Low-cost airlines' results impress

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The Independent Online
SOUTHWEST Airlines and Continental Airlines, two US carriers that have adopted low-cost, low-fare services, reported better-than-expected results for 1993 yesterday in sharp contrast to billion-dollar losses elsewhere in the industry.

Southwest, the Texas-based airline that pioneered the low-fare high-volume strategy, reported a fourth-quarter profit of dollars 38m (pounds 26m), or 26 cents a share, on revenue of dollars 608m. The results compared with dollars 26m or 18 cents a share a year before and included a dollars 10m charge to cover the cost of its recent acquisition of Morris Air.

But the bigger surprise was Continental, America's fifth-largest carrier, which emerged only a year ago from bankruptcy with backing from Air Canada and a group of Texan investors. Because it enjoys more flexible labour agreements than most of its big-league rivals it was able to duplicate much of Southwest's low-cost strategy almost immediately.

Continental, which announced on Monday plans to extend the low-cost plan to more than half its daily flights, lost dollars 26m during the quarter compared with the dollars 13m it lost in the same period in 1992. But the figures are distorted by the airline's adoption of fresh-start accounting last April and its operating results showed considerable improvement throughout the year.

'Our significantly improved operating results evidence our continuing progress,' said Robert Ferguson, Continental's chief executive.

Salomon Brothers raised its rating of both airlines to a buy from a hold yesterday following the strong earnings reports. Julius Maldutis, Salomon analyst, said the changes reflected an industry transition to lower costs and lower fares.

The low-cost strategy involves abandoning the hub-and-spoke systems the big airlines evolved in response to deregulation during the 1980s, relying instead on looser trade union rules that allow Southwest to turn a fully loaded aircraft around in less than 15 minutes.