Southwest Airlines got by with a little help from its friends (in Congress) and scored its troubled industry’s first profitable quarter since the impacts of the Covid-19 pandemic were first experienced in February 2010.
Meanwhile, both American and Alaska airlines reported big first-quarter losses but, like other carriers, they say are seeing significantly improved travel demand conditions for this summer.
Southwest’s first-quarter earnings – $116 million, or 19 cents a share – were small by its normal standards. And they largely were the result of receiving $1.2 billion in federal Payroll Support Program dollars authorized by Congress to keep U.S. carriers afloat during the pandemic. Without that support, Southwest would have reported a $1 billion loss. Nevertheless, after posting four money-losing quarters and its first annual loss in 48 years due to the pandemic, Southwest did return to official net profitability ahead of all other carriers – both in the U.S. and globally.
Additional government payments scheduled for the current quarter mean that Southwest’s net results from the second quarter could end up in the black again, especially if the big surge in leisure travel that Southwest anticipates really does materialize.
Like Delta and United Airlines, both of which already have reported first-quarter losses, Southwest, American and Alaska, all said they’re seeing sharp increases in travel demand currently, plus strong indications that an improved demand environment will continue through at least the summer and likely beyond, albeit with the usual seasonal drop-off in demand once schools reopen after summer vacation.
Southwest president Tom Nealon told analysts and reporters today in a conference call that Southwest is “almost solely reliant on leisure travelers at this point.” But he and other Southwest officials noted that their airline added 50% to its flying capacity in March in response to the big increase in leisure travel demand. And this summer it will reach close to 90% of its capacity from the summer of 2019, before the pandemic’s advent, based solely on the rising demand they see from leisure travelers.
Alas, while the demand picture is turning positive, a huge majority of that rising demand is coming from leisure travelers, who typically buy tickets that cost 50% or less than the fare prices typically paid by business travelers. Business travel demand levels currently are less than 20% of what they were over the same time period in 2019, prior to the arrival of the pandemic.
Though there are very modest signs of improvement in business travel demand, that critically important segment of air travelers, whose frequent and higher fare-buying ways historically have been the primary drivers behind conventional airlines’ profits, aren’t expected to fully return to their pre-pandemic purchasing and travel patterns until 2024 or 2025. Additionally, international travel demand, which historically also generates outsized revenues because of its higher fare prices, remains extraordinarily weak because of closed or tightly restricted borders around the world as countries continue to try to limit further spread of Covid-19. American, for example, said only three percent of its schedule capacity this summer will be in trans- Atlantic and trans-Pacific routes, though its “short haul” domestic flying (mostly to Caribbean and Mexican destinations) will be up significantly from last summer and fall, around 90% of what it was prior to the pandemic.
In response to the dramatic shift in the balance of business vs. leisure travel demand, U.S. carriers now are adjusting their operations to place a higher percentage of their capacity on what traditionally are vacation and leisure travel routes. They also are re-deploying some capacity – including widebody jets normally used only on international routes – on domestic routes with strong leisure travel demand. U.S. carriers also are launching service on a number of routes they’d previously not flown, hoping to capitalize on what’s believed to be a very large amount of pent-up leisure travel demand among Americans who’ve largely been unable to travel for the past 15 months because of their fear of Covid-19 and/or pandemic-related restrictions and lockdowns.
Leaders at all three airlines spoke optimistically about the rising levels of demand and their company’s prospects going forward.
“It is crucial that we continue managing our business prudently in the near-term, while also positioning ourselves to thrive and prosper, once again. We are increasingly optimistic about our future, and we are in the process of updating our strategic plan with a clear set of initiatives for the next five years,” Southwest CEO Gary Kelly said in a statement.
His counterpart at American, Doug Parker, said “With the momentum underway from the first quarter, we see signs of continued recovery in demand. We remain confident the network enhancements, customer-focused improvements and efficiency measures we’ve put into place will ensure American is well-positioned for the recovery.”
And Ben Minicucci, who took over this month as CEO upon the retirement of long-time Alaska CEO Brad Tilden, said “We’re now laser focused on a return to profitability and growth, with aggressive cost control, optimal productivity across all our work groups, and the operational and financial discipline that Alaska is known for.”
Today American reported:
- net loss of $1.25 billion, or $1.97 a share, in the first quarter. That’s better than the $2.24 billion it lost in the first quarter of last year, when Covid-19 essentially killed travel demand entirely in late February and March of 2020. But compared with the first quarter of 2019, when the company earned $185 million in profits, this year’s first quarter for American was disastrous
- Revenue in the first quarter this year -$4 billion – was down a whopping 53% from $8.5 billion in the first quarter of 2020, and down 59% from $9.7 billion the first quarter of 2019
- Excluding one-time accounting changes and payroll support payments authorized by Congress to keep U.S. airlines from laying off more than 100,000 workers, it’s first quarter loss would have been $2.7 billion, or $4.32 a share
- Saw its adjusted cash flow turn positive in the month of March, a first since the pandemic began.
A year ago American added back more capacity to its route network than its rivals during the second quarter, placing a bet that the impacts of the pandemic would be relatively short-lived. But when demand never really picked up as expected – its load factor, or percentage of filled seats in the second quarter of last year, was just 42.3% then – American had to withdraw lots of planned capacity in the third quarter. As a result its load factor, or average percentage of filled seats on flights, recovered to around 70% the third and fourth quarters. But in the first quarter of this year, American’s load factor tumbled again to just 59.5%. That has left some analysts concerned about a repeat of American being overly aggressive about adding back capacity too soon.
Parker said American this time will be much slower to add capacity in the “long haul international markets” to Europe and Asia. “We’re maintaining incredible flexibility (there). We’re going to wait for demand to develop before we deploy” more long-haul international capacity, he said.
But domestically American, the largest of all airlines, is adding back lots of capacity, and this summer it’s two biggest hubs at Dallas-Fort Worth and Charlotte be operating at around 100% of their 2019 summer capacity. Its Miami and Phoenix hubs also will be operating above 90% of their summer 2019 capacity as the carrier focuses on first rebuilding its operations in leisure travel-heavy markets.
Alaska, today said:
- It lost $131 million, or $1.05 a share in the first quarter. In the first quarter of 2020 it lost $223 million, or $1.89 a share. The first quarter loss would have been $436 million, excluding one-time accounting changes and government payroll support payments. In 2019’s first quarter Alaska earned $4 million or 3 cents a share
- First quarter revenue decline 51% from the first quarter of 2020, to $797 million. Compared with 2019’s first quarter revenue of $1.9 billion, the company’s first quarter revenue this year was down about 59%
Minicucci said he expects Alaska to reach or be near the cash flow break even mark in the second quarter, and to be profitable in the third quarter.
In large part that’s driven by the reopening of the California travel market. After a year of severe state restrictions on business and other activities, California has begun opening up and expects to be fully open by June 15. And that’s big for Alaska because traditionally about half of its revenue come from flights that begin or end in California.
In addition to its surprising first quarter net profit Southwest, reported today:
- It’s first quarter profit of $116 million was an improvement over the $94 million in lost in the first quarter of 2020, when the pandemic first hit on these shores, but a 70% decline from the $387 million in earned in the “normal” first quarter of 2019, and down 75% from the $463 million profit it reported from the first quarter of 2018
- A 51.5% drop in first quarter revenue ($2.1 billion) vs. the first quarter of 2020, when the first negative impacts of the pandemic began appearing. Compared with the first quarter of 2019, the last “clean” comparable period, Southwest revenues in this year’s first quarter were down a 60%, a staggering decline but one that is relatively in line the revenue declines seen at other airlines.
Kelly began the call with analysts and reporters by bluntly stating “We lost a billion dollars” in the first quarter, leaning into the company’s unadjusted loss rather than it’s net profit after one-time accounting items. “Clearly that’s not sustainable…. We’ve got a long way to go.
“But we finally began to see bookings improve from the ‘down 65%’ flatline we’d been experiencing since this all began more than a year ago,” Kelly added. As a result, “it’s now realistic for us to even consider (reaching) break even cash flow scenarios, which are possible here in the second quarter.”
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