Skift Take

There's no way around it: Southwest's new emphasis on cost-containment, productivity gains, and other efficiencies doesn't provide an optimistic outlook for passenger experience. It should make Southwest a more profitable airline — if passengers go along for the ride.

Southwest Airlines department heads will have to trim their wish lists in 2019.

That’s because after spending the past decade prioritizing revenue-generating initiatives such as revamping Rapid Rewards and deploying a new reservations system from Amadeus, Southwest Airlines will now make controlling costs its “number one priority.”

Those are the new marching orders from Southwest CEO Gary Kelly as articulated during the company’s third quarter earnings call Thursday. What that means is that some items or initiatives that the airline’s executives “yearn for,” may have to be deemphasized, and greater productivity will have to be achieved, said Kelly, without offering specifics.

The focus since 2008 has been on transforming the airline, which has produced a stronger, larger and more prosperous but more complex carrier, Kelly said.

“The main point I want to make is that our focus with our strategic efforts has clearly been on transforming the airline and driving more revenue along with operational reliability and customer service,” Kelly said. “And I’m very pleased with the results of all those efforts. The results must be sustained and continuously improved from here.”

But now the airline will make a big push for more efficiencies.

“But eventually, I think all of us knew the the time would come where our initiatives would need to zero in on efficiency and productivity and just overall cost control,” Kelly said. “And, clearly, that time has arrived, and cost will be our number one priority.”

The airline projected that in 2019 its revenue per available seat mile will increase 3 percent, but its unit costs would likewise jump 3 percent, too.

“I’m not satisfied with that, as I’m sure our investors aren’t either,” Kelly said.

In the third quarter, Southwest’s unit costs rose 3.1 percent; fuel costs rose 8.69 percent to $2.25 per gallon. The airline achieved record net income of $615 million, up 16.5 percent, while operating income likewise hit an all-time high of $5.6 billion, a 5.1 percent increase.

Southwest President Tom Nealon said the airline is satisfied with strong passenger demand and yields, along with a healthy pricing environment.

He said the airline benefited from a new pricing structure for EarlyBird Check-in, which transitioned from a flat fee to variable pricing of $15, $20 or $25, depending on demand and other factors. Other revenue, including from bag fees and other ancillary services, climbed 6.6 percent in the third quarter to $338 million.

Kelly said the economy is strong today, and he isn’t envisioning any big changes in 2019.

” … We’re not assuming any change in the economy and broader industry demand,” Kelly said. “As we look at the industry macro levels, supply and demand, I think we’re in pretty nice balance right now and I’m not — I don’t think that will get out of balance next year. But it’s a pretty strong environment right now … ”

Hawaii Here We Come

Pending regulatory approvals, Southwest officials said they plan on selling tickets for Hawaii flights this year, and to start service there in 2019. The nonstop service would include flights from Oakland, San Diego, San Jose, and Sacramento, California.

The airline intends to base crew in Los Angeles, in part to support the new Hawaii service.

That’s one initiative that the airline apparently has no intention of reversing.

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Tags: ancillary services, earnings, hawaii, southwest airlines

Photo credit: Southwest Airlines CEO Gary Kelly unveiled its Louisiana One aircraft on March 7, 2018. Kelly said the airline's number one priority now is cost-containment.

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