Southwest, Surprising Some, Predicts More Profit Gains

Southwest Airlines Co. reported second-quarter earnings Thursday that beat forecasts and predicted a 15% profit rise in 2006, surprising investors worried about higher oil prices.

Southwest shares rose 4% as the top U.S. carrier by market value remained bullish about its outlook even though its crucial fuel-price hedges could weaken in 2006.

Extensive purchasing of contracts that lock in prearranged prices of crude and heating oil has helped the low-cost airline shrug off record oil prices that have pushed most of its rivals into the red.

Second-quarter profit increased to $159 million, or 20 cents a share, from $113 million, or 14 cents, a year earlier, beating Wall Street expectations by 2 cents a share, according to Reuters Estimates.

Revenue rose 13.3% to $1.94 billion from $1.72 billion.

But the hedges, which cut quarterly operating costs by $196 million, will protect Southwest less and less over time.

So analysts -- some of whom had expected the diminished hedge to depress Southwest Airlines’ earnings for next year -- were surprised when Southwest Chief Executive Gary Kelly said that he thought more earnings gains were in reach for next year.

He cautioned that the blue-skies scenario would depend on continued strength in demand for air travel and a strong economy. It would also be helped by moves by weaker competitors to cut back the number of flights, or available seats.

The airline realizes it must prepare itself for the worst in 2010, when all hedges expire, he said. For next year, it is 65% hedged at $32 a barrel, compared with 85% at $26 a barrel for the second half. By 2009, that will drop to 25% at $35 a barrel.

Southwest shares rose 44 cents to $14.42.