I wrote on Saturday morning that based on an internal message to employees from Chief Operating Officer Andrew Watterson, Southwest seems on the verge of major network changing. They’re likely to close one or more crew bases.
Going through the whole message to employees there’s a lot that’s interesting about Southwest’s positioning – and problems. The airline doesn’t see the same sort of business travel they used to, and much of their network is still optimized for non-stop business travel on the West Coast. That needs to change, and they need to seek out more connections.
Business Travel Is Never Coming Back
Southwest Airlines is looking for new customers, and targeting their ads to “younger, different” customers because “Road warriors just aren’t where they used to be industry wide.” Watterson does content though that,
Even though the industry as a whole is down in business travel, Southwest Airlines is back to 2019 levels. So we’re taking market share from these people who pay higher yields.
Adam Decaire, Senior Vice President of Network Planning & Network Operations Control, adds that Southwest needs both non-stop and connecting travelers “to make up for the loss of business travelers.”
United and Delta have bragged on their business travel, but I’ve been skeptical. When you listen closely, business travel isn’t really back to where it used to be. Vasu Raja at American wasn’t actually wrong that business travel hadn’t recovered from the pandemic, but it’s still an important market.
Even where people have returned to office, they’re likely not all in the office every day, so the idea of consultants flying out to work for clients in-office Monday through Thursday every week just isn’t real anymore.
- Those who say business travel is ‘80% recovered’ compared to 2019 are missing that it’s 80% of 2019 levels, not 80% of where business travel was expected to be in 2024. It’s on a whole new lower trajectory.
- And that doesn’t adjust for inflation. When talking about revenue, remember that there’s been 20% inflation. So 80% recovered is really less than 2/3rds back.
If Southwest were really happy with business travel, and growing business travel, they wouldn’t be diversifying their network away from business travel.
Southwest Airlines Has A Revenue And Cost Problem
Southwest Airlines says it is doing well on the revenue side,
[O]ur load factor was down 4% versus 2019…Yield though, wa sup 10% versus 2019.” And together – ew call RASM – was up 7.5%, which is good.
It isn’t good, though. Inflation is up 20% while revenue per seat mile is up 7.5%. They’re falling behind, not getting ahead.
Adjusting for inflation is one of the most important things that people forget to do when comparing things against 2019. For instance, Delta crows about nearly $7 billion in revenue from American Express, but that’s where they expected to be now without 20% inflation. They’re actually behind. And the $10 billion goal for 2029 is what the goal was five years ago. That means they’ve permanently lowered their expectations.
Meanwhile, cost per seat mile is up “over 26%.” Watterson first blames fuel but then admits labor costs are a key driver. They have expensive new labor deals.
Southwest Airlines is not a low cost carrier and they no longer have those brilliant fuel hedges that sustained them. They’re a high cost airline without premium revenue and that’s a problem, and to make that work they need to chase premium customers which at the end of the day is what extra legroom and blocked middle seats are all about.
Southwest Will Make Network Changes To Generate More Connecting Business
Southwest is 70% non-stop, 30% connections. They’ve seen a real reduction in non-stop intra-California flying. California has done less return-to-office than many markets as well. And Southwest was more a business airline on the West Coast, and a leisure airline headed East (including Southeast, like Florida).
The airline says “there’s definitely going to be more bank structures as we started to try to create more of that connectivity.” They’re reducing schedules on Tuesdays and Wednesdays. (The airline used to barely vary schedules by day of week.) They are also varying more seasonally. The airline is filling planes middle of day, but less so in the morning and evening.
One of the best business travel routes is to XNA (Bentonville, AR) where the Walmart corporate HQ is, via DEN, ORD & DFW – yet WN will not fly there
Great analysis Gary.
Thanks for that.
Interesting to better understand Souhwest today and the airline business in general.
Imagine paying business fare on Southwest for years, yet somehow not even getting bulkhead or exit row seats because of its antiquated check in and boarding process.
Not sure how much revenue they’ve generated by going after the “two extra large bags fly free” crowd…
These record breaking pay packages for pilots are hurting the prospects of the airlines. In fairness, the airlines squeezed very hard when they had the chance so I’m not putting this purely on the pilots. If the airlines had treated fairly with their employees all along, the unions wouldn’t be so motivated to go for the jugular after getting hosed for years.
Where I see this going is Chapter 11 for at least a couple of U.S. airlines just to make them somewhat cost competitive. After the first airline does this, others will be tempted to follow suit.
@Christian…the difference is, people are not willing to take pay cuts, like they were back in the day. Even if a bankruptcy judge allows a pay cut, people will leave to find other jobs. After the pandemic, people are not settling for low wages any longer. You see this throughout the entire business industry, not just withAirlines. All the other Airlines also gave their pilots hefty raises, yet United and Delta are able to pay those wages, and still make sustainable profits. It comes down to a management team that needs to change with the times, otherwise they’re going to find themselves out of business.
Erndog, are there runway or other concerns at XNA? I’m not familiar with the airport.
I’ve been wondering if, along with assigned seating, WN might adopt an intra-EU style business class. Front of plane, early boarding, blocked middle seat, and a Pret or Chopt-style quick, cold meal with un verre du vin. I’d pay for it, if done well.
What about PDX you have a large market with Niki , intel , Columbia and many other big names and a new airport and yet no Montana flights or other cities in Oregon .. seems like your missing out on market there ? Come on swa make PDX bigger and add Hawaii flights too ..
One significant path to the business traveler is via premium class offerings.i know that WN said they are looking at premium offerings . However , I don’t think that offering more leg room seats or empty middle seats is going to move the needle . It’s just my opinion that WN will need a true premium cabin to be competitive. I certainly wouldn’t pay a fare that is equal to that of F/J fares offered by DL, UA, AA, AS etc. for just an empty middle seat when I can enjoy a premium cabin environment on those airlines . I don’t really care about meal service and I don’t think WN needs anything service wise in a premium offering other than a snack basket and complimentary alcoholic beverages. Just my 2 cents , which adjusted for inflation might get you a penny . 🙂
Ironic they aren’t trying to chase more biz travelers while the Elliott hedge fund is saying make the uniforms more professional
SWA is erroneously grouped as a low cost carrier as that was its legacy, but as the author points out, it is no longer in that category. Fuel hedges have run their course, and labor costs are spiraling as they are with the SWA competitors. SWA is an egalitarian airline that tries to keep everything simple. It finds itself in a quandary – how best to raise revenue without turning away loyal customers accustomed to free bags and no seat assignment fees. Setting aside a few rows of premium seats can generate much needed revenue, but the “bags fly free” policy which hurts revenue may no longer be sacrosanct. As costs rise, revenue must also rise, otherwise the return on investment shifts to a less favorable position. I hope SWA finds its way and begins to thrive while not loosing too much of its identity.
@RJ – You raise some good points.
American has been run terribly since the merger and needs to start with a completely new Board Of Directors, who would find a capable CEO and work down from there. Southwest I’m honestly less sure about. United has some pretty unique strengths which Kirby has utilized. Ditto with Delta.
As to pilots going elsewhere, that’s easier for a new pilot. Senior pilots making $600K but looking at dropping to $400K if they stay or $200K as a first officer when they start at the bottom of the ladder with another airline is a lot less enticing. Hundreds of thousands of dollars a year is not a low paying job in this country.
Banking their schedule without business travel will have only afternoon to early evening as the flying times. It will be more leisure time. I wonder if a Southwest Lounge is coming soon. Get a credit card to get into their lounge and free bags.
If planes have empty seats, there’s room to rip out 3 rows / 18 seats and add 8 1st class seats, which will command a fare premium and attract pax they’ve lost.
I believe XNA has been lobbying for Southwest for quite some time – the airport is a known quantity, and if WN thought it could work they’d be flying there now.
AA was an early adapter of sorts at XNA and has built loyalty there over the past two decades, as reflected by their relatively significant volume of regional and mainline flights and their often lengthy upgrade lists for those flights.
DL and especially United seem to be making inroads – DL is adding DTW/SLC and UA has upgraded a DEN flight to mainline (but still flies some 145s to IAH).
Frontier, Allegiant and Breeze seem to be doing well focusing on leisure routes for the area’s upper-middle-class families and out-of-state students at UofA.
It’s a great airport but I think WN just doesn’t fit.
FWIW I’m in NW Arkansas groups on Facebook and anytime anyone asks about XNA flights, there’s always a chorus of “drive to Tulsa and fly Southwest it’s so much cheaper!” One poor unfortunate soul recommended this to someone asking about Europe flights and several people agreed. From where I fly, I have never seen a price difference for TUL, certainly not enough to justify a two-hour drive. And obviously Walmart (and Tyson and JB Hunt) business travelers have no interest in such a strategy.
According to your other article, the letter/video specifically said no station or city closures. Why are you sensationalizing this too make it seem like it’s something it’s not?
What bases are on the chopping block,
any guesses?
I live in Houston and my family lives in Jacksonville FL. Once upon a Time, I could get a straight across the South flight with maybe a stop in New Orleans. Now, it’s an all-day flight going to Baltimore first or some other out of the way airport. So I don’t bother with Southwest any longer.
Southwest is not, never has never been, and never will be a premium experience. It’s the airline of fun and “heart” and these moves chasing premium experiences will run it into the ground even more than it is now.
Chasing business customers is incredibly short sighted – the only reason why business travel has bounced to where it is now is because most companies have record profits and can afford it. As soon as the party is over and companies start to tighten their belts, business travel will be one of the first easy cuts to make. Boeing already announced as much this week during their strike. Southwest ain’t gonna get much blood out of the turnip when all is said and done and will alienate the rest of its customer base in the process.
I’m flying from XNA tomorrow and planes are usually packed and the terminal is getting overrun for it size. Not enough room for bodies. More terminal renovation is needed. I agree AA fares are so good now, and occasionally even UA, that I don’t think SW is needed or there is even room. Also can’t see too many people wanting to go to Love or connect through there when you can go to DFW for $99 each way often.
In the quest for business travel revenue, step one was to assign seats and create extra legroom seats. Check. Step two is going to have to materialize in the form of a bona fide domestic first class product. This will take several years — unless they aggressively renegotiate FA contracts. But there’s absolutely no way Southwest is going to survive in the long run with the Frontier product model on a scale the size of their network. It won’t work.
@ Lynn Gentry – just FYI Southwest flies nonstop between HOU-JAX and has connections through BNA and STL
“Business Travel Is Never Coming Back”. I hope you are incorrect on this prediction, but you could be right. I agree with your analysis that business travel is not back to 2019 level yet. Much can be done in business without travel now, and business traveling is still considered a necessary evil (coming from an old road warrior). It will all depend on the economy. I use to factor a percent of budget for travel per FTE, but my post pandemic years experience tells me that I can conduct “big deals” with far less travel.
Gary: Just curious – where does the 20% inflation number come from?
“ In 2023, the average rate of inflation was 4.1%.
In 2022, the average rate of inflation was 8.0%.”
Front of plane, early boarding, blocked middle seat, they need a real business class section. Not just extra leg room and still have three seats.
Bureau of Labor Statistics https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=100.00&year1=202002&year2=202406
SWA has lost business flyers because THEY ARE ALWAYS LATE OR DELAYED. You have a 50/50 chance one or all your flights will not be on time. Their only consistency is late . I don’t fly them anymore period.
Why is no one talking about why the airline has such higher internal costs? overpaying pilots. they got huge raises and already have very high pay.
Over 4 years the CPI has increased 21.11% using the August numbers. The same calculation for July was 21.40%. January = 19.55%. February = 19.97%. March = 21.00%. April = 22.29%. May = 22.49%. June = 21.87%. If you consider that the normal rate that the FED wants is 2% per year, there has been about 12% more inflation than there should have been over the last four years.
Desperation …. WN is in serious trouble. It’s extremely sad. Lost identity
No lounges, no first class, no meals…swa is literally my last choice for business travel.
Certain business travel for example client paid consulting work has gone more Zoom/Teams than in person. Clients are demanding less in person, whether it impacts the quality of an engagement or not. I speak to large consulting companies several times a year (Deloitte, PWC, Accenture) as they’re constantly trying to get me to come to work for them and I hear the same thing-we used to travel 90% to 95% and now we’re down to 30% to 40%. Certain types of business travel are fully back, physical infrastructure, high dollar sales, but some types are never coming back to 2019 levels.
Yield, though. Wa sup?
Why would adding more connecting flights generate more income? Connecting flights are terrible. I fly southwest because I want direct flights. If I wanted to connect everywhere I’d fly delta
Overall good info and analysis on the business traveler and economic data.
Certainly COVID forever changed the patterns of business interaction towards more online. I suspect the WN business traveler more substantially more SME than the other Big 3, which therefore have an even more notable impact on them than the others. Also, if you’re in a business where the client is billed for the cost of travel, and it’s probably much more restricted than ever.
Gary, it might be good to review research data from the Global Business Travel Association. I just took a peek and lots of research available, I just don’t have the time to parse it and look specifically at US data.
As for WN, I wish them well. I really do wonder what bases might be affected, though the increased connectivity at focus airports seems obvious enough I suppose; PHX/DEN/DAL/HOU/MDW/BWI/BNA.
If SWA wants assigned seats, 17″ wide to 19″ wide is the problem. Connections between midsized business centers are absurd. San Diego to St Louis by way of Seattle? Are you kidding me?
I love SWA but most of my travel is to middle America now. So I use SWA if possible as have many point in the bank.
But they need to look at other places – like Merida, Panama City etc
It’s over simplistic to say that SWA is overpaying the pilots. Southwest pilots fly one type of aircraft and many work the maximum flight hours allowed by FAA rules. I’m taking a WAG that the majority of the pilots are 20-25% more productive both monthly and annually than DL, AA or UAL. I’ll be the first to admit that basic pilot compensation is better today than it was for the first 35 years but it’s still not the major force dragging the earning down. Had SWAPA and the pilots not had the foresight and voted for Defined Contribution Retirement Plans, all SWA employees (including those that sling Cokes and Sprites) would be in much more peril of layoff’s. Nearly all of those who sacrificed pay and quality of life and grew the company profits are no longer on the payroll.
If Elliott group prevails there will be absolutely NO reason to fly Southwest!
And I agree that the only thing that SW is consistent on lately is with delayed or cancelled flights.
I love SWA and worked for the airline for 18 years. All that time that I worked for SWA I often wondered how the company could grow and compete with the big boys. I thought to myself “think outside box”. We need not only be an airline but a transportation company. The 737 only concept is gone. Diversify into other types and sizes of aircraft. Diversify into other modes of transportation, buses , helicopters. I even wish the old nemesis of high speed rail could be adopted. How can we connect smaller cities and towns to major hubs without having to be car dependent. SWA could could turn a page and be major player in this. Think about it!
If they want to increase business travel they need to put the pre board abuse to bed and assign seats. It’s ridiculous, and causes me to fly delta or AA more often. Additionally, they need to invest in a better inflight experience which would include better seating and better WiFi.
They have no lounges.Onboard seats are to narrow a width and seat bottoms hard as a rock/painful if any orthopedic issues
No seat assignments added to the mix equals no business travel for me
Its an ugh no go
@Christian Pilots for major airlines are paid what they can command as a labor group in the pilot market. Like any market, the major airline pilot market is governed, in a basic sense, by the law of supply and demand. Like most markets, laws and regulations also have an impact on their functioning. In the United States, the Railway Labor Act (RLA) is the law that most impacts the major airline pilot market.
The RLA’s primary effect on pilot pay stems from its strict regulation of labor disputes. By placing significant restrictions on when pilots can legally strike, the Act significantly tempers the pilots’ most powerful economic weapon. This limitation on strike action is particularly impactful during periods of tight pilot supply (like the last several years) when airlines would typically be most vulnerable to labor pressure.
The RLA mandates a lengthy process of mediation and cooling-off periods before a strike can be authorized. This protracted negotiation timeline often (almost always) leads to fatigue among pilot groups, causing them to capitulate before ever being authorized to strike.
Without the constraints imposed by the RLA, it’s likely that major airline pilot compensation would be substantially higher. In a free market scenario, especially in a constrained pilot market, airlines would have few defenses against the economic pressure a united pilot group could exert. Instead, under the RLA, management can count on the Act’s built-in delays to wear down pilot resolve.
In essence, while pilot pay is ostensibly determined by market forces, the RLA serves as an artificial cap on compensation. It achieves this not through direct wage controls, but by systematically limiting pilots’ most potent negotiating leverage. As a result, the compensation levels we see in the airline industry today are likely lower than they would be in a less regulated labor environment.
So, be thankful, I guess, that you live in a country that constrains the ability of labor to advocate for itself. Your airline ticket prices are lower as a result.
Capitalism for me, but not for thee, amiright?
No one mentions cost..I personally could care a less about checking bags it’s faster to carry on 1 bag..I do care about seat assignments I like aisle seats and I don’t want handle of competing for one or anything complicated.. On the west coast here I hate to say it I prefer spirit..They have direct flights now from pdx to San…I’ve gotten hung up twice on vegas connections but at least I’m hung up on an $ 80 fare not a $ 280 fare
I’m wondering who files for bankruptcy first – American Airlines (yet again) or Southwest Airlines.