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Early this morning, Southwest released its written fourth quarter and full 2018 earnings report — bottom line was that 2018 was the company’s 46th year of profitability, and it slightly beat earnings expectations in the last quarter of the year, coming in with $5.7 billion in posted revenue for the quarter.
Airline earnings reports are always highly interesting to investors and analysts, but the meaty details that the average passenger may care about are more likely to come out on the actual earnings calls where real airline executives share a mix of scripted and more off-the-cuff remarks.
Thursday’s call centered largely on the impact of the government shutdown on the airline’s now-delayed operations to Hawaii. To put it succinctly, Southwest CEO Gary Kelly referred to the government shutdown as “maddening.”
Impact of Government Shutdown on Southwest Flights to Hawaii
Previously, Southwest has been relatively tight-lipped when describing the government shutdown’s effect on obtaining the final approvals to fly to Hawaii. But Thursday, many questions were answered, and words like “sloppy” were used.
We also learned that Southwest had received approval for its ETOPS program from the FAA and just had to demonstrate they could follow that program with tabletop exercises and proving flights. Southwest said that completing the remaining steps with the FAA would likely take around a month (assuming all goes well) from when the FAA is able to begin working with them again.
Before the partial government shutdown, Southwest had recached a point where it planned to have flights to Hawaii on sale roughly next week and planes in the air in February. However, that entire schedule is now on a rolling delay pending the government’s reopening. Southwest said to expect roughly a six-week to two-month window from when the FAA resumes the ETOPS process to when Hawaii operations can begin.
Southwest stated if the shutdown ended today, planes could still be in the air to Hawaii in the first quarter, but that window is soon to be pushed into the second quarter if the shutdown isn’t resolved quickly.
Will Southwest Ramp Up Hawaii Operations Faster?
Given the delay in Southwest starting Hawaii operations, the airline was asked if the ramp-up approach to Hawaii (starting a few flights first before expanding to the full route map, including inter-island) would go faster than it otherwise would have on the original timetable. Sadly, while Southwest staff, equipment, gates and procedures are ready (and waiting) for Hawaii, training pilots for ETOPS is a process that won’t go any faster than originally planned, at least for the first three to six months of operations. Southwest expects Hawaii to make up 50% of its 2019 growth, and it is one of the airline’s largest focuses for the year.
In fact, Southwest revealed that all Hawaii forecasts are very positive and that inter-island flights were not part of the airline’s original plan, but were added, in part, because the forecasts for those flights was so positive.
Rapid Rewards Is Rocking
The Rapid Rewards program and cobranded credit cards are strong performers for the airline that are enjoying growth on top of an already strong base. Not only are Southwest’s card acquisition numbers very high (as well they should be with the current best-ever Companion Pass offers), but spending and retention rates are also solid, with a reported runway for continued growth.
International Growth Is Paused
While Southwest’s international demand as a whole was said to be strong, it is ending flights to Mexico City (MEX) effective Mar. 31, as the airline points to its international leisure destinations as more of a current focus. Mexico City was said to be more of a business market, and while the airline is shifting capacity away from MEX in the short term, a return in the future has not been ruled out.
International growth has been paused for 2019 because of the focus on Hawaii. However, the call made it clear that were it not for Hawaii, the airline would be introducing new international routes and capacity this year. In other words, look for international expansion in the future if things continue to progress as they are today.
New Revenue Sources Coming in 2020
Southwest is committed to not introducing bag fees or basic economy fares, but new ancillary revenue products are in the works and coming in 2020. The airline wouldn’t hint at what these would be quite yet other than to say the offerings weren’t possible with its old technology. These new products or options are said to all be things that Southwest would have done sooner if the technology had been in place.
Along those lines, the variable pricing of Early Bird Check-In is said to be performing to Southwest’s expectations.
Bottom Line
Southwest was far from perfect in 2018, but the airline was particularly pleased with its performance in the second half the year. For Southwest, 2019 is set to be the year of Hawaii but, as of right now, the airline is in a holding pattern and is incurring some expenses of operating in Hawaii without the benefits of actually flying to the islands. The airline’s frustration with the shutdown situation was very clear on the call.
In addition to Hawaii operations, expect to see the airline move away from a pen and paper baggage system to more automated tools, continue to use tools to refine and optimize scheduling and recover from IRROPS, and a continued focus on hospitality.
Last but not least, while frustrated with the shutdown’s impact, Southwest stated that air travel is safe even with the government partially closed. However, just as JetBlue did in its earnings call today, Southwest emphasized that the longer the shutdown goes, the greater the risk for longer security lines at peak times, longer taxiing lengths and, of course, the airline’s (and passenger’s) dreams for Hawaii are completely stalled.
Know before you go.
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