Adding IFE?? Southwest reports 41% increase in net profit
By Caroline Daniel in Chicago
Published: October 20 2003 18:57 / Last Updated: October 20 2003 18:57
Southwest Airlines on Monday underlined the strength of its low-cost model, as it reported a 41 per cent rise in net profit to $106m and brought forward orders for five Boeing 737-300 aircraft to 2004.
Southwest said it planned to add a net 30 new aircraft next year - close to its peak additions in 2000 - representing an annual capacity increase of about 7 per cent. For 2005, if Southwest exercises all its 34 total options and firm aircraft orders, capacity could rise by 10 per cent.
Gary Kelly, finance director, acknowledged that the decision to accelerate the orders had been driven by the rise of low-fare rivals. "Having more low-fare competition meeting us head on is potentially a different ball game . . .We can't be complacent about growth. There is a risk of being pre-empted in some markets. We sense some urgency to get there first [with low fares], at least more than we had in the past."
Operating revenues for the third quarter rose 11.6 per cent to $1.55 billion, against $1.39bn a year ago, driven by pent-up demand for leisure travel. Mr Kelly said: "We are pretty pleased with revenue trends so far in the fourth quarter."
Southwest said the percentage of tickets sold at full fares rose to 36 per cent. "It was a much better performance than last year. It does suggest that demand for business travel is strengthening," he added.
However, third quarter operating expenses rose 5.2 per cent to $1.37bn, driven by higher labour and fuel costs. Excluding fuel and the effect of a 2002 special item, third quarter 2003 unit costs rose 2.4 per cent to 6.34 cents. Southwest warned that it expected "more year-over-year unit cost pressure in fourth quarter 2003 and higher unit cost levels than in third quarter 2003".
The carrier said it would follow the rest of the airline industry in reducing commissions paid to travel agents to zero, generating savings of $40m next year. It is also seeking productivity improvements and could put pressure on airports, such as St Louis, to reduce their costs.
Mr Kelly said Southwest would consider following JetBlue and Song in introducing in-flight entertainment. He also said the airline was considering adding larger regional jets to its fleet, such as from Embraer, but "it is nothing that is imminent and it may never happen".
Southwest closed the quarter with $2bn of cash. As a result of bringing forward the aircraft orders, it expects capital spending in 2004 to rise to $1.8bn, up from $1.2bn this year. The shares rose 2 per cent to $18.82 in early New York trading.
