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North America

Southwest Airlines Returned to Profits in March After Holiday Meltdown

Jay Shabat

April 27th, 2023

For Southwest Airlines, January through March was a self-described quarter of “two competing storylines.” During the first two months of the period, the airline suffered residual effects from its December operational meltdown, which combined with a normal seasonal lull to drive $163 million in quarterly red ink, excluding special items. Operating margin for the quarter was negative 5 percent. But the other side of the story: A strong month of March, in which the airline produced “strong double-digit margins despite high fuel prices.”

Alas, those March profits weren’t enough to offset the January and February losses. Included in those losses was $380 million pretax attributable to its December fiasco, which already cost Southwest $800 million in the fourth quarter. But the airline told investors Thursday to expect better things for the quarters to come.

“As we look ahead,” CEO Bob Jordan said, “we currently expect solid profits here in Q2. We continue to expect solid profits for [the] full year.” It said about 75 percent of second quarter seats are already booked, and yields and unit revenues look strong. That’s true for leisure travel. And managed corporate travel is close to being back to pre-pandemic norms. Speaking more generally, chief commercial officer Ryan Green said, “The overall domestic revenue environment remains strong.” Southwest is largely a domestic carrier, with just a relatively small portion of its capacity flying across borders, exclusively to Mexico and the Caribbean.

During the carrier’s earnings call Thursday, management came under some fire for upward revisions to its non-fuel unit cost outlook. Executives responded by highlighting the industry’s escalating labor costs — Southwest hasn’t yet signed a new pilot contract but is already including estimates of its eventual costs in its financial reporting and guidance. It’s assuming it will need to pay something akin to Delta’s industry-leading rates. In addition, Southwest is revising down its capacity plans for the post-summer period, which adds to unit cost pressure. “We are reducing our full-year 2023 growth plans due to a lower planning assumption for Boeing [737] Max deliveries this year,” Jordan remarked. “This relates to the recent news of further supply chain challenges at Boeing. The outcome is a reduction to our 2023 capacity.”

As for fuel, hedging helped lower Southwest’s average fuel costs last quarter to $3.19 per gallon, more than 30 cents less than JetBlue’s average, for example. This quarter, Southwest expects to save about $70 million from its hedges.  

Another big theme of the call was Southwest’s brand, and whether it’s suffered longterm damage from its headline-grabbing mega-meltdown this winter. Management insisted the answer is no. “I want to mention,” said Green, “that we have watched our brand metrics very closely since the disruption, and our scores have improved significantly throughout the first quarter. We are very fortunate to have a loyal customer base at Southwest that we do not take for granted, and we’ll continue to communicate to them about our remediation plans and aim to consistently deliver the hospitality, customer service, and operational reliability they are accustomed to from us at Southwest.” Management downplayed an incident early this month (April 18), when the carrier experienced what it called “a double firewall failure that resulted in an unexpected loss of connection to some operational data.” Ultimately, it led to the cancelation of just 22 flights.

The carrier hopes to further impress customers with three onboard initiatives, namely better inflight wi-fi, in-seat power, and larger overhead storage bins. Other non-customer-facing initiatives include new revenue management software, efforts to win more corporate traffic, and plans to rebuild its network to pre-pandemic status by the end of this year. Central to Southwest’s strategy is its large 737 Max orderbook, which includes the smaller -7 variant that has yet to be certified. Earlier this year, it planned to take 90 new 737-8s but, due to Boeing’s production issues, it now expects just 70 aircraft.

Jay Shabat

April 27th, 2023

Tags: North America

Photo credit:  Southwest Airlines

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