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Southwest Flies Level in 3Q

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Ask any major air carrier, and they'll sing the same song -- it's hard to make a buck in the sky, especially now. Airlines have high costs, labor relations that often get volatile and, these days, stubbornly high fuel prices. So it's commendable whenever any company in the business turns a profit; kudos to Southwest (NYSE: LUV  ) for doing so in its just-reported 3Q. Its results didn't blow the market away, but at least the firm is flying calmly and steadily. For now, at any rate.

Holding altitude
Southwest's revenue for the period totaled $4.3 billion, which was about $300 million down from the previous quarter, and more or less the same as 3Q 2011. Profitability was modest, at $16 million, versus 2Q's $228 million and a $140 million loss in the same quarter last year.

The former number would have been in the neighborhood of $97 million, slightly exceeding analyst expectations, had it not been for $81 million booked in "special" line items. These include losses from fuel hedging activities and integration expenses for bringing AirTran -- another budget carrier Southwest bought in 2011 -- into the fold. That special items hit was nastier in 3Q 2011, when it totaled $262 million, and splattered the company with red ink.

Many of the airline's important metrics were flat on a year-over-year basis, or down from 2Q, so that's a concern. Besides revenue, the number of paying customers carried on Southwest flights didn't really budge all that much, rising only 0.4%, to 28.3 million. Consequently, the company's take per revenue passenger miles was also more or less flat. The uptick in passenger load (i.e., how full the plane is), was barely noticeable, hovering just over 82%.

Certain categories were down, and that was a good thing as far as every airline's bogeyman, fuel costs, was concerned. Typically, this is the biggest single cost item for a carrier and, in 3Q, this was no different for Southwest. The company managed to keep its fuel budget in check; expenses for the stuff that turns the engines actually dropped on a year-over-year basis, by nearly 4% to $1.52 billion.

The ride could get a little bumpy
Will Southwest manage the same feat in upcoming quarters? Possibly not. The company warned that it was anticipating record-high fuel prices (to the tune of $3.45 per gallon) in 4Q and, going further along, admitted that it "will need to more aggressively control costs in the next year."

On a brighter note or two, the airline said its October bookings were up, at around 4% over 2011's level. Late-in-year upticks like that are always good news, since this month is close to the high-occupancy season, and such a rise could indicate robust traffic for Thanksgiving and the December holidays.

Meanwhile, the company's cash position is markedly improved over that of the same period last year, and some of its long-term debt has been whittled away. At the end of 3Q, Southwest had $1.17 billion in its wallet, a nice 41% annual improvement, and about $85 million over 2Q's figure. That's helped pay down debt, which has sunk at a steady (albeit slow) rate over the past year or so -- it stood at $3.1 billion at end-3Q 2011, now it's a touch under $3 billion.

Keeping with the flying-level theme that's characterized Southwest's operations of late, that cash-to-LT debt ratio is roughly average for the industry at present. It compares rather favorably to the indebtedness of incumbent carrier Delta (NYSE: DAL  ) , and also to fellow budget operator JetBlue (Nasdaq: JBLU  ) . It's beaten, however, by the less heavily leveraged major United Continental (NYSE: UAL  ) and the low ticket price-but-expensive-everything-else upstart Spirit Airlines (Nasdaq: SAVE  ) .

Overseas flight
An interesting development for Southwest investors to track in the near future is the airline's non-U.S. flights. By acquiring AirTran, it gained a handful of routes to the Caribbean and Mexico. It's also taken on a $100 million or so project to build an international terminal at Houston's Hobby Airport, with the express purpose of staging more such flights from the facility. After a tussle over the plan with United Continental -- which has its own Latin American hub in the city's George Bush Intercontinental Airport -- it was approved this past May. Construction is slated to begin in 2013.

This is a very promising market because it's growing substantially. Research conducted by MasterCard indicates that visitor numbers to key Central/South American destinations saw a big rise from 2010 to 2011. Rio de Janiero, for instance, posted growth of 27.5% over that time frame, while Lima's arrivals rose 20%, and Buenos Aires saw a 15% pop.

Since that international terminal doesn't exist yet. and won't for a while, this potential won't be realized anytime soon. But Southwest has been flying sideways of late; it could use the lift a hot market can provide. Before then, though, look for the company to continue to try bounding along at its typically steady clip.

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Eric Volkman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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