Southwest COO’s Leaked Comments Reveal Drastic Network Overhaul as Business Travel Crumbles – View from the Wing

Southwest COO’s Leaked Comments Reveal Drastic Network Overhaul as Business Travel Crumbles

by Gary Leff on September 21, 2024

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.

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