Southwest to Keep Capacity Flat; May Lift Fares

"We know we have to get our average fares up, and we have to do that substantially," Kelly said. "I don't think anybody believes we could in short order increase our average fares by $30 or $40."

He also said the lack of baggage fees is a big advantage. Reservations agents tell him the first question they routinely hear from customers is, "Do you charge to check a bag?"

Meanwhile, Kelly said Southwest expects to add code-share flights to Mexico, Hawaii and the Caribbean in 2009, in addition to the Canadian code-share flights it will introduce under an agreement reached this month with Canadian carrier WestJet.

During the quarter, revenue per available seat mile grew 5.3%. Cost per available seat mile excluding special items, was up 10.5%. Excluding fuel, CASM rose 1.8%.