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.
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.