Southwest Airlines’ quarterly net loss narrowed, as lower fuel costs and service cuts insulated the largest domestic US carrier from a severe downturn in air-travel demand.

In a dramatic departure from its longtime growth strategy, Southwest shed 10 per cent of its flight schedule in the past year, refrained from adding new aircraft and targeted New York and other large markets the company had previously ignored.

The tactics, along with a major fare sale, helped limit losses even as total operating revenue slipped 7.8 per cent. Before certain employee-compensation and fuel hedging costs, Southwest posted a quarterly profit that beat Wall Street’s average estimate.

“To produce a profit, excluding certain items, in this environment is a remarkable accomplishment,” Gary Kelly, Southwest’s chief executive, said on Thursday in a statement. “Sixty days ago, even a modest profit seemed unattainable.

“We have staged an impressive revenue recovery from where we were in June.”

The pace of the year-over-year revenue shortfall slowed during the third quarter, and Mr Kelly noted passenger sales were on pace to climb 1 per cent this month.

“September’s strength was a major surprise to us, suggesting that the recent schedule optimisation is generating sustainable revenue gain,” Gary Chase, a Barclays Capital analyst, wrote in a note to clients.

Southwest’s net loss narrowed to $16m, or 2 cents a share, from $120m, or 16 cents, a year earlier. Excluding certain items, the Dallas-based company earned $23m, or 3 cents a share. The consensus analyst estimate was 2 cents.

Total revenue fell to $2.67bn. Operating expenses declined 5.7 per cent, to $2.6bn.

Southwest’s shares fell 57 cents, or 5.7 per cent, to $9.47 in trading on the New York Stock Exchange. The stock has surged along with those of peers such as American Airlines and Delta Air Lines in the last three months as investors bet that improving economic conditions would spur more business and leisure travel.

The company reported a 2.8 per cent increase in enplaned passengers during the third quarter. Capacity cuts helped lift Southwest’s load factor, or the percentage of seats occupied by passengers, to 79.6 per cent.

Southwest plans to trim its capacity by 8 per cent during the fourth quarter.

Mr Kelly also attributed the fuller flights to an influx of new customers lured by the airline’s decision to avoid charging for baggage checks.

Southwest is the first major US airline to report quarterly results.

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