Southwest Airlines executives see signs that travel demand may have bottomed out, but are bracing for a slow, bumpy recovery that will require substantial flexibility in everything from short-term flight schedules to the U.S. domestic giant’s long-term fleet strategy.
Among the few bits of good news shared during the carrier’s April 28 first quarter (Q1) 2020 earnings call: The unprecedented demand dip driven by the coronavirus pandemic may have hit its low point in early April.
“My hope is that the May revenue trends continue to improve from where we are in April,” CEO Gary Kelly said. “It does feel like we bottomed out the first week of April. We’ve seen very gradual improvement in weeks two and three.”
The modest uptick is relative, however. April capacity was down 50% from pre-pandemic flight schedules through mid-month, and 70% in the back half of the month. May scheduled flying is reduced 65%, while June is set to be down 50%.
Southwest’s schedules include padding that the airline uses to make flight adjustments 3-4 days out. This maximizes revenue, re-booking passengers where possible, while keeping the schedule as loaded as possible for as long as possible.
The carrier said that despite a planned May schedule with 65% fewer available seat miles, its total of origin-and-destination markets is only down 28%.
“We’re maintaining itineraries,” Kelly said. “We have product out of the shelf, if you will. If the product isn’t selling, we’ll take it out.”
Most of it has not been selling. After what Kelly called the carrier’s strongest first two months of the year since the Great Recession, demand fell and cancellations rose at “unprecedented, and quite frankly, breathtaking” rates. Despite the strong January and February performance, Q1 passenger revenue dropped 19% and total revenue 18%. Drastic cost cuts combined with less flying helped bring down operating expenses 6.5%, but it was not enough to avoid a Q1 operating loss of $110 million and after-tax loss of $94 million—the carrier’s first quarterly losses in either category since Q3 2011.
The near-term looks like more of the same. While the carrier is not offering official guidance, it is projecting year-over-year revenue declines of 90-95% in April and May, followed by uncertainty of how quickly travel demand recovered.
“We have decent bookings in place for July, as an example,” Kelly said. “We have no way to predict what cancellations will be, and obviously, they’ve been very vigorous for the last seven weeks.”
Southwest accepted Coronavirus Aid, Relief, and Economic Security (CARES) Act payroll-support program (PSP) funding, which means it cannot cut staff involuntarily until October. The airline plans to monitor summer bookings carefully and use the trends to help it determine what the airline will look like in Q4 and beyond.
“We’ve got a commitment through September 30 with the PSP of the CARES Act to not involuntarily downsize the airline,” Kelly said. “If things don’t improve, we’ll have to do something after that.”
Southwest has never involuntarily cut staff, but is using a range of voluntary programs to reduce headcount. It has 3,000 employees on voluntary leave or partial-pay programs in April, and 7,000 on voluntary leave in May.
“We have extended leave programs through the end of August, and we are also considering options for voluntary early retirement, along with long-term leave programs,” Kelly said.
Meanwhile, the airline is working on a major fleet-plan revamp that will see it maintain its commitment to the Boeing 737 MAX while slowing down deliveries and accelerating retirements of older, less efficient 737NGs. A revised deal with Boeing will see Southwest take delivery of no more than 48 MAXs between now and 2022, down from 107. This excludes 16 MAXs coming from lessors.
Southwest’s next 27 MAX deliveries are expected to come from its allotment of the 420 aircraft Boeing built following the models’ March 2019 grounding but has not delivered. Southwest CFO Tammy Romo said that Southwest will take fewer than 27 MAXs this year, meaning its next from-the-factory 737 will not be delivered until sometime in 2021. Boeing recently restarted MAX production after a three-month pause and is awaiting FAA approval needed for the aircraft to return to service and deliveries to resume.
Southwest said it started April with 742 aircraft in its fleet, but 140 of them—34 MAXs grounded since March 2016 plus 106 737NGs—are in long-term storage. The carrier is parking its oldest 737NGs or ones that are facing major maintenance checks, and some portion of them will never return. Another 250 are in a short-term parking program, rotating in and out of the carrier’s schedule.
“The benefits of the short-term parking program is that the aircraft do remain part of the active fleet, and it’s more cost-effective in terms of storage costs and the long-term storage program,” COO Mike Van de Ven said.
While Southwest is still finalizing its revamped MAX delivery schedule, it has not canceled any of the 265 undelivered MAXs it has on firm order from Boeing or lessors.
“Our most cost-effective aircraft to fly is the MAX,” said Van De Ven, adding that Southwest’s current schedule does not include any MAX flying.
The Dallas-based carrier’s executives expect air travel protocol to change because of the pandemic, with both short- and long-term implications. Unlike JetBlue Airways, Southwest has not mandated masks for passengers, but Kelly said it is one of the many possible changes under consideration. Social distancing onboard the aircraft is another—in Southwest’s case, likely by limiting total capacity available on each flight, as opposed to making specific seats unavailable. Kelly said the carrier does not plan to remove or physically block seats. Providing masks, hand sanitizer, and other preventative measures to both staff and customers are also likely.
Whether the efforts are enough to calm passengers’ nerves or ease restrictions on corporate travel remains to be seen.
“I read predictions by people that in 18 months, things are going to be back to normal, and I wouldn’t discount that,” Kelly said. “I think what we’re trying to do is just put ourselves in a position where we can react effectively either direction.”
“We’re in a recession, and historically it has taken years—typically five or more—for business travel to recover,” he added. “That has to be the assumption going forward.”
Southwest had $9.3 billion in liquidity including government aid as of April 24, analysts Cowen and Co. said, and is seeking to raise $2.6 billion through the sale of shares and convertible notes. The carrier is projecting a per-day cash burn rate of $30 million-$35 million this quarter. Kelly said the carrier will apply for $2.8 billion in CARES Act loans, but will decide later whether to take the money.
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