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Southwest Airlines may slow growth plans

The CEO of Southwest Airlines Co. said Wednesday that the low-cost carrier could be forced to put the brakes on growth because revenue isn't rising as fast as expected.
/ Source: The Associated Press

The CEO of Southwest Airlines Co. said Wednesday that the low-cost carrier could be forced to put the brakes on growth because revenue isn’t rising as fast as expected.

Southwest has been growing about 8 percent a year by adding planes and serving more cities, but it might have overshot the runway. Occupancy on its planes has fallen, and it can’t raise fares enough to cover increased fuel costs.

Chief Executive Gary Kelly said company officials set their 2007 plans assuming a stronger economy, “and if that’s not going to be the case, then we’ll need to make some adjustments.”

Southwest is still a growth company, Kelly declared, but 8 percent “is not a magic number.” He said it was logical to think that “if the revenue environment is weaker perhaps we should grow slower, and that’s just something that we’re thinking through.”

Kelly spoke at an investor conference in New York, where executives of other carriers offered different views on challenges facing the airline industry, which is making a precarious comeback after a five-year nosedive.

Gerard Arpey, chairman and CEO of American Airlines and parent AMR Corp., blamed too many airlines adding too many flights.

“We don’t see a demand problem. We see a supply problem,” Arpey said.

One of those carriers that has expanded, Continental Airlines Inc., sees demand holding up well — if fares are low enough.

“There are plenty of folks out there that really do want to fly ... we don’t see any demand weakness; it’s really a revenue issue,” said Jeffrey Misner, Continental’s chief financial officer.

Separately, Continental announced Wednesday that it reached a deal with Boeing Co. to delay the delivery of six jets in 2009 until 2010. The Houston-based airline still plans to take delivery of 30 planes in 2008 and 24 in 2009.

Analysts say the airline industry would be helped if there were fewer carriers, which would give the survivors more pricing power. But after US Airways Group Inc.’s hostile bid for Delta Air Lines Inc. failed, the prospects for mergers are uncertain.

UAL Corp.’s United Airlines — which failed to buy US Airways in 2001 because of regulators’ opposition — is still interested in merging with a carrier that is strong in the Northeast and has a hub in the South, said Chief Financial Officer Jake Brace.

Delta, US Airways and Continental all have been mentioned as possible United partners, but Brace didn’t drop names, and he said UAL wouldn’t make a hostile bid.

Southwest, the only major U.S. carrier to remain profitable through the downturn that started in 2001, aims to earn 15 percent return on its invested capital. But analysts have begun questioning whether the carrier can hit the mark.

Revenue must rise 5 percent for Southwest to achieve the goal, Kelly said, and “that won’t happen” this year based on results so far and forecasts for the second half of the year.

Kelly said a weakening economy has hurt travel demand and undercut the airline’s ability to raise fares. Meanwhile, Southwest’s costs are rising. For years it offset rising fuel prices through hedging investments, but those maneuvers are less effective now.

Since 2004, Southwest has added service to Philadelphia, Pittsburgh, Denver, Fort Myers, Fla., and Dulles Airport outside Washington. All have performed on par for new cities, officials said, but Southwest’s biggest boost has come in its hometown of Dallas, thanks to Congress relaxing flight restrictions at Love Field.

Kelly declined to say whether Southwest would launch service to more cities this year. It is considering new sources of revenue, such as charging for in-flight wireless connections.

For future growth, Southwest is looking to strike so-called code-sharing deals that would let it piggyback off other carriers that serve Europe and Asia — possibly as early as 2009.

Shares of Southwest fell 12 cents to $14.35 Wednesday. That’s near the bottom of the 52-week range of $14.03 to $18.20.

Continental shares lost 62 cents to $33.48; AMR shares rose 13 cents to $25.51; while UAL shares climbed 43 cents to $35.03.