Southwest Airlines (LUV) reported an operating income of 3 cents per share, ahead of the Zacks Consensus Estimate of 2 cents per share. This was lower than the profit of 9 cents per share in the prior-year quarter.

Passenger revenues decreased 7.8% to $2.6 billion from $2.8 billion in the prior-year period. Cargo & Freight revenue decreased 24.3% y-o-y to $28.0 million, primarily due to fewer shipments as a result of the ongoing worldwide recession. Other revenue increased 1.1% y-o-y to $88.0 million. Fall-off in business travel because of the recession negatively affected the revenues.

Total operating expenses decreased 5.7% year-over-year, mainly due to lower energy prices. The quarter’s operating expenses included $27 million of early out program launched during the previous quarter.

Southwest’s revenue passenger miles (RPMs) increased 4.7% y-o-y to 19.7 billion miles from 18.8 billion miles in the prior-year quarter. Capacity (available seat miles or ASMs) decreased 5.8% y-o-y to 24.8 billion miles from 26.3 billion in the year-earlier quarter. Load factor was 79.6% versus 71.6% last year.

During the quarter, Southwest borrowed $124 million under a new term loan agreement secured by five Boeing 737-700 aircrafts. It also replaced its previous $600 million unsecured revolving credit facility with a new $600 million unsecured revolving credit facility that will expire in October 2012.

For the fourth quarter, management intends to reduce year-over-year capacity by 8%. It also anticipates cost pressures to continue and therefore expects fourth quarter unit costs, excluding fuel and special items, to exceed the reported quarter levels.

Southwest Airlines is focused on boosting revenue through various initiatives. The company recently implemented a pet fee, an unaccompanied minor fee and an increase in the third checked bag fee. Additional revenue opportunities include an enhanced Rapid Rewards program, improved functionality of its site southwest.com and several international code share agreements.

However, ticket prices are a major concern as the company has been discounting heavily to stimulate demand.

Zacks Investment Research
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