Southwest Airlines has the planes and the map to meet the rapid return of travelers and then some as the coronavirus pandemic wanes in the U.S. It has ordered hundreds of additional Boeing 737 Max jets, added 18 new destinations that are meeting or exceeding expectations, and expanded its reach to popular sun spots like Hawaii that has forced some competitors to retreat.
But all those opportunities are overshadow a stark reality faced by the Dallas-based carrier: a tough hiring environment for entry-level staff nationally. Southwest has as many as eight large cities where it faces challenges hiring ground staff, even after raising its starting wage to $15 an hour, said chief operating officer Mike Van de Ven during its third quarter earnings call on Thursday. Those cities include Denver where the airline is growing rapidly and has plans to expand its presence with 16 new gates next year.
“If it’s not the number one focus, it is 1A, which is getting our hiring in place and our staffing in place,” Southwest’s Executive Vice President and incoming CEO Robert Jordan said. The airline is getting fewer applications per job than it did before the crisis while the cost to hire a new employee has at least doubled, he added.
The hiring issues, which are mostly limited to ground staff and do not include pilots or flight attendants, were exacerbated when computer issues disrupted operations in June. Southwest was forced to cancel hundreds of flights due to the technology issues, which executives attributed to human error. But the lack of staff in some big cities made the situation worse on the ground.
Businesses across the U.S. are facing similar hiring challenges. The Transportation Security Administration warned travelers of long waits when it fell short of its hiring targets for the summer, and the lodging industry has scrambled to find workers to meet summer demand. Some hotels went as far as to limit capacity due to staffing shortages.
“People, resources — that, I think, will be our constraint,” Southwest CEO Gary Kelly said when asked about the effect on the airline’s planned growth.
Growing in the recovery is the good news at Southwest. The airline plans to recover to 2019 capacity levels in the third quarter after capacity was down 16.4 percent in the prior quarter. And, by 2022, it plans to grow beyond 2019 with the delivery of 70 new 737-7s, a number that includes three aircraft options exercised earlier in July plus 34 in June.
Deliveries next year could rise to as many as 114 aircraft if Southwest exercises its 44 outstanding 737 Max options, something chief financial officer Tammy Romo told analysts on Thursday was very likely. Some of the 2022 deliveries will replace older 737-700s that are slated for retirement.
However, in a potential hitch in Southwest’s recovery plans, Van de Ven said the airline also faces challenges hiring flight instructors needed to train pilots. The airline has roughly 500 cockpit crewmembers still out on voluntary leaves that need to be re-trained before they can fly again, and it plans to hire new crews ahead of the Summer 2022 peak.
Those growth plans are dependent on the return of travelers. But that is not something Southwest executives expressed much concern for. The carrier generated positive cash flow and a profit in June, while lucrative business travel sales recovered to roughly 31 percent of 2019 levels the same month. Executives expect business travel to hit the 50 percent of two-years-ago mark by September.
In terms of the rapid spreading Covid-19 Delta variant, Kelly said Southwest has yet to see any bookings impact but added that the airline was “very ready to manage and muddle through” if there was a slowdown.
Southwest posted a net profit of $348 million including the benefit of $724 million in federal payroll relief in the second quarter. Without the added benefit, the airline lost $206 million. Revenues decreased 32 percent to $4 billion and expenses 31 percent to $3.4 billion compared to 2019. Passenger unit revenues, or PRASM, were down nearly 19 percent to 12.9 cents while unit costs excluding fuel and special items decreased nearly 17 percent to 7.56 cents.
Looking ahead, the carrier forecasts July revenues down 10-15 percent year-over-two-years and August revenues down 12-17 percent. Southwest did not provide revenue guidance for the full third quarter.