Things in the Sky

I realize I’m playing catch-up here, but during Southwest’s quarterly media call earlier this month, CEO Gary Kelly had some interesting comments on the AirTran 717s and that size of aircraft in general:

We have broad discussions underway with Boeing on a number of issues, and at this point we don’t see a reason why we would want to have a different aircraft other than the 737. So, that’s not to say that we don’t want the 717 because we’ve got them, but we don’t see a reason to keep the 717s longer than we have to, or find a unique replacement for the 717 that is anything other than the 737.

Gary also said during the call that it has lease commitments on 717s through 2024.

Those comments made me do a little more digging.

First off, the vast majority (80 of 88, according to Southwest’s most recent 10-Q) of those AirTran 717s are leased aircraft, and it appears that most of these are leased from Boeing. AirTran is the biggest customer of Boeing’s leasing arm, Boeing Capital Corp., representing 29.9% of the firm’s total portfolio at the end of the first half of 2011. In addition, AirTran accounted for 21% of Boeing Capital’s total revenue during the first six months of this year, according to regulatory filings.

The way I look at things – it appears that if Southwest wanted to get out of those 717 leases early, it probably could work something out with Boeing. Something like that could happen if Southwest was interested in making some new orders anytime soon.

Of course, this all depends on how Southwest feels about the 717 overall. After doing some of my own number crunching, it appears the aircraft might not be a great fit from a cost perspective. Using total operating costs from Form 41 financial data, and ramp-to-ramp time from Form 41 traffic data,  the operating cost per block hour for the AirTran 717 in all of 2018 is around $3,211, higher than the $2,922 I calculated for the airline’s 737-700 aircraft.

Now, Form 41 data doesn’t always paint the clearest picture – and of course every airline has their own internal data that is the best source of cost information – but the public government data does suggest that that the cost performance of the 717 might leave a bit to be desired.

Either way, it will surely be interesting to see how Southwest utilizes the 717, and also how the airline considers that gauge of aircraft in the future.

As many here already know, Allegiant and Spirit have each challenged some of the new DOT consumer protection rules in court (the two cases have since been consolidated).

Interestingly, Southwest has tossed its hat in the ring, though the airline’s complaint only deals with the full fare advertising rule. Currently, only some government taxes and fees (like the 7.5% excise tax) are included in fare quotations. Once the rule becomes effective, all taxes and fees will have to be lumped in.

Here’s what Southwest had to say in a recent DOT filing requesting a stay of the effective date:

[The rule] is based on unsupported speculation and conjecture that consumers are deceived by a practice that DOT has repeatedly reaffirmed over the years as being in the public interest, and which DOT, as recently as five years ago, found there was a “compelling” reason to continue. The Rule also improperly prohibits airlines from informing consumers of applicable fees and taxes in a conspicuous way that will ensure that the consumer will easily see and understand that important information.

What’s more interesting is Southwest’s estimated costs of complying with the new rule – which total $24 to $30 million. Interestingly, only $6 million of this total relates to the IT costs of compliance. The biggest component of the estimate is “$18 million to $24 million in previously expected revenue that would be lost by delaying for at least three months the implementation of certain critical revenue generating projects.”

Naturally, one wonders exactly what these “revenue generating projects” are.

Another one of Southwest’s complaints is extra complexity. The airline argued that “for most of Southwest’s 0&D markets it will be impossible for Southwest to advertise a single accurate price to cover all possible itineraries between the origin and destination points.” (For example, a connecting itinerary could contain additional government fees, like another passenger facility charge, or PFC.)

The airline also said it would “be uniquely hurt” by the new regulation due its recently-updated Rapid Rewards program, which is based on money spent with the airline. According to Southwest, the rule “will add a level of complexity to what is currently a straight-forward , easy-to-use process by consumers.” For what it’s worth – so far we haven’t seen anything from JetBlue or Virgin America on this subject – which have the loyalty programs that are most similar to Southwest’s.

Right now, the exact fate of the rule is still up in the air. The DOT has denied Southwest’s request to stay the effective date of the rule, and has done the same for a similar request from Allegiant and Spirit. The court case is still pending. Meanwhile, the DOT extended the effective date of the rule (along with some of the other regulations) after groups like the Air Transport Association requested more time.

I’ve long pondered the future of Southwest’s fleet of 737-300s. It seems that the Texas-based carrier has planned to keep at least a significant portion of the fleet flying for the years to come, especially when one considers the installation of winglets on some -300s along with plans to upgrade some -300 cockpits to help facilitate Required Navigation Performance (RNP) operations that burn less fuel compared to traditional approaches.

Such a fleet plan makes sense. With these upgrades, the 737-300 becomes more fuel efficient. Paired with the fact that new airplanes are expensive, the -300 probably looks pretty good to Southwest from a total cost of ownership perspective.

But it would certainly appear safe to speculate that the depressurization event Southwest experienced a couple of weeks ago could certainly have some implications for its plans for the 737-300 series. “Obviously we’ll work with Boeing Co. to decide what’s the best reliability answer, what’s the best economic answer in terms of retirement versus replacement of new aircraft,” said Southwest CEO Gary Kelly at a recent conference when asked about the event’s impacts.

The current FAA Airworthiness Directive (AD) mandates inspections every 500 cycles for certain 737 Classics with a certain lap joint construction. According to DOT data, the average Southwest 737-300 had six daily departures in the third quarter of 2010. Roughly speaking, that means the aircraft affected by the AD would need to be inspected about every 83 days.

A press release from the FAA said that 80 aircraft based in the United States, mostly with Southwest, were affected by its Airworthiness Directive. The 737 Classics affected are line numbers 2553 through 3132, inclusive. These are some of the newest 737 Classics, produced from 1993 through 2000, according to Flightglobal.

Herein lies a problem for Southwest, I think. It would appear logical that the newest 737-300s would receive winglets and updated cockpits. According to Southwest’s 2010 annual report, 454 of its 548 aircraft are equipped with blended winglets. All of the 737-700s are equipped, and none of the 737-500s have winglets, so that leaves 102 of Southwest’s 171 737-300s with the modification.

It appears that the vast majority –over 75% – of Southwest’s 737-300s with winglets are affected by the FAA’s Airworthiness Directive, according to data from Ch-Aviation.ch. It seems safe to assume that at least a portion of this fleet could have been slated for cockpit upgrades as well.

So a question emerges – what will be the cost of the additional maintenance on the 737-300s affected by the AD? And how does this compare to the savings generated by winglets and cockpit upgrades later on? The answer will probably not be known until the Flight 812 (CHECK) incident is fully investigated.

If the benefits still exceed the costs, I figure Southwest’s plans will largely remain the same. But what if Southwest decides to begin accelerating the retirement of the 737-300?

Lately, Southwest has used its new 737-700 deliveries as replacements for retiring -300s, and the carrier could certainly continue doing so. According to Southwest’s annual report, Southwest has 88 737-700s on firm order in 2011 and from 2013 through 2017, and also has 37 options from 2013 through 2017. The firm orders alone outnumber the number of aircraft affected by the FAA’s AD.

But what about future capacity growth? In addition, what about Southwest’s evaluation of the 737-800? The carrier has said orders for this type would come from converting -700 orders. So far it has converted twenty 737-700 orders to -800 orders, all for delivery next year.

It’s also worth noting that future merger partner AirTran has 51 737 orders on the books for delivery from this year through 2017, according to its 2010 annual report.

Even if we completely ignore the events of the past few weeks, it is still fascinating to consider Southwest’s current thoughts on the 737-300. While the 737-700 has served as the traditional replacement for the type, is it still the best option?

Certainly an important factor in this scenario is Boeing’s plan for the narrowbody segment. Will the carrier announce a clean-sheet airliner in the near future? Or, will the manufacturer announce a re-engined 737, as predicted recently by Airbus’ John Leahy? If Boeing does indeed go with a new-build option, one also wonders if Boeing remains interested in producing aircraft near the size of the 737-600 and -700.

Airbus’ A320neo family is certainly another option that Southwest could consider.  But that option isn’t the greatest, at least if you believe Boeing’s rhetoric. Boeing Commercial Airplanes President and CEO Jim Albaugh told the Seattle PI last month that the 737 has good operating cost performance, saying that “even after the re-engine we’ll be 2 percent better [than the Airbus offering], and that’s if we do nothing on this airplane,” he continued.

Of course, every aircraft producer will spin the numbers to make their product look the best, but one wonders if the benefits of the A320neo are enough to unravel a partnership between Southwest and Boeing that has lasted for nearly 40 years.

A third option – Bombardier’s CSeries – might have a compelling case at Southwest. The CS300 would seat around the same number of passengers as a 737-300 (137) while offering operating cost advantages over both the -300 and -700. Southwest’s 737-300 fleet is large enough that a CS300 order would not make for an orphan fleet.

In addition, the CS100 could be an interesting option for Southwest to consider as a replacement for its aging 737-500s and the AirTran 717s as those aircraft come off lease. A major question here, of course, is if Southwest still desires to operate smaller aircraft.

Maybe we’ll get some interesting nuggets from Southwest when the carrier announces first quarter earnings in the next few days.

…is the average stage length of the Southwest 737-500, the smallest 737 (122 seats) in the fleet. After reaching a low point (at least in the years I looked up) in 2006, it has increased by roughly two-thirds. Any theories on this — is it part of Southwest re-tooling its network?

The 737-500 is Southwest oldest and smallest fleet, with only 25 aircraft (16 owned, 9 leased). I’m interested in the future of this fleet (and the smaller narrowbodies in general) now that Southwest is acquiring AirTran’s 717s. I wonder if Southwest will continue to be interested in this segment, and if so, what are their long-term plans? How long will the -500s and 717s stick around?

And while I’m busy speculating, if Southwest were to further invest in this segment, which aircraft is best?

(Data source is DOT T2.)

When it comes to fees like bags and reservation changes, Southwest hasn’t followed the crowd. That decision doesn’t mean, however, that the airline has decided to give up on non-fare revenue sources. Southwest CFO Laura Wright shared some interesting details on the subject last week at the Raymond James Growth Airline Conference.

Image credit: Southwest Airlines.

Wright reported that Southwest’s Business Select product, which offers bonus Rapid Rewards credit, priority boarding, a free alcoholic beverage, and priority check-in and security (where available) produced $88 million in revenue. Meanwhile, EarlyBird Check-In, which offers priority boarding (after Business Select and A-List) for $10 one-way, raked in another $98 million. Wright added that Southwest’s “pet service, unaccompanied minor and third and excess bags contributed about $50 million to our 2010 results.”

If you total all those numbers up – that’s an additional $236 million in annual revenue for Southwest. Now, that number might sound small. For example, Delta’s bag fee revenue for just the third quarter of last year was $259.5 million. But, to put things in perspective – $236 million is slightly over half of Southwest’s full-year net profit of $459 million.

And while Southwest has some ancillary products are bringing in additional revenue, Wright said last week that Southwest’s decision to not charge for bags is also helping its bottom line:

Finally, you know I’ve got to bring this one up, we’ve been very pleased with the success of our “Bags Fly Free” campaign. It certainly had a significant impact on our load factor. And we’ve continued to see our share of the domestic market continue to increase. Just in the past week, the DOT released the third-quarter traffic data, and Southwest Airlines’ domestic market share increased to 21% of all domestic O&D passengers.

I just find this really interesting. Has Southwest struck a perfect balance here? They’ve found new sources of revenue while continuing to maintain a pro-consumer image. Its advertising certainly helps, but I think a big factor here is that Southwest has been introducing new products, and not charging for things that were formerly free. (One could argue that a bit, since Business Select eliminated the chance of getting A1-A15 for free, but I think that’s different than starting to charge for the first bag. Another exception would be the charge for the third bag.)

But the other question – what new products can Southwest add in the future? I think they’re stuck with things that are brand new, with Wi-Fi, which is fine, but I think there are some other opportunities that might not work with Southwest’s current image. For example, I’d love to see Southwest charge a same-day change fee because that would probably be cheaper than upgrading to a non-refundable fare, but Southwest has been broadcasting the fact nationally that it doesn’t charge any change fee.

On a slightly-related note, I would love to see Southwest share more details in the future about the revenue performance of its Wi-Fi offering, but that might be a bit pre-mature since only a fraction of the airline’s fleet has been equipped with Row 44. Meanwhile, Southwest is planning to replace its reservation system in the near future – I wonder what kind of additional opportunities that opens up?