Other airlines are cutting short-term capacity, but Southwest Airlines has no desire to follow the pack.
While some of its U.S. competitors plan to trim domestic growth later this year, hoping they can reduce capacity to maximize fares, Southwest Airlines expects to keep its upcoming schedule as it is, the carrier said Thursday.
Part of the reason is that Southwest executives believe business remains relatively strong. But there’s another factor. When Southwest publishes a schedule — it is now selling tickets through April 2017 — it intends to operates the flights. Southwest’s main competitors will sell flights months in advance, but they don’t always fly them as planned.
“We don’t publish as much inventory and what we do publish, we very much intend to fly,” CEO Gary Kelly said on Thursday’s Southwest second quarter earnings call. “We rarely go out into a published schedule and make changes.”
That comment wasn’t cheered by investment analysts, many of whom argue airlines should fly fewer flights, so they can raise fares. Most U.S. airlines, including Southwest, have reported revenue pressure in recent weeks, which they generally blame on too much capacity in the market. The last-minute fares often purchased by business travelers have been especially low, airlines have said.
Southwest Airlines made $820 million in the second quarter, but its passenger revenue per available seat mile — an industry metric measuring how much money an airline earns for each mile it flies — fell 3.5% on a year-over-year basis.
“Fares are softer than we were expecting,” Kelly said.
Kelly said Southwest evaluated making tweaks to its fourth quarter schedule, but decided against it. Instead, the airline said it is working on its post-April 2017 schedule, which it plans to publish within a couple of months.
“We already have the employees, we already got the airplanes, we already got the corporate overhead,” Kelly said, explaining why Southwest will stick with the status quo later this year. “It’s real hard to justify pulling in that capacity that close in.”
While Southwest is facing the same general revenue woes as other airlines, the carrier noted airlines are are facing trouble not on leisure bookings, but on corporate traffic. Business customers are a strong segment for Southwest, Kelly said, but the airline is not as reliant on them as 20 years ago. In the past, Southwest’s main business was flying short flights between important business cities, like Houston to Dallas. Southwest still does that, but it has branched out, with more longer flights.
“What a lot of people misunderstood back in the 1990s is how much business travel we had, and some of that was very natural with the short-haul orientation we had with high frequencies,” Kelly said “If anything, I’ll bet you that we’re less reliant on business customers today than we were 20 years ago. ”
Not all analysts seem persuaded by Southwest’s plan to stay the course. J.P. Morgan’s Jamie Baker asked whether the airline’s priorities “might be somewhat out of order.” He said some investors have the impression “that passengers come first, then labor unions and then shareholders.” And he argued the U.S. airline industry is an a “revenue crisis,” one that should prod Southwest into straying from its usual thinking about schedule changes.
Kelly, however, was not swayed.
“We’ve taken very good care of our shareholders,” he said. “It’s interesting that you described the current period as a time of crisis, when in the first half of this year, I believe, we’ve had all-time record shareholder returns in six months.”
And the CEO said it makes sense to focus on employees and customers.
“We care about our people, and then in turn we care about our customers,” Kelly said.”It is a virtuous cycle. [You can’t] simply ignore that and say, ‘We’re only going to focus on the shareholders.’ It doesn’t work. It’s not sustainable.”
Photo credit: Southwest is not expecting to make any short-term trims to its capacity. LM Otero / Associated Press