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Southwest Airlines Warns Growth May Slow on Weak Revenue

AP
Wednesday, 13 Jun 2007 | 2:14 PM ET

The CEO of Southwest Airlines 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 rising 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."

Continental Airlines Inc.'s chief financial officer disputed Kelly's view that air-travel demand has slowed. Jeffrey J. Misner said demand is still strong 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," Misner said.

Continental has also been expanding its capacity for international and domestic flights. Rivals have criticized that growth, especially on U.S. flights, arguing that too many airplane seats are depressing fares.

Misner said Continental needed to increase its domestic flying partly to serve its international routes.

Continental also announced that on Wednesday 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.

Kelly and other airline leaders spoke at an investor conference in New York.

Southwest expected a 15 percent return on its invested capital. But analysts have begun to question whether that is possible.

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 by hedging investments, but those maneuvers are less effective now.

Southwest has committed to take 32 new planes next year from Boeing Co. Kelly didn't threaten to back out of that deal, but he said Southwest has options if it doesn't want all those planes.

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 relaxed 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, like 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 27 cents, or 1.9 percent, to $14.20 in afternoon trading. That's near the bottom of the 52-week range of $14.03 to $18.20.

Continental shares fell 89 cents, more than 2 percent, to $33.21

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