Airline Weekly - October 5, 2015
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Airline Weekly - October 5, 2015

Forever Young: With a selective embrace of change and some good luck, Southwest re-lives the good old days

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Cover Story

Forever Young: With a selective embrace of change and some good luck, Southwest re-lives the good old days

Many airlines, like many people, become more resistant to change as they age. Take Southwest, now in its 40s. Many of its policies and practices are no different now from when it was a high-flying youngster: It still doesn’t charge for bags, still doesn’t charge for ticket changes, still doesn’t offer assigned seating, still doesn’t fly anything but B737s, still doesn’t have a premium class, still doesn’t sell through online travel agencies and still doesn’t interline or codeshare with other airlines.

But even as a new generation of whippersnappers grab the spotlight with their ultra-low costs and ultra-high profit margins, Southwest is hardly just sitting around at the roadside bar with Bruce Springsteen, trying to recapture its glory days. Instead, it’s as profitable today as it ever was, and many times larger too, amassing more than $1b in net profits on almost $10b in revenue during just the first six months of this year. Its operating margin during that time: a monstrous 20%. Only three U.S. carriers did better: Alaska, which is a lot smaller than Southwest, and Allegiant and Spirit, which are even smaller still. Fans in the many baseball markets Southwest serves might call the carrier the Bartolo Colón of the airline industry: older than 40 but still a big winner.

How so?

Thanks somewhat to luck. Aside from Allegiant, Southwest is America’s least international mainline carrier. In 2015, that’s a good thing. More than 97% of its available seat miles (according to Diio Mi data) are deployed in the booming U.S. domestic market, where there’s no worry about foreign exchange volatility—or foreign airline competition, for that matter. Revenue trends, Southwest said as recently as Sept. 18, remain strong.

Cheap fuel, of course, is another stroke of extremely good fortune—more so for Southwest, arguably, than for most of its rivals. Why? Because without the big revenue premiums network giants can command, Southwest still depends on unit-cost advantages—advantages that are harder to maintain when its highly paid workforce and aging fleet aren’t growing. For the past several years, high fuel costs limited Southwest’s growth opportunities and thus swelled its non-fuel costs (because it couldn’t, for example, keep average labor costs in check by hiring many new employees at the bottom of the wage scale). But its dominant domestic network came to the rescue on the revenue side. Well now, along comes cheap fuel to suddenly make expansion more attractive. Sure enough, Southwest is pressing on the accelerator, growing ASMs a whopping 12% y/y this quarter and enjoying all... (441 of 1,762 words)

Also Inside this Issue:

Welcome to the fourth quarter, an unusually pleasant one this year thanks to depressed fuel prices. Sure, it’s not all gumdrops and lollipops—the airline business never is. Many currencies are unhelpfully weakening. Many economies are slowing. And many airlines face nerve-racking competitive battles—don’t tell an airline like Kenya Airways or Gol times are good.

But the fact is, cheap fuel is a gift from heaven for most airlines. That’s certainly true in the U.S., where Delta, for one, expects to report something like a 20% operating margin for the third quarter. Only Alaska, Spirit and Frontier reached that threshold during last year’s Q3.

European carriers too, as has now become abundantly clear, had a great summer, thanks in large part to large fuel savings. Unhedged Chinese carriers surely had great summers too. More generally, air traffic worldwide is growing at a rate above its historical average.

That shotgun wedding between Aeroflot and Transaero? Well, it won’t happen after all. In a stunning reversal of events, the deal fell through just before the two were to say their vows, leaving Transaero out of options.

It was the final chance for Air France’s pilots to accept concessions, the company asserted. So with no deal reached, management now plans an even deeper restructuring.

Republic won’t need to go that route—at least, not if a new pilot deal is ratified. Delta, believe it or not, is cutting management jobs. American raised pay for its airport workers. And United’s new CEO is off and running in his quest to heal the company.

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