The pandemic is forcing many airways to defend their turf. Southwest is utilizing it to invade.
At the same time as air travel languished on this fall, Southwest Airlines Co. executives fanned out to cities from Palm Springs, Calif., to Sarasota, Fla., to scope out potential new markets. The airline is including 4 extra cities to its community this 12 months and introduced plans for one more six in 2021. And it’s searching for extra. It hasn’t added airports this rapidly since integrating with AirTran Holdings, which it bought in 2011.
“It sounds dangerous to go open a bunch of latest cities, however the various is worse,” says Andrew Watterson, Southwest’s chief industrial officer. “You might wait til Covid is over. However that’s far too lengthy.”
By its historical past, Southwest has leapt at opportunities to encroach on rivals’ territory after they had been struggling. If profitable this time, it could be a chief instance how some U.S. corporations, profiting from the carnage round them, can come out of crises stronger.
Southwest’s wager this time is especially placing, because the Covid-19 pandemic is leaving no airline unscathed. United Airlines Holdings Inc., American Airlines Group Inc. and Delta Air Strains Inc. have collectively misplaced $23.5 billion this 12 months by way of September. Southwest has misplaced $2.2 billion within the interval, on monitor to interrupt a 47-year profitability streak, and has told unions that furloughs—the first in its history—are inevitable early next year with out pay cuts or authorities stimulus.
Airways are providing 42% fewer flights this month than final November. Southwest flights are down about 36%. Southwest’s third-quarter income of $1.Eight billion was down 68% from a 12 months earlier and the provider burned by way of $12 million in money a day—a determine it says it trimmed to $10 million a day in October.
Southwest accounted for about 20% of home air visitors within the quarter, behind solely American, in response to Transportation Division figures. Whereas it has borrowed billions this 12 months because it contends with the pandemic, it nonetheless has additional cash than debt.
Many airways are rewriting their route maps. However whereas most are experimenting with new routes amongst cities they already fly to, Southwest is including airports.
Southwest had much less debt coming into the disaster than some rivals, has decrease prices and is extra targeted on home locations the place journey is predicted to rebound earlier than journey overseas. That has allowed it to maneuver into openings at airports such as Chicago’s O’Hare airport that beforehand had no house for brand spanking new entrants and to re-evaluate cities reminiscent of Colorado Springs, Colo., that after didn’t appear definitely worth the funding. It began flying from Miami and Palm Springs on Sunday and introduced plans final month to start flying from Houston’s George Bush Intercontinental Airport.
“Southwest goes to have a look at what the holes are within the majors’ networks,” says Matt Lee, vice chairman of operational planning at aviation-consulting agency Landrum & Brown, “and fill them within the interim.”
Capt. Jon Weaks, head of the union representing Southwest’s pilots, which is combating pay cuts, described the enlargement technique as “predatory and opportunistic—which we like.”
Whether or not that opportunism is sufficient will rely partly on the pandemic’s impact on journey. Southwest will face strain from discounters together with Spirit Airlines Inc. and Allegiant Travel Co. , which regularly cost decrease fares and are discovering alternatives to enter emptier airports. A number of main carriers are chopping into considered one of Southwest’s massive promoting factors by doing away with most domestic change fees.
And Southwest previously stumbled with enlargement, in 2011 when it moved into Newark Liberty airport, a United hub. It struggled to compete in transcontinental flights and by no means gained greater than about 5% share of passengers there, pulling out final 12 months. “In the event that they couldn’t make Newark work,” says Mark Kopczak, an aviation advisor who beforehand led Spirit’s network-strategy workforce, “how are they going to drag the identical factor off at O’Hare?”
Southwest’s Mr. Watterson says the airline’s enterprise mannequin—promoting tickets on to prospects moderately than by way of on-line journey companies—works finest the place it has a giant buyer base. “That’s the case in Chicago, Houston and South Florida,” he says, however not in Newark.
‘Stump the chump’
Mr. Watterson and Adam Decaire, two executives accountable for Southwest’s industrial and community technique, say they’d enlargement in thoughts in early August throughout their quarterly day within the scorching seat with CEO Gary Kelly. Recognized internally as “stump the chump,” the daylong assembly is an opportunity for executives to quiz their community gurus, and no query is off limits.
Mr. Watterson and different Southwest executives had watched what seemed like a summer season rebound sluggish in late June, then stall in July as Covid-19 infections rose. Southwest and carriers reminiscent of American that had bet on summer travel pulled down hundreds of flights scheduled for August and September.
However, Mr. Watterson says, he started realizing that chopping flying and prices might do solely a lot to get again to breaking even and that ready for demand to return would take too lengthy: “We would have liked to power a tempo.”
Bodily distanced amid massive screens and piles of binders within the boardroom, Mr. Watterson and Mr. Decaire ran by way of 20 years of Southwest’s community historical past. After 9/11, it was one of few airlines to remain profitable: Whereas it didn’t add new cities immediately, it picked up market share when rivals pulled again and expanded into long-haul routes that had been dominated by greater airways.
In 2009, when some others had retrenched with the financial crisis, it had gone into Boston’s Logan and New York’s LaGuardia—airports its legendary CEO Herb Kelleher had earlier spurned as too crowded and costly. It added service to Minneapolis and Milwaukee that 12 months, too. These strikes paid off: 20% of its 2010 income development got here from new cities.
“We are able to do that very same factor once more. However we have now to do it on a much bigger scale, as a result of the opening we’re in is larger,” Mr. Watterson remembers saying throughout the assembly.
The play, Mr. Watterson and Mr. Decaire say, is to unfold Southwest’s planes into new locations moderately than persevering with to supply so many a number of every day flights in cities the place it is aware of prospects aren’t flying as a lot. Southwest retains an inventory of airports the place its Boeing 737s can attain from its current cities. From amongst these, its planners had been combing for locations with untapped demand that it might rapidly hook into its community.
“Even when that market remains to be depressed,” Mr. Watterson says, “it’s nonetheless model new income.”
The thought clicked for Mr. Kelly, Southwest’s CEO, Mr. Watterson and Mr. Decaire say. “I’m blissful to play offense,” Mr. Kelly later stated on the quarterly earnings name about two months later.
For many years, Southwest was among the many fastest-growing U.S. airways, identified for splashy entrances into new cities and beginning fare wars. It had a extra measured development tempo lately. Final 12 months, its development was constrained by the grounding of the 737 MAX following two deadly crashes.
Southwest misplaced a few of its low-cost benefit, having advanced from a disruptive upstart. With competitors from ultradiscounters and basic-economy fares that airways like United, American and Delta launched, Southwest doesn’t at all times have the bottom costs, although it doesn’t cost for baggage and different extras.
It shrank capability by 1.6% in 2019, its first contraction in a decade. Earlier this 12 months, Mr. Decaire says, he fretted he didn’t have sufficient airplanes to maintain up with booming demand in cities Southwest already flew to.
The pandemic provided a brand new likelihood. Most cities it has picked are ones it had hoped to fly to finally, and it now has planes to spare and airports with house, Mr. Decaire says: “We most likely put in a decade’s value of latest metropolis development into Southwest.”
Different airways, too, are redrawing their maps considerably throughout the pandemic, together with United, which stated this month it should return to New York’s John F. Kennedy airport after departing 5 years in the past. It’s launching nonstop flights from locations like Cleveland to cities in Florida. United has additionally added flights to a number of small cities, some beneath a subsidy program from the Transportation Division.
Spirit gained slots at Orange County’s John Wayne Airport, a long-held purpose for the ultralow-cost provider. JetBlue Airways Corp. has been increasing at Newark and has launched 60 new routes—practically all from its current cities—because it tries to reorient its community outdoors its strongholds within the northeast, which had been arduous hit by the virus. “We didn’t have nice pandemic geography,” says Scott Laurence, JetBlue’s head of income and planning.
American, which added again flights extra rapidly this summer season than some rivals, is attempting issues like short-haul flights inside Florida. “The price of experimentation proper now’s actually low,” says Brian Znotins, American’s vice chairman of schedule and community planning. American needed to pull again on its massive summer season flying push however added again flights this fall as demand began to return once more.
Total, different airways have largely retreated into their essential hubs. American and Delta have suspended flying in dozens of smaller markets.
A few of Southwest’s new locations match the profile of locations airways are taking a look at for pockets of development, reminiscent of solar and ski locations. Others are cities Southwest believes can feed passengers into its community by way of connecting visitors—a shift for a provider that traditionally targeted on nonstop service.
In its early days, Southwest favored cheaper and fewer crowded secondary airports—like Chicago’s Halfway Airport—tapping demand different airways ignored, says Pete McGlade, an architect of Southwest’s community technique and now a advisor. Over time, Southwest made inroads at different carriers’ hubs: turning into one of many largest in locations reminiscent of Phoenix and Denver, and dominating cities like St. Louis that had been as soon as strongholds for others.
Increasing from secondary airports to bigger ones is a longstanding Southwest technique—a sample it has adopted in New York, Boston and, by way of its AirTran acquisition, Washington, D.C. It’s now choosing locations that may assist usher in income quickest, Mr. Watterson says: “We have to get again to break-even, we have to cease burning money.”
One lesson Southwest realized from earlier ventures into rival territory: Go massive. With sufficient flights to any given metropolis, Mr. Watterson says, “The opposite airways can’t actually contact you.” Southwest will begin 20 flights a day from O’Hare in February.
Southwest says it carefully adopted discussions a couple of years in the past about O’Hare’s enlargement, together with a brand new lease settlement that offers Chicago larger capacity to award gates to new entrants. However it by no means noticed a means in, Mr. Watterson says: “It wasn’t till Covid instances after we noticed a dramatic discount in O’Hare exercise that we might go in and get entry to gates.”
With fewer flights arriving from overseas, “widespread use” gates at O’Hare’s worldwide terminal had additional capability. Southwest pounced. “If we don’t transfer now,” Mr. Kelly, the CEO, stated throughout the October earnings name, “we danger by no means getting in there.”
Houston’s William P. Passion Airport, which Southwest dominates, is a trek for folks in northern Houston and surrounding suburbs. Earlier than the pandemic, Southwest had spoken to airport officers about increasing at Passion, says Mario Diaz, govt director of Houston’s airports. About 2½ months in the past, the airline as an alternative requested so as to add service on the metropolis’s greater airport, George Bush Intercontinental, after a greater than 15-year absence. Southwest final month stated it could start flights from that airport within the first half of 2021.
Earlier than the pandemic, the airline had thought-about airports serving Steamboat Springs and Telluride—Colorado ski cities—and picked Steamboat. In a 12 months when snowboarding appears to be like to be considered one of few actions folks could journey for, Mr. Watterson says, the airline’s planners thought, why not each? Southwest introduced service to the extra airport on Oct. 8.
Even because the pandemic now worsens, says Mr. Watterson, Southwest nonetheless must faucet new markets and believes the technique will maintain up. Mr. Decaire says Southwest is looking for markets it will possibly keep in after the pandemic. “We don’t need to do something now only for a couple of months,” he says. “We’re positively out scouting extra cities.”