Southwest Curbs Labor Spending After 13% Cost Growth

Southwest Airlines Co. (LUV), the discount carrier that has never had layoffs, plans to shrink its workforce amid spending cuts of at least $100 million after higher fuel prices helped cost increases outstrip sales growth.

Southwest, which reduced its staff by 1,400 with buyouts in 2009, will be “trimming our total headcount complement overall,” Chief Executive Officer Gary Kelly said today in a message to employees. While he declined in an interview to detail how that might be done, Kelly later said on a conference call that the airline isn’t contemplating layoffs.

Southwest’s expenses grew by almost 13 percent through the first nine months of this year, outpacing a 12 percent rise in sales. Holding down costs is central to the Dallas-based airline’s business plan because it allows Southwest to remain profitable while offering lower fares that win customers.

“We’ll be very aggressive with our cost controls next year,” Kelly said. “It’s a reflection of concerns about high fuel prices and economic uncertainty.”

The carrier has focused more in the past few years on building revenue than on expenses, Kelly said. Southwest previously has said it won’t add to its fleet of 692 aircraft until it hits certain financial targets, including a 15 percent return on invested capital. The return was 7 percent in the 12 months through Sept. 30.

‘Commodity Business’

The airline’s cost to fly each seat a mile, a measure of efficiency, rose 5 percent in the third quarter and 3.7 percent in the nine months through September. Fuel costs increased 11 percent in the first three quarters, and Southwest expects prices to climb again before year end.

“At the end of the day, airlines are largely a commodity business,” said Savanthi Syth, a Raymond James & Associates Inc. analyst based in St. Petersburg, Florida, with an outperform rating on the shares. “In that type of environment, service is important, but maintaining lower costs is essential.”

The airline is evaluating ways to reduce supplier costs and support from outside vendors and consultants, Kelly said, in addition to “looking for opportunities to stop doing some things that don’t have value.”

Southwest, which has never laid off workers, isn’t considering a hiring freeze at this point, he said. The carrier has offered early retirement programs for employees in the past.

Southwest had 46,048 workers at the end of September, up 2.1 percent from a year earlier.

‘Hiring Frost’

“If nothing else, there’s frost on the hiring front,” Kelly said. “It’s very fair to say there will be much stricter controls surrounding hiring for next year. We will hire more on an exception basis versus business as usual.”

The airline’s stock climbed 0.34 percent to $8.98 at the close in New York trading. The shares have gained 4.9 percent this year, compared with a 16 percent increase in the Bloomberg U.S. Airlines Index.

Southwest is “clearly seeing some weakness in the economy and in demand,” primarily among business travelers, Kelly said. So far in October, however, passenger revenue from each seat flown a mile is running about 4 percent ahead of a year earlier, he said.

Cutting spending is complicated by the ongoing work to integrate AirTran Airways, which Southwest acquired last year, Kelly said. He declined to discuss additional cost-reduction plans under review.

Third-quarter profit fell to $97 million, or 13 cents a share excluding one-time items, on weaker travel demand and a lower average fare, Southwest said. That compared with earnings of $122 million, or 15 cents, a year earlier.

Replacing Aircraft

The result was a penny above the average 12-cent estimate on that basis from 16 analysts compiled by Bloomberg. Sales were flat at $4.31 billion.

Southwest will begin implementing a new revenue-management system next year and will further integrate its network with that of AirTran. The carrier reported $110 million in pretax synergies from combining the companies through September and expects $400 million next year.

The airline is in the midst of a program to boost the number of seats on some planes and is replacing older aircraft with new, more fuel-efficient versions of the Boeing Co. (BA) 737. Efforts to modernize the fleet will add more than $700 million in pretax results each year once fully put in place in 2015.

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

To contact the editors responsible for this story: James Langford at jlangford2@bloomberg.net; Ed Dufner at edufner@bloomberg.net

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