"Southwest Air Profits, Plans Expansion"

Monday, July 21, 2003

Southwest Air Profits, Plans Expansion
By Meredith Grossman Dubner


CHICAGO (Reuters) - Southwest Airlines Inc. on Monday reported a jump in its
quarterly profit as travelers embraced its low fares and said it would speed
up the delivery of more planes next year as it looks for opportunities to
expand.

Southwest, the only major U.S. carrier to report consistent profits since
the Sept. 11 attacks, said it would boost capacity by 6 percent to 7 percent
next year and forecast a higher third-quarter profit than a year ago. Its
larger rivals, meanwhile, are deferring aircraft deliveries and relying on
U.S. government aid to offset huge losses.

The No. 6 U.S. airline also said it may add a new city to its network in
2004, which would be its first move into a new market since it started
service to Norfolk, Virginia, a month after the September 2001 attacks.

Southwest is also looking to scoop up business where its bigger
competitors -- strapped with excessive costs -- are cutting back. In a
conference call with analysts, Chief Financial Officer Gary Kelly said the
decision by American Airlines parent AMR Corp. to cut its St. Louis service
in half provides a big opportunity for Southwest to expand even more.

"The St. Louis announcement is very bullish for Southwest Airlines," Kelly
said. "We are interested in doing something there."

Southwest's second-quarter net income was $246 million, or 30 cents a share,
including $143 million after-tax in government aid to offset security costs.
That was more than double the $102 million, or 13 cents a share, for the
year-earlier quarter.

PROFIT BEFORE FEDERAL AID

Even without the government aid, Southwest's profit rose 22.6 percent to
$103 million, or 13 cents a share, from $84 million, or 10 cents a share,
before one-time items a year earlier.

A federal aid package designed to help the airline industry weather the
travel slump related to the Iraq war has helped several major carriers eke
out net profits for the second quarter. Without that assistance, however,
most posted huge losses.

Analysts on average expected Southwest to earn 11 cents a share, according
to Reuters Research, a unit of Reuters Group Plc.

Kelly said the Dallas-based carrier expected more unit cost pressure in the
second half of the year from labor rates. Southwest is currently in talks
with its flight attendants, its last major labor group without a new
contract.

Kelly also said the carrier was concerned about post-summer travel demand
and could not yet tell if business travel has picked up. But Southwest still
expects third-quarter earnings to exceed its third-quarter 2002 profit of
$75 million.

"Although pricing power continues to more or less evade the industry,
Southwest has been successfully working on improving its yield," Lehman
Brothers analyst Gary Chase wrote in a note.

The carrier said it recently exercised options for the delivery of nine
Boeing 737-700s next year. It also exercised six 2005 options for
accelerated delivery in 2004, and accelerated the firm delivery of two 2005
aircraft to 2004.

The changes to its 2004 delivery schedule -- 42 deliveries and 17
retirements of Boeing 737-200s -- will yield 25 more jets. Southwest also
plans to net 29 more planes in 2005 and 38 in 2006, Kelly said.

As low-cost carriers like Southwest and JetBlue Airways Corp. are adding to
their fleets, others like Continental Airlines Inc.  are deferring
deliveries.

Southwest's low-cost structure is the envy of its major rivals, which are
racing to trim expenses to compete. Bankrupt UAL Corp.'s United Airlines
plans to launch a low-cost operation, and Delta Air Lines in April
introduced a low-cost unit called Song.

Southwest said its traffic was up 4.6 percent in the quarter, and it ended
the quarter with $2.2 billion in cash.

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