Southwest Airlines slows its growth plan

Southwest Airlines, the largest low-fare carrier, said it will expand less than planned, drop unprofitable routes and pursue more business travelers to help blunt rising fuel costs and sluggish demand.

Southwest will add 19 Boeing 737s in 2008 instead of 34, Chief Executive Officer Gary Kelly said Wednesday in New York. The Dallas-based airline will slow capacity growth in the fourth quarter and all of 2008 to 6 percent, from 8 percent, and is still studying its 2009 and 2010 plans, he said.

Trimming growth and winning more corporate-travel accounts will help fill planes and maximize revenue from each flight. Southwest slowed its expansion only once before in 35 years of flying, when it deferred delivery of 19 jets after the 9/11 terrorist attacks.

"They are making some very necessary and smart changes that could prove very fruitful," said Jim Corridore, a Standard & Poor's analyst. "It should be relatively easier for them to increase their penetration among business travelers."

Southwest's cost to fly each airplane seat a mile, a measure of efficiency, has risen 20 percent in the last four years, threatening the airline's ability to grow profits while charging its signature low fares. The changes announced Wednesday will "help restore profit growth," Kelly said.

"Our profits are lagging and we intend to adjust and to fix that," he said. "Our model isn't broken, it's just a little bent."

Shares of Southwest rose 19 cents to $14.83 on Wednesday. They declined 4.4 percent this year before Wednesday.

Southwest plans changes to its boarding and seating practices, frequent-flyer program and fare system. Those shifts, along with a new advertising campaign, will be aimed at wooing business travelers, who make up 40 percent of the airline's passengers. Southwest didn't give details Wednesday, saying the changes will be announced in the fourth quarter.

In total, Southwest expects to add $1 billion in new annual revenue by 2010, Kelly said. Sales totaled $9.1 billion in 2006.

The revenue target would amount to about $10 a passenger, based on projections that the airline will carry 100 million travelers by 2010, said consultant Robert Mann of R.W. Mann & Co.

"That's not a ton of money," Mann said. "That's a good goal; not terribly aggressive. I'd say that's doable."

Southwest is studying operational and revenue changes, including ways to shorten airport wait times by modifying baggage-handling and check-in procedures, and whether to sell items onboard or offer travel products on its Web site. The review of its boarding process began last year. Southwest is the only major carrier that doesn't assign seats.

"I would have liked them to be a little more forthcoming on what they are going to do with boarding," S&P's Corridore said. "It is the thing customers complain about most — the cattle-car boarding."

During the fourth quarter, Southwest will eliminate 39 existing round-trip flights, including some longer nonstop routes such as Los Angeles to Baltimore and Chicago to Oakland, Calif. Only one route is being discontinued — between El Paso and Midland, Texas. The airline will use the capacity to add 46 new round-trip flights in areas where demand is growing.

"Southwest is morphing more and more into a regular airline," Susan Donofrio, a Cathay Financial analyst, said in a note to investors. Southwest is no longer "the less-mature, higher-growth airline that it was in the past."

Southwest hasn't decided how to trim the number of aircraft being added to its fleet next year, Kelly said. The airline may return some planes at the end of their leases, defer deliveries from Boeing or sell some of the jets it owns.

"It makes more sense to us to sell older aircraft and return aircraft under lease rather than defer deliveries," said Douglas Runte, an analyst with RBS Greenwich Capital Markets. Older planes burn more fuel and have higher maintenance costs. Southwest's older 737s have an average age of 16 years, Runte said.

Jet fuel has averaged $1.93 a gallon so far this year, 27 percent more than the same period in 2005.