Note: the following was written shortly before Southwest announced deferral of 30 737-800s by four years to save $1bn in capital expenditures. Half of the deferrals are now scheduled for 2017 and half for the following year. The assumption is that Southwest will convert all these deferrals to the 737-8 MAX. The timing appears to work better for the 2018 deliveries rather than for 2017. Right now, Southwest is scheduled to become the launch operator of the 8 MAX beginning in the fourth quarter of 2017, with just four deliveries. Boeing wants to move EIS “to the left” to first or second quarter, but it is way too soon to conclude that Boeing and CFM will be ready with their products then. Whether Southwest converts some or all of the 2017 deliveries to MAX depends on the progress by Boeing and CFM.

The information below was originally distributed to AirInsight’s proprietary list.

Southwest Airlines has evolved into a Legacy Low Cost Carrier, with high labor costs and is struggling to hold costs, remain productive and now is a very different airline than it was in its first 25 years.

The 41 year old carrier remained profitable through the 1991 Persian Gulf War period, post-9/11 and following the 2008 financial collapse. Almost all other US airlines entered bankruptcy in one or more of these major events. Southwest remained profitable largely through its creative fuel hedging. But these early contracts expired years ago and Southwest now is struggling to increase revenue and maintain its now-mythical image as the low fare airline.

In fact, lower fares can often be found on competitors.

Southwest retains its important culture created under founders Herb Kelleher and Lamar Muse. Corporate culture at Southwest focuses first on employees and on customers second, but these are so intrinsically linked as to be virtually indistinguishable.

The business model propelled Southwest from a three-plane start-up in 1971 to one of the largest US domestic airlines, operating more than 600 aircraft—as large as American Airlines’ global mainline fleet. The following chart has system ASMs, including international seats for the legacy network carrier. Notable is that prior to the Delta-Northwest and United-Continental mergers, Southwest’s ASM matched even the total system ASMs.

By the end of last year, Southwest’s US domestic market share increased to just under 18%. It now ranks as the third largest US domestic carrier.

Even following the mergers of the legacy network carriers, Southwest—after its merger with AirTran—nearly matched Delta and United and has more airplanes than American Airlines.

Southwest continues to tout that it is not a hub-and-spoke airline, and to be sure its connecting traffic trails legacy carriers. But Chicago, Baltimore, Dallas, Houston and Phoenix—just to name several cities—clearly are connecting hubs. The prime difference is that these are “continuous hubs” rather than “bank hubs.”  Continuous hubs provide more productivity and gate utilization than bank hubs. But it remains a myth that Southwest isn’t a hub carrier. The acquisition of AirTran was to gain the Atlanta hub. This, as much as anything, demonstrates the changing character of Southwest.

Other key changes:

  • Peak/Off Peak pricing disappeared ages ago. Now there are  Business Select;  Anytime;  Wanna Get Away; Web Fares
  • Southwest eschewed code sharing for years, but entered into it with the late American Trans Air and explored other opportunities since then (Volaris).
  • Southwest used to avoid the top, highly congested airports. This was given up years ago.
  • Southwest is moving toward offering international flights and likely service to Hawaii.

Labor costs used to be among the lowest ratio to expenses in the industry. Now it is the highest.

CEO Gary Kelly has been open with employees that as legacy carriers cut costs through bankruptcy—with cross-town rival American Airlines now in Chapter 11 to do just that—Southwest is pressed harder than ever to maintain employee productivity, cut costs and increase revenue.

As Southwest grew larger, and its fuel hedges ran out, it was forced to increase fares and prices in line with the remainder of the industry.  We selected three airports where Southwest is the primary airline. The chart clearly illustrates how fares in these markets have risen so that the gap in earlier years has substantially closed.  In 1Q95 the airfare gap between the averages of these tree airports and the national average airfare was 61% and by 4Q11 the gap was only 21%.

To demonstrate just how powerful Southwest’s culture is take a look at the final chart. Southwest is among the biggest US domestic airlines. It may have as many airplanes as network carriers.  It may have the highest labor costs in the industry.  But it also has the most productive employees at any major US airline.

Southwest, as a Legacy LCC, continues to evolve. It has major challenges ahead of it to maintain its industry leadership in an environment that bears no resemblance to its roots.

Please follow and like us:
Pin Share
%d bloggers like this: