Southwest to Invest Millions in Winter Operational Resiliency

Edward Russell

February 13th, 2023 at 12:01 AM EST

Southwest Airlines Chief Operating Officer Andrew Watterson promised lawmakers “hundreds of millions of dollars” in additional upgrades to the carrier’s winter operations infrastructure while in Washington, D.C., during a hearing last week.

“We messed up,” he said at a hearing of the U.S. Senate’s Commerce, Science, and Transportation Committee. The disruption over the Christmas and New Years holidays resulted in the cancellation of roughly 17,000 flights at the end of 2022, and cost Dallas-based Southwest $850 million in the fourth quarter alone.

Watterson said the root cause of the meltdown, which Senator Ted Cruz (R-Texas) described as an “epic screwup,” was a large winter storm that swept across the U.S. in the days before Christmas. That disrupted operations for all airlines but, after many of its crews were displaced due to cancelled flights, and Southwest lost track of them, the carrier was forced to fully reset its operation — resulting in more cancellations — to recover.

Watterson downplayed the role of technology in Southwest’s operational issues, describing it as an “end of the line” factor. The airline’s crew assignment software, SkySolver, has been widely scrutinized following the disruption.

“The bigger element of the disruption was how we handled the storm itself,” he said, adding that in hindsight Southwest’s preparedness for severe winter weather was “insufficient.”

“Our biggest investment this year is going to be how we handle winter operations,” Watterson said. He declined to be more specific on the costs beyond saying “hundreds of millions of dollars.” Southwest plans to invest $1.3 billion in technology this year, up from about $1 billion previously.

Senators did not appear satisfied with Watterson’s explanations and contrite remarks. Senator Maria Cantwell (D-Wash.), who chairs the commerce committee, noted pointedly that Southwest’s CEO Bob Jordan was invited — but did not attend — the hearing, and pushed Watterson on the timeline for upgrades to the airline’s crew assignment software.

“Your CEO didn’t want to show up,” she said, adding that Southwest’s legendary long-time former CEO Herb Kelleher “would be here.” Kelleher led the airline from 1981 to 2001; he passed away in 2019.

The upgrades to Southwest’s crew assignment system, known as SkySolver, will be complete on Friday, February 10, Watterson said. Additional upgrades and investments will be determined following the completion of several reviews, including one by outside advisor Oliver Wyman, that are expected in March.

Senator Ed Markey (D-Mass.) called the fact that Southwest knew of its operational shortcomings “absolutely unacceptable” after Watterson confirmed it was aware of concerns raised before the meltdown by its pilots union, the Southwest Airlines Pilots Association (SWAPA).

“Southwest struggles to manage any disruption,” SWAPA President Captain Casey Murray said at the hearing. The union submitted data showing that the airline has seen an uptick in operational meltdowns over the past decade — as it grew but continued to use many older technology platforms — averaging one every 18 months since 2011.

Southwest will reduce executive bonuses for 2022 by an undisclosed amount as a result of the meltdown, Watterson said. The airline does not intend to halt investor dividend payments.

Senators on both sides of the aisle also used the hearing as an opportunity to raise the issue of potential new regulation on air traveler rights. Markey said he plans to re-introduce legislation that would bar airlines from charging fees for families to sit together onboard flights. And Senators Cruz and Moore Capito (R-W.V.) both challenged the idea that new regulation would improve service.

Additional regulation “would also predictably drive up the cost of air travel, and price many Americans out of the market,” Cruz said. He specified that his comments did not include safety regulations, which is an “integral responsibility” of the government.

Edward Russell

JetSmart Bids for Viva Air, Latam Complains

Chile’s JetSmart wants to buy Colombia’s Viva Air in the latest twist to South America’s ongoing round of airline consolidation. The offer, and a separate complaint by competitor Latam Airlines Group to Colombia’s civil aviation regulator, are the latest stumbling blocks to Avianca’s proposed merger with Viva Air that has been held up on competition grounds.

“We believe that a merger between JetSmart and Viva Air will allow us to maintain the ultra-low-cost model in Colombia, helping to continue offering more routes at lower prices,” JetSmart CEO Estuardo Ortiz said last week. He added that such a combination, between two budget airlines, would preserve competition in Colombia.

JetSmart is backed by U.S.-based private equity firm Indigo Partners, which is known for its successful investments in low-cost carriers around the world, including Frontier Airlines, Volaris, and Wizz Air. American Airlines plans to take a minority stake in JetSmart under a deal that was approved by Chilean regulators in January.

The offer for Viva Air comes less than a month after Colombia’s aviation regulator, Aerocivil, said it would re-evaluate the airline’s proposed merger with Avianca after the airlines offered concessions aimed at preserving competition. The regulator first rejected the tie-up in November. Avianca and Viva Air were Colombia’s first and third largest carriers in 2022, with respective 45 percent and 20 percent shares of domestic seats, according to Diio by Cirium schedule data.

And Latam, Colombian news magazine Semana has reported, sent a letter to Aerocivil raising concerns over a lack of transparency in the review process. Latam is the second largest airline in Colombia, between Avianca and Viva Air.

South America is awash in potential airline consolidation deals. In addition to the proposed Avianca-Viva Air combination, Avianca and Brazil’s Gol are separately seeking to merge and create the new airline holding company, Abra. The new group could also eventually include Chile’s Sky Airline. American has invested in Gol, and plans to invest in JetSmart, as part of expanded commercial partnerships. And, in 2021, Azul tried unsuccessfully to acquire Latam’s Brazilian franchise in an effort to further strengthen its share in South America’s largest market.

Avianca’s plan to form Abra with Gol is separate from its proposal to acquire Viva Air, executives have said. JetSmart’s interest in Viva Air, if successful, is unlikely to disrupt that combination of the Brazilian and Colombian airlines.

An Avianca spokesperson said JetSmart’s offer was an “unfeasible proposal to generate a distraction” from the pending Avianca-Viva air combination. In addition, with the airline as a controlling shareholder in Viva Air, Avianca has a say in any potential sale to JetSmart.

In an October interview, Ortiz said the Latin American aviation market was becoming more competitive post-pandemic following the restructurings of Avianca and Latam, and the proposed mergers in the market. He did not express any interest in acquiring Viva Air or any other airline at the time.

“You’ll see a market with probably fewer players but more efficient,” he said. “So “I do expect a more competitive region … This is something that we thought was coming and I think it is still coming our way.”

A JetSmart-Viva Air merger would give the former a strong franchise in Colombia where it has a limited presence today. JetSmart has domestic operations in Argentina, Chile, and Peru; the former followed its 2019 purchase of Norwegian Air’s Argentina business. The airline serves just three cities in Colombia — Bogotá, Cali, and Medellin — from Santiago and Antofagasta in Chile, Diio schedules show.

Viva Air operates almost exclusively within Colombia or on international routes from the country. It also has a Peruvian subsidiary but that carrier only operates three routes from Lima to Bogotá and Medellin, as well as to Cuzco, according to Diio.

JetSmart (blue) and Viva Air (yellow) routes in February 2023. (Diio by Cirium)

The two airlines also have complementary fleets. JetSmart operated 23 Airbus A320 family aircraft, including nine A320neos and three A321neos, at the end of January, according to Airbus’ latest data. Viva Air also operated 23 A320 family jets, including 12 A320neos.

Viva Air has struggled financially since the pandemic despite the rebound in travel demand. The weak Colombian peso against the U.S. dollar and high fuel costs have added to its challenges. Many expenses, including aircraft leases and fuel expenses, are due in dollars.

“Staying independent in aviation in the 2020s is not an option. It was hard pre-pandemic. It’s not an option now,” Viva Air CEO Felix Antelo said in an argument for the airline’s merger with Avianca in October.

Edward Russell

In Other News

  • The U.S. Department of Justice may be preparing to sue to block the merger of JetBlue and Spirit Airlines, Politico reported late last week. The move is not entirely a surprise given the anti-consolidation statements by Biden administration officials. It is also not necessarily the end of the deal, the DOJ moved to block the AmericanUS Airways merger in 2013 only to reach a settlement allowing the deal to go through several months later. JetBlue and Spirit’s lawyers are likely to work towards a negotiated settlement with DOJ officials if the regulator officially moves to block the merger, something Politico reported could happen as soon as March.
  • Azul has engaged adviser Seabury, and law firm Weil to advise it on a possible restructuring, Air Finance Journal has reported. While the airline hasn’t commented, the fact that it is restructuring now — when revenues are well ahead of 2019, and passenger numbers are way up — suggests some combination of the weak Brazilian real and high U.S. dollar obligations weighing on the carrier. The real depreciated roughly 30 percent against the U.S. dollar from 2019 to 2022, significantly eating into the revenue gains Azul has made. At the same time, expenses have skyrocketed, not least fuel which was up 134 percent compared to 2019 in the third quarter. And Raymond James analyst Savanthi Syth has highlighted Azul’s aircraft lease obligations as a top area of concern; the airline is expected to have a cash shortfall of roughly 3 billion Brazilian reais ($572 million) this year. Talks are underway with counterparties to defer payments or raise cash worth roughly 4 billion Brazilian reais. “We believe bankruptcy filing is a lower probability event … albeit one that cannot be completely ruled out,” Syth wrote.
  • Frontier became the final major U.S. airline to publish and discuss its fourth-quarter financial results. They were underwhelming, headlined by a modest 5 percent operating margin. It earned double that in the same quarter of 2019. In addition, its fourth-quarter profits weren’t enough to avoid a full-year loss, joining Hawaiian, JetBlue, and Spirit as the only scheduled U.S. carriers (of the 11 that are publicly traded) to post losses for 2022. Frontier did say it continues to see “robust” demand for future travel.
  • Kuwait-based LCC Jazeera Airways reported a $24 million operating profit on a 25 percent year-over-year increase in revenues to $111 million in the December quarter. The airline, one of a growing number of budget carriers in the Gulf, flew 85 percent more capacity during the period than three years earlier. For the full year, Jazeera posted an $88 million operating profit on 127 percent higher revenues of $595 million. Jazeera plans to add two Airbus A320neos to its fleet in 2023, which will raise its total aircraft count to 21 by year-end.
  • U.S. regional Mesa Airlines posted a small operating profit of $2.4 million in the December quarter, including a one-time $3.7 million impairment charge related to the end of its contract with American and agreement to transition 38 Bombardier CRJ900s to flying with United Airlines. Revenues were flat year-over-year at $147 million on a 41 percent drop in block hours. Mesa CEO Jonathan Ornstein spoke last week of improvements to “operational performance and both our income statement and balance sheet” as the airline completes the shift to becoming an all-United partner in April. However, a shortage of captains, and elevated pilot attrition, continue to be an issue that Ornstein does not expect to fully ease for 12-18 months — or until mid-2024.
  • IATA, in its latest monthly traffic update, said last year’s air traffic volumes, measured in revenue passenger kilometers (RPKs), reached 69 percent of 2019 levels. Demand improved as the year progressed, however, and by December, traffic was 77 percent of where it was three years earlier. Looking ahead, IATA sees “early signs of recovery” for China’s domestic markets. China is the world’s second-largest airline market after the U.S. but is only now relaxing travel restrictions.
  • On the labor front, Copa Airlines reached new three-year tentative agreements with both its pilots and flight attendants earlier in February. The deals, which were reached with the help of Panama’s Ministry of Labor and Labor Development, avoided a planned industrial action. Pilots at Hawaiian, represented by the Air Line Pilots Association (ALPA), last week ratified a new four-year accord that provides 32 percent raises over the duration of the contract. And Southwest‘s roughly 500 dispatchers (represented by the Transport Workers Union) and facilities maintenance technicians (represented by the Aircraft Mechanics Fraternal Association) have ratified new four-year contracts. Both Southwest accords include pay and quality of life improvements while easing work rules.
  • Australian budget startup Bonza operated its first flight, between Sunshine Coast and Whitsunday Coast, on January 31. The airline aims to stimulate the market by charging low, a la carte fares on routes between, primarily, secondary Australian cities and leisure spots. Bonza will not, CEO Tim Jordan has said, challenge Qantas and Virgin Australia on the country’s trunk routes, primarily the Sydney-Melbourne-Brisbane triangle. Bonza received its air operators certificate in January.
  • People moves: Charles Duncan, a former WestJet and United executive, is the new president of Norse Atlantic Airways. He oversees the longhaul startup’s commercial, operations, network, and people functions in the new role, and reports to CEO Bjorn Tore Larsen.

Clarification: In last week’s issue, we mentioned that Japan Airlines was more international than All Nippon. ANA is in fact larger now, in terms of international capacity. But JAL still gets a larger percentage of its total revenues than ANA does, from mainline international flying.

Edward Russell

February 13th, 2023 at 12:01 AM EST