We’ve got a guest post today looking at Southwest in Atlanta. As I wrote before, I like the way Southwest is handling the merger from an operational perspective, but will it work out financially? Here’s one take. Do you agree?
For more than a decade, the conventional wisdom has been that the legacy carriers are ultimately doomed and that Southwest Airlines will take over the world – or at least its air transportation needs. Nowhere was that supposed to be more true than in Philadelphia, a market Southwest entered in 2004, fully expecting to take over the hub operations of a dying US Airways. 
But a funny thing happened on the road to this inevitable victory: US Airways fought back, and it is now Southwest that is in retreat in the City of Brotherly Love.
Philadelphia, however, is only a skirmish compared to what’s ahead. A much bigger battle is looming in Atlanta, where Southwest’s acquisition of AirTran has put the airline on a collision course with Delta Air Lines. As in Philadelphia, Southwest enters this market with high expectations. But as explained below, it is by no means inevitable that Southwest will thrive in Atlanta. If it does not, the era of Southwest’s industry ascendancy will end, and the U.S. legacy carriers – with their home turf secured – may enjoy a far more stable future . . . until the next major challenger rises to the occasion.
To understand why Southwest might disappoint in Atlanta, we need to look at what happened in Philadelphia. Last month, Southwest quietly revealed that it was pulling out of 4 additional short and medium haul Philadelphia markets, and reducing frequencies on other routes. This brought to 11 the number of Philadelphia routes that Southwest has entered and subsequently exited in Philadelphia. Aviation Consultant Mike Boyd has provided the data which explains the reason for this pullback. Quite simply, Southwest was getting its butt kicked.
On the soon-to-be-terminated Philadelphia-Pittsburgh route – a classic short-haul, business-oriented market (in other words, a “perfect” Southwest route) – Southwest’s load factor was 20 points less than that of US Airways. And on the tickets it did sell, it got 11% less for them. In the even more important Philadelphia-Boston market, where Southwest is reducing service but not yet exiting, the results look even worse. There, US Airways has an almost 30 point load factor advantage and an astonishing 40% yield premium over Southwest.
The only conclusion that can be drawn from these results is that Philadelphia fliers, especially the business travelers who buy higher-priced tickets, have preferred to stick with US Airways rather than give their business to Southwest. There are many reasons to believe the same could be true in Atlanta. Why? First, as has been demonstrated repeatedly, it is very difficult to make money playing second-fiddle at a major hub airport. Delta is gargantuan compared to AirTran in Atlanta – approximately three times the size of its smaller rival, with a global reach, a massive entrenched frequent flyer program, and a corresponding ability to schedule far more frequencies between city pairs to allow travelers to fly exactly when it is most convenient for them.
Of course, these are the same hurdles that AirTran had to overcome to build its presence in the Atlanta market in the first place. But it did so at a time when AirTran’s unit costs were much lower than Delta’s. Back in 2004, AirTran’s CEO claimed he could fly a passenger for 35% less than it cost Delta looking at stage length-adjusted unit costs. It is difficult to know what cost advantage Southwest will have over Delta, but it is certainly far smaller than 35% considering Delta’s costs have come down while Southwest’s climbed since 2004. And AirTran’s incredibly low cost structure will likely climb to Southwest levels very quickly as the merger progresses.
Even with its significant cost-advantage, it is not as if AirTran has truly thrived in Atlanta. “Survived” is a more accurate description. Where it competes head-to-head, Delta has shown revenue premiums of 30 percent or more (remarkably similar to US Airways’ premium over Southwest in Philadelphia). Lower revenues and lower costs have generally enabled AirTran to eke out tiny profits. Last year, for example, AirTran made $38 million. And so far this year, AirTran has apparently been modestly unprofitable, even as all the legacy carriers (except American) have made money.
To produce even this break-even level of financial performance (assuming oil prices do not decline), Southwest is going to have to significantly boost unit revenue from the current AirTran network. For while the combined airlines will undoubtedly have some cost-saving synergies, the 800-lb gorilla in the closet is going to be the expense of bringing AirTran’s relatively low paid workforce up to Southwest’s best-in-industry wages. For example, a Southwest pilot now makes about $260 an hour. An AirTran pilot makes about $100 less.
Boosting these revenues may not be easy for Southwest. First, it plans to give up checked-baggage and change fees, putting it at a significant revenue disadvantage to Delta — which can charge the same base fares and still collect this additional ancillary revenue. Southwest will also be eliminating some of the in-flight perks valued by AirTran’s business customers: a separate business class cabin and seat assignments. Southwest may also face push-back from its new frequent flyer program which can be far less generous than AirTran’s, especially for passengers buying discounted tickets.
Finally – and unlike in Philadelphia – there are virtually no under-served Atlanta markets for Southwest to stimulate with its famous low fares (which are now a lot higher than they used to be, but still cheaper than what legacy carriers typically charge when they don’t face competition). AirTran already flies to nearly all of the places Atlanta travelers want to go. So if Southwest is going to make money in Atlanta, it is going to have to do it largely on the routes AirTran already serves.
Bottom line: Atlanta will be a challenging environment for Southwest. Failure may have been an option in Philadelphia, but it is not an option in Atlanta. Unless Southwest rises to these challenges, what we think we know about our domestic aviation industry is again about to change.
Wayne Rutman is an independent airline analyst and investor in Wilmington, DE. He can be reached at waynerutman@yahoo.com.
33 comments on “Is Southwest’s Pullback In Philadelphia a Sign of Potential Trouble in Atlanta? (Guest Post)”
Probably not. They are the most profitable airline to date. Can’t remember when they actually lost money. They know what they’re doing.
As an airline, yes they are profitable.
But in certain markets they lose money so they pull out – which is what might happen here if they are going to try to stay profitable.
Interesting article but I’m inclined to disagree (Thoughts are my own and not of SWA). I am not privy to the reasoning behind these route changes but I believe these route reductions in PHL are a matter of timing and prioritization. We are adding new markets and increasing capacity in others without any fleet growth. Therefore, this must come at the expense of other routes. This is not to say that long term that SWA will not commit to taking on US Airways but we need to “batten down the hatches” in light of the current cost environment we are facing not to mention another possible economic downturn. Again, my thoughts and they do not necessarily reflect SWA’s.
There’s no question that routes need to be reduced to fund other flying, but which routes do you pull? The routes that suck the most. Would Southwest stay in these routes if it didn’t have better options elsewhere? Maybe, but they don’t seem to perform well so it wouldn’t surprise me to see them disappear anyway. Either way, Southwest has not been successful in Philly.
First, what impact has RR 2.0 had on business travelers? WN seems tone-deaf to the complaints that it is hearing, especially from business travelers. As for my own anecdotal evidence, I haven’t flown WN since RR 2.0 and don’t foresee myself booking there anytime soon. There may be enough money being made off of leisure travelers to make up the difference, for now; leading me to point 2.
Second, I still think WN is dependent on infrequent travelers assuming that WN is cheaper than other airlines to the point they don’t even look elsewhere. I have a friend who is planning on visiting NYC this fall because, in her own words ‘now that WN is flying to EWR, it is cheap to get to NYC.’ She was in for a pleasant surprise when I showed her taht should get nonstop to all 3 major airports for cheaper than WN. Once the leisure travelers figure this out and stay away from sothwest.com, then things will get intersting.
I am really curious how they’re going to handle the “Southwest is cheapest” halo drying up. Have there been recent examples of the “Southwest Effect” in cities?
You bring up very interesting points and I am going to disagree somewhat with you. I am sure Southwest will have a revenue disadvantage when they start taking over routes from AirTran. I honestly think the PHL market is going to be somewhat different from the ATL market for the following reasons: 1) Shear size. ATL will be Southwest’s gateway to the Southeast – much like BWI is for the northeast. At PHL, they were fighting with that gateway in terms of routing connecting or thru passengers to fill up the extra seats that weren’t filled due to the lack of origin/destination passengers. In ATL, they are going to have enough connecting passengers to fill up those empty seats that might not be filled up by the local markets. I’m sure there will be a trial and error to find out what the maximum markets can take but I think it’s going to be somewhat different from PHL. 2) While they may lose some frequent fliers, they may gain some from Delta, also. They may have people that usually fly DL out of ATL only because WN didn’t fly out of there. While I think the defection will be more from WN/FL to DL, I don’t think it will be a big enough amount to really matter.
I do agree it will be challenging to go up against Delta in ATL, but I think ATL is in a much better position to be successful then what PHL panned out.
At the same time, remember that Florida is a huge leisure market so fares tend to be lower, and Southwest already has a good presence in BNA, MSY, HOU and other airports that are viable alternatives for connections. Although you can route connecting traffic through ATL, it doesn’t add all that many new markets/connections that are not feasible elsewhere.
And even though Southwest is essential moving towards a hub and spoke model, it still acts as a point to point carrier and needs a good amount of o/d traffic to compete cost-wise.
I agree that Atlanta is a different beast. I went back and forth with the guest post because comparing a start-up operation in Philly with a massive entrenched operation in ATL seems difficult. But it should almost be easier in a start-up market for Southwest because it can stimulate traffic. In Atlanta, it’s pretty stimulated with only some additional traffic coming from connecting the dots between the two route networks. That won’t be huge, I wouldn’t think.
The thing that always gets me is the cost problem. Southwest’s costs are higher than AirTran’s by a lot and that can make it a lot harder to compete in Atlanta.
PHL and ATL are different for WN since they went into PHL cold turkey and build a network. In ATL Airtran has been there and made a name for itself, and will just be replaced by WN.
You will see more WN jets/signing/uniforms etc around ATL then you would ever see in PHL. They will be more ‘in your face’ in ATL then PHL.
Keep in mind they came to California as a small nobody and for years now have been the dominating force in the intra California market where they had to go up against more then one major carrier in the whole state.
The Airtran/Southwest operation may be smaller then Delta in ATL, but that could be the point for many people.
Delta and Southwest will have a civil co-existance at ATL. I think all the wild predictions of DL killing WN/WN killing DL are nonsense.
DL will still be the 800-pound gorilla, the global carrier that can take you damn near anywhere.
WN will be, as FL was, the solidly entrenched #2.
As an ATL-based traveler, I’ll take what we’ve got over nearly any other city in the nation.
WN has proved that it can coexist with legacy carriers in their hub markets; DEN, SFO, HOU/IAH, DAL/DFW, EWR (to an extent), MDW vs. ORD…but they need a lot of pax to do this. If they’re careful, they’ll get enough people in Atlanta, but they’re trying to grab business customers and having a single-class cabin with no seat assignments replacing Airtran which has both assignments and BC..not so hot.
What’s interesting is that WN is now scaling down MKE as a hub…similar to the BWI-PHL situation but in this case they’re dealing with another LCC and MDW is closer to MKE than PHL is to BWI. WN can out-schedule Frontier without much of a problem if they really want to do so. However F9’s costs and fleet profile (ERJs running short-haul profitable routes out of MKE, 99-seat E-Jets running smaller routes, A320 series with comparable capacity to Southwest 737s) mean that Southwest can’t just come in and compete, expecting to take everything. Yes, they’re now the second-largest airline in DEN, but the three-horse race with UA and F9 means that getting high fares is nearly impossible.
Will Southwest pull out of DEN? Of course not…they have a hub there now. But if they had the ability to mop the floor with F9 they would’ve done it by now.
Southwest has a token presence in San Francisco and Newark, so that’s not really the same thing. Those are minor spokes in the Southwest system whereas Atlanta will be a hub.
In Dallas, Houston, and Chicago, Southwest has the advantage of operating out of a different, less costly airport. There are real differences in demand at those airports, and that’s one big difference in competition versus Atlanta.
Denver is the closest parallel, but that’s also a different story. Southwest hasn’t been raking in the dough in Denver, but it saw an opportunity and keeps pursuing it aggressively. Maybe it’ll work in the long run – the assumption there has to be that eventually capacity shrinks in Denver if something happens to Frontier. But as you say, if Southwest could mop the floor with Frontier, it would have done so by now. So what happens if Frontier survives and thrives?
Southwest specifically has stayed OUT of entrenched hubs. No service to MSP, no service to CVG, limited service to DTW. They choose alternate airports at HOU and MDW to stay out of the way of the entrenched carriers. PHL was interesting because there was an entrenched carrier, but WN smelled blood. Perhaps they underestimated US — God knows how many times that airline has been written off.
Frontier is fascinating because they’ve managed to do well despite sharing a hub with United and, to a limited extent, Southwest. It’s pretty amazing they’ve build a business for themselves there.
To be fair US was a different airline when WN entered PHL in 2004. Since then US has gotten under AW’s management and actually turned around a good bit.
Welcome to now, WN! I just don’t see how this does anything but help DL. Sure FL will finally be relevant in many of its spokes, but I don’t think that revenue bump will outweigh the increase in costs bringing FL up to WN levels, messing with the hyper-banked ATL hub structure, and dumping business class. WN’s struggles in IAD, SFO, PHL, PIT, LGA, and BOS make it clear to me that the game has changed, and while WN has done a great job so far, the next 5-10 years are going to be its biggest challenge yet.
A couple of random thoughts:
A funny thing happened on Southwest’s path to destroy US Airways at Philadelphia. US was taken over by an airline that knew how to compete with Southwest – America West. Southwest was in Phoenix before America West flew its first mission. But America West still found a way (not always successfully, but it hung in there) to go toe-to-toe with the much larger Southwest and survive over a long period of time. It did so by differentiating itself. Of all the carriers started after deregulation, America West survived the longest; and in a very real sense still survives. That says a lot in my book. So if any airline knows how to compete head-to-head with Southwest Airlines, it’s the “new” US Airways.
Delta has a huge advantage over Southwest in Atlanta; just as US Airways did in Philadelphia. But Southwest has one advantage over Delta – flexibility. It’s business plan is a model of flexibility. It will find its profitable niche. Southwest may not be the 200 pound gorrilla most of its fans think it will be in ATL, but I think it’ll survive and thrive when it gets right sized for its niche, whatever that turns out to be.
This time in the airline industry reminds me of the situation with the railroads in the ’70s and ’80s. Back then, there were too many railroads, with too many miles of track and too many employees. Sound familiar? The railroad industry “rationalized” itself through often painful mergers and bankruptcies. Now there are four very large, financially stable railroads in the U.S. – Union Pacific, BNSF, CSX, and Norfolk Southern. It is very telling that Warren Buffett, who lost millions on his investment in the “old” US Airways just took BNSF private.
Given this historical precedent, I agree with the notion that we’ll ultimately end up with three large legacies (UA, DL, and US/AA) and one large LCC (WN/FL). I also think the regionals will consolidate into three large systems built around Skywest, Pinnacle and Republic. It will become harder and harder for the capital markets to justify the large investment involved in starting a new airline given the much more rational (i.e. less fragmented) competition. There will still be a few niche carriers (Alaska, jetBlue and Hawaiian come to mind, and specialty carriers like Allegiant and Spirit may also thrive) but a new Southwest or America West wannabe is not on the horizon and won’t be once the industry has shaken itself out.
Just my two cents.
What exactly do you mean by ‘flexible’ that Delta doesn’t have? That they can easily drop and add routes? They certainly can and (in the post) probably will, but Delta could add and drop routes and capacity as it likes too.
Also, I highly doubt that AA and US will merge anytime soon. AA simply doesn’t have the money to buy anyone, US probably doesn’t want to buy AA for that reason, and they don’t add a whole lot to each others’ networks. They won’t just because it’s ‘convenient’ to do so.
Having recently flown both US/DL/SWA, I will ride SWA -reasons? Prefer their a/c and their customer service-not to mention the quick turns and “get it done” attitude of their crews and agents that I greatly admire. I’ve experienced enough of the “so what?” mentality of some other carriers and uncomfortable regional jet flying on routes that are too long for small a/c
I think that AirTran will lose a large percentage of their corporate business in Atlanta, case in point – Coca Cola. CCE & Coca Cola get complimentary business class upgrades and no change fees as part of their corporate contract with Air Tran. Southwest doesn’t offer either (in a sense). While AirTran has rode out and learned how to compete with Delta, Southwest has been quick to dismiss the Air Tran way of doing business. A handful of people I know have been let go or told to take 25 to 45% paycuts. Support staff decimated. “Our way or the highway” is the mantra the Citrus folks are feeling, and “where is the LUV, not Atlanta” is a theme I’m also seeing as of late. Even a southwest airlines rep was quick to say “its not a merger, we acquired them”.
I think this one is going to be messier than HP/US.
The article fails to mention that Delta is deep in debt thanks to years of massive losses and that Southwest has the financial clout to last many years longer than Delta if an airfare war on competing routes ever surfaces.
Southwest cannot compete on many routes with Delta, and it simply won’t on many others, so saying that Southwest will outlast Delta due to competition makes no sense. Sure, they might capture more passengers on ATL-HOU, but Delta can also afford to take a loss on a route for a bit just like Southwest.
Just about every airline is deep in debt. You missed the fact that the two component airlines of Delta, Northwest and Delta, recently went through bankruptcy to shed a bunch of that debt. Delta isn’t going to ceed ATL in the lifetime of the universe.
The other side of that is Southwest isn’t stupid enough to let one city run the whole operation into massive debt. They’d rather pull out of ATL than lose the whole airline.
While Delta is wicked strong in Atlanta, Southwest is equally or in some cases stronger than many of the spokes Airtran serves from Atlanta. Therefore, pax in markets such as Houston, Austin, Baltimore and many more who were previously going to Atlanta on either Delta or Airtran while flying Southwest for much of their other travel will suddenly have Southwest as an option to Atlanta. Consider the Denver market, Southwest has been unable to tap as much the O&D Denver market as they would like due to United/Frontier. However, they make their money or at least break even on pax who fly to Denver from Southwest’s other markets where they have a strong presence such as Kansas City, St Louis etc. That is what will likely shake out in Atlanta for the time being.
I would gather that Southwest will take some connection dependent departures away and add about 50 more to markets Atlanta doesn’t serve, mainly Nashville, Albany, Hartford, Providence, Manchester, Long Island/Islip, Norfolk, Charleston SC, San Diego etc, all of which have strong Southwest customer bases which translate into more Southwest profit.
When SWA, the greyhound of the skies, completes is decimation of Airtran, removing business class, XM Radio, etc. I will return to a legacy carrier. I hate Southwest, cattle call boarding, cheap service (I don’t want a skylite in my plane at 18K feet), mediocre planes, and the general feeling of being a sardine in a can at a dollar store. No Thanks.
Mike, the skylight comment is a poor cheap shot.
I’d rather have a skylight in my plane than the plane crashing. The plane is designed to have a skylight when that failure happens. Its not ideal, but its better than the plane crashing.
Every major airline except Southwest has had an crash that was fatal to crew and/or passengers. (Although, Southwest has had one crash that killed one person, a child on the ground.)
I say this not as a cheerleader of WN, as I haven’t tried WN because I generally agree with your sentiment.
What happen to the post I left this morning, it’s not here. No wonder I wasn’t getting any emails with comments left by others. I didn’t think no one other then three people would post on this subject.
Now I don’t rememeber what I said…..lol.
It was along the liines that other have now said about being a new carrier in PHL and replacing Airtran in ATL were to different things since in ATL WN would be in your face with planes, signage, uniforms, etc and be noticed more.
I think Southwest is smart enough to know the dynamics of competing with DL in ATL. I understand that Southwest is not the cup of tea for every frequent flyer but it’s no more a cattle call boarding than coach on legacy carriers. If you are addicted to business or first class with fewer, wider seats, that is a choice. But having been a Southwest Customer for many years and a Shareholder, I encourage people to try a flight or two before making judgments. The planes are not mediocre (Southwest flies the same 737’s as AirTran with roomier sit pitch, the famous Southwest Customer Service may be low cost but it’s not cheap in terms of quality – the legendary humor is free. With flights so full on all carriers, it is challenging to not feel like a sardine in a can, even in business class on AirTran. My money is on Southwest to make its entry into ATL a success long-term. DL no doubt has an advantage but there is a niche for Southwest/AirTran. Bring it On!
What I want to know is what is SWA going to do with MIA and FLL?
Is Miami finally going to have SWA service?
There has been alot of shuffling of the FLL / LAX services with JetBlue and Delta.
I think SWA will do fine in ATL, but there will be some hit and misses too as they experiment and adjust their schedule. I personally love SWA but hate their starting and stopping flights to my select destinations….I want to know I can get to where I am going…..
I bet Miami goes away at some point. Airtran has never been able to establish a foothold there other than one daily flight to BWI (Atlanta flights were pulled some time ago). The folks in Dallas may be toying around with it a bit to get a feel for the market, Miami does carry a more business travelers than Fort Lauderdale and they may see potential in adding flights to some Southwest focus cities such as Houston and Chicago. Ultimately though, I bet they pull it because of Miami’s high costs.
I think Huntsville will go away once the subsidy runs out. Lexington will likely be dropped at some point due to its closeness to Southwest’s well established Louisville operation. Des Moines probably won’t be able to support much Southwest service, Chicago Midway is the only new market I see them adding. Despite also being small, I would guess that Charleston WV would stay because of the potential for Atlanta, Baltimore and Chicago flights.
Speaking of Atlanta, Baltimore and Chicago, that is probably where most of the merger related growth will be at first, connecting the dots to those cities. For Chicago, think Akron/Canton, Allentown, Charlotte, Dayton, Flint, Grand Rapids, Harrisburg, Knoxville, Memphis, Portland ME, Richmond, Rochester and White Plains. Baltimore is ripe for service to Akron/Canton, Bloomington/Normal, Charleston WV, Flint, Knoxville and Memphis.
Yes, the Southwest cost problem is huge. Somewhere there was a rumor of them adding another 4 seats to every aircraft, so that would help.
Connecting flows may not be reduced at BNA because the costs at BNA are much lower than ATL. BNA has 4 runways, plenty of gates, barely any competition. I’m not sure Southwest wants to drop all of that to gain a slight revenue premium at ATL (if any).
I’ve heard rumors from a couple of close, credible sources that WN is in negotiation with MEM for concourse A. This happens to be the real estate that DL is vacating as it trims smaller regional jets and centralizes its MEM hub operation onto concourse B. MEM is also very quickly renovating that space as DL trims their flying. I’m not certain what WN would plan to do with the space, but I do know that MEM has historically been one of the cheapest airports to do business due to cost sharing with FedEx and has an excellent performance record, especially in comparison with DL’s larger hub at ATL. Perhaps that is what they are looking at.
“business-oriented market (in other words, a “perfect” Southwest route”
Really? I was under the impression that Southwest was more about the leisure market. Since when did Southwest become a business-oriented airline?