Southwest Airlines is sitting in a really great position. With the worst of the crisis behind it, leisure passengers have come back, small- and medium-sized businesses are sending employees on the road again, and travel restrictions have started to come down. With the environment improving, Southwest Airlines is in a position to grow. However, according to CEO Gary Kelly, there is one open-ended question on whether or not the carrier will be able to grow.
Southwest Airlines’ four categories for growth
In order to grow, CEO Gary Kelly stated on the carrier’s second-quarter earnings call that it is looking at four big categories to drive that growth:
Essentially, Southwest Airlines needs to have the airplanes to fuel that growth. After ticking that box, the airline then needs to turn to airports and ensure they can get the gate space, the counter space, and other infrastructure support systems. These two are some of the basic requisites for growth from the airline operations side of things.
Here is what Mr. Kelly said about airports and people:
“We’ve got the Boeing deal, as I mentioned to you all back in the first quarter, that is a huge strategic positioning for us. I’m very, very pleased with that. So check. I think the airport capacity that we have around the country is in great shape, and where it’s not for the most part we have a line of sight to address it. Number two, so check that one.”
Turning then to money, growth comes at a cost. The carrier needs money to invest in the new aircraft to fuel growth, the airport infrastructure, and it will need to devote a sizable marketing budget to spread awareness in the new communities it adds services to.
The last question then comes down to people. Southwest Airlines needs to have the staff in each location – from ramp staff to gate agents to check-in agents – to handle the carrier’s operations. On the latter two points, Mr. Kelly stated the following:
“We’ve got money…we have more money right now than I thought we would three months ago or six months ago. So I’m feeling really good about the balance sheet and our liquidity, and I think you’re down to…people resources, and that I think we’ll be our constraint.”
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The people constraint
Across the country, airlines and air travel industry operators are seeing a shortage in the labor supply. Southwest has also seen this and is taking steps to be competitive, including increasing the minimum hourly wage across all workgroups to $15 per hour.
Staffing also extends to flight crews. Southwest is hiring some more pilots, and it will need to keep a steady stream of pilots coming into the airline to fuel the growth coming from the MAX induction and replace the natural retirement of pilots. It will also need to ensure it has enough flight attendants to run its operations.
People are a constraint that takes time to solve. While it may seem easy enough to find enough gate agents or ramp agents, there is a security and badging process that takes some time to sort out and inhibits the rapid introduction of new staff.
Pilots and flight attendants are a different story. These groups have to undergo much more extensive training than a gate agent to work for Southwest. Here, the backlog can take some time to clear. This is especially true when it comes to pilot training, as there are only so many new pilots Southwest can train given constraints in the number of simulators and flight instructors. Growing the pool of pilots flying is not a very quick, overnight process.
Southwest still has growth opportunities
Despite being the largest domestic carrier in the United States, Southwest has plenty of room for additional growth. While the airline made some significant additions, adding 18 new cities to its network, there are still some gaps to go in Southwest’s system.
For example, Southwest loyalists looking to go to Mount Rushmore are out of luck for easy access to Rapid City via a flight on the carrier. The airline is also lacking a presence in other leisure markets like Asheville or Key West.
The airline will be coming to Bellingham, in Washington state. Just across the border from Vancouver, this airport allows Southwest to market flights to Canadians who are willing to drive across the border for a cheaper flight. If successful here, Southwest could add more flights to airports near the border that see a lot of tourism from Canadians looking for cheaper flights to leisure destinations. Another example includes Plattsburgh in New York. Also, the carrier does not currently fly to Alaska, so Anchorage could be a natural extension in the future.
These are just examples of domestic growth. The airline has plenty of room to fill in its network to Central America and the Caribbean. New destinations in Mexico, the Dominican Republic, Panama, and the island nations in the Caribbean could be rewarding markets.
Growth also does not have to mean new points. Southwest could always add new connections across its network between existing city pairs. The airline does prefer to fly its passengers on nonstop itineraries. However, that has not stopped the airline from offering connections and building up large bases in places like Baltimore or Denver.
The second component of growth is schedule depth. In plenty of new markets, Southwest is only flying once a day or a few times per day to its bases. As those markets mature, they could be ripe for Southwest is no stranger for flying some heavier frequencies on key short-haul routes, such as between major business destinations.
At the end of the day, Southwest Airliners has a flexible and strong order book with Boeing, plenty of support from airports and room to grow, and a strong balance sheet with plenty of liquidity. Three of the four conditions Mr. Kelly stated for growth have been met. The question now is whether the airline will have the staffing to be able to handle the growth.
What do you make of Mr. Kelly’s characterization of the factors leading to growth? Let us know in the comments!