ANALYSIS: Southwest targets longer-haul flying in move that mirrors industry

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Southwest Airlines has geared its business in recent years more toward medium- and long-haul flying, a major change for an airline that traditionally has relied heavily on revenue from short hops between major cities.

Though the change is not entirely unique to Southwest, it demonstrates difficulties airlines face making money on short routes these days, and reflects a shift by Southwest, traditionally a point-to-point carrier, towards greater reliance on connecting traffic, says an airline analyst.

Between 2005 and 2012, the average length of Southwest's top 20 routes by capacity jumped 41%, from 350 miles (563km) to 495 miles, according to Flightglobal's Ascend Online database.

"Clearly, the growth within the airline business over the last decade has been in longer-haul trips, which is why we are pivoting at Southwest towards longer, versus shorter trips," the Dallas-based airline's chief executive Gary Kelly tells analysts on 25 July during Southwest's second quarter earnings call.

He adds that consumer demand for medium-haul flights of around 1,000 miles has been relatively flat for the past ten 10 to 15 years.

The airline tells Flightglobal it defines short-haul routes as those up to 500 miles.

Michael Boyd, chairman of aviation consulting firm Boyd Group International, says airlines struggle today to generate profits from short-haul flying.

That is largely due to higher fuel and operating costs, says Boyd. But also, the "hassle factor" of airline travel in the last ten years has reduced demand for short-haul flights, he adds.

Industry-wide, US carriers have cut shorter routes in recent years, says Boyd, noting that 30 years ago some 40,000 passengers annually travelled between Boston and Albany, the capital of New York. Back then, airlines offered six to eight daily flights on the route, he says.

Capacity on the route today is less than 10% of what it was, according to Boyd.

"You can't make money [on that route] with a Beech 1900 anymore," he says. "That travel doesn't work anymore."

Airlines still serve small cities like Albany, but most major carrier have consolidated flights at their hubs.

Reliance on longer flights

Now industry-wide trends are catching up with Southwest, which has seen its costs increase in recent years, says Boyd.

He notes that traffic on some of Southwest's oldest and most-venerable routes, such as Dallas (Love Field) to Houston and San Antonio, has declined some 45% since 2000.

According to Capstats, 15 of Southwest's top 20 routes by capacity in 2005 were 400 miles or less, the longest being Oakland to Phoenix, at roughly 645 miles.

Among the top 20 destinations in 2005 were flights to smaller cities like Reno, Nevada, and to secondary airports in large metropolitan areas, like Burbank and Ontario in California.

Capstats

By 2012, Southwest's top 20 routes included 11 that were 400 miles or less; many were medium- and long-haul pairings like Chicago to Las Vegas (1,525 miles), Orlando to Chicago (990 miles), Baltimore to Orlando (790 miles) and New York to Chicago (715 miles), according to Capstats.

Gone from Southwest's top 20 routes in 2012 were flights to Reno and Ontario, replaced in part by flights to major Southwest connecting cities, like Chicago (Midway) and Baltimore.

The trend is not unique to Southwest.

In 2005, the top 20 routes by capacity across the entire US airline industry averaged 702 miles, with eight of those being 400 miles or less and only three being more than 1,000 miles, according to Capstats.

By 2012, the average length of the top 20 routes across the industry climbed 32% to 928 miles. Five of those routes were 400 miles or less and seven were more than 1,000 miles, Capstats data shows.

Capstats

More connecting passengers

Boyd says the data indicates Southwest's increasing reliance on connecting passengers and hub airports, where it can "aggregate traffic."

Boyd adds that Southwest executives tend to downplay that trend, but notes that some 40% to 50% of passengers who fly Southwest through cities like Chicago and Denver change planes.

"Southwest is changing very dramatically how and where they are operating," says Boyd. "This is not a minor thing. It's a major sea change for Southwest."

That is why Southwest is working feverishly on an improved revenue management system, Boyd adds, noting that Southwest's current system is similar to that used 30 years ago by long-defunct Braniff International Airways.

Kelly and other executives told investors on 25 July that the airline is replacing its segment-based revenue management system with a system that can better manage origin-and-destination traffic.

The airline tells Flightglobal that the system, which is expected to be operational later this year or in 2014, will improve forecasting of both nonstop and connecting traffic.

As Southwest builds hubs, it will increasingly face competition from larger legacy carriers, which have some advantages over Southwest, Boyd notes.

For instance, legacy airlines can funnel high-yielding international travellers through hubs.

Though Southwest has international ambitions and serves a handful of international destinations through its AirTran Airways subsidiary, much of its connecting traffic will be from lower-yielding domestic flights, Boyd says.