Southwest CEO: 'I'd rather have a customer than a bag fee'

Posted: January 21, 2011

Even as rising fuel prices hike operating expenses, Southwest Airlines Co. said Thursday that fourth-quarter earnings were up 13 percent and that bookings were strong through March.

"Except for fuel, we have a great outlook for 2011," Southwest chief executive Gary Kelly told investors during a conference call. "In particular, I believe business-travel demand will continue to strengthen."

The Dallas-based carrier's "Bags Fly Free" and "No Change Fees" advertising campaigns are expected to "continue to provide tremendous momentum," Kelly said.

Asked whether Southwest's policy of not charging for ticket changes hampers the effort to increase revenue, Kelly replied, "If we were to begin to charge change fees, that runs the risk of destroying a lot of good will. I'd rather have a customer than a bag fee. We get a lot more money that way."

With oil trading above $90 a barrel, all airlines have been raising fares to cover rising fuel costs.

Southwest has raised fares three times since Dec. 15, airline analyst Jamie Baker of JPMorgan Chase & Co. said in a client note.

The average passenger fare rose 9.1 percent in the fourth quarter. Fares were up 13.7 percent in 2010, Southwest said.

Philadelphia's second-busiest airline said net income was $131 million, or 18 cents a share, compared with $116 million, or 16 cents a share, in the same quarter last year.

Revenue rose 14.8 percent to $3.1 billion, in the latest quarter ended Dec. 31.

Southwest is making money on more traffic and better passenger revenue. The airline said 4.4 percent more passengers, or 22.45 million, traveled in the three months ended Dec. 31, compared with a year earlier.

For the full-year 2010, Southwest reported net income of $459 million, or 61 cents a share, vs. $99 million, or 13 cents a share, in 2009.

Southwest spent $3.6 billion on fuel last year, an increase of almost $600 million over 2009. Fuel prices in the fourth quarter were up 12.7 percent.

Southwest said its fuel hedge program - contracts that lock in fuel prices - would help offset future increases.

"We have a solid year in terms of our outlook, with the current fuel," Kelly said. If crude oil goes up to $147 a barrel as it did in July 2008, "that's on the other side of what would be a good business plan. We are not expecting that will happen."

Airlines generally are seeing improved financials. Earlier this week, Delta Air Lines posted a fourth-quarter profit, compared to a loss a year earlier.

American Airlines reported a smaller-than-expected fourth-quarter loss. United Continental Holdings and US Airways Group Inc. will report earnings Wednesday.

With rising oil prices comes renewed worry that airlines may not sustain profitability in 2011.

"Given the forward curve for fuel prices and the known revenue environment," UBS airline analyst Kevin Crissey wrote in a client note, "Southwest may or may not be profitable in the first quarter, and may or may not grow earnings in 2011."


Contact staff writer Linda Loyd at 215-854-2831 or lloyd@phillynews.com.

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