Southwest CEO Gary Kelly Passes The Torch

Edward Russell
June 28th, 2021 at 12:01 AM EDT

Southwest Airlines will get its first new CEO in nearly two decades next February when Gary Kelly passes the reins to Robert Jordan.

On February 1, 2022, Jordan will become the sixth CEO of the Dallas-based carrier, which celebrated its 50th anniversary earlier this month. He joined Southwest in 1988 and, after serving in multiple roles, is currently executive vice president of corporate services.

Kelly, who has been CEO since 2004, will become the airline’s executive chairman. His retirement has long been expected with rumors dating to at least 2015.

“Gary has been an outstanding CEO for Southwest for nearly two decades and has developed an excellent group of senior leaders to shepherd the airline into its next 50 years,” said William Cunningham, the lead director on Southwest’s board, in a statement. “Bob inherits a solid strategy and great momentum to continue the airline’s recovery as the Covid pandemic wanes.”

Southwest posted its first annual loss in 47 years in 2020 as a result of the coronavirus pandemic. However, with the help of government relief, the airline avoided involuntary furloughs and used the crisis to significantly expand its route map. It has announced or launched service to 18 new cities — including Miami, Palm Springs and Steamboat Springs, Colo. — since the crisis began in March 2020.

The airline is known for long-serving leaders. Before Kelly’s tenure, Southwest’s arguably best-known CEO, Herb Kelleher, led the airline for 20 years from 1981 to 2001. Kelleher transformed the carrier from a small airline serving Texas and surrounding states into a national carrier with dominant positions in some of the largest U.S. domestic markets, including California.

Jordan will guide Southwest through the recovery, which is expected to take years. U.S. leisure traveller numbers have or are expected to recover to pre-crisis levels this summer but business travelers — a highly sought after and lucrative segment for airlines — are expected to return to the skies at a much slower rate. Kelly has warned that it could be up to a decade before business travel fully recovers.

Southwest’s “biggest competitive advantage is its focus and its culture, and Jordan will protect those things,” wrote Wolfe Research Analyst Hunter Keay on the transition on Wednesday. His biggest challenges will similarly be maintaining that culture as well as predicting the future for the airline.

Jordan inherits a somewhat established path for Southwest. The airline has ordered 134 Boeing 737 Max 7 jets since March to replace its 737-700 fleet over the next decade. And, in 2020, it expanded the availability of its flights on global distribution systems popular with corporate travel managers to woo more business travelers. Both of these will help guide Southwest’s growth over the next decade.

During his tenure at Southwest, Jordan has worked on numerous initiatives including the development of the airline’s website and evolution of its frequent flyer program. He oversaw the integration of AirTran Airways, which Southwest acquired in 2010.

Edward Russell

E-Commerce Fuels FedEx to Record Revenues

FedEx reported record profits in its fiscal fourth quarter and full year as consumers trapped at home during Covid-19 lockdowns shifted their purchases of even mundane household goods online. But even better news for FedEx is that this trend shows no signs of abating, marking a structural shift toward e-commerce that the company expects will fuel it to sustained profits and growth of between 13-18 percent this year, a forecast that surprised Wall Street. 

FedEx is so confident the package and air freight sectors will grow that it is adding 20 aircraft to its fleet. The company has exercised options for the Boeing 767F, with 10 aircraft expected in fiscal 2024 and an additional 10 joining the fleet the following year, a spokesperson confirmed. The company has 102 767Fs in its fleet now, and had planned to take 30 more by fiscal 2025. By exercising its options, FedEx now expects 50 767F deliveries by the end of that year. FedEx has 406 aircraft in its mainline fleet, and by the end of fiscal 2025 after factoring in retirements, expects to have 525. The 767F will be the dominant aircraft type in the carrier’s fleet by then.

FedEx is also stepping up its air operations with TNT Express, which it acquired in 2016. The integration will allow the combined carrier to move packages and freight between Europe and both Asia and the U.S. more seamlessly, and allow for overnight deliveries between the regions, Raj Subramaniam, president and chief operating officer, told analysts during the company’s fiscal 2021 fourth-quarter and full-year earnings call.

This integration and focus on Asia and Europe will right FedEx’s historic lower market share in traffic flows between the two continents, Subramaniam added. Strengthening the company’s position in Asia-Europe cargo traffic is especially important now, as maritime shipping bottlenecks have hamstrung cargo transport just when companies are restocking inventories as the world begins to shake off its Covid-19 economic torpor, he said.

In fact, FedEx projects global GDP to grow by almost 6 percent this year and by 4.1 percent next year. The company expects U.S. economic output to grow by almost 7 percent this year and just over 4 percent next year. The company forecasts industrial production in the U.S. will grow by 6 percent this year and 4.5 next year.

All these indicators give FedEx confidence in the years ahead. It’s revenue growth forecast of between 13-18 percent beat analysts’ expectations. “As the pandemic wore on, we thought we would see a slower growth rate, but growth has continued uninterrupted,” Cowen & Co. Analyst Helane Becker wrote in a note to investors. “People got used to having everything delivered, and although we thought we would see more people shop in person, that’s not occurring.” Retail inventory in stores also is low, forcing more people to turn to e-commerce even if they want to shop in stores, she added.

Right now, FedEx has international package transport largely to itself. Although airlines have added thousands of cargo-only flights on converted passenger aircraft, or “preighters,” belly-hold cargo capacity is down significantly as international flights are a fraction of what they were before the pandemic. FedEx expects competition to rise as the world reopens and adds more flights, but the company still is bullish on its growth prospects.

The main challenge for FedEx in the near term is the shortage of labor, which the company expects will last until the end of this year. The inability to hire workers is causing “inefficiencies” in package handling and delivery, Subramanian said. Wages will rise, putting pressure on FedEx’s earnings this year, especially as the company ramps up for its peak season at the end of the year. To alleviate the long-term labor shortage, FedEx is investing heavily in technology to automate as much of its processes as it can, he said.

FedEx reported fiscal fourth-quarter 2021 profits of $1.4 billion, up 105 percent from the same period last year, on revenues that were 30 percent higher than fiscal 2020. Revenues for the full year were up 20 percent to $84 billion. The company’s fourth-quarter operating margin was 8 percent for the fourth quarter, up from 2.7 percent the year prior, and 7 percent for the full year, double that of 2020.

Madhu Unnikrishnan

Air New Zealand Delays 787s With Uncertain Long-Haul Outlook

Air New Zealand has delayed the delivery of the first of eight Boeing 787-10s by a year to 2024 amid an uncertain recovery outlook for its long-haul network. The Auckland-based carrier continues to fly minimal long-haul and Pacific island capacity since the coronavirus pandemic effectively shut the New Zealand border in March 2020. In July, it is only scheduled to fly roughly 10 percent of ex-Australia and New Zealand capacity compared to 2019, according to Cirium data.

The New Zealand government’s Maintaining International Air Connectivity (MIAC) scheme supports the roughly 30 weekly long-haul flights Air New Zealand will operate through October 31. This allows it to provide additional cargo capacity to transport goods to and from the country. The airline anticipates NZ$320-340 million ($225-239 million) in financial support from the scheme in its 2021 fiscal year that ends on June 30.

Domestic and Australia flying is a different story. Air New Zealand is operating 90 percent of pre-crisis domestic capacity with about 80 percent of business travel back onboard, the airline said in a market update on June 18. Trans-Tasman capacity has recovered to roughly 70 percent of 2019 levels following the implementation of the Australia-New Zealand travel bubble in April.

For its full 2021 fiscal year, Air New Zealand anticipates an up to NZ$450 million net loss. This comes even as it has generated positive operating cash flows since the October-December 2020 quarter, and positive earnings before interest, taxes, depreciation and amortization since September 2020. The airline anticipates an additional net loss in its 2022 fiscal year owing to the expiry of government relief.

Edward Russell

Overscheduled American Pulls Flights Amid Training Backlog

The operational difficulties that left a bad taste in the mouths of many American Airlines crews and frequent travelers during the summer of 2019 appear to be making a comeback. Mainline cancellations spiked over the weekend of June 19 and 20 due to what a spokesperson said was a combination of weather and staffing issues. As a result, American will shave roughly 1 percent from its daily operation — or around 30 flights a day — through July that will allow it to “build in additional resilience” into its schedule.

American is scheduled to fly nearly 97 percent of its 2019 domestic capacity in June, according to Cirium data. In July, that number rises to nearly 98 percent of what it was two years ago.

Delta Air Lines faced similar issues as it ramped up schedules this spring. The most recent incident was in April when widespread cancellations forced it to unblock middle seats to accommodate affected travelers. The Atlanta-based carrier has faced a training backlog as pilots move around to different aircraft types following its decision to retire its Boeing 777 and MD-88 families.

These are both examples of how labor shortages across the travel industries are pinching operations as demand is the highest it’s been since the pandemic began.

There have been multiple warning signs that American’s summer plans could be overambitious. In March, Allied Pilots Association (APA) spokesperson Dennis Tajer said that a pilot training backlog could hamper plans to reactivate its 855 mainline aircraft by June. The backlog stemmed primarily from the need to re-certify pilots who were furloughed in October 2020 and recalled that December, as well as retraining for crews who flew one of the four aircraft types American retired last year.

And in April, American’s Vice President of Flight Chip Long told staff in an internal communiqué that it would take the airline until the “end of the summer” to reinstate all of its furloughed pilots to active status. The carrier furloughed more than 1,200 pilots last October. Long’s comments came even as American publicly said it would resume flying its full fleet by June.

The Air Current forecast just such a backlog in June 2020 when it reported that the hundreds — and in some cases thousands — of pilots taking voluntary departure packages from airlines would create a spike in retraining events as crews moved to different aircraft types. This, coupled with limited availability of the simulators needed to train pilots, would create a training “logjam” as demand recovered.

Fast forward to today, and Tajer cited some historic issues that in the union’s view make it more difficult for American to staff flights. These include lower incentive pay compared to competitors and a scheduling system that can make it difficult for pilots to swap trips for one that offers said pay. This has American resorting to a disliked tactic that it used in 2019: re-assigning pilots to new flights mid trip and then leaving their previous itinerary in need of a new crew.

“They keep reassigning us mid trip — robbing Peter to pay Paul,” one American pilot who is not authorized to speak publicly told Airline Weekly. “Everyone’s talking about it happening to them. Just like summer of 2019 all over again.”

An American spokesperson was not immediately available to comment on incentive pay, its scheduling system or mid-trip reassignments.

American’s relations with its pilots have long been testy dating back to at least its merger with US Airways in 2013. Add to that the fact that the contract between them has been amendable since January 2020 leaving many pilots eager for a new agreement.

Edward Russell

ULCC Leaders: Legacy Airlines Will Return Focus to Business Travelers

The leaders of two U.S. ultra-low-cost carriers aren’t too worried about the network airlines’ current focus on leisure travel. As the economy recovers and companies send road warriors back out on their travels, airlines like American, Delta and United will stop flying widebodies around the country and will refocus their networks and marketing on luring back business travelers, Spirit CEO Ted Christie and Frontier CEO Barry Biffle said.

“That’s what makes them money,” Biffle said at the Routes Americas conference last week, referring to business travel. Legacy airlines now are focused on leisure travel, as that’s the strongest segment of the market. They have retooled their networks to offer point-to-point flights that bypass their hubs to go straight to vacation destinations in Florida and to jumping off points for national parks. But it won’t last. Offices are expected to reopen in the fall, and legacy airlines will start shifting their efforts back to the business-travel market. “They’ll go where the money is,” Biffle said. “The experimenting will be over,” added Christie.

Nor are new entrants Avelo and Breeze posing much of a threat now. Biffle was skeptical of Breeze’s business model, arguing that its aircraft gauge and planned destinations are not a recipe for success. The destinations it plans to serve don’t compete with either Spirit’s or Frontier’s networks. “Breeze will never compete with us,” Biffle said, but “Avelo is more similar,” he conceded. But the ULCC market now, just about 10 percent of all traffic in the U.S., offering plenty of runway for all airlines in the sector to grow.

Both Christie and Biffle were bullish on summer demand and continued growth through the remainder of this year. “People are tired of just sitting at home,” Biffle said. But labor could prove to be a challenge. Both airlines already are finding it difficult to recruit workers, especially to low-wage positions. It isn’t clear yet if the labor shortage is due to workers benefiting from generous unemployment benefits, which are expected to burn off later this year, or if there has been a structural shift in the labor market. In either case, wages are expected to rise, putting pressure on costs, the two CEOs said.

Madhu Unnikrishnan

Gol to Take Lead in Latin American Airline Consolidation

Gol is eager to move forward with its deal to acquire Map Transportes Aéreos, a move that CEO Paulo Kakinoff believes will put it at the forefront of consolidation in the airline industry spurred by the Covid-19 pandemic.

“I do believe this is [the] kind of trend created by the pandemic,” he told investors during a briefing marking the 17th anniversary of Gol’s listing on the New York Stock Exchange last week. Gol “is about to reinforce, re-emphasize its role in promoting regional consolidation” with the Map deal, he added.

Kakinoff’s comments were in response to analyst questions on Gol’s view of another possible combination: A merger of Azul and Latam Brasil, which would create a clear domestic leader in Brazil. He declined to speculate on whether a deal could happen — most analysts believe Azul could make a move for the carrier through Latam Airlines Group’s U.S. Chapter 11 bankruptcy restructuring — saying it is one of “several” possible scenarios. However, Kakinoff believed that an Azul-Latam Brasil tie up could pass regulatory muster if it happened.

Gol’s 28 million reais ($5.7 million) deal for Map, while touted as a way to expand its regional reach, is seen as a play for more slots at sought-after São Paulo Congonhas airport. Map has the rights to up to 26 daily flights at Congonhas, which — if the deal is approved — would boost the Gol’s departures to up to 150 a day compared to 118 at Latam Brasil and 21 at Azul. The airline also says the acquisition will expand its presence in Manaus where Gol plans to replace Map’s ATR turboprops with Boeing 737-700 jets on regional routes.

Latin America’s three largest airlines — Aeromexico, Avianca and Latam — are all restructuring through the U.S. Chapter 11 bankruptcy protection process. All three expect to emerge smaller, which as in the case of Azul’s possible move for Latam Brasil, leaves them open to outside bids for some or all of their businesses. In addition, Amaszonas Uruguay and Tame Ecuador have closed their doors since the crisis began, and Mexico’s Interjet has suspended operations.

Already, Avianca closed its Peruvian operation, where it was the second largest carrier after Latam Peru. And Latam has shut its Argentine operation, where it too was the second largest domestic carrier. Aeromexico has pruned its Boeing orderbook to just 20 737 Maxes from 54 prior to the crisis.

The International Air Transport Association (IATA) has placed the blame for these bankruptcies squarely in the laps of governments. Peter Cerda, the group’s regional vice president for the Americas, has repeatedly complained about lack of government support for Latin American carriers and warned that more airlines could collapse without any aid.

But as they say, necessity is the mother of invention, and the crisis has also created opportunity for new entrants. Startup Itapemirim Transportes Aéreos (ITA), backed by one of Brazil’s largest intercity bus companies, plans to begin flights on June 29. And in May, JetSmart CEO Estuardo Ortiz said that, even with the crisis, the ultra low-cost carrier saw ample opportunities to stimulate the market and expand in its Chile home, as well as in Argentina and Peru.

In Brazil, Gol — like Azul — has what could prove to be an overly optimistic view of the travel recovery. The airline expects the majority of Brazilian adults to receive a Covid-19 vaccine by the end of September, which conveniently is the start of the peak southern summer travel season. Currently, just 30 percent of Brazilians have at least one shot and the country recently passed the grim milestone of 500,000 deaths from the virus. Gol also expects domestic business travel to recover to pre-crisis levels by the first quarter of 2022, and grow by as much as 20 percent in 2023.

“Air travel is essential for the function of the Brazilian economy,” said Eduardo Bernardes, vice president of sales and marketing at Gol, on Thursday. He added that the business travel recovery forecast is predicated on the fact that much of the country lacks many transportation alternatives.

Gol is set to take delivery of 11 737 Maxes this year after becoming the first globally to resume flying the plane last December. Three of those aircraft have arrived with eight more due by the end of December, said Chief Financial Officer Richard Lark. He added that Gol has “flexibility” to adjust down its 95 outstanding commitments for the Max — 73 -8s and 22 -10s — if needed.

The airline plans to be flying most of its 2019 capacity in the second half of the year. International service to Caribbean destinations is expected to resume by December depending on border restrictions, said Gol Vice President of Operations Celso Ferrer. He did not provide a timeline for the resumption of U.S. flights.

Separately, Gol completed its acquisition of its Smiles loyalty program on schedule on June 23.

Edward Russell

Air France Streamlines Rail Connections as Move to Replace Short Flights Accelerates

There is growing momentum to replace short flights with train trips in Europe amid a renewed interest in reducing aviation emissions. France is using climate legislation to codify a ban on certain domestic flights, and politicians are debating similar plans in Germany and Spain.

And while it is easy enough to cut flights that rely on local traffic — for example between Paris Orly and Bordeaux — it is another story altogether to replace connecting flights, where travelers arrive at an airport on a plane and must make their way to a train to continue on to their final destination. This adds multiple layers of complexity to a trip that can be detrimental to the success of these carbon-saving tie ups.

Air France wants to remove some of that complexity from its partnership with France’s national rail operator SNCF. The airline is testing a “new, fully digitalized service” that would allow travelers to check in on the Air France website or app for their entire trip. This would eliminate the need for them to stop at a train station for their rail tickets. If the trial is successful, the carrier hopes to roll out the digital offering to all 18 of its “Train + Air” destinations in France.

Improving the air-rail connection experience and expanding it to more markets — Air France is adding seven new routes to its offerings from Paris Charles de Gaulle and Orly airports — is part of airline’s broader climate goals. In a statement, the airline’s Vice President of Sustainability and New Mobilities Vincent Etchebehere said “enhancing” these connections is a “key element” to meeting its goal of cutting domestic carbon emissions in half by 2024.

More than 160,000 Air France travelers use its Train + Air service annually, according to the carrier. However, that represents significantly less than 1 percent of the 52.2 million passengers that flew the airline globally in 2019.

Streamlining the air-rail travel experience is one of the bigger challenges to expanding the offering to more markets. Earlier in June, KLM CEO Pieter Elbers said issues ranging from luggage transfer to reservations systems and irregular operations make the tie ups more difficult than it appears.

“It sounds very simple but there’s a lot of backoffice work that is needed — luggage, rebooking, operational disturbances,” he said. “This is all different than the classical airline connectivity, and we need to find the right way in dealing with that.”

Prior to the pandemic, KLM had shifted one of its daily Amsterdam-Brussels flights to a train operated by Thalys. Elbers was not very optimistic about further expansion of the program citing the high cost of rail infrastructure needed to make more train routes competitive with flying.

But where there’s a will, there’s a way. In the U.S., where most intercity rail infrastructure is poor outside of the Boston, New York and Washington, D.C. corridor, Sun Country Airlines and United Airlines have teamed up with ground transportation operator Landline to provide connecting “flights” on buses. Landline addresses some of the complexity cited by Elbers by transferring checked bags between buses and plans for customers and, with United, departing the Denver Airport from a gate inside the airport’s secure area rather than on the curb outside the of the terminal.

“We can put an airport anywhere an airline wants it to be,” said David Sunde, co-founder and CEO of Landline, said at a conference earlier in June.

And in Florida, passenger rail operator Brightline is building a new line from Miami to the Orlando airport that is due to open by the end of 2022. The company wants to partner with airlines to provide direct air-rail connections in Orlando, where its station is part of the new under construction South Terminal complex.

All of this is not new. Air France, Lufthansa and others have partnered with their respective national rail operators to provide flyers with connections between flights and trains since the 1980s and 1990s. Travelers’ increased concern with global warming and the industry’s renewed focus on cutting emissions is driving many of these latest initiatives.

The renewed interest comes with good reason. A new study out in Nature Communications finds that “improvements to engines and airframes and operations” alone will not be enough for the airline industry to meet its net zero emissions targets by 2050. Skipping flights altogether and using Zoom or taking a train is the most effective way to cut emissions.

Edward Russell

In Other News

  • In other Southwest Airlines news, the carrier told employees last week it is raising its minimum wage to $15 per hour. The new wages will go into effect on August 1, and will give some workers — call center employees, for example — raises of about 10 percent. The carrier said the move was an effort to help it attract and retain talent.
  • A U.S. bankruptcy court has granted Aeromexico a 75-day extension to its exclusive period to file a restructuring plan. The airline now has until September 8 to submit a plan to the court. Aeromexico hopes to exit its Chapter 11 restructuring this year.
  • Air France-KLM has priced an €800 million ($955 million) senior notes transaction. The issue is split between a €300 million tranche due in 2024 with a coupon of 3 percent and a €500 million tranche due in 2026 with a coupon of 3.875 percent. Proceeds will refinance existing debt and begin repaying some of the state aid the carrier received in 2020.
  • Finnair and Juneyao Air will launch a new joint venture covering flights between Helsinki and Shanghai on July 1. The pact will allow them to coordinate operations and improve connectivity for travelers on the route as well as connecting on to points in Europe on Finnair and points in China on Juneyao. Both airlines fly Helsinki-Shanghai route and have codeshared since July 2019.

    The tie up is the latest example of the Oneworld’s flexibility in letting its members make strategic partnerships outside of the alliance. Oneworld lacks a member — either full or connect — in mainland China, through Cathay Pacific Airways in Hong Kong covers much of the market. Juneyao will give Finnair greater access to the domestic Chinese market than is available in the alliance. Asked if Oneworld was in membership discussions with Juneyao — already a Star Alliance Connecting Partner — and a spokesperson for the alliance declined to comment on any specific airline talks.
  • “Government policy has not been at its best,” said Peter Cerdá, IATA regional vice president for the Americas. “We are beginning to move at turtle speed.” Cerdá frustration focused on government policy in South America and Canada, where he said travel restrictions have been inconsistent and not guided by the latest science. Countries reopen and shut down again, or require testing and quarantines, but worst of all, the Americas have been a patchwork quilt of changing travel restrictions that offer no clarity to either passengers or the airlines. Economic recovery in the region is dependent on international travel resuming. Cerdá pointed to the examples of Mexico, which never shut down, and the U.S., which is enjoying a surge in travel as restrictions lift.

    One interesting traffic flow Cerdá has noticed is South-North “vaccine tourism.” A significant portion of traffic between South America and North America is comprised of wealthy Latin Americans traveling to — primarily — Florida for Covid-19 shots. This, he observed, benefits the local economy, as vaccine tourists usually stay for at least a month to accommodate both doses of the Moderna and Pfizer vaccines.

Edward Russell & Madhu Unnikrishnan

Edward Russell
June 28th, 2021 at 12:01 AM EDT

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