Southwest plans $100m cost cuts in 2013

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Low-cost carrier Southwest Airlines aims to slash spending by $100 million in 2013, even as it expects cost pressures to ease next year.

The Dallas-based carrier's president and chief executive Gary Kelly says today in an earnings call that the airline is looking at various ways to cut spending, such as bringing down supplier costs and creating more efficiencies in its supply chain.

When asked, he says that staff layoffs are not being looked at, but adds that the airline plans to control its employee headcount. "No, we are not contemplating that [laying off staff], but we have other techniques to control our headcount," says Kelly. For example, the airline will choose to not replace staff who leave, he adds.

The carrier will look for more ways to drive revenue, but Kelly declines to specify what the airline is studying. Southwest, for now, is not considering charging baggage fees, he says.

Southwest posted a net income of $16 million in the third quarter, but the airline's executives say they are not satisfied with inflationary pressures on Southwest's costs, which will be a focus in 2013. The airline has been emphasising cost discipline as it works towards reaching a 15% return on investment capital target, which it expects to hit next year.

Cost pressures are expected to ease next year as Southwest completes an ongoing seat reconfiguration project in the first half of 2013 on its Boeing 737-700s, which will add six seats to each aircraft. The seat reconfiguration and higher maintenance costs in 2012, partly due to transferring Southwest subsidiary AirTran's engine maintenance onto Southwest's contract, had contributed to higher costs in 2012, says Kelly. Southwest closed on its acquisition of AirTran in May 2011.

Maintenance costs, however, are expected to trend down in the long term and look "very, very good", says Kelly. This is as the airline progressively retires more 737 Classics and eliminates AirTran's 717s from its fleet - aircraft types that are more maintenance intensive. Southwest struck a deal earlier this year to sub-lease the 88 717s to Delta Air Lines.

Kelly has said Southwest's remaining 156 737 Classics will all be retired by the end of the decade, but says today that this might be brought forward as the carrier focuses on improving the fuel efficiency of its fleet.

The airline has said it is likely to extend the seat reconfiguration project onto about 100 of its 737 Classics. Southwest's chief financial officer Tammy Romo says today that the airline is still evaluating the exact number of aircraft to get the additional seats, but that "it will make sense to do a good portion of them".