Good news for the market isn't always great news for passengers.
Southwest Airlines Co. said it will cap growth in 2015 seating capacity at 7 percent, backing off a plan last month to expand as much as 8 percent that helped send U.S. carriers’ shares plunging.
“We don’t want to grow 8 percent, we’re not going to grow 8 percent and we can easily trim the schedule to stick to 7 percent” expansion of available seat miles, Chief Executive Officer Gary Kelly said Monday in an interview. The stock rallied on the news, reversing an earlier decline.
Southwest is also poised to increase its target for return on invested capital, Kelly said. The historic pretax goal of 15 percent a year is too low, according to Kelly, who said the new total may be announced as soon as July without giving a figure. Southwest said its total was 21 percent in 2014.
The world’s biggest discount airline is dialing back on growth to appease some investors concerned that there is a glut of seats on the market, upsetting the U.S. industry’s balance between supply and demand. Carriers can lose pricing power when there’s an excess of seats.
Southwest rose 2.1 percent to $37.84 at 2:05 p.m. in New York, following an earlier drop of as much as 1.3 percent. The shares slid 12 percent this year through May 29.
Southwest initially planned 6 percent growth in available seat miles in 2015 over 2014, then boosted the number to 7 percent after acquiring more gates at Dallas Love Field, where the airline is based. On May 19, Chief Financial Officer Tammy Romo told an industry conference that final schedules had pushed the increase to “the 7 percent to 8 percent range.”
A day later, the Bloomberg U.S. Airlines Index posted its biggest plunge since October 2011 as investors digested Southwest’s strategy and a vow from American Airlines Group Inc. CEO Doug Parker to “aggressively” match low-fare rivals. The gauge of 11 carriers ended May down 7 percent, its steepest monthly slide since December 2013.
“We’re talking about rounding that got us to the 7 percent to 8 percent,” Kelly said Monday. “In this particular case, we’re going to make sure we manage accordingly to the low end of the range. That should address some of the concerns of our investors.”
This article was written by Mary Schlangenstein from Bloomberg and was legally licensed through the NewsCred publisher network.
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Photo Credit: Southwest's growth plans worried investors that competition would lead to lower fares and lower profits in the U.S. domestic market. Southwest Airlines
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