Southwest May Delay Expansion

Price of oil puts damper on airline’s plans to grow capacity.

Southwest Airlines Co. may delay any expansion to as late as 2014 as $100-a-barrel oil erodes profit growth at the largest discount carrier, Chief Executive Officer Gary Kelly said.

Flights and seating capacity at the biggest discount carrier will be unchanged this year, and “we haven’t made a final decision about 2013 yet,” Kelly said today in an interview. “I don’t sense we’re going to see a significant increase in capacity in 2013, if we have any at all.”

Analysts track capacity because a tighter supply of seats improves pricing power. With Southwest paying an average of 35 percent more for each gallon of jet fuel in 2011, the Dallas-based airline is under pressure to curb a history of expanding faster than its peers. The shares rose the most in four weeks.

“Southwest has always been the bad boy for the industry,” said Ray Neidl, a Maxim Group LLC analyst in New York who has a “hold” rating on the stock. “Southwest is realizing they have to be a logical player as the other airlines reduce their costs and become more competitive.”

Capacity rose 4.9 percent last year, Southwest said today. Higher energy costs are helping drive renewed efforts to cut spending and boost productivity at Southwest, which ordered more fuel-efficient jets and will add six seats to most planes as it refurbishes interiors.

“There is waste in every company, and there is a never-ending search to eliminate waste and increase productivity,” Kelly said. “We’ll be ramping up those efforts this year more than ever.”

Kelly said he also wants to assess Southwest’s success in integrating operations with those of AirTran Holdings Inc., which was acquired in May, and whether financial results improve before making capacity decisions.

“Our earnings are not where I want them to be in terms of expansion,” he said. “We’ll wait as long as possible before we make any commitments to 2013.”

Southwest climbed 3.1 percent to $9.30 at the close in New York, the biggest advance since Dec. 16. The shares have gained 8.6 percent this year.

The airline will receive 33 new planes in 2012 and retire 40, Chief Financial Officer Laura Wright said on a conference call. She said capacity this quarter will be up about 1 percent from a year earlier, and down as much as 2 percent next quarter.

 

Quarterly Earnings

Fourth-quarter net income rose 16 percent to $152 million, or 20 cents a share, Southwest said today. Excluding benefits linked to fuel-purchase contracts, profit fell 43 percent to $66 million, or 9 cents, from $115 million, or 15 cents. On that basis, earnings exceeded the 8-cent average of 14 analysts’ estimates compiled by Bloomberg.

Sales rose 32 percent to a record $4.1 billion. Fuel was the company’s largest expense at $1.49 billion. Crude oil settled yesterday at $100.59 a barrel in New York, the ninth close at $100 or more through the year’s first 11 trading days. The 50-day moving average before today was $98.90.

Southwest was the first major U.S. airline to report quarter results. The six biggest are expected to have a combined profit of $106.5 million, excluding one-time items, based on the average estimates of analysts surveyed by Bloomberg. That’s more than 70 percent less than a year earlier as fuel and lagging European demand weigh on results.

Travel demand and airlines’ revenue outlook remains “strong,” Kelly said. Southwest’s revenue from each seat flown a mile rose 8.2 percent in the quarter, and its average fare per mile increased 4.1 percent. The extra seats on each plane should produce $250 million in new annual sales, Southwest has said.

Southwest will add its own flights to Atlanta, AirTran’s main base of operations, and doesn’t plan now to add any other cities in 2012, Kelly said.

While AirTran will add some destinations in Mexico this year, capacity gradually will be reduced as flights transfer over to Southwest, he said. Kelly said the carriers are moving toward receiving regulatory approval this quarter to combine operations.

 

 Bloomberg News

 

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