Southwest CEO predicts lower earnings Airline may miss target due to fuel costs, weak revenue growth

Southwest Airlines Co. probably won't meet its earnings targets this year as the combination of fuel costs and weakening revenue growth are making 2007 less prosperous than the carrier had hoped, its chief executive said Wednesday.

CEO Gary Kelly said Southwest needs its unit revenue - revenue per seat per mile flown - to increase 5 percent this year to increase earnings and to hit Southwest's stated target of a 15 percent return on invested capital.

"Based on our first-quarter results, our second-quarter trends and the best guess we have about the second half of the year, that won't happen," Mr. Kelly said, speaking at a Merrill Lynch conference in New York City.

Mr. Kelly said Southwest doesn't plan to slow its 8 percent growth but will consider cutting back its expansion if revenue doesn't improve.

"We are a growth company, and we will continue to grow," he said. "The 8 percent is not a magic number. It's a best guess."

Southwest had predicted 2007 would continue the trend of 2006, in which unit revenue climbed 17.5 percent over the previous year. That hasn't happened, he said.

"Basically what we're trying to assess at this point is how long the revenue environment will continue. ... If trends don't change, I think it would be appropriate to change the growth rate," he said.

Speaking at the same conference, Gerard Arpey, chairman and CEO of American Airlines Inc. and parent AMR Corp., noted that American has reduced its capacity each year since 2003, while the industry as a whole has been growing.

"From an industry standpoint, we find ourselves swimming against the tide when it comes to controlling supply as it relates to demand," he said. "While the growth of low-cost carriers continues unabated, despite their generally poor financial results, we have kept our capacity, and our domestic capacity in particular, in check."

American has seen its airplanes become fuller and its average fares go higher because it has limited the amount of capacity it is flying, he said.

Continental Airlines Inc. chief financial officer Jeff Misner acknowledged that his airline has been criticized for growing too fast, but he defended his airline's plans to expand its capacity by between 5 percent and 7 percent a year.

"We feel that's a very manageable, comfortable rate of growth," Mr. Misner said. "It keeps the machine in place, if you will, of hiring, training and bringing people on board. Everybody we bring on board now is coming off the streets, so that growth we've got from a labor-unit cost basis is very low-cost. Everybody is back from furlough. Everybody comes in at the bottom of the wage scale."

However, he said, Continental agreed Wednesday to defer delivery of six of the 30 Boeing 737 jets it was scheduled to receive in 2009. Those six will be delivered in 2010, along with four other 737s.

In addition, the airline is looking to lease or sell at least five of its older Boeing 737-500 jets and perhaps get rid of all 15 in its fleet if it finds takers, Mr. Misner said.

AMR shares rose 13 cents Wednesday to $25.51 in New York Stock Exchange trading, while both Southwest and Continental shares fell. Southwest was off 12 cents to $14.35, and Continental shares dropped 62 cents to $33.48.

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