The decision by Southwest Airlines announced Thursday to freeze or shrink capacity next year can only mean one thing for U.S. airline passengers: higher ticket prices.
Rising fuel costs are eating away at airline profits, and Southwest (NYSE: LUV) is the latest casualty of that trend. The company, the largest carrier of U.S. passengers, made the decision to reverse plans for expansion in capacity for 2012 as the cost of jet fuel rise and the U.S. economy slows.
Southwest's second-quarter earnings beat the expectations of analysts by a penny, and profits rose for the period to $161 million compared to $112 million in the same period the previous year. Revenue also rose, attributable to the company's acquisition of AirTran.
But rising fuel costs are the immediate concern for Southwest and other carriers, as Brent crude that airlines use is over $120 a barrel and climbing, pressuring profit margins.
"Given the pessimistic near-term outlook for fuel prices and the U.S. economy, we have re-evaluated our capacity plans (and) we have reduced our planned 2012 capacity to be equal to or less than our 2011 combined available seat miles," said CEO Gary Kelly, in a statement.
Southwest trimmed its 2012 winter schedule, published last week.
"We will be aggressive in our efforts to optimize our combined networks and redeploy capacity more profitably," Kelly said.
For U.S. consumers, that signals higher prices. As the largest U.S. carrier, known for competitive pricing, Southwest is largely responsible for many low fares found by airline passengers. The company recently sold one-way tickets to limited markets from Denver for $9 each way in a price war with Frontier, also a point-to-point carrier.
Earlier this summer airlines including Southwest, Delta and American raised fares by $10 to $20 on many routes. Now, with Southwest freezing or even reducing capacity, that leaves less flexibility for fare specials as the fewer seats airlines have available, the fewer seats they have to discount.