Earnings Preview: Southwest saves on fuel

OVERVIEW: Analysts believe that Southwest earned a slender profit--less than $80 million--while most other carriers were losing money. Largely that's because Southwest hedged more of its fuel expense, buying options that let it lock in lower prices for most of its needs.

Southwest has hedged about 70 percent of its fuel needs at the equivalent of $51 per barrel, a discount of more than 60 percent off Monday's oil prices of around $131.

Other airlines plan to cut flights later this year and are laying off thousands of workers. Southwest has slowed its growth plans in the past year but still expects to expand "modestly," according to Chief Executive Gary Kelly.

BY THE NUMBERS: Analysts polled by Thomson Financial, on average, expected Southwest to report a second-quarter profit of 12 cents per share excluding special items on revenue of $2.86 billion.

ANALYST TAKE: Southwest could benefit from the turmoil swirling around other carriers. Daniel McKenzie, an analyst with Credit Suisse, said this month that as other airlines cut flights, Southwest can shift unprofitable flying to more attractive routes, producing better earnings.

WHAT'S AHEAD: Despite an unmatched string of profitable quarters in the airline industry, Southwest is under pressure to control costs and increase revenue as its fuel hedges decline in value over the next several years.

Dallas-based Southwest is in labor negotiations with its unions over new contracts that will test its cost discipline. The company hopes to boost revenue next year by selling travel to Canada, Hawaii, Mexico and the Caribbean on partner airlines.

STOCK PERFORMANCE: Southwest's stock chart has zigzagged upward since the start of the year, as investors bet that it could handle high oil prices better than its rivals. The shares have gained about 20 percent this year while most other airline stocks have tumbled.

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