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Southwest Airlines to expand to Minneapolis next year

Thursday, October 2, 2008

DALLAS — Southwest Airlines Co. plans to begin service next March to Minneapolis, its first new city in more than a year, even as the airline faces a "very significant risk of slowing demand" due to an economic slowdown, chief executive Gary Kelly said Wednesday.

The Minneapolis service will initially be limited to flights to and from Chicago.

Minneapolis suburb Eagan, Minn., is the home of Northwest Airlines Corp., which is being acquired by Delta Air Lines Inc. Some experts say the combined airline will probably reduce flights at Minneapolis, but Kelly said the Delta-Northwest deal was not a consideration.

Other U.S. carriers have raised fares and sharply cut flights this fall, creating "tremendous opportunities for Southwest Airlines to expand," Kelly said.

Southwest serves more than 60 U.S. cities but has curtailed growth in recent years. Its last new city was San Francisco, in August 2007.

The addition of Minneapolis for Southwest comes as airlines face high fuel prices and concern about a weakening economy. Kelly said he cannot tell yet but suspects that economic weakness — and higher fares — are hurting travel demand. He said bookings are still healthy but planes will probably be slightly less full this fall than a year ago.

The airline's chief financial officer said Southwest has "very limited financing needs" and little immediate exposure to the turmoil in the financial markets.

Laura Wright said Southwest, which enters fuel-hedging transactions with financial-services firms as counterparties, has no exposure to bankrupt Lehman Brothers and only a small amount to brokerages that don't have a commercial banking side.

Wright said Southwest, which reported about $5.8 billion in cash and short-term investments on June 30, has enough cash set aside to cover about 85 percent of its fuel-hedging positions.

Separately, Southwest said Wednesday it would set aside priority security lanes for business-fare customers and frequent flyers at seven airports beginning next month. It's similar to an announcement two weeks ago by American Airlines, which will add priority security screening and boarding for top customers.

Long considered an airline catering to leisure travelers, Southwest has been making a push for business travelers. Customers who buy more expensive "business select" tickets will qualify for the faster "fly by" security screening.

Southwest, the only major U.S. airline to remain profitable this year because of those hedges, which reduce the price it pays for fuel, has slowed growth and deferred aircraft it planned to add in 2009, from 14 down to 10 Boeing 737s.

The Dallas-based carrier has bought 26 new jets this year and has three more deliveries scheduled before year-end, but Wright said the strike at supplier Boeing Co. has put those deliveries in doubt.

Wright, speaking during a company meeting with reporters, said Southwest also has an unused $600 million line of credit and believes it could tap European bank credit markets, as it did this spring.

Southwest debt is rated "A-minus," still investment-grade, by Standard & Poor's and Fitch Ratings, and "Baa1" by Moody's.

The company has hedged against 80 percent of its fuel needs for the fourth quarter at an average price equivalent to $58 per barrel fuel, and is more than 70 percent hedged next year at $66 per barrel, Wright said.

Southwest boasts in advertising that it foregoes the fees that other airlines charge, but it too is looking for new sources of revenue. The airline will soon begin testing Internet access in flight, and plans to charge for it. It is boosting sales of alcohol by accepting credit cards instead of cash.

The company reports third-quarter results on Oct. 16.

Shares of Southwest Airlines Co. fell 31 cents, or 2.1 percent, to close at $14.20. Other airline stocks rose. Those carriers are not as well insulated from fuel prices, so Wednesday's decline in oil prices offered them more support.

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