Southwest's Evolving Network

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Hello and welcome to the Airline Weekly Lounge. I'm your host Gordon Smith and this week I'm

joined by co-host Jay Shabbat. In part one we're talking about Southwest and in part two we'll be

sharing our key trends to watch for the coming season. Hey Jay, how's it going? Good Gordon,

good to be back in the fall rhythm after a nice summer. Absolutely and this is quite

exciting actually because this time next week we will be in person i've never met you in

Person J, which is wild.

I joined Skift in January.

I know.

Kind of crazy that we've never actually met face-to-face.

I probably speak to you more than I speak to my mother in terms of minute-per-minute on a weekly basis.

We speak at length each week, obviously on the podcast and otherwise, but never actually met face-to-face.

So for full context, we've got the Skift Global Forum in New York City next week.

We are speaking here on the 11th of September, but the event is taking place across the 17th, 18th and 19th of September.

That's next week in New York City. From an aviation perspective, we've got two really big hitters.

I will be on stage interviewing Andrew Nacella, the CCO of United Airlines, and then Joanna Geraghty, the relatively new CEO of JetBlue.

There's a lot of other very, very interesting folks from the water, travel business, hotels, OTAs, destination boards, all sorts of stuff.

Live.skiff.com.

I know there are just a handful of tickets left.

So if you have been holding.

out. Do not wait. Okay, let's talk about Southwest, Jay, because there's been news almost every week,

it feels like, for the past six months about Southwest in one way or another. But this week,

we had some really big news. We've got a high-profile exit. Tell us if you don't know

what's going on, listeners. Let's tell our listeners what's going on. Jay, who's leaving

the business? Sure. Well, there was, as you suggest, big news with Gary Kelly, long-time CEO

and most recently chairman, will step aside.

And that comes amid the hostile, how do we describe it?

The hostile efforts by Elliott Management and investor

to really dump the whole management team

and institute some major reform at the airline.

And so as that's going on, you also have management itself,

which for now is holding onto its job,

speaking specifically about CEO Bob Jordan.

um the uh the boat the current board is as it exists today uh expressed full confidence in

jordan and uh you know no no uh imminent departure or anything like that as of yet we have a couple

big milestones coming up including an investor day event um do you have the date of that gordon

i have it somewhere and i uh it's not right on the tip of my tongue september 26th i had a

September 26th. Okay.

But if anyone's booking travel plans, do not quote me on that. But to the best of my knowledge, September 26th.

Sounds about right.

Okay. So we've got that coming up. And then we do have a board meeting, I believe, in November.

So we could get more news as the fall transpires here.

What I wanted to do, though, is not so much dwell on what's happening this week.

And I should add, we're speaking on Wednesday, September 11.

here. This is about 1138 New York time, close to noon. I wanted to dwell not on some of the

changes to the board that were announced this week. Also, we have changes coming to, for example,

the Southwest in-flight product, the boarding process, potentially even the bag fees. We'll

see about that. That's something that we've discussed before in past podcasts.

What I wanted to really focus on today, because it sometimes doesn't get as much attention, but I think it's arguably the most important reform that Southwest is undertaking, and that's the changes it's making to its network.

And Southwest really is the largest, or perhaps, depending on how you measure, second largest domestic U.S. airline.

I guess by some measures, American might be bigger.

But in any case, it's this.

giant presence on the domestic scene, and it's suddenly cutting capacity rather significantly.

And just to give you a sense of that, this year, for the entire year, 2024,

capacity in C-terms, and I'm using Serium DO data here, is going to be down 1%.

So it's going to be, Southwest is going to be a smaller airline this year and last year.

But that trend looks even more pronounced when you move into the later parts of the year.

So in the upcoming fourth quarter, for example, we're a couple of weeks away from that.

But based on schedules that are published, Southwest is going to be down their seats 8%.

That's a pretty big drop for a giant airline.

And so maybe in the second part of this, we'll talk a little bit more about some of the implications for other U.S. airlines.

But you can imagine when, remember a couple of weeks ago when United, for one, was saying that, well, the fall is looking a lot more promising than the summer.

Well, one reason is because of, surely because of all this Southwest capacity is going to be exiting the system as the fall turns into winter in the weeks ahead.

But we'll talk a little bit more about some broader domestic U.S. trends in part two.

I just want to go back to Southwest's schedule specifically, and I will start by just saying, well, I'll throw the question out there.

So, Gordon, what is the Southwest's single busiest airport in their system now?

No.

Okay.

So if you'd asked me this question a year ago.

I like putting you on the spot, Gordon.

You sure do.

He should have a hair because I wouldn't I wouldn't have guessed that if you put me on the spot and I didn't have this data in front of me full full.

mission there but uh but you want to take a guess yeah heaven forbid this podcast is ever live jay

because then you'll really catch us up yeah i i slip i slip our producer monica a little

ten dollar bill and she edits out any of nasties but okay we'll we'll we'll spare you the torture

no no no no no no no go for the go for it go for it i want to take a guess so the question

to be precise is we're talking about today southwest's busiest airport is that it yeah

correct by total number of seats so for all of i'm looking at all of 2024 there's more seats

southwest at this airport than any other airport in its system okay um chicago midway would be one

but i feel like that's not quite as big a deal as it used to be let's go for baltimore okay no both

excellent guesses so chicago is now number four it was at one time number one though so you're

Kurt, you're totally right on the, you know, to guess that.

They have de-emphasized that over the past couple of years.

Now, actually, some of you can see.

If you want to look at any further detail on this, I posted on my LinkedIn site, on

LinkedIn, I posted some detailed numbers on Southwest top airports and how they compare

versus last year, versus five years ago, versus 10 years ago.

And believe it or not, Chicago in C terms, Midway Airport, is actually smaller today

for Southwest than it was 10 years ago.

But it remains critical because it is number four.

You mentioned Baltimore is number three today.

And that's another one where there's been some growth, but not it hasn't been one of Southwest, you know, really, really fast growing airports.

And a simple reason for that is that the Baltimore economy has been fine, but just not, you know, super fast growing.

Now, on the other hand, number one is happens to be Denver and Denver.

Yeah, Denver, which, you know, you might not have guessed if, you know, it's not a market that they've been in for a very, very long time.

And just in the past 10 years, though, they have.

been, you know, they have, when I say not very long time, I mean, I think they can't remember

when they, when they went in, maybe it was the early 2000s, but whatever. Denver in the past

10 years, their sea capacity is up 87%. So, you know, not too far from doubling. And even just

five years ago, 41%. So they've really put a lot of eggs into that basket, so to speak.

And then the number two one that we're missing here in between Denver and Baltimore is Las Vegas.

And that's, that's one that's grown a lot as well over the past couple of years, not quite Denver,

Fast, but pretty fast.

So there you go.

Denver, Las Vegas, Baltimore, Chicago.

And then if you want to round out top five, Dallas, Love Field.

And that's a little bit of a strange one because it's very capacity constricted.

So you can see they're doing a lot of mixing and matching.

Now, just in the past year, there's been, as you might imagine, now that they're just

making very big cuts.

And some of this has to do with the delays in aircraft deliveries from Boeing.

That's part of the reason why they're cutting.

But it's not the only reason.

I think they're also cutting because they realize they need to get their yields up.

And Southwest, if you look at just year over year for the upcoming fourth quarter, you'll

start to see very big drops in airports like Atlanta, down 27%.

What else do we have here?

San Jose, California, that's Silicon Valley, down 12%. Los Angeles, down 12%. A lot of these

California markets are down quite a bit, which suggests that they may be having some trouble

there. I don't know if that's lack of growth or just short haul business markets, maybe struggling

a bit. Fort Lauderdale, down 34%. So they obviously felt they had a little bit too much capacity,

a lot of extra capacity there. It's very, very hard to find any Southwest.

markets that are going to be growing year over year in the fourth quarter. I'll give you a couple.

Phoenix is one. Phoenix is, as I think I've mentioned on this podcast before, that's the

superstar economy of the U.S. right now, tons of investment spending and population growth.

That's going to be up 7%. Nashville, another superstar economy, that's going to be up 2%.

But really, pretty much everything else in the top 20, 25 is down for Southwest.

So that's a good, you know, I think just a summary of some of the changes, the big changes that are underway at Southwest Network.

Did you ever play SimCity, Jay, back in the day?

I never have, no.

I was just thinking, like, the way you were describing Phoenix there is like someone on SimCity with like a cheat code.

Like, you know, populations booming, industries coming in, all the flights are coming in.

I loved SimCity, for full disclosure.

I'm guessing at least some of our listeners are going to get that reference.

um unfortunately that was over my head not at all not at all i i would hope a significant

of our listeners might have enjoyed it. Let's take a look at those numbers in a bit more detail,

Jay, because just worth re-emphasizing that we're talking about double-digit changes in some markets

here. This is not a small airline. This is, by most metrics, the fourth biggest in the US,

even bigger if you look purely at domestic. For even to have a 1% change is pretty notable in

terms of bums on seats, in terms of ASMs, in terms of capacity. So if we're looking at double-digit

changes here, something really significant is going on. How much of this can be attributable,

if at all, to Boeing delays, specifically the Boeing MAX? Yeah, well, that's certainly part

of it, but that's also nothing new, right? I mean, Southwest has been experiencing these delays for,

you know, it's been a while now, so it's multiple quarters. So I think there's just an additional

concerted effort to say, let's pull back on some of these markets that are underperforming,

whether it's California shirt hauls.

or Fort Lauderdale, there's way too much capacity in there.

So I think it's just, you certainly can't ignore the Boeing delays.

That's a big part of not just their network situation, but also their, you know,

the Boeing delivery delays is, you know, frankly, a very big reason why Southwest is underperforming financially.

If you think about how they are overstaffed because they expected to get these planes

and you have all these pilots and other crew members and maintenance people that you hired

in anticipation of having these planes.

Suddenly, you don't.

So you don't have the ASMs.

You don't have the capacity.

But you do have the people.

So that creates a big economic drag, a big unit cost drag.

So it is a very big deal.

But yeah, I think some of these fourth quarter cuts are motivated for reasons beyond just

the delays, I think.

And the fourth quarter is going to be a fascinating one to watch because it feels like almost every major U.S. airline is making some pretty meaty changes in the fourth quarter.

We've got JetBlue going after more VFR traffic and more Caribbean traffic.

We've got Southwest making the changes that we've discussed.

We've got Frontier Spirit, even the U.S. Big Three, making some reasonably significant adjustments.

After the dust settles, Jay, where do you think we're going to see Southwest?

Do you think we're going to see an airline that is sort of going back to its traditional roots?

Or is this going to be potentially with all the changes that we discussed, red-eye flights and the premium push, an airline that doesn't quite look like the one that we see today?

Yeah, so we know there's going to be some significant material changes.

I mean, we know they're going to be changing their in-flight product.

We know they're going to be changing their boarding.

I wouldn't at this point be surprised if they do get more aggressive on the ancillary selling.

They're now distributing through Google Flights, I believe.

So there are changes already underway.

I mean, it's not going to look like exactly the same airline like we used to know.

But at the same time, I think what really, there's a few things that make Southwest just

extremely profitable, or let's say extremely powerful, and that underpin its very long

history of profits.

One of them is that incredible network that they have.

I mean, they're just unmatched for, you know, just think about some of these itineraries between just pulling to Phoenix to Houston or, you know, Nashville to Baltimore or Atlanta.

I mean, there's just so many. It's not not to say that they're the only competitor in these markets, but they often have just tremendous frequencies that, you know, small business travelers, medium sized business travelers love.

and they're getting more into uh you know corporate travel also like sort of managed

corporate travel for

some of the bigger companies as well, they're pushing into that market more too.

So I think Southwest remains, you know, I think the network, it just remains very strong is what I want to say.

And we should say, Jay, it's always difficult on a podcast to try and make sense of a data set,

especially one going back multiple years, even a decade on a podcast, such as the beauty and the curse of audio.

But that table that you described, it will be in the next issue of Airline Weekly, AirlineWeekly.com, if you want to subscribe to that.

Anything else to add on Southwest, Jay, before we wrap up and head into the break?

No, no.

I think just another, you know, just want to second the idea that as all this news about Southwest unfolds, whether it be board changes or product changes or et cetera,

make sure to also pay very close attention to what's happening on their network.

For sure. Good advice. And I just want to end this part with a quote from Gary Kelly's letter

to Southwest shareholders, just an extract from it. Quite long, it goes across multiple pages,

but here's an extract and just a nice way to finish things up. He says, and I quote,

now is the time for change. It's time to shake things up, not just stir them a bit.

The wisdom comes in knowing what to change and what not to change. We know that changes are

required to some of our historic business practices, we know we will need to continually

bring in new talent in leadership and on the board. That's an extract from Gary Kelly's

letter there. And as Jay says, we'll have much more detail on Southwest, not just in this week's

Airline Weekly, but across the next few weeks, particularly with that Investor Day on the

horizon. Don't go anywhere. In part two, we are going to be looking at the key trends for US

travel that you need to know for the coming season.

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Hello and welcome back to the Airline Weekly Lounge.

I'm your host, Gordon Smith, and this week I'm joined as usual by co-host Jay Shabbat.

Part one, we were discussing Southwest, looking specifically at some of their busiest airports today

versus one, five, ten years ago, and a few other bits in between.

We're now going to turn our attention to the key trends that you should have on your radar

for the coming season, specifically in and around the USJ,

because we are entering the fall northern hemisphere season that brings with it usually

traditionally an uptick in in corporate travel leisure still sort of

here and all there, depending on where you are. I'm sure it's not a popular time to head down to

Florida, but other parts of the market, I'm sure, are still holding up rather nicely. Tell our

listeners, Jay, some of the key things that they should be having on their radar for the season

ahead. Sure. So if we go back to July, when US Airlines were discussing their second quarter,

excuse me, their first quarter financial results, and sort of giving commentary on their second

quarter. It wasn't very positive. There was a lot of negativity, let me say it that way.

And yes, you had some airlines that were doing just fine. We talked about how the big three,

particularly United Delta American, were really benefiting from very, very strong overseas demand.

And, you know, there's certainly parts of the U.S. airline sector that we're doing just fine.

There was also talk about just all the tremendous struggles that some of these low-cost carriers

were going through, including Southwest, but even more so Frontier and Spirit and JetBlue

as well.

Well, if you fast forward to here we are, sort of mid-September, we're a couple of weeks

away from the start of the fourth quarter.

We're very, roughly speaking, about a month, maybe a little more away from the start of

second quarter earnings season.

And there's a sense, I believe, I'm sensing it anyway, that there's a little bit more positivity, that I think things are trending up.

And I'll give you a few reasons why I say that.

So one of them goes back to what we were talking about earlier, just the fact Southwest is cutting so much capacity.

That's clearly going to benefit the whole domestic US airline industry.

I don't think there's any doubt about that.

Now, at the same time as Southwest is cutting about 8%.

And again, all these, I just reminder that all these.

These figures I'm giving are from Serum's DO database on schedules, and we're looking

at seat counts here.

At the same time as Southwest is cutting about 8%, JetBlue is cutting about 6%.

We have Spirit, which for many quarters was growing at a tremendous pace, will only grow

just 2% in the fourth quarter.

And we even have rather subdued Delta 5%, American 6%.

It's a little bit elevated, but we're not talking about tremendous growth rates here.

Allegiant, only 3%.

So I think that is going to be helpful.

Now, at the same time, we have fuel prices that are suddenly trending downward.

And if there's anything that puts a smile on an airline's face, it's the falling price

of fuel.

Oh, yes.

Yeah, there's no better reason to throw a party than to see fuel prices fall.

So that is a very, very big deal.

Now, we also...