SWA Article...

[NavyMetro]

Any comments on this from "The Motley Fool"? Such as the "considering adding smaller planes" part.

Southwest Up in the Air

If you've paid any attention to the airline industry, you know that Southwest Airlines (NYSE: LUV) is arguably the cream of the crop, in terms of financial health and performance as a long-term investment. It's also the nation's sixth-largest airline.

But while some things continue to go well for Southwest, not everything is rosy. Here are some updates on this fascinating company:

After some 16 months of negotiations with the union representing its 7,200 flight attendants, Southwest has asked for a federal mediator to get involved. The story is familiar: the union is seeking pay raises, while the company is trying to maximize profits.


Business has been on an upswing over the past year, with August traffic for Southwest clocking in at 3.4% above year-earlier levels and capacity up 2.6% in the same period. The percentage of seats filled (referred to by those in the know as the "load factor") rose from 72.7% to 73.2%.


While Southwest has been famous for only flying one kind of plane (thereby keeping costs down), it is now considering adding smaller planes to its fleet of 737s. This is in part due to the need to keep up with upstart competitor JetBlue Airways (Nasdaq: JBLU), which is spending some $3 billion on smaller planes than its Airbus SAS A320s.

Southwest merits the consideration of any investor, due to its 20-plus years of solid performance. But never forget the risks inherent in the airline business: fare wars, volatile fuel prices, vulnerability to terrorism-related traffic slumps, bad weather, empty seats that still have to be flown to destinations, union negotiations, and more. Many investors in airlines such as American (NYSE: AMR), Northwest (Nasdaq: NWAC), and Delta (NYSE: DAL) have lost money over the past five and 10 years. Since Sept. 11, 2001, airline stocks overall remain down about 50%.

Get more Southwest insights from this Fool Radio interview with CEO Jim Parker, and this piece by LouAnn Lofton.


Any comments?

 

[Swerpipe]

Maybe

I have been paying close attention to Southwest for about 4 years and this is not the first time that I have heard of Southwest "considering smaller aircraft". This time however, it does seem that they want to make it a bit more public. It could be a way of pressuring Boeing to make them a deal they can not refuse. Herb once went to Boeing wearing an Airbus hat after coming back from France to send them a message....

 

[Snoopy58]

now considering adding smaller planes

I don't think anything is much different except that the quote from Jim Parker got a lot of attention. What does he gain by ruling out smaller planes? Nothing. What is gained by considering them? Probably nothing (if the verdict remains "no" as it has been in the past), but perhaps something significant (if the economics have changed enough to make them worthwhile in some form).

Southwest looks at all sorts of things all the time. Most of the ideas never see the light of day, but when something really awesome happens as a result of a lot of careful, thorough contingency planning, that makes all the planning process worthwhile. The overnight expansion into MDW several years ago is an example: the expansion happened very, very quickly, because the plan had been developed & thought out carefully over a much longer period of time.

I don't think -600's are seriously on the radar screen. They have a little more performance than a -700 (being a lighter jet), but fewer seats... therefore they aren't interchangable with the rest of the fleet. It creates problems when a flight is sold for a -300 or -700 (the majority of the fleet, 137 seats), and a -200 or -500 shows up (122 seats). On a slow day, no impact, but on a busy day you just created 15 additional oversold seats! That's not good! Just my opinion, but I doubt that the analysis will support buying -600's instead of -700's. The future is an all -700 fleet. In the meantime, you'll see the -500's used in the "lighter" markets, while they & the -300's are phased out. The long range plan will have commonality of all the jets (except for the special paint schemes!) -- all NG's, all 137 seats, all with winglets, every one interchangable for every other one.

If we see any "smaller jets," I think the least unlikely scenario would be a partnership with an established small jet carrier, that they would be a feeder to Southwest. Buying small jets to run an airline within an airline? Doubt it. Buying a "small jet" carrier? Not in a million years. Too many "never again"s from the Morris buyout. Partnership? Maybe. Lots of reasons to doubt that it will happen, but that seems to me like the least improbably of the improbably scenarios.

Just my humble opinion.

Snoopy

 

[SWA/FO]

no

 

[canyonblue]

no

That's the record for shortest post on a FI board.

Shortest PA on a flight?

"Halfway"

 

[flint4xx]

?

 

[Heavy Set]

.

 

[chazman]

 

[ultrapilot]

Fools !

The "Fools" do not know what they are talking about this time.

SWA will not buy smaller jets, period. Why on earth would we even consider buying any aircraft besides the aircraft that we currently fly?

Parker's statement was true, we are "looking at smaller (RJ) aircraft, but not to buy them. We always have. We are only looking at them to see how they would, could or will affect our airline in terms or other airlines operating them. We have a winning fleet of Boeing 737 aircraft that will continue to provide the customer and the company with the best possible product. We fly our 73's at a low cost that has, for thirty years, proven the concept of one aircraft, one type of training, one type of maintenance, and a known list of parts. Most successful companies change very little when they find a winning combination. We currently have that combination.

I am sure that there are a few of my brothers out there that would say you can operate certain aircraft at a reduced cost compared to the B737 and you are probably right. But if you factor in training, maintenance, scheduling and other cost, the company would spend way more money than any savings from flying a smaller jet.

Look for more 737's in SWA's future but do not expect to see a different aircraft in our fleet unless we rule the skies. All of this of course is IMHO.

Sorry for the soap box but it had to be said. The "fools" are not clairvoyant or they would not have to work.

 

[firstthird]

The Motley Fools have done about 3 or 4 articles on jetBlue in the last 2 months or so, mostly informative but no information that a reader on flightinfo wouldn't have known beforehand and some of it just plain wrong (one of the articles touched on all of their low cost principles high lighting the one aircraft type, unfortunately JB had already announced the EMB-190 by that time). The Fools tend to have informative articles and I used to think they had decent advice but now that I've seen them pontificate on an industry I know a little about, makes me wonder if they are as far off on other ones as they can be on aviation. I mean during all of their JB cheerleading the stock was sitting at astronomic prices and regardless of whether you think JB is THE airline, it probably wasn't the time to buy, just as buying SWA right now when it is at a 2 year high, might not be the best move. I mean, what has changed in the last 2 weeks at SWA that those of us that have been watching for years would be surprised about, nothing.

Actually, let me rephrase that. For a value investor who is in it for the long haul, any day is as good as any other to buy a stock like SWA. I expect them to be around a long time and to gradually add value rather than, WOW, big new announcement, lets buy. Although, "investors" like that make it easier for buy and hold types to make our money I guess.

 

[Indapool]

We already have an RJ..it's called the -500

 

[StopNTSing]

We already have an RJ..it's called the -500

...and if the company could wave a magic wand and turn all 25 of them into -300s (or -700s), they would do it yesterday!

 

[lowecur]

This is my first post here. I am an ERJ shareholder, and have some knowledge of WN operations from an outside perspective.

Let me say that I think WN will order a smaller a/c, and EMB will be their choice. No new cities in the last 2 years, and maybe one in 2004. Just how much can you build out your existing routes with the 737? Barring a collapse of another major in the next 2 years (which I think is unlikely with present/future cash positions), WN has built out it's profitable route structure as far as it can go. They need magins of 15%, and the present single digit margins will not cut it. B6 has set the bar with the 190 order, and WN has no choice but to follow or become stagnant.

The EMB a/c are the only logical choice for the future. The a/c will allow them to keep CASM's low, and take the next step to becoming the largest airline in the world. Manufacturing slots are filling up fast on the EMB a/c, and with the Star Alliance order possible at the end of Oct, WN could be pressed to make an order very soon.


Other possible orders for ERJ by the end of the year include the Chautauqua order, Qantas (new LCC) in Nov, and DL (if they get their renegotiations done).

 

[Bill Nelson]

Your dreamin buddy. Your EMB stock will do you well, but don't count on SWA boosting it any with orders for RJ's. If SWA buys anything smaller than a 737-700 it will most likely be a 737-something. The model works, why change it.

By the way, their route sturcture is far "built out."

 

[MLBWINGBORN]

After having a discussion with one of the schedule planners..

I can safely say that SWAs route system is far..far..far from being maxed out..

SWA can add 100 737-700s to the current list of cities and not have to open any new cities for starters..

They havnt hardly begun to tap into the long haul routes and those are very much in the plans for the very near future..

These are long range plans that dont take into consideration the cut backs of or in some cases the failure of a major or two..

For some..RJs may be the short term answer...

But the SWA plan has changed very little for over 30 years..And most of us here dont see RJs as anything but an un needed cost and in some ways a threat to a business plan that has over 30 years of profitablity behind it..

Like some have said here before..The best RJ for SWA is a Boeing 737-700..


Mike

 

[lowecur]

This is the same rhetoric I heard when I speculated about a possible B6 purchase from ERJ on other boards..

WN's margins are shrinking, and they will continue to shrink with payroll increases in the next few years. You actually believe mgt is going to sit idley by while Air Tran, Jetblue, and possilby ACAI add on profitable small cities? These are not cities that you fly profitably with a 737NG under WN's current busness model of frequency in a market. Frequency with an LF of 75% is the only way you can have a 15% operating margin at WN. With a load factor between 62 - 65% , and no viable city expansion in the works for WN, they will become stagnant.

To quote Mr. Parker:"That whole issue of smaller airplanes is not something we are going to ignore. We're going to look at it, in light of the new technology that's available , and try to make a rational decision whether it makes sense for us to consider some smaller airplanes. The new airplane that JetBlue has ordered, the 100-seat regional jet, is an interesting airplane and we would be remiss if we didn't at least take a look at that."

Last time I looked, Parker and Herb are calling the shots. Look for the order.

 

[Snoopy58]

Strongly concur with what MLBW just posted!

Anybody who thinks that RJ's equate to lower CASMs than 737's needs to relook the numbers. Ain't so! If you can only fill 40 seats, an RJ do better than a mostly empty 737, but SWA has plenty of routes where the planes run full, with more such routes to be added as capacity allows. (For that matter, 757's have better CASM numbers than 737's do, but for the inevitable times when they fly nearly empty, it just kills ya. The Guppy is hugely successful for a good reason -- fills a sweet spot between revenue when full vs costs when empty.)

RJ's work fine for some models (i.e. adding small-city spokes to a large hub-n-spoke operation), but SWA uses a model that works magnificently well with 737's only.

Claims that the SWA route system is maxed out or that RJ's equate to lower CASM's are based on bad data. You'll have to look mighty hard to find any SWA people who believe that the economics will support RJ's there any time soon. I for one certainly wouldn't bet the farm on it!

> WN's margins are shrinking

That has far more to do with the state of the industry than with any problem with the route structure. Virtually everybody's margins are shrinking (or negative). As things return to normal in the industry, SWA has tremendous ability to expand.

As far as the quote from Jim, all he said is that it would be dumb not to LOOK at RJ's. I completely agree that SWA will LOOK at them. He never said anything that would suggest that the OUTCOME of such a look would be any different than the last time SWA looked at RJ's. The economics didn't support SWA getting RJ's then, and I don't see anything to suggest that they do now.

Yes, Jim, Herb, and Colleen *DO* call the shots, and they have the best track record in the industry of making smart, no, brilliant, decisions! They aren't slaves to industry trends, and I don't see the "mass appeal" of RJ's doing anything for them. If the numbers support the massive costs of going to a second type of aircraft, they would, but I can't imagine that the numbers are anything close to that point. (If anything, I think the numbers would support going to a LARGER aircraft, not a smaller one! But I don't see that as particularly likely either.)

Not now, nor in the next several years at least!

 

[MLBWINGBORN]

Ok..
Jim said he would..Weve looked at them before..The answer is still the same..

RJs dont work for our business model!!

In fact..They didnt work for the Midway business model either..

The RJ costs were higher than the 737-700 and at one point the company even said they were going to scale back RJs and replace with 700s due to lower costs..

The secret here is pretty simple..Dont put an airplane that cant make money on a route that wont make money..

Many times airlines put aircraft on routes to either compete for market share or on pure speculation...Neither case is a good idea for making money..

In the case of SWA we only commite to routes that we KNOW are going to make money with the aircraft that we KNOW we can operate at a profit..

And the people envolved in that process are some of the most highly regarded minds in the business...
They have a very simple model that they constantly update and dont do anything on pure speculation or to protect market share..

In short..They dont try to re-invent the wheel..It either makes money or it wont... And if it wont... We dont do it..

Period

Mike

 

[lowecur]

Now granted this is propaganda from ERJ website, but I believe the percentages are close.

Using a 500 NM route, here's the percentage costs using the 86 seats EMB 175 as the base.

EMB170 CRJ700 CRJ900 EMB190 EMB 195 717 736 318

SEAT COST

+8% +22% +5% -1% -10% -3% -3% -1%

TRIP COST

-3% -2% +5% +22% +23% +29% +35% +37%

WN looked at the CRJ 200/700/900. From the above info, you can see why it made no sense at the time. However, with the EMB a/c, it sheds a whole new light on the discussion. These are full size cabin a/c with 6'6'' height, better overhead storage, and overall ergonomic comfort with 2X2 seating than the 717, 736, and 318.

<RJ's don't work for our business model>

You're right, but EMB's do. Look for the order.

 

[MLBWINGBORN]

Now granted this is propaganda from ERJ website, but I believe the percentages are close.

Yeah..you are right..It is propaganda..
I also noticed that you failed to list any data from Boeing on the 737-700..

Your data appears to mix apples and oranges..

You cant compare a full 86 seat airplane with a partially full anything..Our break even loads are around 62% and our loads are running 75 to 77%..That with a travel market thats very soft right now..

If you filled the sky with RJs or EMBs or what ever..Where would you land and park them?
In some markets the answer is a bigger plane..In some markets the answer is a smaller plane..

We choose to go into markets that fit our business model..Which by the way..Is centered around the 737-700.

Yeah..Look for the order..

Of Boeing 737-700s..

Lots and lots of them..

Mike