Southwest is the airline that brought low cost travel to the masses
with a simple strategy: Operate one kind of plane, offer only coach
class, no meals and fly to underused secondary airports.
Since its first flight in 1971, the airline has grown to carry more
passengers in the U.S.
than any other. But now, the maker of the plane that Southwest has
relied on since its start - the Boeing 737 - is in crisis.
The search is on for the black box recorders that investigators hope
will solve the mystery of what caused a Lion Air flight to crash into
the sea shortly after takeoff in Indonesia on Monday.
Tonight, the FAA is under intense pressure as passengers, pilots and
airlines ask whether the Boeing 737 Max 8 is safe, after two brand
new planes crashed in just five months.
Boeing 737 Max planes have been grounded since March 2019.
Days after the second crash
regulators worldwide ordered airlines to stop flying the Max planes.
The airline ordered more than 200 of the troubled 737 Max planes.
Because of the grounding, Southwest had to cancel 20,000 flights in
the second quarter of 2019 alone, slashed its growth plans for the
year and removed the planes from its schedules until January 2020, a
move that means they'll be leaving money on the table during the
lucrative holiday season.
The crisis is testing the airline's lighthearted culture as it seeks
to assure customers of the plane's safety.
We're going to have to have a communications campaign.
We're good at that. Southwest's stock is up about 10 percent in the
six months since the planes were grounded worldwide in mid-March,
thanks to strong travel demand, which is also extending the airline's
streak of profitability.
So is the Boeing crisis just a temporary setback for Southwest, or
could it be the start of bigger trouble for the carrier?
Southwest Airlines was born in 1967.
Herb Kelleher, a tough talking New Jersey born lawyer, and his
client, Rollin King, sketched out their idea on a cocktail napkin.
Provide cheap, non-stop flights to major cities in Texas.
The airline had a personality, upbeat marketing campaigns.
And what are now cringeworthy ads featuring scantily clad flight
attendants in hot pants and go-go boots.
The business strategy was simple: peanuts but no meals.
Only coach class.
And perhaps most important, basically one type of plane: the Boeing
737, the single aisle jet that debuted the year Southwest was
founded, 1967.
The culture of the 1970s is very much in our past but Southwest still
has a very playful culture.
You know, there are videos on social media of the singing flight
attendants and rapping flight attendants, employees are empowered to
be themselves.
Southwest is famous for hiring people based on their personality and
then training them for the skills they need.
Using one type of plane almost exclusively throughout its history
helped keep maintenance costs low and made it easier to swap one
plane for another. The airline has also been known for not having
seat assignments and most of the other add-ons like baggage fees that
have brought in billions for other airlines.
On a Southwest flight, passengers can check two bags for free.
They can also cancel or change their flights free of charge.
They only have to pay the difference in fare.
The airline's first flight was in 1971, and it has since expanded
exponentially. In 2018, Southwest carried more than 163 million
passengers, more than any other U.S.
airline. Southwest has posted an annual profit every year since 1973.
That's a record that's basically unheard of in the airline business,
which has suffered numerous bankruptcies and financial turmoil.
The airline went public in 1971 at about $11 a share.
Its shares are now trading around $50.
The carrier's fiscal prudence has won an investment grade credit
ratings, a bragging right it shares with Delta and Alaska.
Southwest became the largest U.S.
airline by passengers carried in 2003.
In the 12 months that ended in April, Southwest had a more than 17
percent market share, nearly tied with American Airlines.
It's smaller and younger, low cost competitors in the U.S.
- JetBlue, Spirit and Frontier - each have less than 6 percent share.
Southwest suffered its first onboard passenger fatality due to an
accident and its nearly 50 year history, in April 2018, when a fan
blade of an engine snapped off, briefly sucking a passenger out of
the window. There was blood on the windows
that was because of her body and her arms were actually out of the
airplane and her head was out of the airplane.
After that Southwest discounted fares to get more travelers on board.
It will have to do it once more if regulators deem the plane
airworthy again. Surveys conducted after the Ethiopian 737 Max crash
in 2019 have shown travelers would prefer to wait until the 737 Max
is flying safely for several months before they book a flight.
In response, the airline says it won't hold travelers responsible for
paying fare differences if they want to book off the Max for a
different plane once it's approved.
I think Southwest's biggest challenge with the 737, aside from
regaining the trust with its pilots, is once the aircraft goes back
into service, regaining the trust of the traveling public.
Now, that's not just Southwest's problem.
That's really Boeing and the FAA who also must play roles in helping
to regain passenger trust, help make sure people realize that once
it's flying again, the 737 Max is safe, but people are going to avoid
that plane for several months, if not at least a year, just to be
sure it is safe.
Summer 2019 was a frustrating one for the airlines that bought the
737 Max.
Travel demand is growing to record levels, but they had to cancel
thousands of flights because their new aircraft were grounded.
That has impacted perhaps no other airline more than Southwest.
Southwest only flies Boeing 737's.
As a 2019, its fleet has grown to more than 750 planes.
The Southwest
Boeing relationship has been like peanut butter and jelly.
Since 1971, Southwest has bought only Boeing aircraft and only the
Boeing 737, though, in the past they did at different times operate
the Boeing 727 trijet.
However, I think this has been a wakeup call for Southwest.
In 2017, the airline took its first deliveries of a new version of
the Boeing 737, called the Max.
The planes are a souped up version of the type of planes Southwest
has relied on throughout its history.
The airline now has more Max planes than any other carrier worldwide.
But after two fatal crashes, that Max plane has been grounded.
That means the 34 Max planes already in Southwest's fleet cannot be
flown. Nor can the more than 40 Max 8's Southwest had expected to
receive this year. Regulators haven't said when they plan to allow
the planes to fly again.
But they're preparing to evaluate whether they're safe enough to do
so. All 189 people on board a Lion Air flight from Jakarta were
killed in a crash in October 2018.
Another 157 lives were lost, when an Ethiopian Airlines jet went down
in a similar stage in the flight in March 2019.
The global grounding of the Max is especially problematic for
Southwest because the plane has been key to its growth strategy.
The Max planes can fit high numbers of passengers on board and
feature more fuel efficient engines helping the airlines save money
on fuel. That has Southwest pondering the business model its had
since its start in the early 1970s.
With the Max planes grounded, Southwest is planning to reduce its
flying this year. CEO Gary Kelly recently said that capacity
constraints are just helping out its rivals.
We look at all of our route performance, in just market after market
after market, it is obvious that we're short capacity, that we're
spilling traffic and leaving money on the table and helping our
competitors. Southwest halted hiring of new pilots and postponed
promotions of some first officers to captain.
In July 2019, Southwest announced it was pulling out of Newark and
consolidating its operations in New York at LaGuardia.
Instead, it would use some planes to build up service in other
markets like California and Hawaii, which it launched in March 2019.
I think that there is a serious issue of trust, not just between
Southwest pilots and the airlines, but between the pilots and Boeing
and Southwest and Boeing.
That doesn't mean it's a rancorous relationship and it doesn't mean
that the relationship can't be repaired.
Looking forward, Southwest is going to be much more pragmatic and I
think much more intentionally disloyal to Boeing.
It's also keeping its fuel guzzling older 737 longer.
It's pulled the Max planes from its schedules until January 2020.
The first airline to do so, it has taken a profit hit and its costs
are rising as the Max planes remain grounded.
Southwest's profits peaks in 2017 at $3.5
billion, but fell slightly in 2018 as a surge in fuel costs ate into
the bottom line. While fuel costs have eased this year, the grounding
of the 737 Max is hurting the airline's profits.
Southwest lost $175 million in operating income in the second quarter
of 2019, the first full quarter since the Max grounding.
But Southwest still posted a profit of $741 million.
The issues with the Max have Southwest pondering its lifelong
commitment to the 737.
CEO Gary Kelly says it's too early and complicated to suddenly add a
new kind of plane to its fleet.
Such a change in fleet type would take years, he said.
And both Boeing and its main competitor, Airbus, are sold out of the
single aisle planes through the early 2020's.
It is something that we'll want to explore.
In the current scenario some of our competitors who do have a
diversified fleet aren't having their growth plans impacted as
drastically as we are.
If we wanted to diversify the fleet, it would take us years.
Southwest isn't the only airline that operates just one type of
plane. There are a slew of budget airline copycats worldwide.
Spirit Airlines and easyJet only fly Airbus 320's.
Budget airline Ryanair in Europe only flies Boeing 737's.
Ryanair hasn't even received its Max planes yet and had some harsh
words for Boeing in July 2019 after it was forced to cut its growth
plans because of the grounding of the MAX plane.
We were originally expecting 58 aircraft for the summer of 2020
that's now 30 at best.
It may well move to 20, it could move to 10, and it could well move
to zero if Boeing don't get there "S***" together, pretty quickly
with the regulators. Boeing posted its biggest loss ever in the
second quarter of 2019 after it took a $5.6
billion pre-tax charge, a sum intends to use to compensate airlines
affected by the grounding of the Max.
For now Southwest is standing by the plane and by Boeing.
But further delays in aviation authorities willingness to unground
the 737 Max could change its opinion.
We've had a long, strong relationship with Boeing.
It was not their best days handling the Max crisis, but we have full
confidence in them now.
Our cost outlook is really unchanged for the third and fourth quarter
for the year, except for the effect of the Max.
Of course we're incurring a huge penalty from the Max being grounded.
Safety is not negotiable.
We're unhappy that it's taken so long and we're in the dark on a
number of technical matters.
In a statement to CNBC, Boeing said that Southwest Airlines has been
and continues to be a valued customer and we're sorry for the
disruption this situation has caused them.
We've been in constant contact with our customers to support them
during this difficult time and our decades long relationship is very
important to us. Southwest CEO Kelly says it expects to negotiate
compensation from Boeing, but the amount isn't clear yet because
there's no end in sight to the grounding.
For now, the airline is waiting for its planes and not switching up
its fleet. But the grounding has certainly made the airline rethink
its commitment.