Southwest cuts…but ups frequent flyer program!
by Mark Goldstein | CEO
The future looks good for loyalty as the economy downshifts….if Southwest cuts flights and planes but ups its loyalty program…..its likely a harbinger for what others will be doing….
Southwest to Cut Some Flights
By ANN KEETON
June 27, 2007 12:15 p.m.
CHICAGO — With revenue growth slowing this year, Southwest Airlines Co. said Wednesday it will cut back on expansion plans for the fourth quarter and for 2008.
“We wanted to give ourselves a little insurance to boost our profits in the fourth quarter,” Gary Kelly, chief executive, told analysts in a presentation that was broadcast over the Internet.
To get closer to its long-stated goal for average annual profit growth of 15% each year, the leading U.S. low-cost carrier will trim fourth-quarter capacity growth to 6%, down from its earlier plan to grow 8% in the quarter. Southwest will eliminate 39 roundtrip flights, including many of its longer flights, while adding 45 new roundtrip flights in growing markets like Denver and New Orleans. The Dallas airline also plans for 6% capacity growth in 2008.
Speaking to analysts at the New York Stock Exchange, Mr. Kelly said the carrier still sees second-quarter passenger revenue coming in below a year ago. He said passenger traffic this summer is stronger than expected, mainly due to leisure travelers. But he said business travel is growing more slowly, in line with U.S. economic growth.
In 2008, the airline will reduce capital spending by “several hundred million dollars,” cutting planned growth of its 500-plane fleet of aircraft by 15 aircraft. That could include deferring new deliveries or returning leased planes. “With the economy slowing the way it has, we think this is the right thing to do,” he said.
Southwest is also reviewing growth plans for 2009 and 2010, Mr. Kelly told analysts. In Southwest’s “transformation plan” to add new revenue while keeping costs in check, Mr. Kelly said that “Our greatest opportunity lies with the business customer.”
Southwest stands by its long-term earnings growth plan, although the airline may not meet that goal every year, Mr. Kelly said. He added that the airline needs to be “very wise” in managing its labor costs. Southwest, which last year overtook American Airlines, a unit of AMR Corp., as the largest carrier of domestic air passengers, this year is facing rising costs for fuel and labor — the greatest expenses for all airlines — and stiffer competition.
Celebrating the Dallas carrier’s 30th anniversary as a stock listed on the New York Stock Exchange, Mr. Kelly on Wednesday said the company will pursue the aggressive transformation plan, while continuing its core strategy to be “an efficiency machine.”
In midday trading on the New York Stock Exchange, shares were trading at $14.82, up 1.2% and close to the 52-week low of $14.03, set June 6.
During the five-year airline industry downturn after the Sept. 11, 2001, attacks, Southwest remained profitable every year, thanks to aggressive fuel hedging. But hedges have gradually been coming off, even as jet fuel prices have gone through the roof. In 2006, Southwest paid 47% more for fuel than in 2005. Meanwhile, other U.S. airlines in recent years have substantially cut their costs, especially for labor, and new low-cost carriers have sprung up.
So far in 2007, the U.S. airline industry has been profitable, even though jet fuel costs have risen. But carriers this year have seen slower growth in yield, or revenue per passenger. JetBlue Airways Corp., a fast-growing low-cost competitor, said earlier this year it would slow capacity growth to focus on profitability.
Until now, Southwest has continued to advocate growth to pick up new market share. Mr. Kelly reiterated that Southwest is considering adding new sources of revenue, including code-sharing with other airlines and more sophisticated revenue management. He said the airline expects to add more than $1 billion of new revenue per year by 2010.
Southwest is looking at charging passengers for assigned seating and onboard Internet access. Prototypes for Internet use will be in service next year, the executive said Wednesday. He added that a decision regarding assigned seating will be announced later this year. That would reverse the airline’s previous philosophy, which hasn’t included add-on charges for meals or other services. “Our model isn’t broken, it’s just a little bent,” Mr. Kelly said.
The carrier is gearing up to add service outside the U.S., most likely by forming partnerships with other airlines. Southwest already has a successful code-sharing deal with ATA Airlines to fly to Hawaii and Mexico. That agreement is likely to be expanded as Southwest brings new technology onboard by 2009 to accommodate international ticketing and other back-office operations. Mr. Kelly said the company also will enhance its frequent-flyer program, supported by a new marketing campaign.
Mr. Kelly said Southwest will remain flexible as it pursues long-term growth. “We have to be open to all possibilities” for expansion, Mr. Kelly said, including adding more aircraft to its 500-plane fleet, making acquisitions, or ramping up code-sharing agreements with other carriers.
