Wings Magazine

High fuel prices keep Southwest from earning first quarter profit

March 13, 2012, Dallas, Tx. - Southwest Airlines doesn't expect to earn a profit in the first quarter because of higher fuel costs.

March 13, 2012  By The Associated Press

Chief Financial Officer Laura Wright said Tuesday that jet fuel prices have been higher than the airline expected — about $3.50 per gallon instead of the $3.35 it had been forecasting.

Wright also said ticket bookings for spring travel weakened in late February. Southwest if unsure if that was a short-term blip or signals something bigger about the economy, Wright added.

Southwest has been the most consistently profitable large U.S. airline for many years, so news that it won't make money in the first quarter could indicate that other airlines will also struggle for profits.

Fuel costs are a concern for all the airlines. The spot price of jet fuel rose 18 per cent between January 2010 and January 2011, according to government figures. Airlines burn 48 million gallons per day, making fuel their biggest expense.


Southwest has raised fares 10 times in the past 12 months to offset higher fuel prices, but it has also launched frequent fare sales, sometimes every week, to fill seats. Wright said the most recent price hikes have not been as effective in boosting revenue.

Bookings close to the time of travel fell off at the end of February, Wright said. Bookings so far in March "remain good, but we are cautious based on what we saw in late February,'' she said at a JPMorgan conference in New York.

"It's really too early for us to know whether some of that near-in weakness that we saw at the end of February — whether it's a sign of something going on in the economy or whether February was an anomaly,'' she said.

"Fuel unfortunately is the story of the quarter,'' Wright said. In January, Southwest expected fuel prices to be high but stable in the first quarter. Instead, they have risen, leading the airline to add 15 cents per gallon to its forecast for first-quarter fuel expenses.

"This fuel increase is a significant hurdle for us to overcome, and based on the current revenue and fuel estimates, we currently do not anticipate a profit in the first quarter.''

Analysts, on average, expected Southwest to report a profit of 4 cents per share for the first quarter, which ends March 31, according to a survey by FactSet. That's about $30 million, excluding special items such as one-time costs and gains.

Wright said the company was holding to a "favourable'' outlook for the rest of 2012, but that assumes stable fuel prices and a strong enough economy for the airline to increase its revenue.

Southwest share fell a penny to $8.27 in morning trading. For the year, the stock is down more than 3 per cent. While the broader markets are up about 9 per cent since the start of the year, Southwest shares peaked in early February and have steadily fallen since then, as fuel prices jumped.


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