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State Of The Air

Southwest, Continental report third-quarter losses  Oct 16, 2008

DALLAS — Southwest Airlines Co. reported its first quarterly loss in 17 years, and Continental also lost money because of high summer fuel costs, but airline executives said Thursday they are more worried now about a looming recession.

The reports told a story of good and bad news — fuel prices are finally falling, but so is the economy and with it, the ability of people to travel.

"We know that demand for air travel will be adversely affected by a recession," said Lawrence Kellner, the chief executive of Continental Airlines Inc., "and it remains to be seen how deep, wide and long the recession will be."

Despite the losses, Continental and Southwest both beat Wall Street's dire expectations and — helped by falling oil prices — airline stocks soared.

The two reports came a day after Delta Air Lines Inc. reported losing money during the busiest travel season of the year, and American Airlines parent AMR Corp. said it would have too without the sale of an investment business.

The airlines spent much more on fuel than they did in last year's third quarter, but executives cheered the sharp decline in fuel prices since hitting record highs in early July. Southwest said it expected prices to fall even more in the fourth quarter.

But airlines are worried that they are merely trading one big problem for another, as global financial markets sag and indicators point to recession in the U.S.

"The main thing now is the recession and the impact on travel demand," said Southwest CEO Gary Kelly. "We haven't seen any impact yet. My biggest concern now is January."

Continental executives said they were already seeing financial, auto and pharmaceutical companies cutting back sharply on travel and forcing employees to fly in coach instead of first class.

AMR and Delta officials said Wednesday they were also seeing a drop in demand even on previously strong international routes.

The financial performance of airlines usually tracks the economy very closely. Kelly and Kellner held out hope, however, that the coming recession won't be as hard on airlines because the industry has already cut flights sharply, before travel demand falls.

Even Dallas-based Southwest expects to cut capacity 5 to 6 percent in the first quarter of next year. CEO Kelly could not remember the airline ever doing that before.

Southwest lost $120 million in the third quarter due to $247 million in charges, mostly due to writing down fuel-hedging contracts that are less valuable now that oil prices have plunged more than half since July.

Without the write-down and other charges, Southwest said it earned an operating profit of $69 million, or 9 cents per share, which was 2 cents per share better than Wall Street expected, according to a survey of analysts by Thomson Reuters.

Revenue rose 11.7 percent to $2.89 billion, beating analysts' forecast of $2.83 billion.

Southwest has been more successful than any other airline at hedging against high oil prices. It buys options to lock in fuel at set prices, a strategy that has saved it several billion dollars this decade.

But accounting rules require Southwest to constantly update the potential value of some of those contracts, and their value tumbled as oil prices fell.

Southwest also disclosed Thursday that it tapped $400 million from a bank revolving credit account, which Kelly said would go to next year's capital spending. Chief Financial Officer Laura Wright said Southwest would need to raise "a few hundred million dollars" more as collateral against fuel hedges if oil prices fall another $20 — to around $50 a barrel.

Some of those fabled hedges are now under water, because they anticipated oil at more than $90 a barrel, and Southwest is now unwinding some of them, Kelly said.

Still, Kelly said cheaper oil is good for Southwest. It paid $2.44 a gallon for fuel in the third quarter and expects to pay $2 a gallon in the fourth.

Continental swung to a loss of $236 million, or $2.14 per share, in the third quarter, as fuel costs jumped 68 percent to $1.5 billion.

Excluding charges such as severance costs — the airline is cutting 3,000 jobs — Houston-based Continental's loss would have totaled $1.32 per share. That handily beat analysts' forecast of a loss of $1.55, according to a Thomson Reuters survey.

Revenue rose nearly 9 percent to $4.16 billion, beating analysts' $4.11 billion prediction.

Continental said it delayed delivery of two Boeing 777 jets from next year into 2010, and will delay 16 narrow-body planes from 2009 and 2010 into 2011 and beyond.

JPMorgan analyst Jamie Baker discounted the third-quarter results. He said they did not reflect the further drop in fuel prices, the effect of airline capacity reductions (which started late in the quarter) and the impact of the global economic "malaise."

Airline stocks soared Thursday as oil prices plunged again, below $70 a barrel.

In afternoon trading, shares of Continental jumped $2.34, or 18.2 percent, to $15.18; Southwest shares gained 48 cents, 4.2 percent, to $12.04; AMR shares rose $1.40, or 16 percent, to $10.18; and Delta shares were up $1.14, 15.3 percent, to $8.58.

Southwest, Continental report third-quarter losses
AP Photo/Nick Ut

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