LUV in the Time of Covid
Southwest speaks to Airline Weekly
Southwest Chief Commercial Officer Andrew Watterson spoke to Airline Weekly Editor Madhu Unnikrishnan last week about the carrier’s evolving network strategy and why outdoor adventures, as he put it, are fueling Southwest’s traffic now. (This interview has been edited and condensed for clarity.)
Airline Weekly: In the past, Southwest was really focused on connecting the dots that already existed on the map. Since then you’ve thrown a whole bunch of new dots on the map. What’s the thinking behind the “snow and sun” routes?
Andrew Watterson: That’s where customers are traveling right now, because business travel is down quite a bit. Leisure travel is holding up much better than perhaps many expected especially in post summer. And people have a desire to go into kind of more outdoors leisure versus indoor leisure, which in the winter means either snow or sun. Either in the mountains to go skiing or to go to the beach. So that’s when we see a lot of our additional capacity, in Q4 into Q1. For a long period of time, we’ve gone between depth and breadth. It’s not uncommon in downturns for us to use breadth as a way to cast a wider net for passengers to fill airplanes.
Airline Weekly: Southwest is less exposed to international than a lot of your competitors, but you do serve some international routes, mainly to beach destinations. Are you seeing the same strength and demand for your international sun destinations as you are with Florida or the Gulf Coast or California?
Andrew Watterson: That is correct. We are seeing to the ones who are operating we’re seeing robust demand to the same as, Florida, and I also would add, in Hawaii, which is seeing robust demand that keeps getting pushed back by the quarantine. We don’t fly to all the same international [destinations] as before because each country has its own requirements for visitors. Some are essentially discouraging visitors, and some are changing [travel restrictions]. So we’re flying to the ones that have stable requirements.
Airline Weekly: What was the thinking behind expanding to O’Hare and Bush Intercontinental?
Andrew Watterson: We embrace having multiple airports in a metro area, and it does quite well for us. In Chicago, we have a very good operation at Midway that we’re very pleased with. It’s very convenient to the downtown and the South Side. But for corporate campuses in the North Side, getting to Midway is more difficult, especially if they have to drive past O’Hare. And so, we had always contemplated that if O’Hare space were available, we would like to take advantage of it, so that we could complement Midway. We were able to get space there that we couldn’t have gotten two years ago.
The city has done a wonderful job with the terminal at Midway. At the end of the day, there’s only so much space that you can have for air operations in Midway, so you’re just constrained.
Hobby will always be our anchor in the Houston area, but just like in Chicago and in the West Coast, we find that having multiple airports is desirable, especially for those in the northern suburbs. So by having a presence in the north, we can complement Hobby.
Airline Weekly: Can you tell us sort of the latest on demand trends and how bookings are looking for the upcoming holiday season?
Andrew Watterson: We saw that kind of after lockdowns ended in patchwork fashion in May, we started seeing a very strong run up in leisure demand in May and June. The next virus upsurge around the Fourth of July really put a flatline on demand growth, but it didn’t go negative like it did in the spring. About mid-August, you started to see demand start to grow again. It wasn’t like a rocket ship like it was in early summer. It was a more steady-as-she-goes, and we’ve seen that steady-as-she-goes demand increase from mid-August through now.
It’s true during Covid times that people still travel for holidays, even if demand for business is depressed, holidays still get people to travel. And that’s true whether it’s Columbus, a fourth of July, or Thanksgiving.
The booking curve has shifted throughout the pandemic. After the Fourth of July, booking got quite close in. That’s now lengthened, but you can quibble that it’s lengthened because it covers the holidays now. The booking curve is still skewed closer, but it’s not as bad as it was in July.
Airline Weekly: Southwest CEO Gary Kelly mentioned the possibility of codesharing in the future presumably to help advance your goal of capturing more corporate traffic. Would there be an international partnership, or are domestic codeshares a possibility?
Andrew Watterson: Codeshares have been on our roadmap for a couple of years. It’s just never made the list of technology projects. We’ve allocated our tech resources over the years for things like ETOPs and going to Hawaii, for corporate GDS. He was affirming it’s still in our roadmap.
When it will happen — we don’t have a timeline yet. It would be modest in nature. Our agreement with our pilots is such that if we do this, we’ve agreed that it would be a modest venture, not a big one. Our pilots agreement allows for codesharing and interline, subject to a volume threshold that would basically prevent us from being too successful doing that before we have to use our own metal.
Going into GDS with full functionality, which we do for corporate sales, was a precursor to interlining and codesharing. The standard way to [interline and codeshare] is through GDSs. That’s a feature we now have [with the Amadeus reservations system], although its intention was for more corporate bookings.
Airline Weekly: Southwest position has made it abundantly clear that bags fly free. Do you plan to raise revenues through other ancillaries?
Andrew Watterson: We have less ancillary from fees. We want to find ancillary products that people are happy to purchase not obliged to purchase. The ones we do offer have good customer adoption, and good customer satisfaction. We want you to happily give us your money, not begrudgingly give us your money.
Airline Weekly: I have to ask what could you possibly make people happy to spend money on?
Andrew Watterson: People are happy to buy upgraded boarding at the gate. The same with Early Bird. We sell you Wi-Fi on our aircraft. It’s $8. It’s not the fastest Wi-Fi in the world, but it’s solid Wi-Fi, and it’s only eight bucks. The [ancillaries] we have, people actually use.
Airline Weekly: And what about cargo? A lot of airlines have seen cargo take off as a big part of their revenues during this pandemic. Have you seen a similar trend?
Andrew Watterson: Our cargo revenues have held up quite well. We’re a domestic cargo business, and we feel like we have a flattering market share of domestic cargo for passenger airlines. The cargo market was out of balance — transoceanic. So really it was the lack of widebodies flying passenger service that made there not be enough of a supply of cargo for longhaul. Domestically, that didn’t really happen. You still have UPS, FedEx, and Amazon. And yes, it’s less domestic passenger, but the cargo market did not get out of balance domestically like it did in longhaul international.
Airline Weekly: Could you give a rough number on what percentage of Southwest traffic connects both in normal times and now?
Andrew Watterson: In normal times, about 25% of our customers are purchasing connecting itineraries. I don’t know what the number is at the moment, or I actually don’t know if we disclose that.
Airline Weekly: There has been a lot of chatter that Southwest is starting to look suspiciously like a hub-and-spoke carrier. Is this the way of the future or is it a temporary reaction to grab market share now where you can?
Andrew Watterson: For decades, we have had connecting traffic. For one decade, we’ve actually scheduled flights for connections. We have a subset of our flights — less than 20% — that we actually schedule, thinking about connections. The rest of the connections are because we get big in a certain city, and once you’re big, connections naturally happen. As a result of that, 25% of our customers buy a connecting itinerary. We are not a hub-and-spoke carrier, but we are not dogmatically saying only point-to-point passengers are welcome. The connections are the icing on the cake. The cake is point-to-point.
In Covid times, there’s not enough demand to fill up an aircraft for point-to-point, even though our customers prefer it. As a result of that, we do see more connecting demand now than the normal times because demand isn’t sufficient to have the airplane only be point-to-point. So, it’s more of the changed nature of demand. But there’s been no change in strategy.
Airline Weekly: Other airlines have mentioned their mid-continent connecting hubs are doing relatively well aggregating a lot of traffic. Is that generally true of big mid-continent Southwest stations like Chicago and St. Louis?
Andrew Watterson: It’s more about the destination. Denver is doing very well for us. Phoenix is doing very well for us. And you have connections there, but you have a lot of people wanting to go there for the outdoor adventures. Colorado to their credit kept Covid cases under control, all throughout winter and all throughout summer. Because we had a good schedule there and because there’s lots of people going to Colorado, that provided connectivity just because there are a lot of flights. And so the combination of those two things made Denver and Phoenix do quite well.
Airline Weekly: Could you give us an update on Hawaii bookings now that the state’s opening up a little bit?
Andrew Watterson: All throughout the downturn, we would see the state of Hawaii would have a quarantine restriction that would expire on a certain date. And we would see substantial bookings on that date forward. Every time they would shift the quarantine back weeks, we see the booking shift to the end of the quarantine. That’s continued. Now that they have the testing program that allows you to avoid the quarantine, we see the bookings sticking quite nicely.
We decided to be a little bit conservative, and right now we have what we call our essential air service, twice a day from Honolulu to Oakland, that we’ve flown throughout the pandemic, just to provide transportation to and from the islands. We waited till Nov. 4 to start our full Hawaii schedule, just to let them get the wrinkles ironed out and to make sure there are no problems. Bookings look solid for those and forward. As long as it’s safe to go to Hawaii, for the people of Hawaii and if they allow visitors, we see substantial demand.