As the US aviation sector is currently going through a cautious phase with remarks such as “signs of potential trouble” and “softening”, Southwest Airlines is expanding its routes and flights in pursuit of a decades-long growth plan. And this is raising questions over the feasibility of such strategy. (5/29/2007)
“While other airlines are reducing domestic seats in response to softening demand, the low-cost carrier is expanding its routes and flights in pursuit of a decades-long growth plan,” reported The Washington Post.
“But that strategy comes with risks and could require executives to begin tweaking a business strategy that has helped revolutionize commercial aviation. Already, there are signs of potential trouble, according to some analysts. Southwest’s stock price has been stagnant. Its operating income dipped in the first quarter. Its planes are less full, and it has begun losing the benefit of aggressive fuel hedges, which have saved billions of dollars and kept Southwest profitable while other carriers floundered in recent years.”
But, according to Gannett News Service, Southwest Chief Executive Gary Kelly is sticking with his plan to add about eight percent to the airlines’ capacity this year, even though the growth of available seats industry-wide is limiting Southwest’s ability to push its prices a bit higher.
“We are more prepared for this kind of soft environment than any other carrier,” Kelly said, pointing to Southwest’s strong balance sheet and record of profits. “We look at our ability to grow and our flexibility as a competitive advantage when we see that some competitors are already reducing service.”
On top of the 35 new planes Southwest is receiving from Boeing this year, it will add four used 737s to the fleet in 2007. But if demand softens further, Southwest can moderate its growth by retiring older planes, Kelly added.
According to The Washington Post, for the most part, Southwest used its growing fleet to serve secondary airports near major markets. That kept down costs and boosted efficiency while still reaching large numbers of potential customers. Southwest also served some larger airports where executives felt they could gobble up market share.
“But its growth, analysts say, has forced it to find airports that it had long avoided or abandoned: congested hubs dominated by major carriers and served by other low-cost airlines. Last year, for example, Southwest moved into Denver and Washington´s Dulles International Airport, both served heavily by United Airlines. In 2004, it launched service in Philadelphia, a US Airways hub,” highlighted the report.