Southwest Airlines, Moving America

Sebastien Callebaut -

Southwest Airlines is one of the major airlines of the United States and the world's largest low-cost carrier. It is headquartered in Dallas, Texas and has scheduled service to more than 120 destinations in the United States and 10 additional countries. As of 2018, Southwest carried more domestic passengers than any other United States airline. The airline was established on March 15, 1967, by Herb Kelleher and Rollin King as Air Southwest Co. and adopted its current name, Southwest Airlines Co., in 1971.

  • At the time, it started operating with three Boeing 737 aircraft serving three Texas cities: Dallas, Houston and San Antonio
  • It began regional interstate service in 1979, expanding nationwide in the following decades. Southwest currently serves airports in 42 states and multiple Central American destinations
  • Today, Southwest has a total of 728 Boeing 737 aircraft in its fleet and 121 destinations in 42 states and ten near-international countries: Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands and Turks and Caicos

POINT-TO-POINT SERVICE

Southwest has historically principally provided point-to-point service, rather than the hub-and-spoke service provided by most major U.S. airlines. The hub-and-spoke system concentrates most of an airline’s operations at a limited number of central hub cities and serves most other destinations in the system by providing one-stop or connecting service through a hub. By not concentrating operations through one or more central transfer points, Southwest’s point-to-point route structure has allowed for more direct nonstop routing than hub-and-spoke service.

  • However, in response to the effects of the COVID-19 pandemic, the company placed greater reliance in 2020 and 2021 on connecting traffic in an effort to capture customer demand
  • Approximately 73% of the company’s Customers flew nonstop during 2021 and Southwest served 788 nonstop city pairs, compared with 720 as of December 31, 2019
  • For 2021, the company’s average aircraft trip stage length was 790 miles, with an average duration of approximately 2.1 hours, as compared with an average aircraft trip stage length of 748 miles and an average duration of approximately 2.0 hours in 2019

Southwest’s point-to-point service has also enabled it to provide its markets with frequent, conveniently timed flights and low fares.

CHEAPER COST STRUCTURE

A key component of the company’s business strategy is its focus on cost discipline and charging competitively low fares. The company’s low-cost strategy includes, among other elements, (i) the use of a single aircraft type, the Boeing 737, (ii) the company’s point-to-point route structure and (iii) its highly productive employees.

  • Southwest’s use of a single aircraft type has historically allowed for simplified scheduling, maintenance, flight operations, safety management and training activities
  • Southwest’s point-to-point route structure includes service to and from many secondary or downtown airports such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore-Washington International, Burbank, Manchester, Oakland, San Jose, Providence and Ft. Lauderdale-Hollywood. These conveniently located airports are typically less congested than other airlines’ hub airports, which has contributed to Southwest’s ability to achieve high asset utilisation because aircraft can be scheduled to minimise the amount of time they are on the ground
  • This, in turn, has reduced the number of aircraft and gate facilities that would otherwise be required and allows for high employee productivity reflected in lower headcount per aircraft

EFFICIENT FUEL MANAGEMENT

Fuel and oil expenses can be extremely volatile and unpredictable and even a small change in market fuel prices can significantly affect an airline's profitability. Fuel and oil expenses remained the company’s second largest operating cost for 2021. The company’s 2021-2022 fuel efficiency declined, as compared with 2020, due to higher load factors, higher jet fuel prices and the company’s return to service of more of its oldest, least fuel efficient Boeing 737-700 aircraft, which had been placed into storage in 2020 due to capacity cuts in response to the effects of the COVID-19 pandemic.

The company has also introduced a number of measures which are aimed at cutting down operating costs, oil consumption and improve the life of its aircrafts:

  • Installation of winglets, which reduce drag and increase fuel efficiency, on all aircraft in the company’s fleet
  • Use of electric ground power and pre-conditioned air for aircraft at the gate
  • Replacement of eligible internal combustion ground support equipment with electric equipment at select locations
  • Deployment of auto-throttle and vertical navigation to maintain optimum cruising speeds
  • Implementation of engine start procedures to support the company’s single engine taxi procedure
  • Adjustment of the timing of auxiliary power unit starts on originating flights to reduce auxiliary power unit usage
  • Implementation of fuel planning initiatives to safely reduce loading of excess fuel
  • Retrofitting of aircraft cabin interiors to reduce weight
  • Reduction of aircraft engine idle speed while on the ground, which also increases engine life; utilization of company-optimized routes (flying the best wind routes to take advantage of tailwinds or to minimize headwinds)
  • Improvements in flight planning algorithms to better match the company’s aircraft flight management system and thereby enabling the company to fly at the most efficient altitudes

THE MARKET

According to Allied Market Research and Research And Markets, the global low cost airlines industry generated sales of $155.0 billion in 2016 and this number is expected to reach $440.5 billion by 2030, for a CAGR of 10,4% from 2022 to 2030.

  • Low-cost airlines have grown exponentially worldwide over the past few years, owing to amended ease of travel, development of the travel & tourism industry, rapid urbanization, changes in lifestyle, consumers' preference for low-cost service along with more frequent non-stop flights
  • Moreover, increase in purchasing power of middle-class households, especially in developing regions and high internet penetration coupled with e-literacy notably contribute toward the growth of the global low-cost airlines market

FOUNDER-LED MANAGEMENT

Southwest Airlines is led by Robert E. Jordan who joined the company back in 1988 as a programmer. He gradually rose through the ranks and became CEO in February 2022.

Robert E. Jordan

  • Has served as the company’s Chief Executive Officer since February 2022 and has been a member of the company’s Board of Directors since February 2022
  • He has held 15 different positions at Southwest, including leadership roles in the areas of Finance, Planning, Procurement, Fuel, Facilities, Technology, Corporate Strategy and as Chief Commercial Officer. He also served as the President of AirTran Airways during the successful integration. Most recently, he served as Southwest Airlines' Executive Vice President Corporate Services, providing Executive Leadership for Southwest's world-renowned People and Culture, training at Southwest Airlines University, Diversity, Equity, & Inclusion efforts and Communications & Outreach Teams. He joined the company in 1988 as a programmer
  • He earned a Bachelor of Science in Computer Science and a Master of Business Administration from Texas A&M University

Michael G. Van de Ven

  • Has served as the company’s President since September 2021 and as its Chief Operating Officer since May 2008
  • Has held several positions at Southwest, including Executive Vice President & Chief Operating Officer, Executive Vice President of Aircraft Operations, Senior Vice President of Planning, Vice President Financial Planning & Analysis and Director of Internal Audit. Prior to joining Southwest, he was a Senior Audit Manager at Ernst & Young in Dallas, where Southwest Airlines was one of his first clients
  • Received a Bachelor in Business Administration from the University of Texas at Austin, where he serves on the McCombs School of Business Advisory Council and is a Certified Public Accountant

Linda B. Rutherford

  • Has served as the company’s Executive Vice President People & Communications since June 2021
  • Has also served as Senior Vice President & Chief Communications Officer from October 2017 to June 2021, Vice President & Chief Communications Officer from January 2016 to October 2017, Vice President Communications & Strategic Outreach from April 2007 to January 2016, Vice President Public Relations & Community Affairs from December 2005 to April 2007, Director Public Relations from May 2001 to December 2005, Senior Manager Public Relations from February 1999 to May 2001 and Manager Public Relations from February 1997 to February 1999. She joined the company in 1992 as a Public Relations Coordinator
  • Linda graduated from Texas Tech University with a bachelor's degree in journalism

FINANCIAL CHECK

The company's revenue performance in the third quarter of 2022 was strong, despite a negative impact of approximately $18 million due to the flight disruptions caused by Hurricane Ian in late September 2022. This negative impact in the third quarter of 2022 was more than offset by improving leisure demand and close-in bookings in September 2022. In addition, the company's operating revenues benefited from its loyalty program, including elevated point redemptions for flights and incremental revenue from its co-branded credit card agreement, as well as increased upgraded boarding take-rates following the new digital self-service launch in August 2022.

  • Southwest scored a record third quarter 2022 operating revenues of $6.2 billion, a 10.3% increase compared with the third quarter of 2019—in line with the company's previous guidance
  • Third quarter 2022 operating revenues per available seat mile (RASM, or unit revenues) increased 10.6% driven primarily by a passenger yield increase of 5.3%, coupled with a load factor increase of 1.9 points, all compared with the third quarter of 2019
  • Net income, excluding special items, of $316 million, or $0.50 per diluted share
  • Liquidity of $14.7 billion, well in excess of debt outstanding of $8.7 billion

THE BOTTOM LINE

The Good

  • Southwest is a leading airline in the U.S. and by far one of the most efficient globally
  • The travel market is gaining steam again after the pandemic and profitability is back
  • For now, higher jet fuel prices are passed on consumers

The Bad

  • Higher interest rates and a slowing economy may negatively affect consumers' travel plan

Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Credits

Photo by Samantha Gades on Unsplash.