Did an Aggressive United Push Southwest Out of Newark Hub?

Southwest Airlines is retreating from Newark International Airport, saying its flights “underperform financially,” and arguing the aircraft it used there can be more profitably deployed to Hawaii and other winning markets.

CEO Gary Kelly downplayed the significance of the move Thursday on the airline’s second quarter earnings call, but it’s still unusual. Yes, Southwest closed some smaller stations it inherited from its 2011 acquisition of Air Tran Airways, but over its five-decade history, it has rarely left big markets like Newark, which serves New York City.

In early November, Southwest will consolidate its New York City operations at LaGuardia Airport. Southwest now has 37 departures from LaGuardia, a tiny number for what has become the nation’s largest domestic airline.

“This is a tactical decision forced by the MAX groundings and the painful cut of 8 percent of our capacity,” CEO Gary Kelly said on the airline’s earnings call.

The Max is certainly a factor — Southwest needs all the aircraft it can find — but it’s probably worth crediting United Airlines, which operates a hub in Newark, for pushing Southwest out. United’s President Scott Kirby has been ruthless about beating back competition at every stage of his career, first at America West and US Airways, then at American Airlines and now United.

When Southwest entered Newark eight years ago, it seemed like a no-brainer. The airport was slot controlled — the government limited the number of flights — and United had been forced to give up some slots as a condition of its merger with Continental Airlines. Plus, the new United wasn’t interested in much growth, with management more focused on boosting profits than retaining share.

Kirby arrived at United in late 2016, and immediately switched strategies, pledging to make the airline again relevant in New York. At roughly same time, the government loosened slot controls, leading to more competition. Both developments likely hurt Southwest’s profitability.

“We need the airplanes,” Kelly said. “We can’t afford in this highly competitive environment, where our capacity overall is cut, to have underperforming assets.”

This is not the first time Southwest has retreated amidst Kirby-led aggression. In 2004, Southwest started flying to Philadelphia, a US Airways hub, and the airline quickly added flights. By summer 2011, Southwest had nearly nearly 14 percent of market share, to US Airways’ 37 percent.

Eventually, Kirby made Philadelphia a priority, and Southwest reduced its flights. By the time Kirby left American, which had merged with US Airways, Southwest had less than 9 percent share. It is down to about eight percent, according to government statistics.

Growth Elsewhere

By dropping Newark, Southwest said it will have enough aircraft to resume its Hawaii growth. Southwest began flying to the islands in March, and it now has 14 daily flights, including several inter-island flights.

“Hawaii off to a fantastic start,” Southwest President Tom Nealon said.

Southwest had planned to switch flights from older Boeing 737s to newer Max jets, to take advantage of better operating economics. But now, the airline plans to add more Hawaii flights next year using existing airplanes. Flights from Sacramento and San Diego should go on sale soon, executives said.

“We’ll be resuming our expansion without having to wait on the MAX any further,” Kelly said.

Southwest, like American Airlines, is also postponing some aircraft retirements this year so it can maintain capacity despite the Max groundings. The airline said it will retire only 11 Boeing 737-700s this year, down from 18.

Humming Along

Southwest is the latest U.S. Max operator to report a big profit despite challenges from the Max. Southwest, like its competitors, said demand for domestic travel remains strong.

The airline reported net income of $741 million on record total revenues of $5.9 billion, with an operating margin of 16.4 percent.

Southwest on Thursday said it cancelled all Max flights through Jan. 5, the first U.S. carrier to move cancellations into 2020. On their earnings call, executives said they’ve mostly figured out how operate an efficient schedule without Max jets.

The airline has 34 jets in storage in Victorville, California, plus other jets that were supposed to be delivered since the grounding but are now in storage at Boeing.

Southwest has been an all-Boeing customer since its founding, and it seems unlikely the airline would shift from that strategy. But Kelly reiterated on Thursday the company has a duty to evaluate aircraft from all manufacturers, and said it’s possible Southwest might someday alter its approach.