Southwest won’t expand fleet through 2015 to reach profit goal

04/17/2014 9:14 AM

04/17/2014 9:14 AM

Southwest Airlines will freeze the size of its jet fleet through 2015, a one-year extension, as the largest discount carrier focuses on boosting its return on invested capital.

CEO Gary Kelly has said the airline intended to hold the number of planes – now about 680 – steady through 2014. He said in January that he wanted to “match and exceed” a 15 percent return that Southwest projects reaching this year after ending 2013 at 13.1 percent.

“In 2014 and 2015, the plans are for the fleet to be flat,” Chief Operating Officer Mike Van de Ven said in an interview at Southwest’s Dallas headquarters. “We should be in a situation after 2015 to grow the fleet if the economics and the business are right.”

Showing a higher return on invested capital is part of Southwest’s push to broaden its appeal to investors, along with stock buybacks and the longest-running dividend among major airlines. Delta Air Lines, the only other carrier in the Standard & Poor’s 500 Index, also has a 15 percent goal and matched that figure last year.

Keeping the fleet unchanged also raises the prospect of cutbacks in Southwest’s less profitable flights as it expands its network. By the end of 2015, Southwest has said, it would more than double service at Washington’s Reagan airport, add New York and Dallas flights, and start international routes from Houston.

“If you’re going to expand in certain locations, you’re going to have to adjust your network in other locations,” said Kevin Crissey, an analyst at Skyline Research in Mahwah, N.J. “Some other airlines are eagerly and anxiously waiting to know where those openings will be to decide if they want to backfill those locations with their own capacity.”

Southwest’s stock, which gained 84 percent in 2013, was up 22 percent more this year as of Tuesday. In May, the airline quadrupled its dividend, paid for 147 straight quarters, to 4 cents a share and boosted a stock repurchase program by $500 million to $1.5 billion.

While Southwest describes the 15 percent return as a long-standing target, it hasn’t achieved that mark since 2000. Kelly mentioned the figure in 2008 at a transportation conference, and the airline cited it in a 2009 report to employees and investors.

“We’ve been working to get back on track since 9-11,” spokeswoman Brandy King said. U.S. economic weakness that damped demand and average fares “significantly impacted” Southwest’s progress toward its ROIC goal last year, King said.

The arrival of larger, more efficient jets in 2014, which will replace other planes, should increase revenue and cut operating costs, a step toward the 15 percent target, the airline has said.

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