Southwest Airlines plans to rein in capacity growth this year and next in an effort to grow profits amid a slowing U.S. economy, CEO Gary Kelly told investors today.
"For both fourth-quarter 2007 and full-year 2008, we currently plan to grow available seat miles year-over-year by approximately 6 percent, or about two percentage points less than previously reported," Kelly said. "We also plan to implement a variety of revenue-enhancing initiatives by the end of 2007 that set the stage for continued profitability into the future." The carrier said next year it plans to add 19 new aircraft to its fleet, "15 fewer than was previously reported."
Southwest will eliminate 39 roundtrip flights from its schedule, in many cases limiting frequency, but in some cases will abandon citypairs. For example, by the end of the year Southwest will cut its single daily departures to Oakland and Los Angeles from Baltimore, and will abandon the Philadelphia-Los Angeles market, among others. The carrier is focusing on cities it deems growth markets, noting that "Southwest today has added 46 new roundtrip flights in key growth market cities such as Denver and New Orleans."
Southwest in recent years has bulked up its domestic operations as network competitors have scaled back domestic available seat mile growth, favoring international expansion. As measured by ASMs, Southwest grew capacity by 8.8 percent last year and by 10.8 percent in 2005, according to its annual reports. Southwest's domestic capacity growth still trumps that of its legacy competitors.
"Growth in capacity largely comes from Southwest and Continental and a little bit from the other low cost carriers," TRX Travel Analytics vice president Scott Gillespie told attendees last month at
BTN's Corporate Travel World conference. "The other network carriers, other than Northwest, which was break-even, have all shrunk."
Kelly was among the first airline CEOs to suggest a softening of demand during the carrier's first-quarter earnings
(BTN, May 7), but initially maintained its growth forecasts.
"Given the slowing U.S. economy and fuel-cost pressures, we are taking these steps to adjust our capacity growth rate, which will help to restore profit growth," Kelly said today. "If we find that conditions change, we will reevaluate our growth plans for future periods. In this economic environment, we simply need to take less risk and grow more slowly."
Meanwhile, Kelly said the carrier is targeting an additional $1 billion in incremental revenue "over the next few years" through fourth-quarter plans to "enhance its low-fare structure," amend its frequent flyer program and "unveil a new boarding/seating method." The carrier has been flirting with assigned seating in San Diego, Southwest representatives said.