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Southwest Could Grow, Not Shrink

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Bloomberg News

The Tampa Tribune

Published: June 18, 2008

Southwest Airlines Co., the only big U.S. carrier that's still profitable, may expand its fleet next year as competitors shrink operations to blunt surging fuel bills, Chief Executive Officer Gary Kelly said.

The largest low-fare airline may keep as many as 10 older planes set to be retired in 2008 and then add 14 new jets in 2009, Kelly said. As United Airlines and others prepare to pare flying in the fourth quarter, Southwest has delayed deciding on expansion, he said, without giving a time frame.

"We're all curious to see what the effects of the cutbacks in the fourth quarter will be," Kelly said Monday in an interview. "We're willing to grow the fleet, and that's very different than what's going on with most of our competitors."

Southwest is benefiting from its strategy to lock in fuel prices in advance. About 70 percent of its fuel needs this year are hedged at prices equivalent to oil at $51 a barrel, less than half of Monday's $134.61 closing price.

After Frontier Airlines filed for bankruptcy court protection, Dallas-based Southwest said May 20 it would increase service in Denver, which is Frontier's home airport and a hub for United.

"That certainly has been Southwest's historical pattern," Standard & Poor's credit analyst Philip Baggaley said in an interview. "They have the financial strength to exploit opportunities, more so than any other airline."

Net income will be $196 million in 2008, the average of three analyst estimates compiled by Bloomberg. Although that would be the smallest profit since 1995, Southwest would be bucking industrywide losses that may reach a record $7.2 billion this year. The airline earned $645 million in 2007.

Southwest gained 30 cents, or 2.1 percent, to $14.30 in New York Stock Exchange composite trading Tuesday. The shares have risen 17 percent this year, compared with a 36 percent plunge for the Bloomberg U.S. Airlines Index.

Kelly said Southwest would keep promoting its policy of not charging fees for services such as checking an extra bag or nonalcoholic drinks, as other airlines are doing to help counter the 81 percent surge in jet fuel in the past year.

Southwest has, however, added a preferred boarding charge in its effort to boost revenue from sources other than ticket sales by $1.5 billion annually by 2010. Last year's revenue was $9.86 billion.

Adding more planes to Southwest's 534 Boeing 737s would expand the second-biggest U.S. fleet, behind only AMR Corp.'s American Airlines. U.S. carriers led by United and American have unveiled plans since April to ground as many as 378 planes through next year and cut at least 10,300 jobs. Most of the 2008 reductions will occur after the summer travel season.

Michael Boyd, president of consulting firm Boyd Group in Evergreen, Colo., expects "zero" opportunity for Southwest as other carriers cut back. Large airlines aren't dropping any major markets, and "only marginal capacity is going away," he said in an interview.

Kelly said deciding where to put new service is "a real balancing act."

"It's just not an environment that pays to be overly aggressive," he said. Southwest is now the fifth-largest U.S. airline by traffic.

The industry and Southwest both may suffer should the carrier speed its growth, said James M. Higgins, a Soleil Securities Corp. analyst in Solebury, Pa.

"Southwest needs to get their overall pricing up, too," said Higgins, who advises buying the shares. With Southwest's prices lower than those of its rivals, having a bigger supply of those fares would undercut the industry's efforts to get rid of its cheapest seats and cover more of its costs, he said.

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