Southwest Learns to Adapt to 737 Max ‘Crisis’

Southwest Airlines does not know when it will again fly what it once hailed as its newest and most efficient asset — the Boeing 737 Max jet. Executives on Thursday warned investors it is losing market share as it cuts longer routes to make better use of aircraft.

The airline reported fourth quarter net income of $514 million, down about 21 percent compared to the same period in 2018. For the full-year, net income was $2.3 billion, off about 6 percent, year-over-year.

That certainly could be viewed as an impressive performance for a carrier that by now should have at least 75 Max jets, which were to account for about 10 percent of its fleet. But it was a less lucrative year and quarter than it could have been, Southwest CEO Gary Kelly told analysts on the airline’s fourth quarter earnings call on Thursday, when he referred to the Max situation as a “a crisis-like challenge.”

Kelly told analysts the airline calculated it lost about $828 million last year in operating income because of the Max grounding.

Here are some highlights from Southwest’s discussion with media and analysts:

Max Return to Service

For months, airline executives expressed confidence they could accurately predict when the Max might return, even as they continued to push out the target date.

But no longer.

Officially, Southwest has identified June 6 as the return-to-service date, but no one on the call suggested much confidence in that estimate. Kelly said Southwest was surprised recently when Boeing announced the aircraft likely would not be ungrounded until at least mid-year. “Obviously, that would make our and other airlines’ June dates unworkable,” Kelly said.

And don’t expect flights to resume just after the ungrounding. Southwest executives reiterated Thursday they expect to need about two months after the Federal Aviation Administration lifts restrictions before they can fly the aircraft. Pilots will need to prepare, while mechanics must ready the jet for service.

Southwest has a lot of aircraft to return to service. When the FAA grounded the airplane last spring, the airline flew 34 of them. But Southwest had planned an aggressive delivery schedule. It was to have 75 by the end of 2019, with 38 more deliveries in 2020.

Not all those airplanes will be delivered on schedule, but Southwest still will have a lot of planes enter the fleet in a short period. Executives said, as of now, they expect they could fly 60 Max jets by year-end, though that’s subject to change.

Network Tweaks

As Southwest tries to do more with less, the airline is cutting some of its longest flights, and putting passengers who might have taken them on connecting itineraries.

Many analysts consider Southwest’s business-centric short-haul routes as the jewels of the airline’s network. On big city-routes like Los Angeles to San Francisco or Dallas to Houston, business travelers prefer frequency. On a typical Monday, Southwest flies 21 times between Dallas and Houston, and while the airline could cull one or two of them, it doesn’t want to cut too much.

The longer routes, many coast-to-coast, take up a lot of aircraft time and are a less efficient use of the airline’s resources. In addition, they burn a lot of fuel, making them more appropriate for newer airplanes with better fuel economy, like the 737 Max.

If the Max cancellation goes further than June, as now expected, Southwest may look to slash other longer-haul routes, executives said.

Loss of Market Share

Profits remain up, but Kelly said he’s worried about Southwest losing share to its rivals, several of which do not fly the Max. He told analysts the airline is betting it lost between six and seven million customers last year to other airlines.

“I’m very worried about that,” he said. “That’s not anything that we can mitigate. We can deal with the operation. We can deal with all these other things, we can get the finances whole. But we can’t do anything about [share] until we get airplanes, until we can grow again.”

Southwest already has been compensated by Boeing for the airlines 2019 troubles, but the two companies must negotiate for 2020. Kelly said he will discuss the market share issue with Boeing this year.

New Airplane Type

Recently, Kelly told analysts the company’s board asked him to evaluate adding a new airplane type to complement the 737. Except for a couple of brief periods, Southwest has been an all-737 operator for its entire history.

The Airbus’ A220 has seemed an option, but Kelly said Thursday he had no updates, saying the airline is taking its time with evaluations, he said.

“We’ve got to have the right product, and it’s got to come at the right price,” Kelly said.

One analyst asked whether the company’s pilots union would be receptive to flying a new fleet type. If it’s a smaller aircraft, pay scales might be lower.

But Kelly said he is not concerned, noting pilots like when a company grows, because they can move up in seniority and make captain quicker.

An Acquisition

Analysts love to speculate about mergers and acquisitions, with some wondering whether Southwest might solve its fleet troubles by buying another airline.

Like any senior executive, Kelly would not discuss acquisition strategy in detail. But he broadly discussed it on Thursday.

“I do not agree that the Max crisis compels us to acquire another carrier,” he said. “We would not overpay. We would not commit us to a course that’s inconsistent with our strategy.”