Joe DiMaggio's hitting streak ended, so did Cal Ripken Jr.'s string of consecutive games. Will Southwest Airlines' mark of 69 straight profitable quarters be the next record to fall?
On Thursday, the low-fare pioneer reported a bigger second-quarter profit than Wall Street expected, thanks again to financial deals that lowered its fuel spending.
But the whispers grew that Southwest might soon succumb to the same combination of high fuel costs and a sagging economy that have already plunged other U.S. airlines into big losses this year.
After growing earlier this year, Southwest has stopped adding flights, and the chief executive said Thursday that the company might continue the freeze right into 2009.
Dallas-based Southwest Airlines Co. said Thursday it earned $321 million, or 44 cents per share in the quarter ended June 30. That's up 15 percent from a year ago, when the airline earned $278 million, or 36 cents per share.
Excluding special items, Southwest said it would have earned $121 million, or 16 cents per share. Analysts, who also skip the items, had forecast 12 cents per share, according to a survey by Thomson Financial.
Revenue rose 11 percent, to $2.87 billion, as Southwest raised fares and carried more passengers.
Still, shares of Southwest fell 98 cents, or 6.2 percent, to close at $14.90. Other airline stocks fell more sharply as the price of oil rose again after a short slump. Light, sweet crude gained $1.05 a barrel to settle at $125.49 on the New York Mercantile Exchange.
Southwest has not had a losing quarter since early 1991, plugging ahead through two major industry downturns in the past seven years mostly because of fuel hedging _ financial transactions that lock in lower prices for fuel.
Those deals can lose money if oil prices fall, but they've been golden for Southwest. In the second quarter, they were worth $511 million. Without them, Southwest would have lost money.
The analysts surveyed by Thomson expect the company to earn 6 cents per share in the third quarter and just a penny per share in the fourth.
One influential analyst, Jamie Baker of JPMorgan, said a fourth-quarter loss is "likely" because of expensive fuel and the tendency for other costs to rise late in the year. Only an improbable rise in revenue will avert a loss, he said.
Chairman and Chief Executive Gary C. Kelly told reporters he was not concerned about a loss in the third quarter _ although he said he does not believe there is much chance of matching or beating the year-ago profit of $162 million, or 22 cents per share.
He declined to make predictions about the fourth quarter, the one analysts expect to be weakest.
Kelly said he does not worry about the streak.
"Even Herb Kelleher, as great a CEO as he was, he had a couple of quarters where he lost money, so it happens to the best of us," he said, referring to Southwest's co-founder and longtime leader.
"Nobody at Southwest Airlines intends to lose money in any quarter, but I can't guarantee you that that won't be the case," he said.
Southwest has raised fares and cut service on less productive routes while adding flights where it can take advantage of rivals' weakness.
Kelly said the company must raise fares "substantially," and it could gain pricing power after Labor Day, when other airlines plan to cut capacity 15 percent where they compete head-to-head with Southwest.
In a concession to high fuel costs, Southwest scaled back its own growth plans to 4 percent or less for 2008 _ flat from July through year-end _ and Kelly said it might not grow at all next year.
In recent years, Southwest has poached business from weaker or higher-priced competitors in Denver, Philadelphia, Pittsburgh and Dallas. Knowing Southwest's history, analysts are not convinced that the company will freeze growth next year.
Michael Derchin of FTN Midwest Securities said Southwest is just waiting to see how and where other airlines cut flights after Labor Day.
"They are going to be ranking the opportunities from competitors dropping by the wayside," he said. "Denver wasn't a layup, but United and Frontier are pulling back and now Southwest sees it as a good city."
But, Derchin added, Southwest could sell more tickets even without adding flights because its jets are usually less crowded than those of other airlines.
Even with fuel hedging, Southwest was hit by soaring energy costs in the second quarter. It paid an average $2.19 per gallon for jet fuel, but the going price on spot markets last week was nearly $4 per gallon. By comparison, American Airlines, with a much smaller fuel-hedging program, paid an average of $3.17 per gallon in the second quarter.
Southwest has hedged about 80 percent of its third-quarter fuel needs, down from 90 percent a year ago. The coverage falls to 70 percent next year, 40 percent in 2010 and 20 percent in 2011 and 2012 _ with steadily rising prices as well.
(This version CORRECTS if oil prices fall sted rise in 10th graf., deletes stock quote in last graf, adds closing stock price and oil settlement price.)
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