Southwest Air weathers safety controversy for now

WASHINGTON (Reuters) - Southwest Airlines (LUV.N) appeared to weather a week-long controversy over safety with the carrier saying it saw no noticeable weakness in bookings and a credit rating agency sounding an optimistic note.

Shares of Southwest fell 4.5 percent for the week to close Friday at $11.64 on the New York Stock Exchange, a modest drop as rivals experienced double-digit declines, driven by record fuel prices and a weak economy.

Southwest spokeswoman Beth Harbin said the airline continues to sort out its safety issues but is heartened by bookings that show no noticeable drop off, despite an avalanche of negative publicity about maintenance shortcomings.

U.S. aviation regulators proposed a $10.2 million fine on March 6 alleging the carrier failed in 2006 and 2007 to inspect 46 Boeing Co (BA.N) 737s for cracks.

Southwest then flew those planes while it completed the work. The Federal Aviation Administration said the aircraft should have been grounded.

In a follow-up review of its maintenance records this week, Southwest grounded 38 737s in order to reinspect them for fuselage cracks around windows, canceling 4 percent of its flights for one day.

Small cracks were found on four planes, and all but two had returned to service by Friday, Harbin said. The remaining two were expected to fly again over the weekend.

The maintenance problems were a rare lapse for an airline that has long been regarded as a model of efficient operation.

The airline's internal investigation continues. "We have not gone through everything. It's a comprehensive look and we expect it to take as long as it takes," Harbin said.

The FAA has said it is investigating another potential safety issue with Southwest but has declined to give details.

Standard & Poor's said on Friday that Southwest's exposure to maintenance issues will not affect its ratings or outlook on the airline.

"We expect the financial impact, including the $10.2 million fine levied against the company, to be immaterial relative to the company's earnings, cash flow, and liquidity," said Betsy Snyder, S&P credit analyst.

Snyder said the view could change if passengers wind up avoiding the carrier because of safety concerns.

Separately on Friday, the Senate Commerce Committee announced it would investigate Southwest, joining the House of Representatives Transportation Committee, the Federal Aviation Administration, and the Transportation Department's inspector general.

(Reporting by John Crawley; Editing by Tim Dobbyn)