Southwest Airlines Set to Launch $519M Love Field Redevelopment

DALLAS - Southwest Airlines is ready to launch a $519 million redevelopment of its flagship Love Field Airport in Dallas, even though the carrier's growth is "suspended indefinitely," chairman Gary Kelly said yesterday.

Including special items, Dallas-based Southwest lost $56 million in the fourth quarter, the first back-to-back quarterly losses in nearly 18 years.

Despite the no-growth scenario, Kelly said the carrier and the city of Dallas are on track for the five-year redevelopment of the Love Field terminal and baggage facilities. Demolition of existing gates is expected to begin in June.

"Love Field is in dire need of an upgrade," Kelly said in an earnings conference call. "It's in essence remaking the airport."

While Southwest will continue to dominate the in-town airport with 16 gates, Continental Airlines and American Airlines will each keep two. The combined carriers will have 160 daily departures.

In 2008, Southwest managed to show an operating profit for the 35th year in a row, but Kelly acknowledged, "I'm glad 2008 is over."

Fort Worth-based AMR Corp., parent of American Airlines, said Wednesday it lost $340 million in the fourth quarter and $2.07 billion for the full year.

Southwest plans to reduce capacity by 4% this year, mothballing some aircraft as needed. Prospects for selling planes are not good due to the credit crunch, he said.

Financing of the Love Field project will come from tax-exempt bonds backed by lease payments from Southwest, Kelly said.

A new entity known as the Love Field Airport Modernization Corp. would issue the bonds, with a first tranche likely to come in September. The debt would be rated according to Southwest's credit rather than airport revenues.

Standard & Poor's this week affirmed its A-minus rating on $400 million of Southwest's senior secured notes due 2011. The airline's corporate credit rating is BBB-plus.

"Our criteria provide that such obligations, if adequately secured by acceptable aircraft collateral, typically receive a one-notch enhancement from the corporate credit rating for an investment-grade rated airline," noted senior credit analyst Philip Baggaley.

Fitch Ratings matches Standard & Poor's, while Moody's Investors Service ranks Southwest's senior notes at Baa1.

Standard & Poor's raised its rating on Dallas' $27 million of airport revenue bonds issued in 2001 for Love Field to BBB-plus from BBB, citing a 20.5% increase in annual enplanements and improved financial performance. The city's airport revenue bonds are rated Baa2 by Moody's. Fitch does not rate the airport bonds.

The terminal redevelopment follows a five-party agreement in 2006 to repeal the 1979 Wright Amendment, which originally restricted Southwest from flying passengers from Love Field to destinations beyond the four states bordering Texas. The federal law was later loosened, to allow Southwest to fly from Dallas to destinations in Alabama, Mississippi, and Missouri.

The repeal agreement allowed Southwest to issue tickets for passengers traveling from Dallas to cities it served anywhere in the United States until 2014, when all restrictions on passenger flights from Love Field are to be removed.

Parties to the repeal agreement included Dallas and Fort Worth, Dallas-Fort Worth International Airport, American Airlines, and Southwest.

The new terminal will have a capacity of approximately five million passengers a year. The existing terminal handles about four million passengers a year.

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