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Southwest posts profit, but slows growth

Despite high fuel prices and a slowing economy, Southwest Airlines managed to post a profit for the first quarter, a bright spot in an otherwise dismal period for airlines.

But the Dallas-based carrier said it is still under intense pressure amid the hostile industry environment, and announced plans to slow its growth over the next two years, shelve plans to accept more airplanes in 2009 and raise fares this summer.

Southwest said it earned $34 million during the first quarter of 2008, down from $93 million a year ago. The results were ahead of Wall Street’s expectations.

It was a sharp contrast from Fort Worth-based American Airlines, which reported a loss of $328 million on Wednesday. Overall, analysts expect the airline industry to lose more than $1 billion for the quarter. Continental Airlines, based in Houston, reported an $80 million loss Thursday.

Three smaller airlines have shut down in recent weeks, and discount carrier Frontier Airlines filed for bankruptcy earlier this month.

Hedging contracts, which allowed Southwest to purchase a majority of its fuel at lower prices, helped shield it from the brunt of the spike in oil prices. Still, the airline’s fuel costs rose 20 percent for the quarter compared to a year ago.

“Our obvious immediate concern is fuel prices, they’re soaring,” said Gary Kelly, Southwest’s chief executive, in a conference call with reporters and analysts. “It’s clearly a very real threat, as well as the threat of a travel recession.”

Passenger traffic appears to be stable for the moment, Kelly said. April traffic has been solid, he said, and bookings for the remainder of the second quarter remain strong. And first-quarter unit revenues were also up nearly 5 percent, boosted by Southwest’s new “Business select” product and its new boarding process, which has helped attract business travelers.

But the airline is clearly gearing up for turbulence going forward.

For travelers, that means higher fares. A week ago, the airline raised round-trip ticket prices by as much as $12, its first fare increase of the year. And Kelly said that the carrier will temporarily raise round-trip fares by up to $20 between June 13 and Aug. 17.

Airline spokesman Marilee McInnis said it was the first time in recent memory that the airline has implemented a seasonal price increase.

“Clearly this is being driven by the volatile nature of jet fuel,” she said.

And prices could go up further, Kelly said.

“We’ve put through two fare increases in the past week, and we’ll be looking for opportunities to do more,” he said.

Other major carriers also raised round-trip fares Thursday, boosting fuel surcharges on some flights by as much as $20, according to Rick Seaney, chief executive of the online travel firm Farecompare.com. American, Delta Air Lines, Continental Airlines, Northwest Airlines and U.S. Airways all raised some fares, Seaney said.

But Kelly acknowledged there may be a limit to how high fares can be raised, particularly if travel demand slows as the economy cools.

“If we’re forced to raise fares, then fewer people will be able to afford to fly,” he said. “So that’s something we need to keep in mind.”

Kelly said Southwest will expand its fleet with 14 new planes in 2009, half its original plan. The airline is also considering retiring 22 planes this year.

The carrier trimmed its planned capacity growth for 2008 from a maximum of 5 percent to a cap of 4 percent.

And next year’s growth has been scaled back from 8 percent to 2 percent at the most, “and we may not grow at all.”

That’s a significant course correction for an airline that has been growing steadily for years.

The airline is also looking for partners to replace an alliance between Southwest and ATA that allowed the airlines to sell seats on each other’s flights. The agreement had allowed Southwest to create itineraries to destinations it doesn’t serve, including LaGuardia Airport in New York and Hawaii.

That fell apart when ATA closed its doors earlier this month.

And Southwest continues to work on finding partners for international service. That isn’t expected until 2009, Kelly said.

Shares of Southwest (ticker: LUV) rose 11 cents in trading Thursday to close at $12.61 per share.

TREBOR BANSTETTER, 817-390-7064

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