After Southwest Airlines permanently parked almost 90 of its smallest, oldest jets last year, it had a choice while it waited for Boeing’s new fuel-efficient replacements. It could cut its schedule, slashing flights and reducing revenues, or it could push existing aircraft harder.
Southwest chose to do more with less, growing capacity by about 3 percent between January and June, despite starting 2017 with 17 fewer aircraft than a year earlier.
That forced the airline, which has never flown overnight red-eyes, to add flights during the only periods aircraft were available — early in the morning and late at night. In March, on average, each aircraft flew one more trip than in March 2017, Southwest spokesman Brian Parrish said.
The plan may not have worked as well as intended. Late last month, as many major U.S. airlines said they would meet or exceed revenue guidance for the first quarter, Southwest warned investors its unit revenue would fall short of expectations. However, it said, revenue would be roughly in line with last year’s first quarter.
Southwest gave several reasons, including the timing of many school spring breaks, and a weakened fare environment in non-peak periods. But it also blamed what it called its “sub-optimal” first quarter schedule, driven by 737 jet retirements, which hurt revenue and load factor. Passengers weren’t rushing to book Southwest’s new flights, many leaving before 6 a.m., or arriving 10 p.m, and if they did, they expected discounts.
“It’s not terribly surprising,” said Robert Mann, an independent consultant. “If you fly when people don’t want to fly, they don’t want to fly your airplanes.”
The revenue blip isn’t ideal, but it should be short-term. This year, Southwest will take 44 new aircraft, including 14 Boeing 737 Max 8, the manufacturer’s newest model, and by year-end, it expects to have more airplanes than at the end of 2016. By the second half of this year, Southwest expects to ramp-up its growth, with capacity increasing about 7 percent year-over-year. “The current fleet deficit is temporary,” Parrish said.
All-At-Once Retirements Are Unusual
During strong economic periods, airlines often park aircraft on a one-for-one basis with new deliveries, ensuring they won’t be without enough planes. But Southwest retired its Boeing 737-300 fleet quickly for strategic reasons.
As the third quarter ended last year, Southwest was about to take delivery of its first new 737 Max aircraft, and the airline wasn’t sure the Federal Aviation Administration would permit its pilots to fly three models of the 737— early-generation “classics,” “next-generation” 737s from the late 1990s through the present, and the new Max jets — at the same time. Southwest, unlike most airlines, prefers all its pilots be able to fly every plane.
“Boeing and the FAA weren’t expected to determine the training requirements of operating the Classic and MAX pair until mid-2017,” Parrish said. “We didn’t want to potentially impact our 2017 MAX launch, so we designed a cut-over plan that alleviated any related impacts.”
The 737 classics would have been retired soon no matter what, because they were based on older technology and not as fuel efficient as later models. Southwest has told investors the retirements will create $200 million in cumulative pre-tax savings by the end of 2020.
But while the retirements made sound business sense, not everyone is sure stretching the existing fleet was the right move.
At times in the industry’s history — Mann gave the internet boom of the late 1990s as an example — several airlines extended their schedules, flying early and late to capture extra demand. But when only one airline is flying at 5:30 a.m., customers will usually avoid it unless the deal is so impressive they can’t resist.
“If demand is so strong that the entire industry in effect expands the normal business day, then you probably get your fair share,” Mann said. “In this case, Southwest is doing this because they have no options but to do it. The results are less than compensatory.”
Some people are buying. Brett Snyder, who blogs at CrankyFlier, said his wife and children recently flew a Los Angeles to Indianapolis flight that boarded at 4:55 a.m., because it was cheaper than an American Airlines departure a few hours later. But flights like that certainly don’t help unit revenue. “You’re going to have to win on price,” he said.
Snyder said he is surprised Southwest didn’t use the opportunity to try red-eyes. When airlines are short planes, or they see excess demand, they often add overnight flights when aircraft would otherwise sit on the ground.
“If these guys could get their act together and fly red eyes, they could better meet customer demand,” Snyder said. “People would rather take a redeye than a flight at 5 a.m. or something that is going to get in at 2 a.m.”
Southwest has never had red-eyes. In the past, airline officials said an older reservations system couldn’t handle them. But Southwest replaced that system last year, giving it new options.
“Our new reservation system gives us the capability to operate red-eye flights, but we have never offered red-eye flights in Southwest’s history,” Parrish said. “The capability to operate red-eye flights is available as a future opportunity, if red-eye flights ever fit into any of our plans.”