Southwest’s Gain AMR’s Pain

Southwest Airlines (LUV - Analyst Report) said on Friday that its August traffic grew 1.5% to 6.7 billion revenue passenger miles (RPM). Load factor increased to 80.2% from 74.6% last year. However, capacity fell 6.1% from the prior-year period to 8.3 billion available seat miles.

In August, Southwest Airlines reported second-quarter profit of $54 million on sales of $2.6 billion. Both revenue and net income declined from the prior year as the carrier was hurt by low demand for business travels. Unless demand rebounds, management sees third-quarter sales shrinking further from second-quarter levels.

Southwest’s successful business model involves flying multiple short, quick trips into secondary airports of major markets and using only one type of aircraft, the Boeing 737.

In addition to other cost-containment measures undertaken by the company, it has frozen hiring as well as pay for officers and senior management. Recently, Southwest also launched an early-out program in which about 1,400 employees have elected to participate. Though an additional cost of $70 million is being incurred, annual savings in subsequent years from the program should eventually exceed the cost of the program.

As of August, Southwest Airlines operated scheduled service to 67 destinations. In November, General Mitchell International will be added as the 68th service station.

Peer AMR Corp. (AMR) said its August traffic fell 8.1% to 11.17 billion RPM from a year ago, while capacity declined 9.4% to 13.19 billion available seat miles.

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