Southwest Fine-Tunes Plans for its Future

On Wednesday, Southwest Airlines CEO Gary Kelly promised Wall Street an array of changes aimed at extending the Dallas-based discounter's astounding run of 34 consecutive years of profitability.

Set for change: the airline's legendary open-seating system, its loyalty program and its route structure. Kelly also said the airline, through 2008, will throttle back its planned growth in capacity to 6% from 8% on a year-over-year basis.

Though Kelly has discussed many of the planned changes before, this appearance before investment analysts was notable for its comprehensiveness and for its targeting of business travelers, who generally are less price sensitive than leisure travelers.

Said Kelly: "We want to keep our fares low and ... friendly, but at the same time hit our profit target. That's what's being fine-tuned here."

Long the industry's low-cost leader, Southwest has seen its advantage over the large, traditional carriers shrink in the past few years. Rivals have lowered their operating costs through Chapter 11 reorganization or by restructuring outside of bankruptcy. And, like its rivals, Southwest is challenged by high fuel prices that Kelly believes are permanent.

To meet the challenge, Kelly said, Southwest needs to generate $1billion in additional revenue "over the next few years." Some of the changes in the works:

*Seating. Southwest, which has been experimenting with assigned seats, will announce its new boarding plan before year's end. Kelly did not spill the beans as to what the procedures will be, but some rivals have generated extra revenue by charging more for the most-desirable seats (those on an aisle or near the front of the cabin).

*Schedule changes. It will eliminate 39 daily round-trip, non-stop flights by year's end, including all non-stop service on some of its longest routes. Losing non-stop service: Baltimore-Los Angeles; Baltimore-Oakland; Chicago-Orange County, Calif.; Cleveland-Phoenix; Philadelphia-Oakland; and El Paso-Midland, Texas. That will allow Southwest to add 46 daily non-stop round trips in what Kelly said are key growth markets, most notably Denver and New Orleans.

*Frequent-flier program. Kelly wants to make Southwest's Rapid Rewards program more attractive to business travelers.

Next year, its fleet of all Boeing 737s will grow by only 19 planes, to 539.

It will either defer delivery of 15 new planes scheduled for delivery next year, retire or ground existing planes, return leased planes, or sell planes on the used jet market to keep the fleet from growing too fast.

Southwest shares closed Wednesday at $14.83, up 1.3%.

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