Airline Pilot Central Forums - SWA expects to keep cost edge: Kelly

Southwest expects to keep cost edge:

YORK (Reuters) - Southwest Airlines Co. expects to be able to keep its cost advantage over most U.S. rivals even as bankruptcy gives them greater latitude to cut their own expenses, its chief executive said on Wednesday.

Gary Kelly painted a rosy picture of both costs and revenues at the top U.S. carrier by market value, which has prospered relative to competitors because of its ample hedges protecting it from high fuel costs.

Those costs helped push Delta Air Lines Inc. and Northwest Airlines Corp. into bankruptcy last week.

"Bankruptcy will allow carriers to reduce costs," he said in an analyst presentation. "We don't see how that will eliminate our low cost advantage."

Southwest shares were up 19 cents, or 1.3 percent, at $14.39 in morning trading on the New York Stock Exchange, the sole U.S. airlines in positive territory.

JP Morgan on Wednesday raised its recommendation on Southwest to "overweight," while Citigroup started coverage of the airline with a "buy" recommendation.

Kelly, who said Dallas-based Southwest's costs were about 35 percent below those of the "legacy" carriers that are burdened by higher labor and pension costs, added that the airline is guarding against complacency.

Southwest is working with its pilots to improve productivity and plans to do the same with flight attendants as it seeks to further reduce the employees needed aboard each flight, he said.

"We will continue to bear down on our own cost structure," he said. "We'd be crazy not to expect that our competitors will eventually get closer to our cost structure."

That won't happen in the next 12 months, though, he said.

"The biggest concern I have are high fuel prices," he said. "We've bought ourselves time, in fact we've bought ourselves a lot of time."

Southwest has regularly bought contracts that lock in fuel prices at a certain level, giving it a huge advantage over cash-strapped rivals that sold their hedges or could not afford to buy any in the first place.

For this year, Southwest's hedges largely cover the cost of refined jet fuel, which has soared relative to crude oil this year, he said.

Helping to boost revenue, Southwest raised fares by up to $4 each way in August and September, he said.

Kelly said he felt "really good" about revenue momentum for 2005, adding that planes flew fuller in July and August than they ever have and that September demand also looks "solid."

Kelly said Southwest expected to reduce its fourth-quarter flights from what had previously been forecast as a result of a strike at Boeing Co. , its sole aircraft provider and because of a sharp reduction in traffic to New Orleans after Hurricane Katrina.

Copyright 2005 Reuters