Southwest sticking with 4 percent capacity cut

Southwest Airlines Co. CEO Gary Kelly sees twin risks ahead, one if the economy gets worse, one if it gets better.

A worsening economy will keep Southwest cautious even as it adds routes like Minneapolis-to-Chicago, he said.

But he's also worried about another fuel price spike, especially if a recovering economy brings more demand for jet fuel, he said on Monday in Minneapolis to promote Southwest's new service to Chicago that began on Sunday.

Southwest is adding routes like Minneapolis and (later this year) service in Boston and New York-LaGuardia, even as it reduces overall capacity 4 percent this year. To make up for the new service, it's reducing flights elsewhere. Kelly said the carrier made the cuts on its least-used routes.

Speculation has been rising that as the recession continues, airlines will make deeper capacity cuts than they've already announced. But Kelly said the 4 percent capacity cut is "still about the right number."

"It's still early in the year. If anything I think the economic outlook has gotten worse, as we've gotten further into the year. So we're going to continue to be very cautious," he said.

Meanwhile he has his eye on fuel prices. Bets that fuel prices would rise saved Southwest's bottom line during the fuel price runup that peaked last summer. But like other carriers it lost money on those hedges as fuel prices dropped, and in January it said it had closed out most of its hedges.

But on Monday Kelly said oil prices in future months are running higher than the spot price, suggesting fear of another price runup. Fuel is the biggest expense at most carriers.

"We need to make sure that we protect against a fuel price spike. I think in this environment that would be pretty deadly. We'll just have to be very cautious about adding any new capacity at all in an environment where the overall market is shrinking."

Still, Southwest has about 10 percent of its 2009 fuel needs hedged, "which is considerably wound down from the previous position," spokesman Chris Mainz said.

Kelly said Southwest hasn't yet parked any of its Boeing 737s, but it could.

Northwest Airlines, now a part of Delta Air Lines Inc., had a reputation for fierce protection of its hubs, including Minneapolis, where it flew 76.6 percent of scheduled departures last year. Rather than barging in, Southwest has stuck more of a foot in the door, coming to Minneapolis with Chicago as its only destination, eight times a day.

"We purposefully only offered service for now to Chicago to limit the risk in this economic environment," but other destinations — especially to the West — might make sense in the future, he said.

Southwest shares rose 5 cents to $5.18 in afternoon trading.