AirKarp

No growth for Southwest in 2012

RSS

Southwest Airlines chairman, president and CEO Gary Kelly gave a mostly upbeat assessment Thursday when discussing his carrier's $178 million 2011 net profit, its 39th straight year in the black, but insisted growth is off the table in 2012. The Dallas-based LCC's fleet will actually shrink this year as it takes delivery of its first 33 737-800s but retires 40 older 737s. Full-year 2012 capacity for Southwest and AirTran Airways (the carriers expect FAA to grant them a single operating certificate in March) will be flat year-over-year because the incoming aircraft will be larger than the retiring planes (total trips will be down 3-4%).

Kelly conceded to analysts and reporters that the company is following a "conservative" fleet strategy that eschews growth in favor of boosting unit revenue. But he described the current economy as "a very good environment. The macro-[economic] environment feels better now [compared to mid-year 2011], much more stable, much more consistent."

Nevertheless, growing capacity continues to be verboten for Southwest and most other US airlines.

If you can't grow capacity following a year in which PRASM increased 8.2%, overall revenue lifted 12.7% and your cross-town rival (and competitor on numerous routes) is occupied with Chapter 11 reorganization, when can you? Kelly's response is that high fuel costs (up 35% year-over-year in 2011) have driven up expenses and prevented Southwest from reaching its profit targets. Absent hitting and exceeding profit targets, Southwest doesn't grow capacity. Period.

For much of its history, of course, the carrier did hit profit targets and grew capacity at a fairly steady pace. Not so in recent years (though, of course, acquiring AirTran does increase the company's size, but neither Southwest nor AirTran is growing ASMs).

Southwest's discipline has always been one of its hallmarks; even if profits were down last year, earning positive net income for 39 straight years in the US air transport market is quite an achievement, one that likely wouldn't have been accomplished without sticking religiously to the credo that revenue must outpace costs, a simple business philosophy that has often been ignored by US airlines.

The rest of the US industry, however, appears to have also finally accepted that basic supply/demand operating strategy over the last couple of years. SWA's opening salvo in US carriers' 2011 earnings reporting season likely previews a trend: US airlines are making money, the economic environment is showing noticeable signs of improvement, BUT the industry won't actually grow again until it is near-certain that the growth will pay off on the balance sheet.

Please or Register to post comments.

ATWOnline Marketplace - Buy a Link Now
What's AirKarp?

ATW senior editor's blog

Blog Archive