231 Million (EFA, Greg Auld, Erich Schnitzler)

Today's SWAPA Number is 231 million. That's the net loss for Southwest Airlines in the first quarter of 2024. Today, we're sitting down with Eric Schnitzler and Greg Auld of the Economic and Financial Analysis Committee to shed some light on the industry as a whole, as well as the financial outlook of Southwest Airlines, given some recent events.

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- Today's SWAPA Number is 231 million. That's the net loss for Southwest Airlines in the first quarter of 2024. Today we're sitting down with Eric Schnitzler and Greg Auld of the Economic and Financial Analysis Committee to shed some light on the industry as a whole, as well as the financial outlook of Southwest Airlines, given some recent advance.- I'm Amy Robinson.- And I'm Matt McCants.- And here's our interview with Eric and Greg.- Guys, there've been a lot of moving parts in the airline industry as a whole in the last 12 months. What's the 41,000 foot view from where you're sitting?- There really has been a, a significant change in the air airline industry and really using the pandemic as kind of the inflection point. If you look back in the last two or three years before the pandemic, you know the ccs, those are the ultra low cost carriers like Spirit Frontier, Allegiant. They were the high flyers, all reporting double digit margins. And the laggards were the big three airlines. American Delta, United were always near the bottom of the pile, single digit margins. As we left the pandemic, consumer preferences have changed fundamentally, the big airlines with the premium products are seeing a real uptick in the demand. A delta's even said 57% of their revenue now comes from the front side of the cabin. American said 61% the other day. Passengers are now traveling and upselling to these higher products and this has now inverted the financial returns of the industry. So now you're seeing the higher margin airlines are the big three that have a diversified product, and the laggards are those ccs that are now struggling to turn a profit.- I would also add that with United Airlines, they are leaning into basic economy. Their basic economy revenues were up 35% year over year and that that's a product that pretty much hits right at Southwest and they have been very forward about promoting that product in many of our cities and they're seeing a good amount of success with it.- Is there a concern for losing these low cost carriers in the market?- I think everybody knows right now Spirit is in a bit of financial trouble. Part of that is due to the GTF engine issues and part of it is strictly due to they're just, they're having trouble competing against, as Greg mentioned, these carriers that have diversified revenue streams and whole differentiated products and and people's preferences have just changed.- The model for the ULCC before the pandemic is, is high growth, high utilization. So they BA essentially leased most of the airplanes, but they, if they fly'em 12, 13 hours a day and turn those airplanes and continue to grow at double digit rates year after year, they can keep their unit costs low. That's been the model, this high utilization model. Well, what has happened since then is the commoditization of labor costs, airport costs, leasing costs, all of these things have now driven their cost structure higher and they don't, like Eric just said, they don't have that diversified product. So there is essentially a ceiling on what they can offer and how well they can perform. And then you add to them, like some of these engine problems they're having on the Airbus side, they're all reporting losses of the last several quarters.- There's something else that they have call out, particularly Spirit, JetBlue and even Frontier are the operational difficulties that they're having in Florida. And and we of course have noticed that ourselves here at Southwest, but every quarter these airlines call out extra costs associated with the A TC delays, be it in the Northeast and particularly on in Florida with the Florida a TC issues that we've all, that we're all aware of. And that continues basically every quarter. There's not been any fix to that yet. And that also adds costs to all those airlines.- And how about business versus leisure travel as business travel kind of rebounded the way the airlines thought it would?- Well, Delta in their call says that their business travels back to 2019 levels and United is right up at 90%. So, and even Alaska reported that the tech industry is finally back traveling. Many of us know that'cause that has had an effect of course with Southwest on some of our north south flying in California. But Alaska now has talked about the tech industry and the information services industry, particularly in Seattle, Portland, and San Francisco has rebounded and is now finally getting back not all the way, but pretty close to 2019 levels as the airlines always refer to, as Greg had mentioned earlier, that kind of pre covid versus post covid time period. And so everybody's looking for that business travel to come back to the pre covid or the 2019 and before era of travel. And it looks like many of the airlines, particularly United Delta and Alaska, have noted that their travel has come back almost, if not all the way, just about to 2019 levels and that that was a big reason that that Alaska outperformed even with their grounding of the max nines in the first quarter.- Yeah, just to be clear, I mean passenger travel is well in excess of 2019 across the board and business travel, as Eric said, is essentially recovered Southwest even called out on its managed business. You know, we kind of have two different segments to the Southwest business model. One is we are, we're attractive to a small and medium business that is coming back, but we've also worked really hard to get to do managed business where, you know, corporate clients have a portal where they can actually buy a business ticket and they called out that they're now at 2019 levels on the managed business side. So that trajectory is going okay, it's going well, but of course we've had this large uptick in leisure traffic, but passenger demand across the airline industry now as well in excess of 2019.- Is there any impact from let's say far international travel that is driving those revenues on the other carriers versus say southwest- Far international, particularly the transatlantic region has been strong now for several years and the majors, you know, the United Delta American are expecting another very strong summer. So certainly that region has been strong. Pacific has been a little bit slower to come back, but that is expected also, maybe not back again to pre covid levels, but United in particular, who's the largest carrier there in the Pacific region has noted that their Pacific travel has come back. One area that has actually shown weakness is the short haul Latin America, long haul Latin America is doing good, but the, the short haul Latin America, meaning the Mexico Central America Caribbean is quite oversupplied right now. One of the carriers called out a 60% increase in capacity in the last couple of years. And that is hurting returns in that area. But of course, as you mentioned, these, some of these other airlines, particularly the big three, have the far international kind of cover for that. And we do believe that that is having an effect certainly on Southwest since that's not an area that we currently fly.- Our international footprint is very small. So I think the, the short answer to the question there is, you know, by lacking that long haul international, we just don't have that revenue headwind or revenue tailwind, excuse me, we do just very little of our capacity in our international footprint.- I think that covers the industry realities as a whole there. How about some of the broad economic realities that might be spilling over into the airline world? Are there other consumer behaviors that are overlapping here or some macro level effects being seen?- Well you're, you're definitely seeing, you know, what happened really when you, again, looking at Covid and the pandemic is kind of an inflection point, is the, the cohorts that have higher income, they're traveling, they're spending on experiences and they're traveling at at a higher rate than they used to. So from that economic aspect, that's definitely helping the legacy carriers that have this large international network. I mean, just as a couple of data points, I mean Delta Airlines has said a couple times and they brag that they get a fair bit of income off of their Amex co-branded cards and those cards, they say now roughly 1% of us GDP goes through those Amex cards. So if you start thinking about it, you know, 25 trillion GDP and the amount of the money that's going through that is helpful to them, it's the travelers that make more than a hundred thousand dollars a year are traveling freely. So that economic trend is definitely helping as a tailwind for those large carriers.- And speaking of Delta, they are incredibly brand focused and numerous times during conference calls at Wall Street conferences, their CEO will reference the fact of aspirational travel for the upcoming generations, the generation, millennial generation and Gen Z. And they look at, as Greg said, experiences and, and kind of goals, aspirational goals of travel is very important and Delta is doing a really good job at marketing their brand to that kind of experience, that kind of travel. And they've been very successful at it.- You've seen this everywhere. I mean, across the travel industry, across the service economy, cruise lines are doing well now post pandemic airlines are doing well. I mean even though some of the carriers are struggling as they're trying to, you know, harmonize capacity and reconcile revenues with expenses, the passengers are there, the airports are full. And so the, the macroeconomic trends are generally good for the airline industry. And we saw GDP report yesterday that was slower than expected, so we might be seeing some sort of slowing, but this recession's been predicted now for two years. It has yet to be realized. So right now things are generally, you know, positive for the airline industry going forward.- So with that, we had Southwest first quarter earnings call not too long ago. Let's talk a little bit about that. What are the things that are probably the bigger issues with that?- Well, Southwest reported loss for the first quarter, now first quarters are historically weak for most of the airlines. There's a couple of the small airlines where their first quarters are strong, but for the general part of the airline industry for airlines just essentially want to break even or do slightly, you know, slightly positive margins in first quarter. But Southwest now has had five first quarter losses in a row dating back to 2020 as we said, I think in the intro number, A $231 million net loss,$218 million adjusted on an operating margin basis. They as a negative 6%, you know, and so that is, by any measure, it was a poor financial performing quarter for Southwest, primarily driven on on not getting their revenue that they needed twice during the quarter, they guided down on the revenue they expected, even though it was a record first quarter revenue, there's no doubt about me,$6.3 billion has nothing to sneeze at, but it was expected to be a couple hundred million dollars more at the beginning of the quarter and it came in a little bit light. And so all that contributed to just not a very good quarter for the airline.- Just to look at the three years before 2020, just looking at basic pre-tax margins, we had double digit pre-tax margins. And then one year in 2019 that was right at 9%. And since then, as Greg mentioned, you know, we've had these losing quarters and just have not been able to kind of recover here in the first quarter to be able to post a profit.- Now the first quarter was not good by, by any stretch of the imagination, but just to be clear, the second quarter is almost always the best quarter of the year for the airlines. And we, we do expect the airline to post a profit for the quarter and we expect the airline to be profitable for the year. We do expect a profit sharing payment of, of some sort at the end of 2024. So put first quarter in a box, it was a poor quarter, it will impact the full year results, but we do expect a profit for 2024.- So to some of those points, Bob and Tammy talk about initiatives to grow revenues and expand margins. What exactly are they talking about and why haven't they worked or are they just not maturing yet?- Right now, up to date, they've been hanging their hat on network optimization. They've had said that that's what they expect to get between a billion and a billion and a half dollars of additional revenue by essentially moving the network to where the passengers are. They've done some things already that is pulling down flying on Tuesdays and Wednesdays, they said between 10 and 15%. So reducing the amount of block hours on Tuesdays and Wednesdays, those are traditionally lower flying days and moving the network to where people want to go. So maybe some of the less frequencies and some of the short haul markets, they tried aggressively to build up the intra Cal short haul and they realized that just the traffic wasn't there. So they're starting to move that. You're seeing some of that in the network, that's been a major effort, but now they're gonna have to think of some other things to find additional revenue.- I would also add that they're cutting some of the underperforming cities. As we all know, we moved into 18 cities during the pandemic and the announcement that we're gonna be dropping four cities due to underperformance is also kind of aligns with that network optimization. We've found that we just, we are just not competitive in some of these cities and we're just not with our cost structure the way it is, we are not generating the revenue to keep some of those cities around. So that's also part of the, the network optimization that going forward.- When you said other ways to produce revenue, what are you thinking that might be? Are we supposing or are they saying they're going to,- Everybody's in the proposal right now. The conference call was full of the, both the media and, and the Wall Street analyst to a lesser extent all kind of guessing and trying to get ahead. The company has announced an investor day for the end of September where they promised to unveil some of these initiatives. And just to go backwards a little bit, when you think about what these initiatives might look like, we've already seen some of them in previous years you saw the new want to getaway plus fare, that was an example and it worked, it drove additional revenue, you know, remember the early bird and the variable pricing for the early bird. They've changed some of the ancillary revenue payments. Those, those have also helped another major initiative that was started pre pandemic and has continued since then is what referenced earlier this idea of managed travel using these global distribution systems. So they're doing some things to try to drive additional revenue, but now we're a little bit, I think the community, the, the analyst community and the media is a little bit of a guessing game of what might the next thing be. You know, could it be something like Frontier just recently announced where they're going to block the middle seat in first couple of rows and basically charge a premium for extra space in, in the first couple rows. That's kind of along the lines of Spirit has that big front seat, might they charge for other seat assignments? Might they do something like that? There's, there's, there's a lot of speculation and the company's got some work to do internally to figure out what that might look like. So it is speculation to, to wonder what might be coming. I mean, if you read the tea leaves and you just kind of listen to the body language, it looks like we might have some sort of seat assignment coming and then, you know, as other airlines have said, they're now getting revenue from things they previously gave away for free. That would be a different model for Southwest and maybe that's where we're headed. But I think right now as we, as we record this several months before that investor day, it's just too early to know what those are gonna look like.- I would add that the Wall Street community is expecting something, you know, at that investor day because there is concern, I think as Greg mentioned earlier, about revenue generating abilities as compared to some of these other carriers and their diversified revenue streams. So I think there, there's even a little bit of impatience and what, what is Southwest gonna do? What, what are we gonna do to generate that extra revenue and kind of catch up with some of these other carriers?- Yeah, I think things you're not gonna see,'cause the company has been telegraphing this for a long time, is any kind of charging for bags. You hear analysts and people speculate that there's a lot of money being left on the table there, but the company is very much into its transparency model and the company believes that it gains market share by not charging for check baggage. So I don't think we'll see something like that going forward, but I I, I think we will see additional, you are gonna see additional revenue coming from network optimization, moving the network to where people want to go and then layering on some other fees, maybe some things in the cabin. I think that's what we're gonna see here in the next few months.- Well, and you mentioned earlier you were talking about Delta has really leaned into that experiential traveler sort of experience for the millennials. Do you think that Southwest is gonna have to sort of rethink their sort of leisure traveler focus to compete in those markets?- Well you're seeing that right now. I mean the, the, the big flex ad campaign that kicked off last week, I mean does have a Gen Z millennial focus to it. They're trying, you know, the traditional Southwest passenger that's been very loyal to the company or is aging and so they're now trying to reach to a younger audience. So I think you're seeing that and they're promoting the things that Southwest believes gives it a market advantage and that is no change fees points don't expire. They just unveiled a couple days ago. The fact that you can use a combination of points and dollars to buy a ticket. So that's what they're trying to do is to attract this newer flyer experiential. I don't know if we're gonna see any kind of travel packaging, if that's what you were thinking along those lines, but I think all things are open as they're trying to gain extra revenue. So I don't think we can let- This go without pointing out that Tammy Roman was calling return on investment capital, the company's North Star metric. Is that the right metric or do they need to look at another constellation of choice that they should be talking about right now?- Those of us that have been around for a while, remember the 15% ROIC campaign starting in the 2 0 0 8, 2 0 0 9 time period and lasting for five or six years. And we eventually did get there, took a bit of time, but we eventually achieved that. It's interesting to hear that. Again, I would just say that, you know, whether that's the right number or not or the right metric, rather, there's no question that, as we've talked about, Southwest needs to step up the game on the revenue generation side and if that's what's necessary to, you know, raise our ROIC above our, they, like Bob likes to talk about though ROIC being greater than our, our WAC A-W-A-C-C awaited average cost of capital, which it is currently not at the present time, but that is, that is a financial, one of our financial goals and you know, we'll see if we can get there, but I, again, I think all of this leads back to uplifting our product and, and being able to generate that extra revenue that will allow us to get there. Yeah,- That, that's the metric they've chosen. I mean all kinds of metrics are good. Earnings per share clearly is what the, what the financial community wants to see is, you know, there's better profitability for every share of the stock, whether you focus on that or focus on the inputs to that, which is the revenue available seat mile and the cost for available seat mile. That of course supports this idea of ROIC. So pick your favorite one. They, they've chosen ROIC as a way, it's a playbook that's worked well for them before coming out of 2008, 2009, the company really constrained capacity until they could get their ROIC back above 15%. I think it worked well in the past and they see that as a playbook if they focus on that going forward.- Okay. 800 pound gorilla in the room. Plenty of speculation about mergers and acquisitions out there, but let's stick to the facts. We've seen JetBlue and spirit mutually terminate their endeavors. Alaska and Hawaiians still seem to be working something out. Can you walk us through what has happened so far and where things are going with those parties?- Sure. As, as you mentioned, it's an interesting climate right now. You know, on one hand you do have the JetBlue, American Northeast Alliance turned down and as you mentioned, the spirit JetBlue and, and you know, the reasoning there apparently was, you know, acquiring A-U-L-C-C would hurt competition. And then on the other hand you have Alaska and Hawaiian who are in the process. You know, right now they're, they're complying with the DO J's second request for information and the, the Hawaiian board is a, shareholders have already voted to approve that and so they seem to be moving forward and, you know, analysts talk on the street is that they feel pretty comfortable that that merger will happen because it's a merger of two hybrid airlines and particularly since Ola has talked about operating Hawaiian as a separate brand. And, and so it seems you're, you're kind of looking on that side, it looks like it's a, a pretty good possibility of happening. But in general, I don't know, what do you think Greg? I think that, you know, there is still the regulatory environment.- Yeah, I, I agree with you. The, the DOJ has, you know, if you look at the, you know, two suits they filed and have won successfully to stop these, these alliances and these mergers, and they've done that essentially because there's been, you know, the, the worry about two of concentrating the, the market in, in too few companies, I mean the airline industry has been a history of consolidation. So that is a big hurdle that Southwest would have to overcome if it was gonna be allowed to acquire another airline of size. 78% of the market right now is concentrated in the big four airlines. If we were to absorb another airline, you know, down the scale, that would further concentrate the market in, in the hands of those four. So that would just be a hurdle under this administration I think would be difficult. All things can change, but right now we don't think that it's likely going in the, in the near term.- Okay guys, so we know that we've stopped hiring new classes here at Southwest. There seems to be a slowdown industry-wide with this pilot shortage that we heard so much about. Is that pretty much over right now? What's, what does it look like outside looking in?- It's interesting because, you know, if we go back a year, year and a half, it was going to be, you know, hiring 10,000 pilots a year every year for the next 10 years. And, and now it's interesting how quickly this pivots. I mean, right now the industry has a pretty good supply. Certainly pilot hiring is moderated. I mean if we look at, at some of the individual carriers, I mean Delta's still talking about 1100, you know, United as we know has stopped hiring for right now. They may possibly hire again in the fall. As you mentioned, we have stopped hiring. Some of the regionals still are hiring, but interestingly, you know, SkyWest one of the largest, if not the largest of the regional carriers noted that their pilot attrition rates are half this quarter, they're half of what they were a year ago, the same quarter. So certainly there is a, a definite slowing in the industry. We know that American is talking about slowing their hiring and maybe resuming in the fall. So I think- Well, and don't forget the elephant in the room, Spirit's gonna furlough, they've already announced their furlough- Exactly right. 260 pilots and possibly more depending on if they can get pilots to, if, you know, we, if they have enough attrition there leaving to other airlines. I think that, you know, for sure there is still some hiring going on. It's nowhere near where it was last year or the year before and there seems to be a sufficient supply. All of our sources that we talk to say that, you know, right now that there's plenty of pilots, a pilot starts are still up, the aviation universities are still turning out a lot of pilots. So I think in terms of, of hiring, I think it's, it's definitely slowing and will stay this way for a little bit unless something dramatically changes, at least to the rest of 2024.- Just looking at the network plans we're gonna have, the airline is actually gonna gonna have less capacity in the fourth quarter than it had in the fourth quarter of 23. So I would not expect any more pilot hiring at Southwest for the remainder of 2024.- I guess that leads us into kind of the next question, which is the Boeing issues, a lot have been pushed toward that, that the, you know, the, the lack of planes, et cetera. How much does that really have to do with pilot hiring and also the economic woes that Southwest seems to be blaming a lot of their first quarter losses on?- Well, we could do a whole podcast I think on, on just on Boeing and its woes and its impact on its main customers. You know, Southwest is, you know, the largest operator of the 7 37. So it is, I mean we've talked earlier in this podcast about the airlines, our airlines revenue shortfalls and those are all part of it, but it also has a fleet problem. We announced at the beginning of this year we were going to get 79 max eights that was reduced a few weeks later to 46. And now at their earnings call, they just reduced that number to 20. We only got five airplanes in the first quarter, so we're only gonna get 20, but we still have to retire some older seven hundreds. They're coming, they're gonna require very expensive D checks and so they're going to retire and the airline, our airline is going to get smaller at the end of the year. We're at 819 airplanes right now and the company expects only 802 airplanes by the end of the year and that's after deciding to delay some retirements of some of those seven hundreds. So this, the reduction of the fleet is attributable to all the production problems that Boeing is having right now, and we can go into more of those details, but it is a real problem. Boeing is probably doing the right things to get their assembly line back in order. They've cut their production rates on the 7 37 effectively in half and they're going to be working all year just trying to get back to their previous production rates of roughly 38 7 3 sevens a month, let alone their established goals of over 50. So there's, this is a long road to get Boeing back to being healthy and get their production floor healthy and churning out airplanes at the rate that the industry and that Southwest needs.- I think it's also fair to bring up that Boeing is not the only issue that the airlines have. There's also the Airbus, the Airbus, the A three 20, A three 20 ones that have the Pratt and Whitney gear, turbo Fran engine on them, several of those airlines, spirit, JetBlue, Hawaiian, even- The two 20 - Yes, but majority three 20 and 3 21, yes. But yes, also the two 20 major issues with this Pratt and Whitney engine, which has, you know, basically engine defects, metal impurities on the, the high pressure turbine blades that requires enhanced inspections and replacement. And these airplanes are down as much as 250 to 300 days with the airplane being on the ground with the engines being inspected and or replaced. So this is causing major issues at, at these airlines that fly the, the air buses with the Pratt and Whitney engines. So it's not just Boeing, it's really a, an industry-wide issue and it's, it's hard to believe that we have, you know, both of the major aircraft manufacturers have issues that are causing capacity constraints throughout the industry.- I know you're saying that they both have, you know, issues with the planes themselves, but isn't some of the slowdown another like layer for Boeing that maybe does not exist for the Airbus?- Yeah, the Airbus is a engine issue that happened to be attached to those airframes. So it's not Airbus company specific. I think your question is, is the problem at Boeing larger than the problem at Airbus? Yeah, probably it is. It's both problems are solvable. It will take time for both, you know, Boeing will get their production back. We were at a meeting, you know, after the earnings call we met with the senior executives of Southwest and it's very clear to them. They see the problem as serious, they've communicated it's a serious problem. I mean we see all in all the news reports of the troubled Boeings happening. I think the silver lining is they're going to get this fixed and the way they're gonna get this fixed is really slowing their production line down and making sure they get all of that travel to work, all the problems that show up on the factory floor, get that stuff addressed so they can slowly build back to those production targets they need. This is gonna take some time, but I think it will get fixed.- We've gone through some of the downsides of some of the first quarter earnings and things like that. So really what is the outlook sort of over the next few months?- There's definitely some positive takeaways here. I think our network optimization is going to be meaningful, it's gonna bear results. The company's worked very hard on that. I mean, it's always difficult to see us lose cities, but I think in the long run that's going to help us. I think, you know, some of the other initiatives, the managed business that we've spoken of, the ad campaigns. I mean, Greg, what do you, you had mentioned earlier about the flex.- Yeah, that, that, that big flex campaign is just, you know, it's an anecdote, but it's the idea that, I mean, you can take that as a positive. The company definitely sees the challenge ahead, there's no doubt about it. I mean, they get it. The, they, we may have been a little bit slower to the idea of this changing market, but I think the company is very focused on attracting additional revenue to the airline. And, and you're right, you know, when you exit cities, I mean that's a painful thing to do, but remming the network growing some of our strengths is a good thing. So we're gonna make money in the second quarter. There's no doubt about it. Second quarters always strongest. I mean all, all the forecasts are are for positive earnings in the second quarter. And quite frankly, we'll, we'll make money throughout the rest of the year. So no doubt about it. Southwest is still the largest domestic airline as far. It has a very strong network, has very strong brand identity. It's frustrating to watch a poor financial quarter. It's frustrating to see the troubles we're having with Boeing, but I'm confident that the strength of the airline, the strength of the balance sheet, the things it's going to be doing, that it's gonna be forced to do, the market's gonna force it to do. We'll see some sunny days ahead.- We wanna thank Eric and Greg for stopping by to talk about the financial realities out there in the industry and with the company.- Please remember, if you have any feedback for us at all, please drop us a line at comm@swapa.org. We really do wanna hear your feedback.- And finally, today's bonus number is 10. That's the number of additional passengers per flight that Bob Jordan says we need to carry to meet the company's financial goals. Despite the negative lighting of the first quarter report, SWAPA will continue to stay ahead of the aircraft offer solutions and keep the membership apprised of how those discussions with the Company are going.