Southwest is in a Funk, But It Has a Plan

Southwest did not have a good first quarter, and that’s putting it mildly. The airline that used to crow like clockwork every three months about how many consecutive profitable quarters it posted… posted another loss. It really had nothing good to report this quarter at all, BUT… it has a plan to fix things. They say the first step is admitting you have a problem…

I’m not going to detail all the numbers. You can read a press release if you want that. I’m also not going to focus on the airline’s cost problems. It’s the revenue side of the equation that always calls my name, so that’s where we’ll focus today.

The airline’s total unit revenue was basically flat (actually down 0.1 cents) this quarter. Passenger unit revenue specifically was up 0.8 cents. Load factor was up 0.7 points to 78.3 percent. These are all pretty small changes, so consider it a general lack of progress. How does it compare to other airlines? I don’t care.

See, late December 2022 is when Southwest melted down. We all know the story about how the airline failed for over a week in the middle of the holidays. It made a lot of people angry just before the off-peak season began in early January. In other words, last year’s January should have absolutely sucked. So for Southwest not to improve this year? That is criminal. Meanwhile, costs keep rising, so results get worse.

The good news is that Southwest knows it has a problem, and it has been pretty open about its plan. Let’s get into it.

The Network Gets a Makeover

When we were doing Cranky Network Weekly a couple weeks ago, we noticed several changes. Most importantly, Southwest cut back Atlanta significantly, shifting frequencies from spokes over to Nashville, Baltimore, and Chicago/Midway. Here’s the chart we put in our analysis.

Southwest is indeed reducing Atlanta’s importance in the network, letting Nashville run away as the most important southern gateway. This makes sense with Southwest being a very distant number two in Atlanta but a clear number one in Nashville.

Zooming out, let’s remember that Southwest added a ton of new airports during the pandemic, and now it is admitting some of those haven’t worked. It pulled down Chicago/O’Hare flying to a lower level, and it will exit Bellingham, Cozumel, Houston/IAH, and Syracuse.

Bellingham, Cozumel, and Syracuse are tiny. I see no way that this has a real impact on the airline’s profitability. But going in and out of a city is not something Southwest does lightly, so this does indicate the airline is serious about trying to fix things. IAH is bigger, but clearly it was just hurting the Hobby operation and not providing enough value.

Those may be the headliners, but there’s a lot more going on that will probably have a bigger impact. Some of those actually went into place in March’s schedule of this year. Those are:

Fly less on Tuesday/Wednesday Reduce short-haul business market flying Operate fewer flights outside of peak hours during the day

Southwest says those last two changes actually contributed about $100 million in extra revenue in March alone. Putting fewer seats in the market during off-peak times means that people will have to pay more to fly at better times.

One last network note… Southwest has now extended its schedule out to March 5, 2025. It has never sold tickets that far out, but this means it will sell close to the same time period that other airlines sell, helping capture those, ahem, early birds who don’t like to wait around and might not normally consider Southwest for that reason.

Fixing the Marketing Problem and Maybe the Product

Southwest doesn’t really say it has a marketing problem, but its actions suggest that it thinks it needs to do more. Specifically:

We are working to ensure our current and future customers understand our terrific value proposition. That includes a significant new brand campaign which started last week, highlighting our signature customer-friendly policies.

If you haven’t seen the campaign, you can watch it here. The tagline is “That’s a Big Flex,” and it talks about free checked bags, no change fees, etc. It’s all the stuff that Southwest used to talk about incessantly, but it hasn’t seemed as active lately. Whether you like the campaign or not, it will at least be a useful reminder for people, assuming it’s plastered all over the place.

On the call, Southwest specifically said it needs to increase passenger volume, and this is a key way it plans to do that… start shouting louder from the rooftops.

It is also looking at “adding different attributes to our value proposition.” That sounds like consultant-y garbage, but there are probably more things Southwest can do to get people to fork over more money for ancillary services.

One thing it did mention is that it is starting to think about its seating policy again. The airline is famous for its open seating policy, but it did change that several years back with those boarding stanchions we all know so well. On this topic specifically, Southwest said:

It’s been several years since we last studied this in-depth and customer preferences and expectations change over time. We are also studying the operational and financial benefits of any potential change.

Perhaps more interesting was this quote from CEO Bob Jordan on this topic:

I’m proud of our product today, and our customers love it, but it was designed at a time when load factors were lower and higher load factors do change the way preferences work, the operation works and also, our customer — the customer expectations change over time. So there’s no decision. There’s nothing to report other than we are seriously looking at this. But early indications, both for our customers and for Southwest look pretty darn interesting.

It sounds to me like Southwest is signaling that it is willing to consider some sacred cows as it tries to find ways to get revenue growing again. Bag fees seem to be off the table, but a change in seating? That may have some legs.

Aircraft Troubles With a Bright Spot

Boeing’s failure to certify and deliver the 737-7 MAX along with delays in delivering the -8 have been a problem for Southwest for years. It is getting worse, and that means the airline keeps revising its expected delivery plans downward.

Not having the -7 means Southwest does have a lot more -8s than it expected, but the bigger issue is just not having the airframes to fly the schedule it wants to fly. It does have a plan to address that, however.

First, there are fourteen 737-700s that were supposed to be retired this year that will now stay in the fleet for longer. That gives some breathing room.

Above that, however, Southwest is working on improving turn times. It says that there are 12 airports that will see a 5 minute reduction in turn time starting in the November schedule. More reductions will come in 2025.

Southwest tried to reduce turn times a decade ago, and it did not go well. But this is a different airline with different people at the top who are clearly looking to take a more measured effort before going all-in.

Lastly, Southwest is going to improve utilization through the red-eyes that we’ve all been talking about. These are not in the schedule yet, but they will come at some point. I just don’t know when they’ll start flying.

As you can see, there’s a lot going on here. I didn’t even mention the effort to “better anticipate and optimize demand” in the airline’s new revenue management system. (You’d think that would just be a normal part of business.)

I have more sympathy for an airline in a circumstance like this. It knows it has a problem, and it has detailed a whole host of things it’s doing to fix it. That being said, this is the airline’s one chance to get things right. I will have less sympathy in the future if this plan doesn’t actually work.