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Is Southwest Putting Smaller Markets On Notice?

Is Southwest Putting Smaller Markets On Notice?

December 6, 2013 — We were asked this question after Southwest Airlines’ announcement yesterday that it is pulling out of three cities. Two of them – Branson and Key West – appear to be a continuation of Southwest’s culling marginally-performing AirTran cities from its network. Jackson is different. It is one of Southwest’s legacy (i.e., pre-AirTran) markets. Throughout its history, Southwest has so rarely exited an MSA entirely (the last being Denver in 1987, we think) that, when it does, the event demands attention, especially from the airport perspective on which we focus; but first, a disclaimer: we are a former SWA Employee, but this entry is our opinion based on outside observation, not a revelation of inside information.

There is no reason to doubt Southwest’s stated rationale for Jackson: “the level of local demand no longer allows Southwest to profitably serve these markets.” Based on its demography and geography, Jackson would tend to be a Quadrant III airport for airlines – neither high-yielding nor strategic – and the substantial erosion of Southwest’s cost position post-2007 makes it easy to believe that the fares it needs to be profitable on a unit basis would depress demand at Jackson past the point of no return. The question other Southwest legacy airports should ask themselves is, how much of an outlier was Jackson?

If we were a small- or medium-hub airport with demographics similar to Jackson’s, we’d be concerned. The world has changed. Southwest, changing with it, appears ready to achieve its stated, yet so elusive, 15% ROIC goal by means not previously employed, and, really, has little choice. Southwest must perform financially for the sake of all its stakeholders and, since February, 2002, quite frankly it hasn’t. So no, we do not believe Southwest is putting smaller markets on notice; we think Southwest is saying that it will do what it has to do to reach its financial targets, no matter how painful it might be. Good for them.

If not to bash Southwest, then, why are we writing this? Well, in order to quote Bear Bryant, obviously: “The first time you quit, it’s hard. The second time, it gets easier. The third time, you don’t even have to think about it.”  Jackson was Southwest’s first market exit (in a long while, anyway), and so it was hard. We believe Southwest went through a version of corporate agony in making the decision, probably exploring countless alternatives to complete withdrawal – it takes its commitments to its people and communities that seriously – but in the end, it made the tough decision.

The lesson of Jackson is that a business must deliver value to its customers or it will tend to lose them, no matter how loyal they have been in the past. An airport is no different, and an airline is one of its customers. In the post-2007 environment, what airlines most often demand is a target level of profitability. When they don’t get it, every other U.S. domestic airline has previously been willing to leave a market entirely. Airports used to feel secure that, even if Southwest cut a flight here, an entire route there, it would retain something. That Southwest has now shown itself willing to exit entirely is significant, and should cause airports nationwide to reassess what kind of value they provide to their airline customers. Southwest made the hard choice to leave Jackson; and as most of us – even those not nicknamed Bear – know from our own experiences, their next one will be easier.

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