/‘Predatory and Opportunistic’: Southwest Airlines Seizes the Moment as Rivals Struggle

‘Predatory and Opportunistic’: Southwest Airlines Seizes the Moment as Rivals Struggle

The pandemic is forcing many airlines to defend their turf. Southwest is using it to invade.

Even as air travel languished in this fall,

Southwest Airlines Co.

executives fanned out to cities from Palm Springs, Calif., to Sarasota, Fla., to scope out potential new markets. The airline is adding four more cities to its network this year and announced plans for another six in 2021. And it’s looking for more. It hasn’t added airports this quickly since integrating with AirTran Holdings, which it bought in 2011.

“It sounds risky to go open a bunch of new cities, but the alternative is worse,” says Andrew Watterson, Southwest’s chief commercial officer. “You could wait til Covid is over. But that’s far too long.”

Through its history, Southwest has leapt at opportunities to encroach on rivals’ territory when they were struggling. If successful this time, it would be a prime example how some U.S. companies, taking advantage of the carnage around them, can come out of crises stronger.

Southwest’s bet this time is particularly striking, as the Covid-19 pandemic is leaving no airline unscathed.

United Airlines Holdings Inc.,

American Airlines Group Inc.

and

Delta

Air Lines Inc. have together lost $23.5 billion this year through September. Southwest has lost $2.2 billion in the period, on track to break a 47-year profitability streak, and has told unions that furloughs—the first in its history—are inevitable early next year without pay cuts or government stimulus.

Airlines are offering 42% fewer flights this month than last November. Southwest flights are down about 36%. Southwest’s third-quarter revenue of $1.8 billion was down 68% from a year earlier and the carrier burned through $12 million in cash a day—a figure it says it trimmed to $10 million a day in October.

Southwest accounted for about 20% of domestic air traffic in the quarter, behind only American, according to Transportation Department figures. While it has borrowed billions this year as it contends with the pandemic, it still has more cash than debt.

Many airlines are rewriting their route maps. But while most are experimenting with new routes among cities they already fly to, Southwest is adding airports.

Southwest plans to add Chicago’s O’Hare airport to its network in February.



Photo:

DANIEL SLIM/Agence France-Presse/Getty Images

Southwest had less debt coming into the crisis than some rivals, has lower costs and is more focused on domestic destinations where travel is expected to rebound before travel abroad. That has allowed it to move into openings at airports such as Chicago’s O’Hare airport that previously had no space for new entrants and to re-evaluate cities such as Colorado Springs, Colo., that once didn’t seem worth the investment. It started flying from Miami and Palm Springs on Sunday and announced plans last month to begin flying from Houston’s George Bush Intercontinental Airport.

“Southwest is going to look at what the holes are in the majors’ networks,” says Matt Lee, vice president of operational planning at aviation-consulting firm Landrum & Brown, “and fill them in the interim.”

Capt. Jon Weaks, head of the union representing Southwest’s pilots, which is fighting pay cuts, described the expansion strategy as “predatory and opportunistic—which we like.”

Whether that opportunism is enough will depend partly on the pandemic’s effect on travel. Southwest will face pressure from discounters including

Spirit Airlines Inc.

and

Allegiant Travel Co.

, which often charge lower fares and are finding opportunities to enter emptier airports. Several major carriers are cutting into one of Southwest’s big selling points by doing away with most domestic change fees.

Southwest Airlines has moved steadily into new airports since its founding and is adding cities at a quicker pace during the pandemic.

Airports served by Southwest

Service begins

at new airport

Southwest Airlines has moved steadily into new airports since its founding and is adding cities at a quicker pace during the pandemic.

Airports served by Southwest

Service begins

at new airport

Southwest Airlines has moved steadily into new airports since its founding and is adding cities at a quicker pace during the pandemic.

Airports served by Southwest

Service begins

at new airport

Southwest Airlines has moved steadily into new airports since its founding and is adding cities at a quicker pace during the pandemic.

Airports served by Southwest

Service begins

at new airport

And Southwest in the past stumbled with expansion, in 2011 when it moved into Newark Liberty airport, a United hub. It struggled to compete in transcontinental flights and never gained more than about 5% share of passengers there, pulling out last year. “If they couldn’t make Newark work,” says Mark Kopczak, an aviation consultant who previously led Spirit’s network-strategy team, “how are they going to pull the same thing off at O’Hare?”

Southwest’s Mr. Watterson says the airline’s business model—selling tickets directly to customers rather than through online travel agencies—works best where it has a big customer base. “That’s the case in Chicago, Houston and South Florida,” he says, but not in Newark.

‘Stump the chump’

Mr. Watterson and Adam Decaire, two executives responsible for Southwest’s commercial and network strategy, say they had expansion in mind in early August during their quarterly day in the hot seat with CEO Gary Kelly. Known internally as “stump the chump,” the daylong meeting is a chance for executives to quiz their network gurus, and no question is off limits.

Mr. Watterson and other Southwest executives had watched what looked like a summer rebound slow in late June, then stall in July as Covid-19 infections rose. Southwest and carriers such as American that had bet on summer travel pulled down thousands of flights scheduled for August and September.

‘I’m happy to play offense,’ says Southwest CEO Gary Kelly.



Photo:

saul loeb/Agence France-Presse/Getty Images

But, Mr. Watterson says, he began realizing that cutting flying and costs could do only so much to get back to breaking even and that waiting for demand to return would take too long: “We needed to force a pace.”

Physically distanced amid big screens and piles of binders in the boardroom, Mr. Watterson and Mr. Decaire ran through two decades of Southwest’s network history. After 9/11, it was one of few airlines to remain profitable: While it didn’t add new cities right away, it picked up market share when rivals pulled back and expanded into long-haul routes that had been dominated by bigger airlines.

In 2009, when some others had retrenched with the financial crisis, it had gone into Boston’s Logan and New York’s LaGuardia—airports its legendary CEO Herb Kelleher had earlier spurned as too crowded and expensive. It added service to Minneapolis and Milwaukee that year, too. Those moves paid off: 20% of its 2010 revenue growth came from new cities.

“We can do that same thing again. But we have to do it on a bigger scale, because the hole we’re in is bigger,” Mr. Watterson recalls saying during the meeting.

The play, Mr. Watterson and Mr. Decaire say, is to spread Southwest’s planes into new places rather than continuing to offer so many multiple daily flights in cities where it knows customers aren’t flying as much. Southwest keeps a list of airports where its Boeing 737s can reach from its existing cities. From among those, its planners had been combing for places with untapped demand that it could quickly hook into its network.

“Even if that market is still depressed,” Mr. Watterson says, “it’s still brand new revenue.”

The idea clicked for Mr. Kelly, Southwest’s CEO, Mr. Watterson and Mr. Decaire say. “I’m happy to play offense,” Mr. Kelly later said on the quarterly earnings call about two months later.

For decades, Southwest was among the fastest-growing U.S. airlines, known for splashy entrances into new cities and starting fare wars. It had a more measured growth pace in recent years. Last year, its growth was constrained by the grounding of the 737 MAX following two fatal crashes.

Southwest flight attendants in Texas, circa 1968.



Photo:

Alan Band/Keystone/Getty Images

Southwest lost some of its low-cost advantage, having evolved from a disruptive upstart. With competition from ultradiscounters and basic-economy fares that airlines like United, American and Delta launched, Southwest doesn’t always have the lowest prices, though it doesn’t charge for bags and other extras.

It shrank capacity by 1.6% in 2019, its first contraction in a decade. Earlier this year, Mr. Decaire says, he fretted he didn’t have enough airplanes to keep up with booming demand in cities Southwest already flew to.

The pandemic offered a new chance. Most cities it has picked are ones it had hoped to fly to eventually, and it now has planes to spare and airports with space, Mr. Decaire says: “We probably put in a decade’s worth of new city growth into Southwest.”

Other airlines, too, are redrawing their maps somewhat during the pandemic, including United, which said this month it will return to New York’s John F. Kennedy airport after departing five years ago. It is launching nonstop flights from places like Cleveland to cities in Florida. United has also added flights to several small cities, some under a subsidy program from the Transportation Department.

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Spirit gained slots at Orange County’s John Wayne Airport, a long-held goal for the ultralow-cost carrier.

JetBlue Airways Corp.

has been expanding at Newark and has launched 60 new routes—nearly all from its existing cities—as it tries to reorient its network outside its strongholds in the northeast, which were hard hit by the virus. “We didn’t have great pandemic geography,” says Scott Laurence, JetBlue’s head of revenue and planning.

American, which added back flights more quickly this summer than some rivals, is trying things like short-haul flights within Florida. “The cost of experimentation right now is really low,” says Brian Znotins, American’s vice president of schedule and network planning. American had to pull back on its big summer flying push but added back flights this fall as demand started to return again.

Overall, other airlines have largely retreated into their main hubs. American and Delta have suspended flying in dozens of smaller markets.

Some of Southwest’s new destinations fit the profile of places airlines are looking at for pockets of growth, such as sun and ski destinations. Others are cities Southwest believes can feed passengers into its network through connecting traffic—a shift for a carrier that historically focused on nonstop service.

In its early days, Southwest favored cheaper and less crowded secondary airports—like Chicago’s Midway Airport—tapping demand other airlines ignored, says Pete McGlade, an architect of Southwest’s network strategy and now a consultant. Over the years, Southwest made inroads at other carriers’ hubs: becoming one of the largest in places such as Phoenix and Denver, and dominating cities like St. Louis that were once strongholds for others.

Second airports

Expanding from secondary airports to larger ones is a longstanding Southwest strategy—a pattern it has followed in New York, Boston and, through its AirTran acquisition, Washington, D.C. It is now picking places that can help bring in revenue fastest, Mr. Watterson says: “We need to get back to break-even, we need to stop burning cash.”

Southwest’s Chicago flights have been at Midway airport, above in March.



Photo:

Charles Rex Arbogast/Associated Press

One lesson Southwest learned from previous ventures into rival territory: Go big. With enough flights to any given city, Mr. Watterson says, “The other airlines can’t really touch you.” Southwest will start 20 flights a day from O’Hare in February.

Southwest says it closely followed discussions a few years ago about O’Hare’s expansion, including a new lease agreement that gives Chicago greater ability to award gates to new entrants. But it never saw a way in, Mr. Watterson says: “It wasn’t until Covid times when we saw a dramatic reduction in O’Hare activity that we could go in and get access to gates.”

With fewer flights arriving from abroad, “common use” gates at O’Hare’s international terminal had extra capacity. Southwest pounced. “If we don’t move now,” Mr. Kelly, the CEO, said during the October earnings call, “we risk never getting in there.”

Houston’s William P. Hobby Airport, which Southwest dominates, is a trek for people in northern Houston and surrounding suburbs. Before the pandemic, Southwest had spoken to airport officials about expanding at Hobby, says Mario Diaz, executive director of Houston’s airports. About 2½ months ago, the airline instead asked to add service at the city’s bigger airport, George Bush Intercontinental, after a more than 15-year absence. Southwest last month said it would begin flights from that airport in the first half of 2021.

Before the pandemic, the airline had considered airports serving Steamboat Springs and Telluride—Colorado ski towns—and picked Steamboat. In a year when skiing looks to be one of few activities people may travel for, Mr. Watterson says, the airline’s planners thought, why not both? Southwest announced service to the additional airport on Oct. 8.

Southwest plans to begin flights to Colorado Springs airport, pictured in April.



Photo:

David Zalubowski/Associated Press

Even as the pandemic now worsens, says Mr. Watterson, Southwest still needs to tap new markets and believes the strategy will hold up. Mr. Decaire says Southwest is seeking markets it can stay in after the pandemic. “We don’t want to do anything now just for a few months,” he says. “We’re definitely out scouting more cities.”

Ontario International Airport, California, in June.



Photo:

Will Lester/SCNG/Zuma Press

Write to Alison Sider at alison.sider@wsj.com

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