UPDATE 1-Southwest CEO warns of volatile fuel prices

* CEO says outlook improved

* Fuel price remains a risk

* Southwest shares down 3.5 pct

CHICAGO, May 19 (Reuters) - The outlook for Southwest Airlines LUV.N is much brighter in 2010 than it was a year ago, but volatile fuel costs are still a big risk for the industry, Southwest's chief executive said on Wednesday.

“It is imperative for us and the airline industry that we continue to focus on fuel efficiency,” Gary Kelly said at the company’s annual shareholder meeting in Dallas.

Although crude oil, which directly influences the price of jet fuel, is currently near an eight-month low CLc1, it remains high by historical standards and therefore a burden on the airline industry.

Kelly said the airline plans to add new cities to its network but that it has no plans to increase its fleet until it meets its financial targets.

“We have every desire to continue to grow. We just have to keep our costs under control,” Kelly said.

Shares of Southwest were down 3.5 percent to $12.20 on the New York Stock Exchange. The Arca airline index .XAL was down 2.4 percent. (Reporting by Kyle Peterson; Editing by Tim Dobbyn)