Southwest’s CEO Could Be Forced To Restructure Airline

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Southwest Airlines may have to “radically restructure” as overstaffing becomes a risk. In a video message on May 22nd, CEO Gary Kelly discussed what the future could be for the airline given impending capacity cuts.

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The airline could be forced to radically restructure in the fall. Photo: Getty Images

Southwest Airlines may face a radical restructuring

CEO Gary Kelly was given this question which he answered virtually:

“Based on current schedules and demand projections, how overstaffed will Southwest be heading into 2021?”

Mr. Kelly did not cite rigid numbers, saying he does not know. However, he did discuss the future at Southwest Airlines. Heading into the fall, Southwest anticipates a 30% capacity reduction. Overstaffing is not exactly related to capacity cuts. However, there is some correlation. Of course, raw numbers will not be available until the fall.

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Southwest’s CEO Gary Kelly made the comments in a video question. Photo: Getty Images.

In terms of extrapolating from those numbers, Mr. Kelly said, in regards to this:

“You can make at least some assumptions that we are overstaffed in many areas at a similar rate.”

While, for the last fifty years, Southwest has never had a layoff or involuntary furlough. This crisis is pushing the airline to its limits. In April, the airline lost “about a billion dollars, which just isn’t sustainable. At the same time, however, the airline did earn some cash in a sale-and-leaseback agreement for 20 737s. In the end, however, Mr. Kelly noted that:

“Things have to improve quickly over the summer, and if they don’t, we’ll have to radically restructure Southwest Airlines. If we do, you will see a radically restructured industry.”

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Southwest anticipates a 30% capacity reduction this fall. Photo: Getty Images

Is Mr. Kelly right?

Southwest Airlines fared better than the big three airlines in the first quarter. However, the airline is feeling the crunch. While passenger numbers have been on the uptick, it is not enough yet for airlines to start making money again.

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The industry is preparing for a long, protracted recovery. Most airlines do not expect the situation to improve by the third quarter drastically. As such, airlines are altering their expansion plans. Based on moves from Delta, that airline likely does not expect a significant return of demand for the next two years.

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Southwest Airlines operates an all-737 fleet limiting it to short- and medium-haul routes. Photo: Getty Images

Southwest, however, is in a different place. The carrier primarily flies domestically with no international long-haul services. As a result, the airline will likely start to see demand rebound and systemwide capacity increase sooner than other airlines, which will have to contend with international government restrictions on critical routes.

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If Southwest has to restructure, expect a radically different industry. Photo: Getty Images

What could a radically restructured Southwest look like?

Mr. Kelly did not elaborate as to what precisely a radical restructure would look like. However, we can make some assumptions based on his answers.

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For one, any sort of restructuring will come with a reduction in capacity. The airline will likely send off older aircraft into the sunset while deferring deliveries of new jets. If the 737 MAX returns to service by then, we can expect accelerated retirements of older planes.

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The return of the MAX will likely accelerate the retirements of older 737NGs. Photo: Getty Images

Layoffs will come with any sort of restructuring. The biggest question is the magnitude of these layoffs. Expect at least a few thousand to start, but that could get worse. However, all this depends on how the summer goes.

Southwest already operates an operationally efficient all-737 fleet with high aircraft utilization. Thus, restructuring will include cost-cutting, which puts older, less fuel-efficient, and more maintenance-intensive aircraft on the chopping block. Related jobs, such as flight crew or even some maintenance personnel may face involuntary layoffs.

But Southwest won’t be alone in this. If the airline has to restructure radically, then it is guaranteed that other airlines in the US will be under a lot of strain.

What do you think a radically restructured Southwest could look like? Let us know in the comments!

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