Southwest Suspends Fleet Growth

Jan 22, 2009

Southwest, reporting its second straight quarterly loss and seeing post-January "softness" in bookings, said Jan. 22 it will cut its capacity by 4% in 2009 and suspend its fleet growth plans through at least 2010 because of the recession.

It will mark the first time Southwest has ever shrunk its capacity over a full year.

"The economic environment has never been more uncertain, certainly in Southwest Airlines' history, and accordingly we've got to adjust," CEO Gary Kelly said. "Our immediate goals will be to protect: We want to protect our financial health, and we want to protect our profitability."

Southwest lost $56 million in the fourth quarter, following a $120 million third quarter loss that was its first quarterly loss in nearly six years. A lot of that could be attributed to special charges tied to the declining future value of its fuel-hedging portfolio.

Kelly and other Southwest officials emphasized that the airline still turned a profit in the third and fourth quarters of 2008 when special items such as fuel hedging value adjustments were excluded. It has dramatically reduced its fuel hedging exposure for future years, saw fourth quarter revenue rise 9.7% to a record $2.7 billion-- even with a 0.8% increase in capacity--still reported its 36th consecutive year of profitability in 2008 and is hopeful for a 37th in 2009. The airline also has not given up on post-January bookings, noting that it also had early softness for December and January until a surge of close-in bookings gave it actual and expected 7% increases in unit revenue.

"We do very well, comparably, in recessionary times, and I think the fourth quarter is good evidence of that," Kelly said.

Nonetheless, Kelly and CFO Laura Wright said the airline must be cautious. "I don't think any of us are comfortable predicting one way or the other [on bookings]," Kelly said. Wright said February revenue is down 12% year-over-year right now, on 4.4% lower capacity for the first quarter.

Regarding the capacity cuts, Kelly said Southwest would make them without cutting jobs--although some employees might be "redeployed" under the carrier's plans to eliminate unprofitable flights and lower its aircraft utilization.

Regarding aircraft, Kelly said the airline's fleet growth plans have been "suspended indefinitely," but later specified that definitive decisions to have no net gain in its fleet have only been made through 2010. The airline, with 26 new aircraft deliveries, grew its fleet by a net of about 15 aircraft in 2008.

Arranging for no net gain this year and in future years required renegotiating part of its Boeing delivery schedule, and will require retiring or selling aircraft.

For example, in 2009, Southwest still will receive 13 aircraft, including three aircraft deliveries that were pushed into 2009 by the machinist strike at Boeing. But Southwest actually plans to reduce its fleet from 537 aircraft at the end of 2008 to 535 by the end of 2009 by retiring or returning 15 aircraft.

For 2010, Southwest has reduced its scheduled aircraft deliveries from 22 to 10. It has also reduced them from 32 to 20 in 2011 (10 firm orders and 10 options), and 40 to 23 in 2012 (13 firm orders and 10 options).

How the airline will keep its net fleet gain to zero will depend in part on the market for selling its aircraft, which right now is non-existent given the condition of airlines and the credit market, Kelly said.

"If we have 10 more airplanes than we want, and we can't find anyone to take them off our hands, we'll have to make a decision whether we want to retire some of our older aircraft early, put aircraft on the ground or look for additional flying," he said.

The airline's total firm orders, options and purchase rights for the 737-700 aircraft remain at 220 through 2018. Kelly said several times that Southwest still wants to grow, it's just a question of when.

Aviation Week & Space Technology photo by Joseph Pries

AVIATION WEEK Copyright 2009, The McGraw-Hill Companies, Inc. All Rights Reserved.

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