Southwest Airlines (LUV) widened its profit in the fourth quarter on stronger passenger revenues, however the improved results could not mask a sharp drop in earnings in fiscal 2011, as fuel costs continued to place heavy pressure on operating margins.  

While the company reported a stronger year-over-year profit last quarter, the carrier booked a 61% decline for the full year, to $178 million, or 23 cents a share. That’s down from $459 million, or 61 cents, last year and sharply below average estimates of 41 cents.

The airline attributed the decline to significantly higher fuel prices, with quarterly economic fuel costs per gallon increasing 33.7% in the fourth period to $3.29, compared with $2.46 a gallon last year. For the full-year, fuel costs were $3.18 a gallon, up 34.7% year-over-year.

The Dallas-based carrier earned $152 million, or 20 cents a share, during the period ended Dec. 31, which is up from $131 million, or 18 cents a share, in the year-earlier period.

Excluding one-time items, the company said it earned 9 cents a share, ahead of average analyst estimates of 8 cents in a Thomson Reuters poll.

Revenue for the three-month period ended Dec. 31 was $4.11 billion, up 32% from $3.11 billion a year ago, but just below the Street’s view of $4.13.

The carrier saw an 8.2% increase in passenger revenues during the most recent period, driven by record yields and continued high load factors. The company said it is on track to book another period of strong passenger revenues in the first quarter of 2012.

“High energy prices demand continued focus on improving productivity and eliminating waste,” Southwest CEO Gary Kelly said in a statement.

To help tackle the higher expenses, Southwest announced in December that it will launch the new Boeing (BA) 737-MAX starting in 2017, the company’s newest, fuel-efficient jet.

Southwest, which acquired AirTran Airways in May, continued to expand its reach in the fourth quarter, opening new routes between Newark and South Carolina and increasing its presence at key hubs such as New York LaGuardia, Boston and Milwaukee.

Kelly said it will take “several years to fully integrate” AirTran, however he touted the “tremendous progress” over the last eight months.

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