Southwest Sees More Signs Of Business Travel Rebound

Southwest Airlines reported a $131 million profit for the fourth quarter, up from $116 million a year earlier, and it says there are new signs that the rebound in business travel at the carrier is strengthening.

The airline also reported a $439-million profit for all of 2010—its 38th consecutive annual profit and more than quadruple its $99-million profit in 2009.

Revenue increased 14.8% in the fourth quarter to $3.1 billion, the airline’s highest fourth-quarter amount ever. Passenger unit revenue increased 8.1% and total unit revenue rose 8.8%.

Fare increases—which have continued in January—helped boost the average fourth-quarter fare by 9.1% and yield by 3.5%.

Southwest executives say passenger unit revenue in January is on track to match or exceed a 5% year-over-year increase in January. They further say bookings also are strong for the rest of the quarter, although year-over-year unit revenue comparisons will be tougher in February and March because of revenue strengthening at that time in 2010.

An even better sign may be that the percentage of tickets sold at full fare is continuing to grow. The figures rose two points to 20% from the third to the fourth quarter—a period in which the percentage usually declines because of seasonal factors.

“It is evident [business demand] is improving,” Kelly said during the fourth-quarter earnings conference call.

“Except for fuel, our outlook for 2011 is quite good,” Kelly added.

Southwest currently expects to spend about $650 million more for fuel this year, when adjusted for year-over-year capacity increases, because of higher prices. But at this moment that is not enough to cause the carrier to change its plans, given the strengthening it has seen in revenue. Southwest says it plans to increase capacity by 5% to 6% this year—unchanged from previous guidance.

“At least for now, we’re very comfortable with our plan,” Kelly says. But every $10 increase in the crude oil price costs the airline about $300 million, he adds, so an increase in the price of crude to $110 to $120 a barrel would wipe out Southwest’s profitability if airlines did not react.

“Nobody stands still, so that’s not a prediction,” he noted. “But at that level, [the price and costs] would be a problem," even with Southwest's hedging. Southwest is 51% hedged this year for crude oil prices above $105 a barrel.