Morningstar | MAX Groundings Could Challenge Southwest's 2019 Expansion Plans
Southwest has been consistently profitable for more than 40 years thanks to exceptional execution of its low-cost-carrier strategy, which includes fleet commonality, point-to-point flying at secondary airports, short-haul routes, and a distinct company culture. And, unlike most major carriers that rely on third-party distributors for ticket sales, Southwest has succeeded using its own distribution channel, which accounts for roughly 85% of bookings. Southwest currently commands the largest percentage of U.S. domestic market travel of any major carrier. Historically, Southwest had little trouble finding new short- to medium-haul routes that fit its point-to-point low-cost strategy, but opportunities are becoming increasingly scant. Consequently, the airline has begun to pursue other avenues for growth, such as flying international and long-haul domestic routes and chasing more price-inelastic travelers who are accustomed to flying with legacy carriers. We anticipate top-line growth will peak in 2019 thanks to the California reinforcement and an emergence of routes between California and Hawaii in early 2019. Nonetheless, we anticipate long-haul routes will weigh on profit margins. In addition, gradually turning away from a no-frills product offering and choosing to pursue travelers higher up the cost curve will drive unit cost and unit revenue higher as Southwest adds amenities to lure travelers from legacy carriers.Flying long-haul and launching routes from congested Tier 1 airports will also hurt Southwest’s productivity. Part of Southwest’s low-cost strategy relies on employees, particularly pilots, delivering industry-leading productivity and planes turning quickly through airports, another productivity measure. Southwest traditionally relied on running a highly productive and lean fleet, but the recent dispute with its mechanics union and the 737 MAX groundings pose challenges. If MAX aircraft remain grounded for several months, Southwest will need to forgo capacity expansion plans for 2019.Southwest Airlines operates Southwest Airlines, a passenger airline that provides scheduled air transportation in the United States and near-international markets. The company has Boeing 737 aircraft in its fleet and serves destinations in various states, the District of Columbia, the Commonwealth of Puerto Rico, and other near-international countries such as Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos. The company principally provides point-to-point service, which allows for direct nonstop routing. The company also provides a suite of digital platforms to support Customers' needs prior to and during the course of their travel.
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