opposition among union leaders at AirTran to a plan for combining pilot workforces.

Pilots at both airlines are now voting on a new plan for combining the groups. Southwest has raised the possibility of operating AirTran separately if the deal is voted down.