Southwest Airlines, encouraged by growing leisure travel demand, expects to be profitable this quarter and through all of 2022, making the third quarter of 2021 the last loss-making quarter for the carrier.
So far, the threat of the Omicron variant has not discouraged Southwest’s passengers from booking holiday and first-quarter travel. But the variant’s effect on travel is not fully known, and may yet affect business-travel bookings, which tend to be closer to the day of travel, Chief Financial Officer Tammy Romo warned at the Dallas-based carrier’s investor day on Wednesday.
Southwest expects to fly about 8 percent less capacity in the fourth quarter than it did in 2019. By contrast, the carrier began this year flying roughly half of its 2019 capacity. The airline expects 2022 capacity to be in a range from down 2 percent to up 3 percent from 2019, Romo said. “2022 will continue to be a transition year,” she said, adding that when the effects of the pandemic on travel fully recede remains unclear. Southwest plans to expand capacity by the low single digits annually through 2026.
Southwest spent much of pandemic adding new routes and cities to its network. The carrier has added 70 new routes from existing bases since June 2020, of which 58 were the only nonstop flights in the market. In addition, Southwest added 18 new cities to its map, accomplishing years worth of network growth in 18 months.
Most of the new cities Southwest added are leisure destinations — like Bozeman, Mont., and Santa Barbara, Calif., and beach destinations in Florida — to capitalize on leisure demand trends, Chief Commercial Officer Andrew Watterson said. But some, like Chicago O’Hare, Houston Bush Intercontinental, and Miami, were new airports in existing Southwest markets to appeal to business travelers.
The carrier does not plan to continue this route-expansion spree next year, and instead will focus on adding depth — frequencies — to existing markets. Southwest redeployed more than 120 aircraft to support its new routes and cities, reducing schedule depth by 22 percent from 2019 while demand remained depressed. This gave the carrier little wiggle room in the event of irregular operations. Southwest cancelled thousands of flights in October when storms in Florida caused cascading delays and cancellations throughout its system. “More schedule breadth means we have little recovery options to recover from extended delays,” President Mike Van de Ven said. “We were overscheduled.”
Stung by the October meltdown, Southwest is taking a measured approach to adding schedule depth. The carrier won’t add new flights unless it is fully staffed for the operation. Southwest is in the process of hiring 5,000 new employees this year, and expects to add 8,000 next year to support its expanded network and additional aircraft. But the airline is competing for that talent in a historically tight labor market with the likes of Amazon. “We are being cautious,” Romo said. “It will take us a while to staff up.”
In October, Southwest exercised options for 14 Boeing 737 Maxes, all -7s, for delivery in 2023. The carrier expects to add 264 -7s and 149 -8s between now and 2027 and has combined options for 238 more aircraft during that period. Aircraft capital expenditures are forecast at between $1-2.5 billion annually through 2026. Southwest plans to retire between 30-35 737-700s per year over that period.
Spending on aircraft, inflation, and increased wages are factors in driving up Southwest’s costs. Unit costs excluding fuel will rise 8 percent over 2019 levels next year. Fuel is a factor, too. Romo noted that although fuel prices are falling now after rising precipitously this year, prices remain volatile.
Managed travel is an increasing part of Southwest’s business, with the number of contracts doubling since 2018, Watterson said. Although it still lags American Airlines, Delta Air Lines, and United Airlines in the managed travel sector, the gap with those carriers is narrowing. In 2022, Southwest will “renew its focus” on managed travel and sales through the three GDS platforms where it has a presence: Sabre, Amadeus, and Travelport, he said.
But leisure remains a core focus. The carrier hopes to segment its leisure fares through a new fare class, set to debut in the middle of 2022. Watterson did not divulge many details, except to say the new fare class will be between Southwest’s “Anytime” and basic “Wanna Get Away” fares and will offer “enhancements” over the basic fare class. “This closes the gap between our existing fare products,” Watterson said.