Southwest plans to speed growth, records another quarterly profit

THE BALTIMORE SUN

Bolstered by a recent surge in fare-conscious summer vacationers, Dallas-based Southwest Airlines reported its 49th consecutive quarterly profit yesterday and pledged to accelerate its growth plans, which airline officials say could make Baltimore-Washington International Airport its top destination after a new pier is completed in 2005.

"It could very easily become the largest departure point" in the network, said Gary C. Kelly, Southwest's chief financial officer, in a conference call with reporters yesterday. "That's not a mandate, but that is a reflection of the kind of opportunities we see out of Baltimore."

The low-fare airline, which controls 44 percent of the BWI market, reported second-quarter net income of $246 million, or 30 cents per share, compared with $102.3 million, or 13 cents per share, in the corresponding period in 2002.

The results included $271 million in federal aid to help cover increased security costs resulting from the Sept. 11 terrorist attacks.

Without the federal money and other unusual items, Southwest earned $103 million, or 13 cents per share, compared with $84 million, or 10 cents per share, in the second quarter of 2002. Analyst estimates called for a profit of 12 cents per share. Sales climbed 2.9 percent in the quarter to $1.52 billion, while total costs rose 7.1 percent.

"The key is that the company has been able to keep its cost inflation in check and now it's starting to benefit from fuller planes and higher prices," said Glenn D. Engel, a Goldman Sachs analyst. "I think Baltimore has been one of their more successful markets and it seems they have plenty of planes, so they can certainly afford to put more in Baltimore."

The only major airline to remain profitable during the worst slump in aviation history, Southwest continues to grow and gain market share as its larger competitors slash flights to cut their losses.

Nowhere has that been more apparent than at BWI, where Southwest took advantage of US Airways' bankruptcy in 2002 to pick up passengers.

Recent growth has made BWI the third-busiest airport in Southwest's network with 156 daily nonstop flights to 35 destinations. As part of a $1.8 billion expansion program, BWI is building a new Pier A-B that will create more than a dozen new gates for Southwest planes.

The growing airline is engaged in an aggressive fleet expansion program at a time when its competitors are parking hundreds of planes.

Kelly said the airline expects to expand its fleet by a net of 25 planes in 2004, resulting in a 6 percent to 7 percent increase in capacity. The company flies only Boeing 737s, helping it to minimize its maintenance and training costs.

The airline is expected to add 92 planes through 2006, making it the fastest-growing fleet among major carriers. Capacity growth will accelerate to 10 percent in 2005, airline officials said.

Some of the new planes will likely head to St. Louis as a result of American Airlines' announcement last week that it will pull half its flights from the city as part of a restructuring plan.

Kelly said Southwest sees major growth opportunities in the St. Louis market, where the carrier already has a strong presence.

"They seem to have more confidence and they are stepping up their growth," said Raymond E. Neidl, an analyst with Blaylock & Partners in New York.

Like all airlines, Southwest suffered a drop in demand during the Iraq war and SARS scare, said Kelly, the carrier's chief financial officer. But demand from leisure travelers exploded in mid- to late June, he said. That trend has continued in the current quarter, though demand from business travelers remains weak as a result of a sluggish economy.

"What this shows is that Southwest is not immune to the challenges faced by the entire industry," said Henry H. Harteveldt, a senior analyst with Forrester Research.

Other major carriers are expected to continue losing money into next year, when many analysts expect to see a return to profitability. American lost $75 million in the second quarter, while Northwest Airlines, Delta Air Lines and Continental Airlines posted profits as a result of government aid.

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