updated 7/15/2004 1:58:17 PM ET 2004-07-15T17:58:17

Southwest Airlines Co. chief executive James Parker stepped down Thursday, saying he was retiring for personal reasons. The company said he would immediately be replaced by chief financial officer Gary Kelly, who had previously been tapped as Parker’s eventual successor.

The surprise announcement came as the Dallas-based airlines reported a 54 percent drop in second-quarter profits, missing Wall Street targets amid higher expenses for fuel and labor.

Southwest chairman Herb Kelleher said in a statement that the board accepted Parker’s decision with “deep regret and profound gratitude” for Parker’s contributions to Southwest’s success.

Laura Wright, Southwest’s treasure and vice president of finance, will succeed Kelly as CFO, Kelleher said.

In early afternoon trading, Southwest shares were down 28 cents at $14.78 on the New York Stock Exchange.

For the three months ending June 30, Southwest earned $113 million, or 14 cents per share, compared to $246 million, or 30 cents per share, in the same period last year.

Analysts had expected the company to earn 16 cents per share, according to a survey by Thomson First Call.

“Overall, the quarter was in line with expectations,” said Susan Donofrio, an analyst with Fulcrum Global Partners LLC. “More important were the company comments on looking ahead. The company’s comments with respect to booking and pricing bodes well for meeting future earnings expectations.”

Southwest is among the few U.S. airlines to stay profitable during a difficult period for the industry. Delta Air Lines Inc. is struggling to stay out of bankruptcy, while United Airlines is trying to exit from bankruptcy protection. US Airways emerged from bankruptcy protection last year.

The airlines are selling more tickets than a year ago but finding it difficult to make a profit because of a flood of cheap fares, many of them from low-cost carriers, including Southwest.

Southwest’s revenue in the second quarter rose 13.3 percent to $1.72 billion from $1.52 billion.

That, however, was offset by rising costs, including a 6 percent increase in salaries and benefits, to $622 million, and a 26.8 percent jump in fuel costs, to $246 million.

In a statement released with the earnings, Parker said results in the current quarter would beat Southwest’s profit of $106 million in the third quarter of 2003.

He also said the second-quarter results were affected by significantly higher jet fuel prices, a recent tentative contract agreement with flight attendants that was retroactive to 2002, and an early-retirement offer that was accepted by more than 1,000 employees.

Southwest said the flight attendants’ deal, on which employees are now voting, added $12 million in pretax costs during the April-June period.

Southwest also said that the early-out offer to nearly all of its 34,000 workers resulted in a pretax cost of $11 million in the quarter. The offer has ended.

Parker said he was pleased with the increased revenue and traffic, considering what he called a difficult environment within the airline industry. Southwest’s planes flew at average 76.3 percent occupancy, 6.2 percentage points higher than a year earlier.

Parker said passenger traffic remained strong in July, the first month of the new quarter, and vacation-travel bookings looked good through August, which he said would make third-quarter revenue per miles flown by passengers higher than last year.

The company said it is continuing to use options to buy about 80 percent of its fuel at an average price equivalent to about $24 per barrel of oil. The company said it is 80 percent hedged in 2005 at an average cost of $25 per barrel.

“They’re very solid and are hedged through 2005. Other airlines are more impacted” by rising fuel costs, Donofrio said. Crude oil is selling for about $41 a barrel.

For the first six months of the year, Southwest reported earning $139 million or 17 cents per share, compared with $270 million or 33 cents per share a year before. Excluding the government grant, the first-half 2003 figures would have been $127 million or 16 cents per share.

Southwest Airlines Inc. said Thursday that second-quarter earnings missed analyst estimates by 2 cents per share, due to fuel costs, the company's July early out offer, which was accepted by more than 1,000 employees, and its tentative agreement with flight attendants.

Quarterly earnings fell to $113 million, or 14 cents per share, from $246 million, or 30 cents per share, a year ago. Excluding a $271 million government grant, year-ago earnings would be 13 cents per share. Wall Street expected the low-cost airline to earn 16 cents per share in the latest quarter.

Total revenue rose 13.3 percent to $1.72 billion from $1.52 billion a year ago.

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