Southwest Vows Quick Return to Recovery After Meltdown

Edward Russell

January 30th, 2023 at 12:05 AM EST

Two months. That’s how long Southwest Airlines expects there to be an impact on bookings from its massive holiday meltdown that disrupted millions of travelers over Christmas and New Years.

The Dallas-based carrier forecasts a $300-350 million hit to revenues as a result of the meltdown in January and February, it disclosed in its fourth-quarter results last week. That is on top of the roughly $800 million hit it took in December. But, by March, executives are confident that the fallout — at least on its earnings statement — will be fully behind it.

“I think we’re going to be very pleased with the [financial performance in the month of March,” Southwest Chief Commercial Officer said during the airline’s earnings. “It feels like we’re, kind of, back on plan.”

That’s pretty remarkable considering the magnitude of the disruption that began on December 21 and continued through New Years Eve. Southwest canceled more than 16,700 flights or, put another way, nearly 40 percent of its schedule over that 11 day period. That, based on back of the notebook calculations using its average of 83 percent of seats filled during the fourth quarter, equals as many as 2.2 million affected travelers (the actual number may be lower because some travelers are connecting on two or more flights).

Put another way, the number of travelers impacted by Southwest’s meltdown was equal to the population of the Kansas City metro area.

“I’m not proud of what happened,” Southwest CEO Bob Jordan told investors. He apologized again for the meltdown and then, along with Chief Operations Officer Andrew Watterson, detailed all the steps the carrier has and is taking to ensure a comparable meltdown does not happen again at Southwest.

While severe winter storms were the initial catalyst for Southwest’s meltdown, it was its crew-assignment software — SkySolver provided by supplier GE Digital — that was unable to keep up with the situation that, when combined with everything going on, prompted the multi-day reset of the airline. Watterson said upgrades to allow the system to keep up with a dramatic spike in crew rescheduling events have already been made by GE, and are currently being tested.

“[The] software they sold to us and others performs well in normal times,” Watterson said of the GE system. “This is a use case that nobody defined for them. So, in their defense, the software worked fine.”

In addition, Southwest has taken a number of other steps to ensure a similar meltdown will not happen again. These include a new early warning system of any potential spike in the number of crew and aircraft that need to be rescheduled; new crew communications tools; more crew scheduling staff; and a full review of the airline’s cold-weather operational preparedness. In addition, Southwest has engaged advisors Oliver Wyman to do a full review of the meltdown and its causes; Watterson said they expect the report “soon.”

One area where Jordan and his team were on the defensive was on technology investment. In response to analysts’ questions over potential underinvestment, he said: “We invest a lot in technology … There’s been no lack of investment.” Jordan went on to describe the investments as a “journey,” where there is a constant need to make upgrades as the airline grows increasingly complex. Southwest will invest roughly $1.3 billion in technology this year, up from about $1 billion in 2022.

“At the end of the day, that kind of disruption cannot happen again,” Jordan said.

Southwest’s schedule recovery and growth — it will surpass 2019 flying levels this year — continues unabated in 2023. System capacity will increase roughly 10 percent year-over-year in the first quarter, and 16-17 percent for the full year. The full-year number is at least one point higher than the airline’s previous guidance owing to year-over-year comparisons to the holiday meltdown.

Jordan and other executives emphasized that the operational chaos in December was no reason to put Southwest’s growth plan on hold. Travel demand is robust with the exception of January and February. And managed corporate travel, a key indicator of the economic recovery, is expected to hit 2019 levels by March; it was at 80 percent of three years ago in the fourth quarter.

And Southwest is ahead on its hiring plan. The airline saw a net headcount increase of 11,000 staff in 2022, which Jordan said was more than its target. It plans to add another net 7,000 staff this year. Pilot hiring, however, will step up with the airline seeking roughly 1,700 new cockpit crew members compared to 1,000 last year.

Almost all of the carrier’s growth this year will go into restoring the depth of its network. When the pandemic hit, the first thing to go were the multiple daily flights Southwest offered on key routes — for example, the Los Angeles-Phoenix route had eight daily flights where today it has five — those lost frequencies will come back this year. In addition, it plans significant growth in several key cities, including boosting Baltimore-Washington to more than 220 daily departures and Denver to more than 300 departures by July.

The growth in Denver comes after the airport opened a 16-gate extension of Southwest’s concourse for the airline last year. The Baltimore-Washington airport is also investing in new terminal facilities for Southwest.

Southwest’s capacity growth forecast “could be a cause for future concern given the severe operational issues previously experienced in their network over the holiday season and in the months prior,” Cowen & Co. analyst Helane Becker wrote on the carrier’s outlook last week.

While her comments came before Jordan and other executives commented on their plans, Becker raised a key concern among both investors and travelers about Southwest’s outlook. Namely, whether the airline is actually able to fly the full schedule it sells. This was something United Airlines CEO Scott Kirby highlighted in his takedown of the airline industry’s capacity forecasts earlier in January.

Jordan and his team were clear in their remarks: Southwest was staffed and ready to operate its full schedule over the holidays. It was only the weather, and the inability of its crew assignment system to keep up with the amount of changes, that led to the meltdown.

Ultimately, though, that is not for Southwest to decide. The U.S. Department of Transportation has launched an inquiry into the carrier’s scheduling practices, and whether it was selling more than it could reasonably operate over the holidays — meltdown aside.

“DOT is in the initial phase of a rigorous and comprehensive investigation into Southwest Airlines’ holiday debacle that stranded millions,” an agency spokesperson said. The “DOT is also probing whether Southwest executives engaged in unrealistic scheduling of flights which under federal law is considered an unfair and deceptive practice.”

Transportation Secretary Pete Buttigieg has been critical of Southwest’s handling of the meltdown, describing it as “unacceptable” in December. He has promised to use the full weight of the DOT to ensure the carrier refunds tickets and reimburses travelers for all eligible expenses. Legislators in both the House and Senate have also called for answers, and said they plan to hold hearings on the situation.

Any potential action or penalties against Southwest could extend the period where the airline feels the financial burden of its meltdown well beyond February.

Southwest lost $220 million in the fourth quarter after the roughly $800 million meltdown hit. Revenues increased 7.7 percent compared to 2019 to $6.2 billion but expenses ballooned nearly 30 percent to $6.6 billion. Revenue per available seat mile, a measure of how much the airline makes per mile it flies, increased 14.9 percent from three years earlier, while costs per available seat mile excluding fuel and special items jumped nearly 45 percent. Southwest flew 6 percent less capacity in the fourth quarter than it did in 2019.

And for the full year, Southwest posted a $539 million net profit. Revenues increased 6 percent compared to 2019 to $23.8 billion. Revenue per available seat mile was up 12.5 percent, and costs per available seat mile excluding fuel and special items by more than 22 percent.

Looking ahead, Southwest anticipates a 20-24 percent increase in revenues in the first quarter compared to last year. Unit costs excluding fuel and special items are forecast to increase 2-4 percent; the metric is forecast to drop 6-8 percent for all of 2023.

Updated to include Andrew Watterson’s comment on GE’s SkySolver crew assignment software.

Edward Russell

American Focus on Utilization, Other Improvements

Despite a number of constraints in the aviation industry, American Airlines achieved a full year of profitability in 2022 for the first time since the pandemic hit. The carrier had total revenue of $49 billion, an increase of 7 percent over 2019, and a total net income of $803 million — all while flying 8.7 percent less capacity. And that is despite a $1.9 billion pretax loss in the first quarter.

The Fort Worth, Texas-based carrier also had the best fourth quarter in its history, with a total revenue of $13.2 billion, an increase of 16.6 percent from in 2019. 

“Key to our success has been sizing our airline for the resources we have available and the operating conditions we expect to encounter. And we will continue to do that going forward,” American CEO Robert Isom said.  

Now, post-holiday bookings are the strongest they have ever been, Isom said. Demand for domestic and shorthaul international flights are leading, while longhaul international demand is expected to increase this year. 

Even with the financial uptick, American is still working against multiple post-pandemic issues — including a workforce shortage, supplier constraints, and higher expenses — that will affect its growth and operations this year. 

The biggest cost for American right now is underutilized aircraft, Isom said. That is being addressed in part by modernizing and simplifying fleet, but there are other opportunities that can offset those costs, like airport rent, landing fees, and maintenance. 

“The fleet’s meant to be flown. Those are the areas I would probably look to most as being opportunities for us to see much greater efficiency,” said Devon May, chief financial officer for American. 

American is also experiencing elevated upfront costs as it goes through a big hiring spree to replace retiring pilots and other workers. The company is considering those multiple factors as it plans for the year. 

“What is different from times past is we have been very conscious in [first quarter] about how we use the airline’s resources — it’s people, it’s planes, it’s facilities, everything — largely so that we can have as much of that capacity for the summer peak as possible,” said Vasu Raja, chief commercial officer for American.

Still, American is making progress on other fronts, especially in paying down its more than $32 billion in long-term debt and finance leases. The airline aims to repay $15 billion of that by the end of 2025. The company has reduced its total debt by $8.2 billion since 2021, and expects to pay down another $3.3 billion this year.

American anticipates 23 aircraft deliveries this year, 12 of which are financed. However, the delivery number fewer than the airline had been planning.

Despite Boeing’s contractual commitment to deliver 27 Boeing 737 Max aircraft in 2023, the airframer has informed American that it will deliver 17 this year, said Derek Kerr, president of American Eagle. “This change in timing will shift planned [capital expenditure] out of 2023 and into future years,” he added.

In August, American started receiving Boeing 787-8 planes for the first time in 15 months. It took delivery of five aircraft in the fourth quarter, and four more are expected during the first half of 2023. Deliveries of Boeing 787-9s are to begin in the fourth quarter. 

“What we have now is aircraft manufacturers that are just starting to get their feet back under them,” Isom said. “We continue to work with both Airbus and Boeing to make sure that we encourage them in an appropriate fashion to deliver on time. And I know that they’re working hard to make sure that they can meet our needs.”

American shed 50 longhaul aircraft during the pandemic, including its Boeing 757 or 767 fleets, Isom said. The company has also simplified its mainline operation to four fleet types, and has increased seating capacity in its existing planes. 

It’s part of the airline’s ongoing work to simplify and modernize the fleet, which executives said will ultimately lead to higher aircraft utilization that will offset investment costs. 

“What that enables us to do is in the fleet that’s left, we can much more dynamically alter schedules to follow where the demand is,” Raja said. “We can produce schedules that … are a lot more operable and, frankly, a lot more efficient. We’ve seen the benefits of that in our recent revenue performance, and we anticipate the benefits of that in the year ahead.”

The airline has also been working on investments in technology to track crew location and maintenance requirements, as well as tech that can help the company more efficiently manage big events like winter storms. Crew scheduling technology has come into focus after the major meltdown at Southwest over the holidays was blamed on its scheduling system being unable to keep up with cascading cancellations and changes.

American has hired 40,000 people over the last two years. That includes hundreds of pilots, with plans to hire 2,000 this year to replace a large number of retiring pilots. There were nearly 900 retirements last year, and 2023 will likely have around the same. 

“We’re going through the greatest training cycle of pilots that we’ve ever experienced,” Isom said. “So we’re stretching our training resources like we’ve never before. But fortunately, we planned for this.”

On American’s historic pay increase for pilots at its wholly-owned affiliates, Envoy, Piedmont Airlines, and PSA Airlines, Isom said the move had “stabilized” its pilot workforce at the three airlines. “I think that is the biggest thing that any company can do, and has done, to actually get the pump primed and people flowing back in,” he said. “And we’re seeing that. We’ve stabilized the pilot ranks in our regionals, and we see potential growth as we come through the end of the year.”

American was criticized earlier in January for doubling the cost of regional pilots for the industry, while not solving the pilot shortage. Isom’s comments suggest that, while maybe not creating an excess of pilots, the raises had stabilized the workforce. He did not comment on the new economics of regional flying.

Justin Dawes

Alaska Margins Take Fourth Quarter Hit

Alaska Airlines, one of the most profitable airlines in the U.S. throughout the 2010s, reported just a 5.5 percent operating margin for the fourth quarter — less than half what it generated (11.3 percent) during the same period three years earlier.

The Seattle-based airline looked like it was regaining its pre-pandemic levels of profitability during the summer quarter, July-to-September, when it led all U.S. airlines with an operating margin that topped 15 percent. Summers are typically its strongest period of the year. The fourth quarter, however, presented new challenges.

One was a bad winter storm around the holidays, which erased about $45 million in revenue. In addition, Alaska signed a new pilot contract in October, granting wage increases of up to 23 percent; senior captains will earning $330 per hour after two years. Importantly, the pricey new contract also contains provisions that ensure Alaska’s pilot pay stays competitive with other U.S. airlines — namely American, Delta Air Lines, JetBlue, Southwest, and United — as they sign their own new contracts. Combined with other new labor agreements, Alaska’s new pilot pact contributed to an 11 percent year-over-year increase in labor costs last quarter.

In addition, Alaska faces headwinds currently plaguing all U.S. airlines, including higher fuel costs and difficulties achieving pre-pandemic levels of productivity. “Productivity is not where it used to be in this post-pandemic era,” Alaska CEO Ben Minicucci said during the company’s fourth-quarter earnings call last week.

Another concern is Alaska’s exposure to the troubled technology sector. Many of the airline’s customers are tech workers employed by giants like Amazon and Microsoft, both headquartered in Seattle. And make no mistake, Alaska’s success in the 2010s was at least partly fueled by fast-growing tech firms both traveling frequently and — more generally — contributing to strong U.S. West Coast economic and income growth.

Alaska executives acknowledged that tech spending on travel is depressed but said this is unrelated to the recent spree of tech worker layoffs. Tech companies haven’t been traveling much since the start of the pandemic. “Even though you have these headlines of layoffs,” Chief Financial Officer Shane Tackett said, “it doesn’t really mean that there’s like, another downward step in terms of their travel. And I do think that at historically low travel volumes, they may never go back to where they were pre-pandemic. [But] I think they’re going to be above where they are today. I’m very confident about that.”

Tackett also stressed that tech customers typically pay lower fares than other corporate travelers, presumably because Alaska has to discount heavily to win their business.  

Tech’s suppressed travel budgets, even throughout the industry recovery in 2022, is one reason why California’s airline markets have been slower to revive than those in other areas of the country. Alaska executives said roughly a third of its revenues are linked to the Golden State, where it became a much larger player after buying Virgin America in 2016. Ever since, the market has proved challenging, owing to heavy competition, not least from Southwest.

In Seattle, by contrast, Alaska holds the market’s commanding heights, even with Delta operating a competing hub. Management didn’t address specific markets, but intra-California and transcontinental routes to California are likely struggling right now. Beach markets like Hawaii and Mexico, also important to Alaska, are likely performing better. Keep in mind that during the spring and summer, big corporate markets like Los Angels, San Francisco, and Seattle become big tourist markets as well.

Regarding business travel more generally, the executives said bookings have been “highly choppy” this month. But “March and forward is very solid.”  Overall, “demand remains strong and passenger booking patterns are keeping pace with scheduled capacity.” For the current January-to-March quarter, Alaska plans to grow available seat miles (ASMs) 11-14 percent year-over-year, pending labor and aircraft availability. It expects revenues to jump roughly 30 percent, relative to last year’s depressed levels; travel demand did not start reviving in earnest until second quarter. Unit costs will be down 2 percent year-over-year at best. But Alaska does expect to lose money this quarter, forecasting a pretax margin of between negative 1-4 percent. Conditions will improve during subsequent quarters, however, and pretax margins should reach 9-12 percent for all of 2023. In 2019, Alaska’s pretax margin was 12 percent. In 2018 it was 9 percent.

Last March, Alaska outlined its longterm strategy, highlighting areas of importance like its improved credit card deal with Bank of America, its plan to retire all the Airbus planes it inherited from Virgin America, and its growing engagement with American and other fellow Oneworld alliance members. Looking ahead, approximately two-thirds of the airline’s capacity growth will be focused in the Pacific Northwest (besides Seattle, Portland is also a key market), and the other third in California. In October, Alaska placed another larger order for Boeing 737 Maxes, exercising options to purchase another 52 units for delivery from 2024-2027. By 2030, Alaska could operate more than 250 Maxes.

For this year, though, Tackett said, the focus will be on “improving utilization, productivity and delivering on more of our commercial road map as we attempt to lead the industry again in financial performance in 2023.”

Jay Shabat

JetBlue Sees Big Loyalty Boost

JetBlue reported $2.4 billion worth of revenue during the fourth quarter of 2022, its highest ever in a fourth quarter, which the New York-based carrier attributed in part to significant growth in its TrueBlue loyalty program.

President and chief operating officer Joanna Geraghty said during JetBlue’s fourth-quarter earnings call last week that TrueBlue recorded a 50 percent year-over-year increase in program enrollment in 2022, representing the most successful year in its history. Geraghty added that TrueBlue also registered a 40 percent year-over-year increase in co-branded credit card signups.

The loyalty program “continues to not only exceed our expectations, but also hit new records,” said CEO Robin Hayes.

JetBlue also projects another major boost from TrueBlue, having announced last month it would make major upgrades to the program for the first time in a decade. The company said it would expand its elite Mosaic programs and create a level of mileage accumulation named tiles enabling customers to obtain perks before reaching mosaic levels of flying.

TrueBlue was far from the only major area of growth for JetBlue in 2022. Geraghty credited a surge in passengers from its Northeast Alliance with American as a reason for its strong fourth quarter.

“We’re very pleased with performance of the [Northeast Alliance],” she said. “We’re seeing the [Northeast Alliance] very much on the correct trajectory.

While Geraghty declined to provide financial details about its relationship with American, she stated the company expects that its partnership to produce more revenue. Cowen & Co. analyst Helane Becker predicted last week that JetBlue will look to expand its partnership with American in 2023. The company more than tripled its number of daily flights from New York’s LaGuardia Airport in 2022 compared to before the pandemic.

JetBlue also expects to see capacity increase up to 8 percent year-over-year, both for the first quarter and the full year of 2023. The carrier’s capacity for the fourth quarter of 2022 increased by 2.4 percent from the same period in 2019.

However, Chief Financial Officer Ursula Hurley said JetBlue projects a net loss in the first quarter of 2023, adding that the company is grappling with higher labor costs and surging rentals and landing fees.

Meanwhile, Hayes also addressed JetBlue’s planned merger with Spirit Airlines. He said he expects the transaction to close by no later than the first half of 2024, stating it could happen sooner if the company is able to reach an agreement with the U.S. Department of Justice. The Justice Department also filed an antitrust suit against American and JetBlue in September 2021, arguing the two carrier’s alliance had reduced competition for consumers. A ruling from a judge, which potentially has major implications for the JetBlue-Spirit merger, could come soon.

“If we [reach an agreement], it’s possible that could happen sooner. But the timeline is down to the Department of Justice, and we certainly want to be respectful of that,” Hayes said, acknowledging the possibility of the Justice Department suing JetBlue if an agreement doesn’t place, which would delay the closing of the merger.

Regarding JetBlue’s fourth-quarter performance, Becker said results were mostly in line with expectations. The company recorded an adjusted net profit of $72 million for the period. The carrier also saw its RASM increase 16.1 percent compared to the same timeframe in 2019.

Rashaad Jorden

In Other News

  • Italy’s Ministry of Finance and the Lufthansa Group entered exclusive negotiations last week over the latter’s proposed investment in ITA Airways, Italian daily Corriere Della Sera reported. The parties now have six weeks to reach a deal where Lufthansa would initially take a 40 percent stake in the Italian airline worth €250-300 million ($271-325 million), and could later take full control of ITA. If a deal is reached, it would still need approval from Italian and European competition authorities.
  • TAP Air Portugal shrugged off reports of a profitable 2022 last week, issuing a statement to the market that results for the year had “yet to be determined.” It intends to release its numbers in March. TAP did, however, indicate that 2022 revenues were among the highest in its history.
  • Struggling Norwegian startup Flyr is diversifying its business with new charter contracts. Last week, the discounter signed a contract work 90 million Norwegian kroner ($9.1 million) with an undisclosed customer to operate charter flights from May through October. The deal was its second charter contract of the year, following one earlier in January for flights during the summer season worth roughly 30 million Norwegian kroner. Flyr, citing weak demand, was forced to park or lease out more than half of its fleet this winter to reduce cash burn. The airline has struggled competing against a more nimble post-restructuring Norwegian Air, and legacy incumbent SAS

Edward Russell

Edward Russell

January 30th, 2023 at 12:05 AM EST