Southwest Airlines’ Former CEO Gary Kelly Was Right About the Corporate Travel Recovery

Photo credit: Southwest ticket counter in Dallas Airline Weekly / Edward Russell

Southwest Airlines former CEO Gary Kelly‘s firm belief that the industry was in for a slow corporate travel recovery is looking increasingly prescient. Southwest is undertaking the not-so-simple task of redesigning its network to reflect a future with fewer road warriors for some years to come.

“I expect business to come back, but I think it’s going to trail the restoration of leisure for a while,” Southwest’s current CEO Bob Jordan, who replaced Kelly in February 2022, said during the carrier’s second-quarter earnings call Thursday.

While Jordan did not say when he expects corporate demand to recover from the pandemic, given we’re already three years into the rebound, Kelly’s forecast of a 5-10 year business travel recovery is looking increasingly accurate. Southwest’s network changes, which Jordan said will drive roughly $500 million in incremental pre-tax profits next year, will only begin in January and be completed by March — or four years into the Covid recovery, and only a year shy of Kelly’s expectations.

The return of corporate travelers has broadly stalled in the U.S. In recent comments, executives at Alaska Airlines, American Airlines, Delta Air Lines, and United Airlines all put the recovery of the segment, at least among large, managed accounts, at roughly 75-80% of 2019 levels. Most are optimistic that the recovery of corporate demand will resume after Labor Day, the symbolic end of summer in the U.S., but in a measured, gradual manner.

Continued recovery or not, Southwest is preparing for a future where there are fewer road warriors who need a 6 a.m. flight from, say, Chicago to Columbus, and more travelers — whether for a business, leisure, or blended trip — from Chicago to Phoenix, or Columbus to Tampa. Hence the network rejig.

The changes are four-fold as Southwest Chief Operating Officer Andrew Watterson explained. The first is to remove some short-haul flights in favor of more medium- to long-haul ones; for example, Southwest will end service between Burbank and San Francisco in January. Second, the carrier will reduce flying on Tuesdays and Wednesdays — the weekdays with the lowest travel demand — by 7-10% compared to other weekdays; previously it only reduced its schedule by roughly 2% on those days. Third, Southwest will shift some early morning and late night flights to more attractive times of day. And, fourth, the airline will reduce some of its Hawaii flying to reflect seasonal demand shifts, with executive comments suggesting a pull back in inter-island capacity.

“It’s kind of a mix shift at the margin, not unlike going to the other guardrail so to speak,” Watterson said. “You do this to all of our network, it leads to a substantial change, but each one is modest.”

The changes to Southwest’s network are set to begin in January and be complete by March. And, as a result, the airline plans to slow overall annual capacity growth to the “mid-single digits” in 2024 from up 14-15% this year as it continues to rebuild from the pandemic.

Asked by J.P. Morgan analyst Jamie Baker if the slow corporate travel recovery is in any way connected to Southwest’s operational meltdown during the year-end holidays last year, Jordan responded with a firm no.

“As you think about demand for the brand, demand for the product that shows up, obviously, in bookings,” Jordan continued. “We’re just not seeing any sign of weakness.”

Some other highlights from Southwest’s second-quarter call.

U.S. Airline Yields Peaked in 2022

If there was any question — and there should not be — yields, and airfares, for U.S. domestic travel peaked last summer. That was true in Southwest’s results and at its domestic-oriented competitors. Southwest saw unit revenues, measured in RASM (revenue per available seat mile) down 8.3% year-over-year in the second quarter, and forecast to fall 3-7% in the third quarter. Chief Commercial Officer Ryan Green said Thursday fares remain elevated but, when compared to the records set in 2022, the comparisons are difficult. And he is right, unit revenues at Southwest, while down from last year, are still up 12% from 2019 levels.

Domestic Travel Demand is Strong

“We’re seeing leisure booking and yield strength continue throughout the summer travel season with July revenue, which is essentially booked, expected to also be a record,” Green said. Southwest carried 8.5% more passengers in the second quarter than it did a year ago, and 5% more than in 2019. While capacity was also up from four years ago — 6.5% to be exact, compared to a 14% year-over-year increase — Southwest executives and other data points all indicate that more and more people are flying. They’re just not paying as much to fly on domestic flights this year as they did a year ago.

And The Numbers

Southwest posted a $795 million operating profit in the second quarter, and an 11.5% operating margin excluding special items. Revenue increased nearly 5% year-over-year to $7 billion, while expenses rose faster at 12% to $6.2 billion. The faster cost growth was attributed to higher labor expenses and maintenance needs for the airline’s fleet of Boeing 737-800 aircraft. Unit costs, excluding fuel and special items, were up 8%.