Bloomberg News

Southwest to Add Seats on Jets for $250 Million Revenue Gain

January 18, 2012

(Updates with closing shares in 11th paragraph.)

Jan. 17 (Bloomberg) -- Southwest Airlines Co. will add six seats to most of its planes as part of cabin refurbishments that will cut fuel use and boost revenue by at least $250 million a year at the biggest discount carrier.

The first change to aircraft interiors since 2001 will mean an investment of about $60 million, Chief Commercial Officer Bob Jordan said in an interview. A switch to lighter materials and seats will cut 635 pounds per plane and save about $10 million a year in fuel, he said.

Extra seats will increase revenue for Southwest, which eschews the fees for the first two checked bags that are now an industry standard. Chief Executive Officer Gary Kelly told employees last month that the Dallas-based airline’s cost advantage had fallen by half over rivals like Delta Air Lines Inc., and urged them to help hold down operating costs.

“With load factors north of 80 percent, meaning that many flights at desirable times are leaving completely full, adding seats is a no-brainer,” said Jeff Straebler, an independent airline analyst based in Stamford, Connecticut. “The payback on the additional seats should be fairly quick.”

Southwest’s load factor, or average number of filled seats on a plane, was 81 percent last year, the airline said on Jan. 9

The carrier didn’t originally intend to include seats in the cabin refurbishment, then decided to do so after realizing the changes allowed room for expanding without compromising passenger space, Jordan said.

‘More Revenue’

“We had a chance to add the seats without customers feeling less good than they do today,” he said. “In a world where we have $100 fuel, we would have been crazy to look past at least studying the opportunity for more revenue.”

Southwest posted $12.5 billion in sales in the first nine months of 2011 and analysts estimate it will report $4.13 billion from the fourth quarter when earnings are announced Jan. 19.

The modifications will bring total seats to 143 on Southwest’s Boeing Co. 737-700s. Boeing 737-800s, which will begin entering Southwest’s fleet in March, will come with the new interior, as will 737 MAX aircraft slated to start arriving in 2017.

Making Room

Adding the seats on the carrier’s 372 737-700s, which will be done first, will give Southwest the equivalent of 16 “free” aircraft, Jordan said today at a news conference in a maintenance hangar adjacent to company headquarters. Buying those planes would cost $600 million, he said.

Southwest rose 1.1 percent to $8.94 at 4:03 p.m. in New York trading. The shares fell 32 percent in the past 12 months.

Room for the seats was created by switching to lighter, thinner padding; limiting the range of recline to two inches (5 centimeters) from three, and replacing seat-back pouches with netting. Pitch, or the distance from the back of a seat to the back of the one behind it, will slip to 32 inches from 33.

“How much legroom you have between you and the seat in front of you did not change,” Jordan said. “The smaller seat- back pocket, the change in the seat cushion that seats you lower and further back and a higher armrest worked to give you an equal or better experience than you have today.”

Pitch on Boeing 737-700s flown by Delta is 31 to 32 inches, and it’s 31 inches on Continental Airlines, part of United Continental Holdings Inc., according to SeatGuru.com.

Southwest doesn’t anticipate any luggage logjams from having more seats without adding overhead bin space because the lack of fees means passengers don’t have an incentive to use carry-on bags, Jordan said. It also shouldn’t change Southwest’s average 30-minute “turn time,” or the length of time its planes spend on the ground between flights.

Saving Money

More durable seating material and different carpet that can be replaced in individual pieces also will reduce maintenance and other costs, Southwest said. The refurbishment includes environmentally friendly materials and different life-vest pouches that increase storage room under seats.

“We were able to move to better materials that are lighter, can hold up longer, can be recyclable and, at the end of the day, will burn less fuel because of less weight,” Jordan said.

Aluminum parts on the sides of the seats and tray-table hinges will last twice as long as the plastic they are replacing and are recyclable, said Brian Hirshman, vice president of technical operations. New material in the seat covers will last six years versus four.

Work on Southwest’s Boeing 737-700s will start in March and be completed by mid-2013, with employees handling the refit in 12-hour overnight shifts, Hirshman said. The carrier then will redo 52 737-700s and 86 Boeing 717s acquired when Southwest bought AirTran Holdings Inc.

Southwest hasn’t decided whether to refurbish its 737-300s and won’t rework the interiors of its 737-500s, which are being retired.

The cabin redesign began about three years ago, and incorporated elements of a more environmentally friendly aircraft Southwest designed in 2009, Jordan said. The decision to add seats was made about six months ago.

--Editors: James Langford, Niamh Ring

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at {edufner@bloomberg.net}


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