Jan. 22 (Bloomberg) -- Southwest Airlines Co., the largest discount carrier, rose the most since at least 1980 in New York trading after saying it will cut seating capacity this year as the recession slows travel demand.

The plan for a 4 percent reduction in flying snaps a 20- year expansion streak in which the Dallas-based airline relied on lower prices to win customers while full-fare carriers struggled. Southwest also delayed some 2010 jet deliveries.

“The best news is they are planning a capacity cut,” said Ray Neidl, a Calyon Securities analyst in New York. “That’s very wise in this environment. They are planning for a slow recovery, which is what they should be doing.” He rates Southwest as “underperform.”

Southwest disclosed the move as it posted a second straight quarterly net loss on fuel costs. Excluding those expenses, it had a fourth-quarter profit of 8 cents a share, beating the 5- cent average estimate of 14 analysts surveyed by Bloomberg.

The net loss was $56 million, or 8 cents a share, compared with a year-earlier profit of $111 million, or 15 cents, Southwest said. A third-quarter net loss ended Southwest’s 17- year profit streak, the U.S. industry’s longest. Sales rose 9.7 percent to $2.73 billion.

“Now is not the time to be growing,” Chief Executive Officer Gary Kelly said in an interview. “Passenger traffic is declining. We’re slowing our growth at just the right time.”

He told analysts on a conference call that Southwest’s growth plans were “suspended indefinitely.” The airline doesn’t plan any job cuts as a result, he said.

Shares Advance

Southwest jumped $1.43, or 17 percent, to $9.81 at 4:03 p.m. in New York Stock Exchange composite trading for the biggest gain in Bloomberg data dating to 1980. The shares have fallen 18 percent in the past year.

Southwest’s results mean that all of the nine biggest U.S. airlines probably will report net losses for last quarter as consumers pare travel plans and business passengers move from premium seats to coach.

American Airlines parent AMR Corp. and United Airlines parent UAL Corp., the second- and third-largest U.S. carriers, announced losses yesterday and said 2009 demand was weakening.

“Southwest’s decision to reduce capacity is belated, but a welcome development for the U.S. industry nonetheless,” said Douglas Runte, managing director with Piper Jaffray & Co. in New York. “The last thing the U.S. industry needs right now is an increase in capacity given the recession-driven demand destruction we are seeing.” He doesn’t rate Southwest shares.

Fuel Fallout

January should be similar to November and December, when revenue for each seat flown a mile rose 7 percent, Chief Financial Officer Laura Wright said.

“Bookings are less for at least March and April than they were a year ago,” Kelly said. “The watchword right now for 2009 is a tremendous amount of uncertainty.”

Southwest’s run of quarterly profits was driven in part by its ability to trim costs with fuel bought in advance. Those bets soured after jet fuel fell 65 percent in 2008’s second half, forcing the airline to put up cash collateral for the contracts and spurring the third- and fourth-quarter net losses.

In December, Southwest reduced most of its so-called hedges, slashing the amount of cash it had to pay by $600 million to $230 million.

“They dodged a bullet there and addressed that problem,” Neidl said. Fourth-quarter costs related to fuel hedging were $117 million, Southwest said.

Fewer Seats, Planes

Southwest last reduced flying on a year-over-year basis in 1988, when it shrank by 0.1 percent. Airlines measure capacity in available seat miles, or the number of seats on their planes multiplied by the number of miles flown.

The new delivery schedule announced today calls for Southwest to add 13 new Boeing Co. 737 jets this year, including 3 delayed by a strike at Boeing in 2008. The airline will return or retire 15 737s and end the year with 535 aircraft. Southwest will take 10 planes next year instead of 22, and will receive fewer than planned in 2011 and 2012, too.

“We have consistently been saying we don’t want to grow the fleet for 2009,” Kelly said. “The report today is that we are extending that thought through 2010. We will aggressively be pruning out those flights that are unproductive.”

Southwest will keep adding new cities and new routes, he said.

Unrestricted cash and short-term investments totaled $1.8 billion at the end of the quarter, down from $2.78 billion a year earlier, Southwest said.

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

Last Updated: January 22, 2009 16:15 EST