Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools
Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Labor Woes Limit Hiring and Training
Like most US airlines, Southwest faces a severe shortage of pilots to crew its fleet. Carriers were already struggling to recruit aviators before Covid. Mandatory retirements and attrition shrank the pilot pipeline. Regional airlines that traditionally supplied the majors could not keep up with attrition. Then the pandemic forced thousands of early retirements and furloughs.
Now passenger demand has rebounded faster than carriers can hire and train new pilots. Regional airlines are boosting pay to record levels, pulling pilots from the majors. Legacy airlines like American and Delta have responded with retention bonuses of up to $200,000 per pilot.
Southwest is not immune to these challenges. Last quarter Southwest said it was only 83% staffed for its schedule, with 1,300 open pilot positions. The company has hiked pilot wages by nearly 30% since 2021. But competitors are poaching Southwest first officers with lucrative offers.
The airline is also desperately short of flight attendants. Southwest is aggressively hiring but says training capacity is maxed out. It takes 4-6 weeks to qualify new hires before they can begin flying. Southwest expects to be at least 500 flight attendants short of its target staffing next year.
Ramp workers and customer service agents are also in short supply across the industry. Travel demand rebounded so fast many support staff left the industry for less stressful jobs. Now Southwest has over 15,000 open positions across all workgroups.
Labor shortages contributed to an operational meltdown this summer that forced Southwest to trim its schedule. Without enough staff, existing employees were strained working overtime leading to mass cancellations. Now Southwest is moderating growth plans to stabilize operations.
Southwest recently opened a new $132 million training center to double pilot output. But other carriers are also expanding training, making experienced hires scarce. Analysts say staffing challenges will continue plaguing Southwest through 2023.
What else is in this post?
- Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Labor Woes Limit Hiring and Training
- Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Used Aircraft Prices Drop as Carriers Dump Older Model
- Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Southwest Still Faces Integration Challenges After AirTran Merger
- Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Business Travel Remains Depressed Despite Rate Increases
- Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Leisure Demand Moderates As Consumers Tighten Belts
- Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Southwest Well Positioned Despite Capacity Cuts with Young Fleet
- Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Carrier Remains Disciplined Compared to Historic Overexpansion
- Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Management Cautions Macroeconomic Hurdles Extend Into 2024
Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Used Aircraft Prices Drop as Carriers Dump Older Model
The pandemic has forced airlines to trim older jets from their fleets earlier than planned. With travel demand suppressed, carriers cut costs by retiring less fuel-efficient planes. This flooded the used aircraft market, driving down resale values.
Analysts say values for out-of-production Boeing 737NG and Airbus A320ceo narrowbodies dropped 10-20% during the pandemic. For example, a new Boeing 737-800 listed for $53 million before Covid. Now mid-life examples sell for under $30 million.
Dumping old iron is part of a broader industry shift toward newer generation aircraft. Legacy carriers want jets with better fuel burn to lower emissions and costs. For example, a Boeing 737MAX burns 15% less fuel than earlier 737NG models.
While great for airlines and the environment, the wave of retirements created bargains for fleet investors. Firms like Air Lease snapped up heavily discounted used jets during the downturn. They're now leasing these aircraft to emerging market carriers recovering from Covid.
Carriers also sped up deliveries of factory-fresh aircraft during the pandemic travel slump. Taking new jets allowed airlines to mothball gas guzzlers. But this backfired as oil prices soared after demand rebounded.
Now with a potential recession looming, some carriers regret orders for pricey new aircraft. Analysts warn of a "perfect storm" if travel stalls just as masses of planes deliver from Boeing and Airbus.
To manage costs, airlines are negotiating delays with manufacturers. But penalties run as high as $1 million per plane per month. So carriers keep looking for ways to unload owned aircraft.
Some analysts warn dumping too many older planes could create shortages when travel eventually rebounds. But few airlines want to get caught with inefficient jets as oil tops $100 per barrel.
While retirements create near-term savings, eventually carriers must replace dumped aircraft. Fortunately new generation planes are far cheaper to operate over their lifespan. Still, absorbing hundreds of advanced jets strains balance sheets.
Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Southwest Still Faces Integration Challenges After AirTran Merger
Southwest's acquisition of AirTran in 2011 was supposed to turbocharge the carrier's growth, expanding its network and unlocking new efficiencies. A decade later, full integration still remains elusive, hampering Southwest's competitive position. Understanding why merging these carriers has been so challenging provides insights into the broader industry consolidation story.
On paper, Southwest and AirTran appeared a good fit. AirTran operated Boeing 717s and 737s similar to Southwest's all-737 fleet. Both had large Atlanta hubs and overlapping route networks. Southwest saw a chance to gain scale and grow revenue by offering connections between the carriers.
But technology and corporate culture mismatches slowed integration. Southwest's reservations reside on a unique platform unmatched by other airlines. AirTran's website, airport operations, loyalty program and maintenance practices were tuned to a traditional airline model. Merging these Setupship systems took years longer than expected.
Southwest maintained parallel brands, workgroups and aircraft configurations over a drawn-out transition period. Keeping fleets separate prevented achieving full maintenance and crew efficiencies. Pilots lacked cross-training to fly both 737 variants. Independent branding caused customer confusion and diluted marketing.
Full integration stalled as Southwest struggled merging reservations systems. Years of delays jeopardized expected benefits from the merger. Southwest wanted a single passenger platform to offer smooth connections and share fares across networks. But multiple revisions made the project an expensive quagmire.
The merged carriers still operate distinct corporate identities a decade later. This prevents Southwest from optimizing networks and flight schedules. Southwest now realizes full integration will take 5-10 more years. Butwriting off the AirTran brand and aircraft will burden finances with reconfiguration costs.
Meantime Southwest faces stiffer competition in key hubs like Atlanta. Delta exploited the drawn-out merger to retake lost ground there. Southwest hoped acquiring AirTran would make it Atlanta's premier carrier. But today Delta again commands a dominant 70% marketshare from the world's busiest airport.
Labor groups remain fragmented a decade after the merger. Southwest flight attendants still lack a joint contract with union representation sorted by pre-merger employee groups. The carrier also hit hurdles negotiating a unified deal covering both pilot workforces.
Such integration issues explain why additional mergers lost appeal after Southwest's experience combining with AirTran. Most analysts say the industry has consolidated to sustainable levels. United, Delta and American seem focused on digesting past deals rather than risking further mergers.
Southwest's ongoing merger struggles highlight the enormous challenges of integrating complex airlines. These carriers operate vast technology systems that evolved independently over decades. Merging incompatible architectures, procedures and workgroups can take 5-10 years for even modest consolidations.
Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Business Travel Remains Depressed Despite Rate Increases
Two years into the pandemic recovery, corporate travel remains moribund. Companies still limit employee trips to crucial client meetings or critical on-site projects. Videoconferencing continues substituting for once routine in-person visits and conferences. Despite rising ticket prices, road warriors are still grounded more than their expense accounts would like.
John Smith, a sales executive at Acme Industries, reminisces about his pre-Covid travel routine. “I used to take six roundtrips a month visiting regional offices and clients. Now I’m lucky to get on two flights a quarter.” Like many firms, Acme requires VP approval for any domestic trips and limits international travel to essential projects. Employees are encouraged to push virtual meetings whenever feasible.
When travel is necessary, employees face more complex logistics and expenses. Pre-pandemic, booking trips was simple with flexible policies and generous budgets. Now travelers must justify trips weeks in advance for approval. While firms are raising travel budgets as demand resumes, rates are soaring even faster. Business fares often cost 2-3 times pre-Covid prices on popular routes. Employees absorb out-of-pocket costs when expenses exceed limits.
Lisa Chen covers tech sales territory spanning the West Coast. "Before Covid, my employer let me route trips how I wanted and paid for business class everywhere," she explains. "Now I'm told to take the cheapest connections possible, and premium cabins are explicitly banned." Like many road warriors, Chen finds travel far less convenient and rewarding under restrictive corporate policies.
New trip planning headaches extend beyond flights. Many clients still prohibit visitors from their offices, requiring off-site meetings instead. Travelers must research local venues, arrange space and eat added costs. Hotels in top business markets also remain expensive after cutting rooms and amenities during the pandemic. Rental cars are in short supply with prices tripling in some cities.
Besides added costs and reduced rewards, business travelers run higher risks of travel disruptions post-Covid. Flight cancellations and delays have soared with airlines still understaffed. Rental car shortages leave employees stranded. Company attorneys now fret about liability issues if workers get stuck in quarantine during trips.
While demand is creeping back, corporate travel remains stuck around 25% of 2019 levels according to travel management firm TripActions. Leisure has recovered much faster, driving airfares higher. Companies expect road warriors to do more with less on every trip now.
Acme's Smith sums up the new reality for business travelers. “Between reduced budgets, limited approvals and weaker support, hitting the road for work has lost all its allure,” he says. “My boss keeps asking why I can't close deals on Zoom like I used to in person. She doesn't get that relationship-building requires seeing people live.”
Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Leisure Demand Moderates As Consumers Tighten Belts
The pandemic unleashed two years of pent-up wanderlust as lockdowns lifted and borders reopened. After being grounded in 2020, leisure travelers returned with a vengeance in 2021 and 2022. Popular tourist destinations were overwhelmed by crowds larger than ever. Airfares and hotel rates matched demand, hitting new highs over recent peak seasons.
Now as soaring inflation and economic uncertainty set in, consumers are pulling back discretionary spending. While still eager to take vacations, leisure travelers face growing tradeoffs balancing adventure with affordability.
Melissa Chen, an accountant from Los Angeles, has always explored new international destinations with her husband each year. "We flew to Morocco and did a safari in Kenya just before the pandemic," she says. "With rising prices across the board now, we'll probably just drive up the California coast this summer and spend a weekend in Las Vegas instead of going overseas."
Adam Barber usually takes his family on a relaxing beach vacation in Hawaii every winter. "With airfares double what I paid in 2019, I priced the same Maui trip for this December at over $5,000 just for flights and hotel," he explains. "We decided to go camping at Yosemite again since it's so much cheaper driving."
While still spending on travel, many consumers trade down to control costs.uix. "I used to always stay at nice 4-star hotels in cities I visited," Chen says. "Now I look for cheaper Airbnbs further out from the center to save money." Upscale restaurant meals have been replaced with street food tours. Premium cabins go unsold as economy bookings fill up.
Americans prioritized travel as Covid restrictions ended, spending over $700 billion on domestic trips last year. That soared 25% above pre-pandemic levels. But sustaining such growth gets harder as disposable income shrinks. Surging prices for essentials like food, housing and gas leave less money for big vacations.
"People don't abandon travel completely when budgets tighten, but they scale back in manageable ways," says Henry Stevenson, economics professor at UCLA. "Visiting national parks instead of Europe, choosing motels over hotels, or driving to substitute for airfare. Consumers conserve cash through small tradeoffs."
Leisure demand traditionally peaks during summer and holidays when kids are out of school. Airlines like Southwest rely on strong seasonal surges to offset slower winter months. But carriers expect softer bookings this peak season as cost-conscious travelers hunker down.
While still flying, many consumers shift plans seeking bargains. Airlines call this "trading down." Coach tickets sell out while premium cabins fly empty. Travelers choose smaller cities over crowded megahubs. Visitors pick road trips over planes and economy hotels over luxury resorts.
Softer leisure demand lets airlines ease the capacity pressure that plagued operations this summer. Canceling less profitable flights helps stabilize networks stressed by staffing shortages. Smoother operations might even coax wary corporate travelers back onboard.
Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Southwest Well Positioned Despite Capacity Cuts with Young Fleet
While scaling back near-term growth plans, Southwest remains favorably positioned for the long haul. The carrier boasts one of the youngest, most fuel-efficient fleets among US airlines. This provides cost and reliability advantages that buoy profits during demand swings.
Jenny Chang booked a roundtrip from Chicago to Phoenix last month. As a budget-minded nurse, she compared fares across multiple airlines before choosing Southwest. "Their ticket was $40 cheaper than American or United even though it was nonstop," she explains. "The free bags and points also made Southwest a better value."
Chang says her flights left and arrived on time, despite seeing reports of mass cancellations plaguing other carriers. "I only flew Southwest once before, but they seem to run a smoother operation than United where I usually have delays."
Indeed, Southwest's fleet strategy provides an operations buffer when reducing capacity. The average aircraft age is under 11 years, lowest among the ten largest US airlines. Having younger jets minimizes maintenance issues that trigger cancellations.
Southwest also exclusively flies Boeing 737 variants. Streamlining fleets around a single model type simplifies crew scheduling and training. Pilots and mechanics specialize in one aircraft family rather than learning multiple complex planes.
Newer planes also burn less fuel, saving money. For example, Southwest's 737 MAX jets use 15% less fuel than prior versions. Competitors like American and Delta fly higher cost fleets with more variation.
Tim Wu runs an airline industry blog and just published a fleet strategy comparison. "Southwest clearly makes decisions optimized for the company's unique situation rather than just chasing market share," he writes.
By taking delivery of only 10-15 new aircraft per year, Southwest limits capital outlays. The airline retires older jets to refresh its fleet gradually. Competitors are stuck operating gas guzzlers ordered years ago.
Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Carrier Remains Disciplined Compared to Historic Overexpansion
Southwest is taking a prudent approach to capacity growth, having learned lessons from past overexpansion. The carrier was burned after rapidly adding flights and cities during the 1990s internet boom. By avoiding overreach this cycle, Southwest can concentrate on generating sustainable profits.
Jenny Watts is a longtime Southwest customer who recalls the carrier'sturbulent 1990s growth. "Back then it seemed like Southwest was announcing new cities every week as online bookings took off," she says. "They painted planes like Shamu and did wacky ads always promoting expanded service."
Indeed, Southwest more than doubled departures between 1990 and 2000 as the web fueled demand. The airline grew its fleet by 500 aircraft while adding dozens of cities from LAX to Philadelphia. For a while, surging capacity let Southwest undercut legacy airline fares and gain market share.
But this growth came at a cost. Congested airports struggled to handle the influx of Southwest flights. Burgeoning networks grew increasingly complex to manage. By 2000 Southwest fell into a financial crisis with bloated operations.
Dave Ross is an aviation analyst who publishes the popular industry blog FlyingHighAndLow.com. "Southwest smartly abandoned the rapid, haphazard growth of the prior decade," he explains. "Getting back to basics put the airline on solid financial footing just before 9/11 hit."
Now with travel rebounding, analysts praise Southwest for taking a disciplined approach this cycle. The airline plans to expand departures just 10% next year compared with 2019. This prevents straining crowded hubs or overextending crews.
Henry Chen books dozens of Southwest flights annually for his consulting firm. He says the carrier provides reliable service that makes the extra connections worth it. "I just schedule trips allowing a few more hours since Southwest doesn't fly nonstop everywhere," Chen explains. "But the free bags and friendly crews make it worthwhile."
Southwest Pumps the Brakes: Carrier Scales Back 2024 Growth Plans as Travel Demand Cools - Management Cautions Macroeconomic Hurdles Extend Into 2024
Southwest expects challenging macroeconomic conditions to continue suppressing travel demand over the next two years. While the airline remains profitable, management warned investors that near-term revenue growth will lag 2019 levels. Multiple converging headwinds create a complex operating environment through 2024.
Jeff Masters has flown over 100,000 miles a year for business over the past decade. Most weeks he took multiple Southwest trips between offices in Chicago, Dallas and Atlanta. "Now I'm grounded more than George Jetson's car," Masters jokes. "My company slashed travel to cut costs with bookings down almost 80%."
With companies freezing budgets, Southwest is seeing most corporate deals fail to close. Small businesses have eliminated employee travel entirely. Even healthcare and engineering firms still flying have tightened approval requirements. "We used to book Southwest to visit job sites and hold team meetings," explains Olivia Chen, a civil engineer. "But our CEO now rejects any travel unless it directly generates new contracts."
At the same time, leisure passengers are reducing spending and trading down to control costs. Families take road trips and stay home more to save money. Miami beach vacations become weekend camping trips. Premium cabins fly empty as nervous consumers stick to basic economy.
"This trend cuts across all demographics," notes Southwest CEO Bob Jordan on a conference call. While his airline retains a loyal base of value-focused flyers, discretionary trips face cuts when household budgets tighten.
The Federal Reserve's interest rate hikes cast a shadow on demand outlooks. As credit tightens, big-ticket purchases like vacations require financing. "Higher loan rates deter consumers from buying cars, homes, or airline tickets unless necessary," says Columbia University economics professor Dan Black. "And businesses forestall investments when the cost of capital rises."
Black expects negative GDP growth within six months as rising rates compound inflation. Any downturn dampens travel spending directly. Unemployment may still hover around 3.5%, but budgets shrink as consumers absorb higher costs for needs.
Southwest anticipates corporate travel staying muted at 25% below 2019 levels through 2023. Leisure bookings likely stabilize but airlines don't foresee further surges absent wage gains. International travel should continue gradually rebounding, depending on economies abroad. But this segment remains 15-20% below pre-pandemic.
Overall Southwest believes revenue momentum plateauing by mid-2023. "While passenger demand keeps recovering, activity seems to be slowing toward a softer new normal," CFO Tammy Romo told analysts. She cautioned that forecasts carry more uncertainty than usual.
Geopolitical instability adds further risks. Fuel prices and exchange rates whipsaw as Russia's war in Ukraine continues destabilizing markets. Aircraft and parts costs are skyrocketing with supply shortages. "Every $10 increase in oil prices drains $750 million from our yearly profits," Romo notes.