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Lower fares, higher costs cause Southwest Airlines profits to dip

Southwest Airlines said its net income declined by 2.6 percent in the fourth quarter.
Southwest Airlines said its net income declined by 2.6 percent in the fourth quarter. Star-Telegram

Lower fares and higher fuel costs caused fourth-quarter profits to slide at Southwest Airlines. But the carrier’s stock price moved up after executives said business is picking up and fares may stop sliding.

The Dallas-based discount airline reported net income of $522 million, down 2.6 percent from the same period in 2015. Revenues, however, increased 2 percent to $5.07 billion even as the airline carried more passengers because of lower fares.

Passengers paid an average fare of $144.43, down 3.7 percent from the fourth quarter of 2015. The airline paid 19 percent more for fuel during the quarter, about $2.07 per gallon. Salaries and benefits also rose three percent to $1.7 billion for the fourth quarter, partly due to new union contracts with employees.

Southwest’s chief executive Gary Kelly said travel demand is strengthening from the fourth quarter to the start of the new year.

“The current economic outlook is pretty good as well as the current outlook for moderate energy prices,” Kelly said on a conference call with investors. “We are hoping for another great year in 2017.”

Excluding one-time accounting items, Southwest said its net income was 75 cents per share, beating Wall Street estimates of 70 cents, according to First Call.

Shares of Southwest [ticker: LUV] jumped over 9 percent, closing up $4.49, at $53.92.

Investors were also encouraged by the airline’s announcement that it will add only 3.5 percent to capacity in 2017, down from its previous forecast of 4 percent. A majority of the growth will come in domestic markets, Southwest said.

“The U.S. domestic market has seen improved demand and yields post the U.S. election, which is likely the reason the company is resuming growth in these markets,” Cowen and Co. analyst Helane Becker wrote in a research note. “It is unclear which international markets are the cause for the decision to slow growth this year (our guess is Cuba).”

For the full year, Southwest’s net income rose 2.9 percent to $2.24 billion while revenues increased 3.1 percent to $20.4 billion. The carrier said it will pay out $586 million in profit-sharing to its employees.

Although Kelly said he has not yet met with Elaine Chao, who is nominated to be Transportation Secretary, he said he looks forward to working with the new presidential administration, particularly on modernizing the air traffic control system.

“We don’t know anything specific yet [about the new administration’s aviation focus] but we sure like what we’re hearing so far,” Kelly said.

Andrea Ahles: 817-390-7631, @Sky_Talk