Southwest Airlines Co. (LUV) will freeze the size of its jet fleet through 2015, a one-year extension, as the largest discount carrier focuses on boosting its return on invested capital.
The cap goes beyond Chief Executive Officer Gary Kelly’s stated goal of holding the number of planes -- now about 680 -- steady through 2014. He said in January he wants to “match and exceed” a 15 percent return that Southwest projects reaching this year after ending 2013 at 13.1 percent.
“In 2014 and 2015, the plans are for the fleet to be flat,” Chief Operating Officer Mike Van de Ven said in an interview at Southwest’s Dallas headquarters. “We should be in a position after 2015 to grow the fleet if the economics and the business are right.”
Showing a higher return on invested capital is part of Southwest’s push to broaden its appeal to investors, along with stock buybacks and the longest-running dividend among major airlines. Delta Air Lines Inc., the only other carrier in the Standard & Poor’s 500 Index, also has a 15 percent goal and matched that figure last year.
Keeping the fleet unchanged also raises the prospect of cutbacks among Southwest’s less-profitable flights as the airline expands its network. By the end of 2015, Southwest has said it would more than double service at Washington’s Reagan airport, add New York and Dallas flights and start international routes from Houston.
“If you’re going to expand in certain locations, you’re going to have to adjust your network in other locations,” said Kevin Crissey, an analyst at Skyline Research LLC in Mahwah, New Jersey. “Some other airlines are eagerly and anxiously waiting to know where those openings will be to decide if they want to backfill those locations with their own capacity.”
While Southwest’s 84 percent stock-price gain in 2013 marked the best annual performance since 2000, that advance was good enough for only fourth place on the Bloomberg U.S. Airlines Index. Delta, the third-biggest U.S. carrier, more than doubled.
Southwest rose 2.8 percent to $23.54 at the close in New York, extending its year-to-date advance to 25 percent, again fourth among 11 carriers in the gauge. In May, the airline quadrupled its dividend, paid for 147 straight quarters, to 4 cents a share and boosted a stock-repurchase program by $500 million to $1.5 billion.
While Southwest describes the 15 percent return goal as a longstanding target, it hasn’t achieved that mark since 2000. Kelly mentioned the figure in 2008 at a transportation conference, and the airline cited it in a 2009 report to employees and investors.
“We’ve been working to get back on track since 9/11,” said Brandy King, a spokeswoman. U.S. economic weakness that damped demand and average fares “significantly impacted” Southwest’s progress toward its ROIC goal last year, King said.
The arrival of larger, more-efficient jets in 2014 should increase revenue and cut operating costs, a step toward the 15 percent target, the airline has said.
Joining the fleet will be a mix of 45 new and used Boeing Co. (BA) 737s, which will seat 143 or 175 passengers, while Southwest retires an undisclosed number of 143-seaters and removes 66 smaller Boeing 717s that it acquired with AirTran Holdings in 2011 and has been selling to Delta.
The aircraft changes come amid expansion plans at LaGuardia and Washington Reagan, where Southwest bought flight rights divested as part of American Airlines Group Inc. (AAL)’s 2013 merger with US Airways, and Dallas Love Field, where a federal law limiting nonstop service is expiring in October.
In 2015, Southwest plans to add flights, possibly to Central America and the northern cities of South America, when new international terminals open at airports in Houston and Fort Lauderdale, Florida.
With Southwest’s one-time cost advantage over larger rivals now eroding and new union contracts on the horizon, the airline needs to increase operations in larger markets that produce greater revenue, Crissey said.
“They’re going to have to pull from somewhere, reduce some frequencies,” he said.
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