Southwest sees healthy corporate demand as it continues to navigate 737 Max groundings

2 May, 2019

Even as Southwest Airlines was forced to cancel roughly 10,000 flights in the first quarter due to the grounding of the Boeing 737 MAX and a dispute with its mechanics, the airline is maintaining a robust outlook for corporate demand.

Even as it doesn't offer all the premium perks of its full service rivals, the LCC has built up a solid corporate following that plays an important role in its overall revenue base.

Speaking to analysts and investors during its recent 1Q2019 earnings discussion, Southwest president Tom Nealon concluded close-in bookings remains strong year-on-year and "business travel demand continues to be strong as well, but we took fewer close-in bookings, simply because the reduced inventory per sale…our corporate travel, which is really good indicator of the economy is robust".

Mr Nealon concluded that "it's just a shame we have this MAX thing going on, because it's a pretty good business environment". He added that he wishes Southwest had more close-in inventory to sell, "but we're reaccommodating". The airline has cut MAX operations from its schedule through early Aug-2018.

The challenges with the MAX and other issues forced Southwest to revise its 12018 unit revenue guidance from growth of 4% to 5% to an increase of 2% to 3%, its unit revenue ultimately grew 2.7% year-on-year for the quarter. Southwest's expects unit revenue growth during 2Q2019 of 5.5% to 7.5% year-on-year, "based on the booking curve and pricing trends we are seeing", added Mr Nealon.

Southwest is well known for its loyalty to the 737, but chairman and CEO Gary Kelly said recently there is "no reason at this point in time to declare that we'll have a single aircraft type forever or not" and while the carrier operates and all Boeing 737 fleet, this does not mean it will be an "all-737 carrier into perpetuity". He explained the situation with the MAX is "not anything that's been happy for us".

TABLE - Southwest Airlines is an exclusive Boeing 737 operatorSource: CAPA - Centre for Aviation Fleet Database

Earlier this week the airline's GDS inventory showed it plans to suspend operation in 13 local markets between 01-Jun-2019 to 03-Jul-2019, attributed to the MAX issues, This comprise Austin-San Francisco; Chicago Midway-Portland (Oregon); Birmingham-Las Vegas; Indianapolis-Oakland; Los Angeles-Omaha; Los Angeles-Pittsburgh; New York Newark-Oakland; New York Newark-San Diego; Oakland-Orlando; Orlando-Sacramento; Orlando-San Diego; Orlando-San Jose (California); San Diego-Tampa. The airline is also decreasing Orange County-San Jose del Cabo service to weekly.

Southwest currently has 34 Boeing MAX aircraft, which Mr Kelly says "will remain out of service until the FAA rescinds this order, and we feel confident that all of the necessary actions have been taken to operate the aircraft safely and reliably".

It has now modified its schedule through to 05-Aug-2019 based upon the continued grounding of the aircraft. "We simply don't have a confirmed timeline to share with regard to when the MAX will return to service," says Mr Kelly. There have been some suggested dates ranging from May to July. "If the aircraft are available to fly earlier, we will use them as additional spares to further enhance the reliability of our scheduled service," says Mr Kelly.