Southwest Cuts Capacity to Smooth Operations

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Southwest Airlines has “modestly” trimmed its capacity plans following its operational challenges in recent weeks even as the carrier reports improving demand, including from its corporate travel customers.

For the third quarter, Southwest pursued an “aggressive” capacity plan, nearing its pre-Covid-19 levels in terms of available seat miles, chairman and CEO Gary Kelly said. At the same time, Southwest’s staffing “fell below plan,” which was a major factor in operational issues during the quarter, culminating with a weekend of more than 2,000 cancellations earlier this month due to the cascading effects of weather and an air traffic control stop in Florida.

“We’ve gone from not enough to do to too much to do in a very short period of time,” Kelly said Thursday during Southwest’s third-quarter earnings call. 

Southwest now plans to operate about 92 percent of its capacity compared with 2019 in the fourth quarter. Its previous estimation had it operating about 95 percent of its pre-pandemic capacity for the quarter. The carrier is more than halfway toward reaching its goal of hiring about 5,000 new employees by the end of the year, but it is planning 2022 capacity based on “more conservative staffing assumptions,” Kelly said.

Like the other U.S. carriers, Southwest saw improving demand in July that was derailed by the Covid-19 delta variant’s spread in August and into September. Southwest executives estimated the surge cost the carrier about $300 million in revenue. Total operating revenue in the third quarter was $4.7 billion, down 17 percent compared with the third quarter of 2019.

Revenue from managed business travel were down in the lower 60 percent range compared with 2019 levels in July and August but then dropped to 73 percent down in September, EVP and chief commercial officer Andrew Watterson said. October, however, has shown “steady improvements” in managed business bookings, and Southwest expects they will continue to modestly improve in November and December to close the year out at about 60 percent down, he said.

“This estimate is less optimistic than what we previously shared prior to the impact from the delta variant, as many corporations pushed back their campus openings until after the new year, but we remain cautiously optimistic about overall business travel improvement throughout year-end,” Watterson said. “We believe there is some pent-up business demand, and there’s a chance we see it pick up at a faster clip as we get into early 2022.”

Southwest went live in the Sabre global distribution system in late July, completing its entry into the four major GDSs that it started the prior year. As that timed with the emergence of the delta variant, it is difficult to quantify the impact so far, but Southwest already is seeing “some channel shift” to the GDSs from direct channels following the start with Sabre, Watterson said. Southwest expects its largest corporate customers will use a mix of the GDS, direct channels and the Swabiz corporate booking tool depending on the traveler, he said.

Kelly also fielded several questions regarding Covid-19 vaccine mandates during the call. Earlier this week, Southwest said it would not place employees on unpaid leave if they remain unvaccinated by its previously announced Dec. 8 deadline. Kelly said the carrier is having conversations with the federal government—including reconciling the upcoming rules from the U.S. Department of Labor, which will require vaccinations but have a testing option, and the requirements for federal contractors, which do not have a testing option—but was adamant that the carrier would not fire any employee who did not want to be vaccinated, exemption or otherwise.

He added that he did not expect decisions around vaccination requirements to affect operations, despite United CEO Scott Kirby’s warnings on Wednesday that airlines relying on Covid-19 testing programs for unvaccinated employees could find themselves facing sudden staffing shortages.

“We’re not going to disrupt travel, and the White House has been clear that they do not want to disrupt travel ever, much less through the holidays,” Kelly said.

Southwest Airlines reported a net income of $446 million for the third quarter, which included $776 million in federal payroll support. Excluding that and other special items, the carrier had a net loss of $135 million for the quarter, compared with an adjusted net loss of $1.17 billion in the third quarter of 2020.

RELATED: Southwest Q2 earnings

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