October 25, 2018 / 11:04 AM / in 25 days

UPDATE 3-Southwest pledges revenue boost but no baggage fees

(New throughout, adds details, background and CEO comments)

By Tracy Rucinski and Rachit Vats

Oct 25 (Reuters) - Southwest Airlines Co will boost revenue without breaking its long-standing policy of no baggage fees, the company’s CEO pledged on Thursday, after rising costs at the airline spooked investors and sent its shares into an 8 percent nosedive.

“We like the fact that we’re more customer friendly,” Chief Executive Officer Gary Kelly said, warning that reversing its no-fee policy could turn customers away.

Dallas-based Southwest has built a reputation for offering lower fares versus legacy competitors such as United Continental and American Airlines, which have tried to counter rising jet fuel bills by slapping fees on everything from baggage to seat selections.

Southwest allows passengers to check two bags at no extra charge and does not charge for ticket changes.

The company’s shares dropped 8 percent after its forecast for a 3 percent rise in 2019 cost per available seat mile (CASM), excluding fuel and profit sharing expenses, overshadowed a quarterly profit beat.

“The company has struggled to maintain their non-fuel unit cost structure all year as they integrate their MAX fleet,” Cowen analyst Helane Becker said.

Kelly defended recent investments to modernize its fleet with Boeing’s latest fuel-efficient single-aisle 737 MAX planes, but said that cost controls would be the top priority going forward. He did not provide further details.

The company’s net income grew to a record $615 million, or $1.08 per share, in the third quarter to Sept. 30 from a year ago, beating the Wall Street consensus forecast of $1.06.

Total operating revenue rose 5.1 percent year-on-year to $5.57 billion, also a record for the quarter.

Fourth-quarter unit revenue - a closely watched performance measure that compares sales to flight capacity - is seen rising 1 percent to 2 percent.

Next year Southwest said it will restrict capacity growth to under 5 percent, including a new Hawaii route.

Despite a rise in global travel demand, airlines are trying to avoid adding too many seats to a competitive market, particularly as high fuel prices eat into profits.

Southwest’s fuel cost rose 16.2 percent during the quarter.

Among other airlines reporting on Thursday, American Airlines shares jumped 8 percent after the No. 1 U.S. carrier targeted a higher fourth-quarter profit margin than most on Wall Street had expected.

Shares in Spirit Airlines Inc and Alaska Air Group were also higher after broadly positive quarterly earnings. (Reporting by Rachit Vats in Bengaluru and Tracy Rucinski in Chicago; editing by William Maclean and David Gregorio)

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