Southwest Airlines sees no letup in cost pressures, orders additional Boeing jets

Reuters | October 26, 2023

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By Rajesh Kumar Singh and Shivansh Tiwary

(Reuters) -Southwest Airlines on Thursday warned of higher costs next year due to rising labor pay rates as well as its decision to slow down capacity growth to protect its pricing power.

The Dallas-based company also unveiled new orders for Boeing’s 737 MAX planes to help modernize its fleet.

A tight labor market in the United States has driven up wages. The shortages are far more acute for pilots amid robust travel demand, enabling unions to secure big gains in new contracts.

While Southwest has yet to reach a contract deal with its pilots, the company is widely expected to match the hefty pay raises at rival carriers.

The company also expects higher aircraft maintenance expense next year. In the meantime, its bid to protect margins by slowing down capacity growth is projected to worsen the cost pressure.

Soaring costs led to a 30% fall in Southwest’s third-quarter profit.

All the major U.S. carriers are struggling to get control of mounting operating costs, stoking worries about the industry’s profits once consumer demand softens.

Southwest’s CEO Bob Jordan said the airline is aiming to drive up its margins by eliminating inefficiencies and enhancing productivity.

As part of the plan, Southwest now expects year-on-year capacity growth in the January-March quarter to be in the range of 10% to 12%, lower than its previous estimate of 14% to 16% growth. It has also lowered capacity growth plans for 2024.

The company said while travel demand remains healthy, higher-than-seasonally normal capacity growth is hurting revenue per available seat mile – a proxy for pricing power.

“We are working on capacity,” Jordan said on an earnings call. “Don’t want to be slaves to capacity here.”

Southwest, one of the biggest customers of Boeing’s MAX planes, said it will buy an additional 108 MAX 7 planes through 2031. The plane’s delivery schedule, however, is dependent upon its certification by the Federal Aviation Administration.

Delays in the certification has already forced the company to convert dozens of MAX 7 orders to MAX 8. Jordan said a “tight” new aircraft market prompted the company to lock in its order.

“We want to ensure that we have access to aircraft into the future,” he said.

Southwest’s adjusted profit for the third quarter came in at 38 cents a share, in line with Wall Street estimates.

(Reporting by Rajesh Kumar Singh in Chicago and Shivansh Tiwary in Bengaluru; Editing by Shounak Dasgupta and Jonathan Oatis)