CEO: Southwest's strategy shifting

Jun. 28--For 36 years, Southwest Airlines has pursued two basic principles. Rule 1: Keep everything simple. Rule 2: Don't do anything that violates Rule 1. The result has been an anti-corporate flying experience for passengers, with no frills, low...

"Southwest has for years added capacity to take advantage of the weakness of the LCCs, but it's caused the profits to stagnate," Mr. Hamilton said. "The analysts certainly know full well that the profits have been generated by the fuel hedging. Therefore, you see them not buying into the stock."

Southwest shares, which rose 19 cents to $14.83 Wednesday in New York Stock Exchange trading, have risen steadily for much of their history.

But prices have been stuck in a $14-to-$18 range for several years, despite Southwest's repurchase of 83.5 million shares from early 2006 through March 31 as part of $1.8 billion in buybacks authorized by the Southwest board.

As Southwest adjusts, it is having to consider adding products, which can add complexity to its operations. But industry analyst and consultant Michael Boyd, in a May 29 comment, warned that "bare-bones product offerings" are not the trend among low-cost carriers.

"In fact, the most pressing challenge facing Southwest today is that they're competing with LCCs like JetBlue, AirTran, and Frontier (not to mention restructured comprehensive network carriers such as Delta) that are offering a higher value-to-cost product perception -- things like seat assignment, free snacks (nutritional value notwithstanding) and in-flight entertainment -- at the same fares," Mr. Boyd wrote.

To keep its revenue share in "some very key markets," Southwest "will need to at least add seat assignment to their product," Mr. Boyd said.

Such a move would attract the higher-paying business travelers who prefer to know in advance where they're sitting. But assigned seating could slow Southwest's traditionally quick boarding process.

Mr. Kelly, in his comments to analysts, said Southwest has been profitable for 34 straight years and had record profits last year.

"We have a very strong balance sheet, we have lots of liquidity, we have the best fuel hedge, low operating costs and very prudent growth estimates. But because of escalating costs, our profits are lagging and we intend to adjust and fix that," he said.

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