Skift Take
Southwest is flying too much capacity for the current level of travel demand in the U.S. Management knows it and is under increasing pressure to slow things down and boost profits.
Southwest Airlines executives want investors to be clear about big thing: U.S. travel demand is "healthy." Southwest leaders repeated the word several times during the third-quarter earnings call Thursday.
Healthy is OK in a normal market. It means airlines can fill their seats.
But in a market with rapidly growing supply — with many more airplane seats — steady demand is not enough to boost profits. Add in rising labor costs and the pressure gets worse.
That was clear in Southwest's results. It was profitable, but barely. Its operating profit margin excluding items was just 3.4%. Capacity grew 12.5% from a year ago, but passenger traffic grew only about half as much. That contributed a 6.4% drop in passenger unit revenue.
“Travel patterns are changing," said CEO Robert Jordan. "While it's still strong, they're changing for leisure, [and] they're also changing for business — we're seeing gains, but that last 10 to 15 points of business recovery is a little bit stubborn here.”
One change Jordan highlighted is that return-to-school dates for many Americans are moving earlier in August. That contributed to weak off-peak demand in August and September.
The business travel recovery, as Jordan noted, remains stalled at roughly 80-85% of 2019 volumes. And blended leisure and work trips have increased since the pandemic, which has shifted when and where people are flying.
This has U.S. domestic-focused airlines rethinking where and when they fly. Frontier Airlines, JetBlue Airways, and Spirit Airlines