07/25/2013 07:01 EDT | Updated 09/24/2013 05:12 EDT

Southwest reports 2 per cent drop in 2Q profit but beats forecast, revenue sets record

DALLAS - Southwest Airlines got a small break at the fuel pump during the second quarter, and that helped offset flat revenue and higher labour costs.

The airline paid 16 cents a gallon less for fuel than it did a year ago, and that added up to $88 million.

Southwest said Thursday that its quarterly profit fell 6 per cent, but the results were still a bit better than analysts expected.

The airline, which carries more passengers in the U.S. than any other, saw a 2 per cent drop in revenue per mile. CEO Gary Kelly said that demand was hurt by automatic federal spending cuts that reduced government travel and by higher taxes, but he said third-quarter trends were encouraging.

The company's revenue per mile — a closely watched figure in the industry — has been about 3 per cent higher this month than in July 2012, and bookings for August and September "also look solid," he said.

Southwest officials declined to comment Thursday on the investigation into an accident this week at New York's LaGuardia Airport.

The National Transportation Safety Board is trying to determine why the nose gear of a Southwest Boeing 737 collapsed upon landing Monday night, causing the plane to skid off the runway with its nose on the ground. Several passengers and flight attendants were treated for injuries.

Southwest shares fell during morning trading but recovered to finish up 5 cents at $13.81. They have gained 35 per cent for the year, about the same as the Arca index of airline stocks.

The stocks have rallied as investors grow more confident about sustained profits in an industry that lost billions last decade. Mergers have reduced competition, the airlines have curtailed flights to push up fares, and they've added revenue from a flock of fees for various services.

Southwest Airlines Co., which owns AirTran Airways, said that second-quarter net income was $224 million, or 31 cents per share, down 2 per cent from $228 million, or 30 cents per share, a year ago.

Southwest said that stripping away special items — mostly changes in the value of fuel-hedging bets — it would have earned 38 cents per share in the latest quarter. That's a penny better than analysts surveyed by FactSet were expecting.

Revenue increased less than 1 per cent to $4.64 billion. Southwest said that was a second-quarter record, but it fell short of analysts' forecasts of $4.66 billion.

Traffic increased about 3 per cent, and the average one-way fare rose less than a buck — to $151.23. The rate of fare increases has slowed from 2011, when airlines raised prices quickly to offset higher fuel costs.

Southwest and AirTran added flights in the quarter, so the average plane was 81.6 per cent full, down slightly from 81.9 per cent a year earlier. But capacity in June hit a record 85 per cent as the summer vacation season hit full stride.

Lower oil prices early in the April-to-June quarter helped Southwest save 6 per cent on fuel, its biggest expense, and the company cut maintenance spending by 3 per cent, or $10 million. But labour, the second-biggest expense, rose 6 per cent, or $76 million.

Kelly said the company was on schedule to repaint AirTran planes in Southwest colours and combine the two carriers by the end of next year. Southwest will complete the update of its reservations system next year, allowing it to handle international flights, he said.


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