Southwest 3Q profit rises, investors fret about rising costs

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DALLAS (AP) - Southwest Airlines said Thursday that third-quarter profit rose 16 percent, but it warned that fuel and other costs are rising surprisingly quickly, and the company's shares sank.

Southwest has been struggling to control costs, with labor, maintenance and airport expenses all rising. The company said that a key cost figure that strips out the impact of fuel would rise at least 3 percent next year.

A Raymond James analyst called the looming increase in so-called unit costs "a negative surprise." A Stifel analyst said it was "way above our expectations."

Chairman and CEO Gary Kelly noted that Southwest has spent money to improve its frequent-flyer program and reservation system, which he said increased revenue, and to buy new planes. It also faces higher costs because it carries more passengers and more bags than ever, he said.

Kelly said some cost increases are acceptable, and he promised to focus on controlling others.

"Certainly we can't be satisfied with that kind of unit-cost increase, and we're not," the CEO said on a call with analysts.

Stifel analyst Joseph DeNardi said rising costs could give Southwest "a greater sense of urgency" to raise prices.

Southwest shares fell $3.84, or 7 percent, to $50.75 in midday trading.

Kelly said a trend of rising revenue was continuing into the fourth quarter, which started Oct. 1. He called that a nice recovery from the first half of the year.

Southwest was able to blunt some of the increase in fuel with financial hedges against rising prices. Southwest's fuel costs rose 16 percent, or $168 million, less than half as fast as at American Airlines, which does not hedge against rising fuel prices.

Southwest predicted a fourth-quarter fuel cost of between $2.35 and $2.40 a gallon - more than it paid in the third quarter.

Dallas-based Southwest, the nation's fourth-biggest carrier, said it earned $615 million in the third quarter as it booked more passengers on more flights. That worked out to $1.08 per share, 2 cents better than the average forecast of analysts surveyed by Zacks Investment Research.

Revenue rose 5.1 percent to $5.58 billion, also slightly higher than expected.

Revenue for each seat flown one mile, a closely watched figure in the airline business, rose 2.3 percent, an indication of rising prices for passengers.

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David Koenig can be reached at http://twitter.com/airlinewriter

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