Southwest to reduce plans for expansion
Southwest Airlines Co., facing rising costs and tougher competition, plans to trim its expansion through next year because of a slowing U.S. economy and softening travel demand, its chief executive said Wednesday.
Southwest, the leading U.S. discount carrier, intends to adjust its route schedule and reduce its planned fleet expansion by 15 aircraft, CEO Gary Kelly said during a meeting here with analysts and investors.
The measures would lead to capacity growth of about 6% in the fourth quarter of this year and in 2008, down from a planned increase of about 8%.
The smaller expansion, as well as business initiatives that Southwest hopes will add more than $1 billion to annual revenue by 2010, should help it meet its target of 15% annual earnings growth in the future, though the changes probably will be too late for this year, Kelly said.
“Our model isn’t broken. It’s just a little bent,” he said.
Dallas-based Southwest, which is often credited with inventing the low-cost airline model, has gotten off to a slow start this year, buffeted by tougher competition, higher fuel costs and softening demand for air travel.
The company, which flies only Boeing 737 aircraft, may return leased planes, defer deliveries or sell some jets to slow its fleet growth.
The No. 6 U.S. airline left open the possibility of a further slowdown in growth.
“We could find that that growth rate is a little bit too fast,” Kelly said.
Slower growth could help Southwest reduce capital expenses and lower operating costs, which have been rising as its fuel hedging contracts expire and because the company pays some of the highest wages in the industry.
“It’s the equivalent of the biggest, baddest guy on the block backing off,” airline consultant Robert Mann said. “It gives [traditional airlines] a little more breathing space. It may give them a little more pricing power.”
After sluggish revenue growth in the first quarter, as measured against seats available, Southwest expects unit revenue and earnings to decline in the second quarter. But it is hopeful for a pickup in the second half and said Wednesday that bookings for July and August were strong.
To combat rising fuel costs and offset its high wage bill, Southwest plans to start generating revenue from sources other than selling plane tickets. These initiatives could include charging for assigned seats, offering in-flight Internet and booking hotel rooms through its website.
Southwest shares, which have fallen about 8% over the last 12 months, rose 19 cents Wednesday to $14.83.
