With Demand Weak, Southwest Aims To Cut Overhead

Oct. 19, 2012
To offset rising costs and sharply higher fuel prices, the carrier will trim its workforce next year and cut $100 million in corporate overhead

Oct. 19--Southwest Airlines Co., Philadelphia's second-busiest carrier, posted a small third-quarter profit but saw weaker travel demand and softer ticket pricing in September.

To offset rising costs and sharply higher fuel prices, chief executive officer Gary Kelly said, Southwest will trim its workforce next year and cut $100 million in corporate overhead. He declined Thursday on an earnings call with investors to specify how the head count would be reduced.

"We may sharply curtail our hiring, and our total employment in corporate functions may begin to fall as we have voluntary turnover within the company," Kelly said. "At this point, I'm not suggesting that we are going to have layoffs or furloughs."

Southwest has 194 employees at Philadelphia International Airport, with 27 daily nonstop departures to 13 cities, and additional connecting flights to 51 cities.

The Dallas-based airline, which bills itself as a discount carrier offering lower fares, said third-quarter net income was $16 million, or 2 cents a share, compared with a loss of $140 million, or 18 cents a share, a year earlier. The latest quarter included onetime charges of $81 million tied to fuel contracts and other items.

Excluding those charges, profit was $97 million, or 13 cents a share, compared with $122 million, or 15 cents a share, a year earlier. That beat analysts' average estimate of 12 cents a share.

Kelly said that although Southwest's performance was in line with the rest of the industry, year-over-year unit revenue growth was more sluggish than planned due to weaker demand, particularly in September. Unit revenue is passenger revenue for each mile flown.

"This is the third year in a row we've seen a bit of a soft patch in the summertime," Kelly told CNBC-TV. "At least in 2010 and 2011, it was followed by a pretty strong autumn and winter travel season. That's what we are hoping for."

"While the economy remains a significant concern, we are encouraged, thus far, by October's booking and revenue trends. Passenger unit revenues are running ahead of last October by about 4 percent."

Airfares purchased by business travelers softened in the third quarter, while consumer spending held up, he said. "We had a record load factor for the third quarter. It's certainly not that things are falling apart."

However, Kelly said, he expects fourth-quarter fuel prices to hit a record, at $3.45 a gallon. "Jet fuel prices are up sharply over the last 30 to 60 days."

Southwest has implemented five system-wide fare increases this year.

With the impending U.S. fiscal crisis next year, when higher tax rates and lower government spending are scheduled to kick in unless Congress works out a compromise, "I don't think any of us can predict exactly where the economy is going to go," Kelly said. "All of the economic signals are very mixed."

Contact staff writer Linda Loyd at 215-854-2831 or [email protected].

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