Delta Confronts the Oil Price Crisis

Subscribe  Apple Podcasts | Spotify | YouTube | RSS

Delta’s latest results are in and the fuel price challenge is front and center. Gordon, Jay, and Meghna dive into what the numbers say about the airline’s strategy and resilience. In part two, the conversation turns to Southwest and the next chapter of its transformation story.

Watch This Episode

Transcript of This Conversation

This transcript is generated by artificial intelligence.

Hello and welcome to the Airline Weekly Lounge. I'm your host, Gordon Smith, and this week I'm joined by Jay Shabat and Meghna Maharishi. In part one, we're crunching Delta's Q1 numbers, and in part two, we're asking, is Southwest still Southwest?

Hey Jay, hi Meghna, how are you?

Good, Gordon, how are you?

Doing really, really well, thank you.

Busy day here, 8th of April as we are recording, and we usually record on the Tuesday as regular listeners may know, but we brought it forward a day to Wednesday because we've just had Delta's earnings call, the Q1 numbers.

Meghna, I know you've been reporting this busily for Skift just in the past couple of hours. I know you also had an opportunity to speak to Ed Bastien in the recent hours as well. We'll get to that in just a moment.

Thank you for joining us on this special episode. Jay, as is customary, let's kick things off with just the headline numbers, and then we'll cross over to Meghna for a little bit of additional analysis.

Sure. We'll do, Gordon. So yeah, Delta reported their first quarter.

That's January to March results. Delta is always the first now. That's their claim.

Their big claim to fame is going first in the earnings parade. And in fact, I think they're the first of any company, really any major company in the all of the US corporate America. So they had that interesting distinction there.

And they basically did well. They reported a 5% operating margin. That's excluding special items.

And what did they do last year? Also 5%. What did they do first quarter of two years ago?

5%. What did they do the first quarter three years ago? 4%.

So very consistent. Now, obviously, towards the back end of the quarter, they experienced this big fuel spike with fuel now, before. I mean, we have a lot of volatility in the oil markets now.

Again, we're speaking Wednesday, day after the ceasefire that was implemented. But just on the eve of that, Jeff fuel price is on average in the US about $4.80. That's using the Airlines for America index.

Just to give you, for comparison sake, that $4.80 compares to an average fuel price of $2.30 for Delta in 2025. So obviously, a very big increase, a lot of extra cost there.

Delta, in fact, expects that in the current quarter, if fuel prices hold where they are, and that's a big if with the ceasefire and all that, and who knows what else is going to happen between now and the end of this quarter.

But if things hold, they expect that their fuel cost will go up by another $2 billion. And that will have a profound effect on their earnings for sure.

So if they have a full quarter of that, they expect their second quarter operating margin will be just somewhere between 6% and 8%, and that would be compared to 13% a year ago.

So whereas the first quarter, right in line with historical norms, second quarter, as of now, on pace to be less than what Delta's used to.

Sure.

3:28

Delta Market Outlook

A lot of key themes there, Jay, that we'll pick up later in our conversation. I want to bring Meghna in because you were listening in to the earnings call as well.

I think it was Ed Bastien who said, the best type of fuel recapture is not to buy fuel in the first place. There were a few sort of little quips in there. What did you make?

What was the mood music on the earnings call? Meghna, you've listened in to a fair few of these. What was your take on the tone?

Yeah, I think it seemed actually, I think, decently positive.

I think when I compared to what the conversations were like at the same exact time, like last year when tariffs became a thing, there was a lot more worry in that call in 2025. I think this year, they seem to be striking a more optimistic tone.

I think they're really emphasizing that they have other structural advantages, whether it be in their loyalty program or their partnership with American Express.

And I think also just the fact that demand has held up really well because that tippy top end of that K-shaped curve that Ed Bastion likes to reference a lot, they're still buying tickets, they're still flying, they still want to fly in business

class, they still want to go to Europe in the summer. So I think that's really just been propping Delta up and they don't really seem to be worried about that demand waning at any point soon.

I think also Ed Bastion said today that those travelers just seem to be immune to headlines. Maybe it's news fatigue or something, but they don't seem to be bothered by what's been going on.

Yeah, yeah, that exact quote. The premium consumer is, quote, immune to the headlines. Is that something that you think is Delta specific?

Or do you think that is replicated across premium travelers, really across the board, certainly in the US sector?

I think it is probably just across the sector. I think United, whenever they report earnings in two weeks, I think they'll probably report something similar, even just in past conversations and just hearing from investor conferences.

It does seem to be the case of that cohort of travelers is still spending. And I think also just more generally that their spending has been really propping up the economy for the most part.

Jay, so much focus on premium. We heard that throughout the earnings call that we've had just in the past couple of hours here. They also called out an inflection in the main cabin.

Main cabin is their parlance for economy. Do you buy that this is a real turning point? What was your insight into that comment?

Yeah, you can use the term turning point if you like.

I think the way to see it is that at this time last year, we had a lot of revenue uncertainty because of the tariffs and because of, remember, there's a lot of government budget cuts.

There was a lot of policy uncertainty, there's a lot of economic uncertainty, there was even that accident in Washington, DC., American Airlines. So a lot of revenue uncertainty.

The difference today is that the revenue is very strong, but there's a lot of cost uncertainty because of what's happening in fuel. So very, very different scenario. But I do, you know, it's pretty clear that the revenue situation is very favorable.

And the way Delta described it, it's pretty much across the board. Leisure, corporate, across different geographies, premium, non-premium. The only place I think they flagged that was weak was maybe Mexico Leisure.

I don't know, Meghna, was there anything else? I think that was it, right, that they called out.

Also, you're a point of sale, but that's been weak last year.

Yeah, yeah, yeah. Good to point that out as well. So it's, you know, Americans are spending on travel.

And it's, you know, I like to, if you look at the economy and there's so many ways, this is, you know, I know an Airline podcast, not an economics podcast, but if you look at the US economy right now, there are really three very powerful engines that

are propelling consumer spending. One of them is just these, you know, this AI investment spending. I don't know if anybody who's listening took a look at JP Morgan's, Jamie Dimon, who's the CEO of JP Morgan.

He did his annual shareholder letter this week. It's always an interesting read. It's a very long read.

It's very interesting.

And he mentioned that just these five AI hyperscalers, these companies, Google and Amazon, and these big Silicon Valley, West Coast, US AI investment companies or tech companies, they're going to be spending $725 billion this year on capital

expenditure. $725, that's up from $450 billion last year. So, you're getting close to a trillion dollars. That's, the entire economy is what, $30 trillion?

So, it's an enormous amount of spending that's circulating through the economy that has to be doing something for travel demand, consumer demand.

And then on top of that, you just still have that wealth effect from all the asset price of appreciation.

I mean, stocks have maybe wobbled a bit a little since, you know, the start of this Middle Eastern conflict, but stock prices are still way up, you know, where they are one, two, three years ago.

Then of course, you have, you know, real estate prices have held firm and et cetera, et cetera.

And then, you know, just the third kind of engine behind the economic strength is that you do have just a lot of government deficit spending, a lot of fiscal stimulus, and that's coming from, you know, heavy military spending, tax cuts.

There's still a lot of infrastructure spending from the 2021, you know, Infrastructure and Jobs Act. So there's just a lot of federal money that's circulating through the economy as well. So should it surprise any of us that demand is still good?

Maybe not.

You know, you might say, well, the housing market is weak and the job market is weak and the, you know, the ag market is where there's so many different parts of the economy, but there seems to be some tangible economic reasons for the demand

Meghna, anything to add there?

Yeah, no, I definitely do agree with that.

I think something that executives have noted is that also corporate travel has just really, I think, made a comeback, especially this time around.

I think at the same time last year, corporate travel did start dampening a little bit because of tariffs. But now, it also seems as if companies are also maybe immune to headlines a little bit too, and they're willing to spend.

I think Joe Sposito, the Chief Commercial Officer at Delta, he did note that markets like New York, Los Angeles, Boston, Seattle are still performing really well for them in terms of that business travel market.

Yeah, it makes sense that, just like I was saying before, there was a lot of revenue uncertainty, a lot of demand uncertainty last year because of the tariffs and other policy uncertainties.

And this year, that seems to have faded, so you have companies. I mean, corporate profits are still pretty strong across the board if you look across the US companies. So, nobody's shedding a tear for Apple.

And think about just companies who spend heavy, heavy sums of money on air travel, corporate air travel.

These Silicon Valley companies are not, maybe they're on the margins tightening their belts here and there, but there's plenty of money to go around travel.

So, it's still relative.

10:33

Fuel Prices M&A

I don't know about you guys, but one of my favorite quotes from the earnings call, I think it was from Ed Bestien. He said, we woke up this morning with a very different set of fuel assumptions than when we went to bed.

And I think that just reflects just how quickly this situation is moving.

Obviously, as we're recording here, we've got that two-week temporary ceasefire announced and hopefully some changes around the situation around the strain of humus and fuel prices as an impact of that. Contact, I think is important.

Ed Bestien, he's been with Delta since, well, how far back do you want to go? 2016, certainly as the head honcho there, but he's got decades of experience and he reflected on that on the call.

He said, looking back throughout his career, high fuel prices are the fastest catalytic factor for change at an industry level.

What do you read into that, Meghna and Jay, if fuel prices stay at that higher level, which Delta do expect for some time, even if they do settle down, the comment was that we expect the fuel prices to settle down at a higher level.

Do you think we will be seeing structural change by that? I'm thinking mergers, acquisitions, and other activity. We had some interesting comments from Sean Duffy, no less, yesterday, Meghna.

Yeah, I think that is something that is definitely a possibility.

I think even yesterday on a call with reporters, Ed Bastion was saying that, this crisis is going to either force airlines to improve or consolidate or be eliminated basically.

And I think this is definitely like a concern if you're a low cost carrier, if you're a spirit just emerging out of chapter 11 bankruptcy or a frontier who's been struggling or even a jet blue, which there's a lot of speculation that jet blue might

be considering a merger. These high fuel costs, I think, do throw a wrench into a lot of their plans. So I think we could potentially see room for consolidation.

I think we've seen a lot of people running different scenarios as to who maybe jet blue might merge with since they seem to be the most likely candidate to pursue some sort of consolidation right now.

I think those comments from Sean Duffy were also pretty favorable.

Just because for a long time, it didn't really seem as if those big four airlines, American Delta, United and Southwest really had room to merge because they're already quite big and they think combined, they already have 80 percent of the market

share in the domestic market. But I think those comments now maybe open up the possibility that if one of those four airlines decide to pursue a merger, they might be met with a favorable response from the DOJ and the DOT.

All right, Meghna, you brought it up. Who's jet blue going to merge with?

Oh, I don't know.

Gordon, you're free to speculate as well.

I will speculate wildly, but not on the podcast.

Looking from this side of the Atlantic, I did think Secretary Duffy's comments were relatively candid, and I think that will just reinforce what we already knew, reading between the lines of this administration is more open, certainly than the most

recent previous administration with the Biden White House. That isn't really moving the needle in terms of what we thought we knew, but it's just reinforcing that. And I think there will be some additional conversations had.

Will this be a golden era for M&A? We were speaking about Allegiant and some country on earlier podcasts. I think that was pretty much a done deal.

I think any administration would have signed that off. These are very, very small players on the fringes, relatively speaking. I think there is movement for at least one significant deal.

And I wouldn't even put Spirit and Frontier into that category. I'm talking maybe even one level above that, the Alaskans, the Southwest, the Jet Blues. So make of that what you will.

That's my two cents. One thing I did want to pick up both of your brains on is Ed Bastien's comments around COVID. He said, COVID was a different animal.

No one was strong enough to engage. And that was basically meaning that, yes, there was an opportunity with deflated share prices and lots of sort of turbulence. I don't like to use the word turbulence on this podcast.

It's so cliche, but there I go. I did it. COVID was a different animal in Bastien's words.

Delta is coming into this crisis, call it what you will, in a much stronger position and quite a unique position compared to some of its peers and its partners. Meghna, do you think Delta could make any moves? Are they just too big?

I don't know.

I mean, it's hard to visualize, like, which airline Delta could even merge with. I mean, if JetBlue is the candidate right now, a merger with JetBlue, I mean, even given Duffy's very favorable comments towards that would receive antitrust scrutiny.

And I mean, even if it went to trial, I would not be surprised if a judge did not approve that just because of the overlap in Boston and New York. So that's, like, really hard to visualize.

I think even, like, a United, for that matter, has been, you know, tatted around a lot as a possible candidate because they have that partnership with JetBlue. But also United is quite big, too. So it's still very, like, unclear to me.

I've seen quite a few analyses that maybe, like, Southwest or in Alaska might have a better shot at it. But Alaska is also still, I think, kind of dealing with their Hawaiian merger and still integrating all those operations.

So you have to wonder how much will Alaska really want to do another merger right now?

Well, especially coming off here Virgin America, I know that was 2014, but, you know, he sort of seems like Alaska is in a perennial state of merger flux or acquisition flux. Jay, anything to add?

I think we can pretty safely rule out Delta getting involved. But as Bastien said, any outcome regardless, Delta will benefit. Even if they're on the bylines watching from afar.

For sure.

And I echo everything that Meghna just said.

I bet Delta would probably be unlikely to see them merge with Jepalu, and Jepalu does seem to be that kind of wild card out there, the one that would be most likely to find a buyer since they already entered this fuel crisis in a distressed state.

But Delta, well, like Meghna said, just too much overlap at JFK in Boston. United seems like the most obvious one because of their unreserved desire, I mean, or let's say well-documented desire to get back into New York JFK in a big way.

So that would be a nice fit in addition to the, you know, limited partnership they already have. And then Southwest would be the other, you know, kind of obvious one too, since they are traditionally weakish in the Northeast.

And so they wouldn't mind having a bigger New York, New England presence as well. You know, Alaska, I don't see how that makes any sense from multiple angles. I mean, I think as you guys just suggested, Alaska is already busy digesting Hawaiian.

And on top of that, if you put a JetBlue and Alaska network together, it's more of that barbell effect, you know, where you have really nothing in the middle, don't have a lot of overlap, some Transcon overlap for sure, be helpful in the Transcon

markets, but not anything I'd see. I'd be very, very surprised if Alaska would go after a company like JetBlue. The only other thing I wanted to say, regarding this topic is that and to reference what Mr.

Bastian said, the last round of consolidation or big consolidation was triggered by a fuel price crisis. Back in 2007-2008, we had oil run up way above $100 a barrel.

Airlines didn't know what to do, and they wound up eventually merging over the next, let's call it the next decade. So would we have that situation again? Well, I think a lot depends on just how long this lasts.

If fuel prices are close to $5 a gallon now, if they stay close to $5 a gallon for six months, one year, two years, something's got to give, right? I mean, some airlines are going to have to go into bankruptcy, out of business, or find a partner.

It's almost, unless, you know, there's a lot of moving parts here, so you can never be too confident in any predictions, but there is a possibility that revenues just get so, so, so strong that they offset some of this.

As we see now, hard to believe that if oil prices stay, you know, plus $100 plus per barrel, that the economy won't at some point buckle. But then again, you never know.

I mean, the economy's less oil intensive than it was back in the 2008 fuel price crisis.

So, you know, a lot of moving parts, you don't know, but huge, you know, bottom line is huge amount of pressure from diesel fuel, gas, jet fuel prices at close to $5 a barrel.

And by the way, guys, if I just, I'm looking today, you know, this is one day, or the day that the ceasefire is, you know, supposedly taking effect here. It's only a two week ceasefire, but oil is back down to 96. I just Googled it.

That's WTI oil. So we're just seeing these huge fluctuations. So who knows where this goes.

You remember too that I mentioned that in August of 2008, the WTI price of oil hit something like $140 a barrel, but then you had the financial crisis that set in that fall.

And by the end of the year, you were talking about 30, $40 a barrel, maybe even less than that. So don't go trying to predict anything. Don't, you know, if anybody tells you they, you know, I think oil is going to be that, just cover your ears.

Don't pay any attention. Nobody knows.

A lot more insight in the next issue of Airline Weekly as well, Jay. Meghna, I just want to touch on a few quickies with you before we get into the break.

We did hear from United, I think it was, last week, around sort of this idea of basic business, a segmented business class. We've seen that across the board in other parts of the world.

I'm thinking KLM, Etihad, Emirates, they have this stripped back business class option where you don't get lounge access, you don't even sometimes get a checked bag, you don't get a signed seat. We are seeing that come in to play at United.

There was a question from an analyst about that happening at Delta and they were told, expect more from us in the next quarters around segmentation. Do you think this is the general direction of travel that we're going to be seeing?

Right now, it seems like it.

I think a few months ago on an earnings call, former president Glenn Hauenstein, he was saying that segmentation was something Delta was experimenting with and was really interested in, just because they'd be able to maybe better meet that high

demand that they have for premium travel. Scott Kirby has also said that United is currently building out the supply to meet the demand and that the demand had always been there, but the supply was lacking.

So I think creating these fair tiers would probably help better meet that really high demand that these executives have been talking about for the past few years.

21:36

Delta Strategy Post-Pandemic

Yeah, we had one Skifter who is in our group chat yesterday saying, I don't care about the amenity kit, I don't care about the lounge, I don't care about anything, just give me the bed, especially on an overnight red eye.

They don't even want the meal, they just want the absolute bare basics. So it'll be interesting to see if Delta does go down that route, just how stripped back the entry level option is.

And also just one final point on Delta from my side, the MRO revenue, that's maintenance, repair and overhaul, basically engineering and everything else. Their revenue more than doubling year over year, expanded margins.

I think it's called Delta TechOps, which sounds a little funky, but essentially it is just repairing the planes instead of outsourcing it and doing actually some of that in-house for other operators as well.

That's looking like a really powerful profit engine for the wider business and maybe one that can sort of ride it through these extra rough times.

Agreed, yeah, very profitable business and growing very fast right now. They even said cargo was growing rather fast as they get these newer airplanes, particularly the wide bodies like the A350s.

They'll soon be getting, I don't think they have any A350-1000s yet. Is that right? I can't remember.

I don't think they have any yet, but they'll be getting those as a great cargo aircraft. So that's another nice business to have to support. And then don't forget they have the refinery as well.

That one's a little tricky. I'm sure the refinery is paying a lot more for the crude oil that they use, but at the same time, they get to sell jet fuel and whatever else they produce from that refinery at very, very elevated cost.

So that gives them presumably some advantage as well. They didn't really talk about it too much in the call, but don't forget that they have that.

The only other fact I wanted to point out or highlight from the call that I thought was kind of interesting, they said that a lot of the new planes that they're receiving, some of them as many as 50 percent of the seats are premium in some way, not

necessarily flat beds, but maybe a premium economy or whatever. But about half the seats on some of these new planes are premium, whereas they're replacing planes with only maybe 30 percent of the seats. So that does a number of things for you.

I mean, you're just tapping into this incredibly strong premium demand, but it also instills some capacity discipline too, because you're not flying as many total seats at the end of the day, because obviously the premium takes up more space.

So that's, I thought, a very interesting fact. You see, obviously, United American kind of going down that road as well. So yeah, premium, premium, premium.

Big, big story of the post-pandemic era.

All the P's.

All the, yeah, post-pandemic, premium. We got to find a synonym for era that starts with a P, but you guys work on that. Yeah, there you go.

You got it. Perfect.

Yeah, and I'll just, you know, if there's nothing else you take away from, you know, the, if you want, if you're thinking about, or, you know, next time you're at your, you guys are at a dinner party, talking airlines, you can think about it this

way, or bring this up. If you think about the airline industry, particularly the US airline industry, in the post-pandemic era, the two things that you can say, probably most importantly, is that costs are way, way up, but revenues are way, way up.

However, revenues are up more for some airlines than others. Everybody's got the very aggravating cost inflation, but Adelta and United have very, very strong offsetting revenue gains.

Whereas, the kind of lower down the totem pole you get in terms of, you know, LCC business model, the less revenue gains, the less powerful those revenue gains will be.

And that's why you have carriers like Spirit and Frontier, and even JetBlue just experiencing so much distress in this post-pandemic period.

For sure. So much more we could discuss. We will get into a bit more detail in the next issue of Airline Weekly.

Go to airlineweekly.com/subscribe if you're not already a subscriber. Meghna, I know you're going to hang around in part two. We're going to be talking about your feature, which is just published around Southwest.

Jay, we'll let you get back to the earnings crunching. I know you've got a huge set of numbers to get through ahead of our next issue. So thanks for your insights, Jay.

Really appreciate those. I will look forward to hearing from you on the next show. Anything to add before we wrap up?

No, thank you, guys, and happy earnings season to you, as I always like to say.

Absolutely.

We'll be talking a lot this earnings season, for sure.

Oh, yes.

Right. Before we get into the break, a quick reminder to send any questions or comments that you might have for us to podcasts at skift.com. That's podcasts with an S at the end.

Please don't forget to follow or subscribe to the podcast wherever you're listening or watching.

If you are enjoying the show, please rate us 5 stars or leave us a post of review so we can be the team to spread the word about the Airline Weekly Lounge. Don't go anywhere. We'll be speaking Southwest after the break.

Before we head into the break, we're joined by a skifter that you might not be so familiar with, and that's Adam Stacey. He's a Senior Editorial Event and Awards Producer. That's a big title.

And he's currently working on the Skift Idea Awards. Adam, welcome to the Airline Weekly Lounge.

Thank you very much. Glowing introduction.

For the benefit of listeners who aren't familiar with the Idea Awards, what are they all about?

Yeah. So, Skift Idea Awards, we're just moving into our eighth year. So the awards were launched really to recognize and celebrate the most impactful ideas across travel, just the entire ecosystem.

But I like to think of them as the travel industry's innovation benchmark. We all know we're at the pivotal moment of transformation for the industry, structurally, technologically, operationally.

And these are awards about spotlights in the companies and leaders who are actually driving that change.

So, I'm talking about things like advancements in customer experience, AI, digital transformation, sustainability, product design, all that good stuff. And what's important with the awards as well is that it's not necessarily about scale.

So, we're open to everyone because our focus is about impact. So, we see submissions from startups, mid-sized players, global brands, individual leaders. I was like to think innovation doesn't correlate with the size of the company.

It correlates with the execution and the results that they're putting out and that's what we are recognizing with these awards.

Totally agree. Sometimes it helps if you're a little bit more nimble, a bit smaller. You can be a little bit more disruptive than a very large corporation.

But what would you say, Adam, to an Airline Weekly Lounge listener who says, that all sounds great, but where do I fit in? Yeah.

And I'm not an airline expert, so I'm not going to tell people what to do. But I think for this audience, we have an obvious category, which is airlines and airports is specifically designed for that industry.

That could cover anything from carbon innovation, distribution strategies, emerging advanced aimability. We're seeing all this stuff with flying taxis and this crazy stuff. But we also have categories specifically for technology.

So this industry specifically is deep into AI deployment. We're focusing on revenue optimization, workforce planning, retail transformation, data-driven personalization, and sustainability as well.

That's another area where this industry is focused on. So fleet strategy, emissions tracking, new planes, all that stuff.

So we're looking for initiatives really that just demonstrate tangible progress and are bettering the experience for the end user and the industry as a whole.

Sounds great. And if anyone's still unsure, I believe you've got a quiz as well.

We do. We do. Our marketing team, I like to call them the best in the biz.

They've come up with a quiz that you answer a couple of questions and the quiz will tell you basically which categories are the best fit.

Amazing.

One new thing we've launched this year is where is that you can actually download a sample form before you submit.

So if you're entering on behalf of a client maybe, or you're not quite sure what the submission forms looks like, you can just download a PDF sample and take a look in advance.

Super, super helpful. You've got everyone interested. What is the call to action?

Where do they go next if they want to apply or learn a little bit more?

Yeah. So the next step is to just head to the website, which is hosted on live.skift.com. And then you just follow through to ID Rewards.

As you mentioned, we've got a quiz. You will find all of the categories, the sample PDFs, judges, previous winners. If you're curious to see who's made in the past and all of the relevant timelines.

The submission process is very straightforward and streamlined. It's all done remotely via our online system. You can buy now at the lowest rate and continue to edit up until the entry deadline in July.

So there's no huge time commitment there. And one thing I would say is even if you're unsure about whether your project or initiative will qualify, it's worth exploring.

Some, from speaking to past winners, some of the most compelling have come from projects that they didn't think would be a good fit. And then they've gone on to win.

So yeah, if you've got a smart solution that solves a real-world problem, take a look.

We'd love to hear from you. Fantastic. Yeah, sounds great.

Thanks again for coming up to the show, Adam, and telling us all about it.

And I can speak for myself for the Global Forum in New York last September, we got to see for ourselves many of the IDEA Awards winners and they are from right across the industry. It's not always who you might expect.

So yeah, do check that website out, lifedoreskift.com, where you find all the details for the IDEA Awards. Just scroll down to the bottom of the page, you'll get all the info there.

Thanks to Adam for joining us on the show and listeners hanging around because we'll be talking IAG right after this short break.

31:35

Southwest Reinvention

Hello and welcome back to the Airline Weekly Lounge. I'm Gordon Smith, joined in part one by Jay and Meghna, now just Meghna because we are focusing on your feature.

And if anyone's not familiar with this, this was called Southwest 2.0, the radical reinvention of America's favorite cult airline. I love that headline.

If anyone is familiar with Southwest, which we assume they are, if they are listening to the Airline Weekly Lounge podcast, but aren't familiar necessarily with your feature, Meghna, give them the 30 second elevator pitch. What was it all about?

Yeah, so Southwest has gone through quite a transformation in the past couple of years. Now they have assigned boarding, assigned seats, no more two bags fly free. You can find a Southwest fare on Expedia or Google Flights.

It's just like a very different airline today than it was two years ago. So I was really interested in just wanting to figure out what was the big catalyst for these changes? How do executives feel about them?

I feel like Southwest has always been kind of a polarizing airline, just because even the way that its old model worked was so different from everybody else.

But the people who were able to maybe master that old model, who were able to set a timer on their phone for when to check in to get a good boarding group and who were fine with the open seating, those people who really liked it, maybe for them, I

think it's a very big change to suddenly now go from that to being like everybody else. So I really just wanted to learn more about that and what that has been like for just everyone involved in this process.

And you did a bit of traditional, original, on the ground reporting. You didn't just keep it to the desk. You traveled down to Texas, to Dallas.

You visited the company headquarters. You spoke to some of the executives. What was the impression you got at head office there?

Yeah, I think the big impression that I got was that, you know, they all think that these changes are warranted and that it's a good thing for the airline.

Southwest is, I think, just a really interesting company in general because it has a very strong, distinct culture that I don't think any other airline has or maybe even any other company in America might even have.

You know, like they have a perfectly preserved version of Herb Keller's office that they kept in place when he died in 2019. Essentially, it's almost untouched.

They have a lot of tributes to him and also Colleen Barrett, who was the president of Southwest. Their conference room is named after them. You know, they are super serious about Halloween.

I think you have to, if you work at Southwest, you have to have a good Halloween costume on Halloween. So it has like this very friendly corporate culture.

And, you know, they recently dealt with this activist investor, Elliot, coming in, which I think really became the catalyst for a lot of these changes.

If you listen to any Southwest earnings call, like before Elliot, you'd hear kind of Southwest executives sort of waffle back and forth on whether they were going to actually change or stay the same.

Even I believe in 2023, Bob Jordan had said that he thought and some of these premium changes that a lot of other executives are talking about are cyclical and not structural. That narrative has obviously changed since then and since Elliot came in.

So I think the big consensus was that these changes were necessary and Elliot really sped up the pace of them because maybe Southwest would have been a lot more slower to really just rip off the band-aid because I think executives were feeling that

And Meghna, we know Elliot is a big fan of the changes.

35:04

Southwest Customer Reaction

They were sort of the fire in the belly, bringing through a lot of those. We know Wall Street more generally has been in favor of those changes up until the start of the Iran War. Southwest was one of the best performing stocks in the sector.

That all sounds great. You also spoke to just ordinary Southwest passengers. Some of them devotees, some of them slightly more casual passengers.

What was the feeling on the ground there? Are they feeling alienated? Are they appreciating the need for the change?

What was the impression at the airport?

Yeah, it's super mixed. Some customers, I think, really do not like the new Southwest.

I think they're really re-evaluating if it is worth even being loyal to the Southwest because even for some of these changes, Southwest, I think, was known for being just generally very, very customer-friendly.

The fare class that people would buy the most was their want-and-get-away fare, which was sort of like the equivalent of a basic economy fare on another airline, but it offered a lot more perks than a normal basic economy airline.

Southwest obviously got rid of that and now does have a basic fare. So that's been like a big point of contention.

I think also just changes in the loyalty program too and the fact that you earn fewer points on that basic fare than you may have earned on, you know, want to get away in the past has also been another issue.

But it seemed to me, just in speaking to a lot of these travelers, they seem very attached to Southwest, I think, as a brand. And I think they seem very attached to Southwest's identity.

If you talk to like any random avid Southwest flyer, you know, they have always really loved Southwest.

It's a difficult airline, you know, in terms of the way that they would have open seating and kind of the stressful process it would be to like check in to get a good boarding group and everything.

But those flyers, I think, really mastered that process. And I think they liked the Fapa Bay had mastered that process. So I think that change or those growing pains are hard for them.

But also, like on the other hand, there are a lot of flyers who do really like having assigned seats. They like being able to pick a seat. They think it's a lot less stressful than it was in the past.

You know, Southwest executives have said they've conducted a ton of surveys and they've found that 80 percent of their customers like wanted assigned seating, for example, which is, I think, a pretty significant percentage.

So I think, just as the old Southwest is polarizing, the new one, I think, is also polarizing.

Is there a risk, though, you mentioned the assigned boarding and some other elements that bring it into sort of conventional US mainline, airline territory.

Is there a risk that Southwest gets stuck in the middle between your ultra low cost carriers and your premium carriers?

So funnily enough, right now, even with these very high fuel prices, Wall Street is actually projecting Southwest to be one of the airlines that could maybe best weather a lot of this uncertainty, and that they can still maybe break even this year if

those prices stay elevated, which I think is kind of a testament to show how much these changes have maybe impacted Southwest and the carrier's bottom line. So maybe they do run the risk of being like everybody else or getting stuck in that low cost

ULCC mode. But I think at the same time, Southwest is a little bit more distinct from those other carriers.

The big thing that the executives that I spoke to emphasize was that the customer service at Southwest, that is something that they take to be their biggest differentiator. I will say I did fly Southwest for the first time for this story.

And I did kind of notice the flight attendants are a lot more maybe interactive than you might notice on another flight. And I think also the customers there, people were just talking to each other.

They were complete strangers just talking to each other and being really social, which is not something that you see super often when you're flying.

So I think Southwest still has that identity still of being this very friendly airline, this friendly place. And I think that is something that executives still view as a strength that makes it different from everybody else.

I will also say, like, there have been like some complaints that the extra legroom seats, there's really not that much extra legroom compared to the standard economy seat.

But when you fly, maybe like on a Southwest flight versus maybe flying on like Spirit or something, the economy, like the seats are a little bit better than what you would get in a typical economy seat elsewhere.

There is still a little bit more space to them. At least that's how I felt when I was flying them. So I think it is still like an option for people too, who may not want to pay a super expensive Delta fare, but they might not also want to fly Spirit.

I think it's still like a very appealing option. And I think also the fact that they do have just a lot of dominance in some of those secondary airports like Dallas Love Field or Chicago Midway.

I think that's also just still like a very big benefit for them. That is also like another strength that executives have pointed to as well.

Meghna, really appreciate your time. I know it's a busy day for all of us, a busy week for all of us, but just a quick reminder, Southwest 2.0, the radical reinvention of America's favorite cult airline is now available to read on skift.com.

If you're an Airline Weekly subscriber, you get access to the airline news on skift.com, included in your subscription and that includes Meghna's features as well. I think I'm right in saying so go check that out if you haven't already Southwest 2.0.

Meghna, thank you so much. So much more we're going to discuss around Southwest when we get the earnings in a few weeks time. So I'm sure we'll have you back on the show to pick through those.

Right. Thank you to Jay for joining us in part one for Delta. And of course, thank you to Meghna for joining us in part two.

Thanks to you for listening. And thanks as always to our producers, John, Monica and Will. Wherever you are in the world, thanks for listening and we'll catch you next time.

Bye for now. Whether you're listening to us on Spotify, Apple or wherever you get your podcasts, please remember to subscribe, rate us five stars or leave us a positive review. This really helps us get the word out about the Airline Weekly Lounge.

So you can continue to bring you this podcast every week, absolutely free of charge. And if you're watching us on YouTube, be sure to subscribe to the Skift channel and hit the notification bell to find out whenever a new video drops.