Southwest Airlines’ new cabin refurbishment program, which adds another row of seats to each of its Boeing 737-700s, will provide the carrier with additional revenue capabilities on each frequency as it reduces the number of aircraft in its fleet.

The retrofit project, dubbed Evolve, introduces a redesigned, lighter-weight, lower-profile seat using existing frames to the carrier’s -700 fleet. The project enables the carrier to remove 635 lbs (288kg) from the aircraft while adding six more seats to the current 137-seat configuration. This coincides with the introduction of Boeing’s 737-800 to Southwest’s fleet. The airline expects to take in 33 of the 175-seat aircraft this year.

Evolve is scheduled to start in March and is expected to be retrofitted on all 372 of Southwest’s 737-700s throughout this year and next at a cost of $60 million, $40 million of which will be allocated to the carrier’s 2012 maintenance expenses. AirTran Airways’ 737-700s and Boeing 717s also will be retrofitted as that airline’s fleet is merged with Southwest’s over the coming years. Southwest’s 737-300s and -500s likely will be retired before being considered for the new cabin.

Despite the addition of the new seating across the -700s, which Southwest equates to the addition of about 0.5 percentage points of capacity, and the larger -800s, the airline says 2012 capacity will remain at 2011 levels. “What you will see are more seats per departure and a slightly longer distance,” said CEO Gary Kelly during the airline’s fourth quarter 2011 conference call.

The larger per-aircraft seat count also mitigates a more than 3% drop in departures, compared with last year, and a net reduction of seven aircraft to 691 units at the end of 2012 as the airline accelerates its -300 retirements, Kelly added.

Southwest’s decision to boost aircraft capacity coincides with a strengthening demand for its services. According to CFO Laura Wright, a mid-year lull was replaced with growth rates of about 7% toward the end of 2011 and these should continue into January and February before a dip in March, and that is due to a change in the Easter holiday break, rather than slack demand.

Kelly also noted the strong demand trend during the fourth-quarter conference call, saying that the “macroeconomic environment is better,” and that “things feel much more stable.”

This view is reflected in Southwest’s financial performance, with a third of the 31.9% year-on-year rise in fourth-quarter sales to a record $4.1 billion attributed to organic growth at the airline; the other two-thirds come from AirTran.

But, as in previous quarters, fuel costs weighed on profits, with a 58.9% increase in fuel expense contributing to a 31.9% decline in the fourth quarter’s operating income to $147 million, although fuel hedging gains increased net profits 16% to $152 million. For the full year though, hedging contributed to a $198 million non-operating expense that compounded a 55.9% rise in fuel that depressed operating costs 34.6% to $15 billion and net income 61.2% to $178 million despite a 29.4% improvement in full-year revenues to $15.7 billion.