DALLAS ( TheStreet) -- Southwest ( LUV) exceeded third-quarter expectations, both its own and Wall Street's, but the carrier nevertheless provided a glum economic outlook. Airlines are lagging economic indicators, so perhaps what Southwest -- the world's second largest carrier, by passenger count -- has to say is what we already know, or should know. That is, "the economy will continue to bump along," according to CEO Gary Kelly, on an earnings conference call. "I don't believe the worst is behind us. "I think there's a tremendous amount of relief to find in the fourth quarter that things haven't gotten worse," he said. "That extends clearly to air travel. For Southwest, we've seen a remarkable improvement in the third quarter. (But) I don't think it's the economy that's moved us" from a 6% second-quarter decline in revenue per available seat mile to a 2.2% increase in third quarter. Rather, he credited Southwest employees, increased fee revenue, reduced capacity and successful allocation of aircraft. Southwest's meager earnings, excluding items, of $23 million were hardly spectacular in what is normally the strongest quarter for airlines. But what is more troubling is the carrier's outlook. In selling seats, airlines have two choices. One is to maintain high fares for in-close bookings, selling to business travelers who fly because they believe they can generate profits for their employer. The lesser choice is to reduce fares enough to attract discretionary leisure fliers. Kelly said the current environment is all about the latter strategy. "We're not counting on a return of the business traveler anytime sooner," he said. "It is a low fare environment. (Overall) domestic capacity is down 8%. The demand, in other words, is down. People are spending less. There's certainly been a sharp drop in business travel. And we're expecting that's going to continue."
The good news, at least for Southwest and other low fare carriers like AirTran ( AAI) and JetBlue ( JBLU), is that people search out bargains in a bad economy. In fact, Southwest is seeing improved bookings for October, November and December, although fares are lower than they were a year ago. -- Written by Ted Reed in Charlotte, N.C. .