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Between 2011 and 2014, Southwest Airlines (NYSE: LUV) took a hiatus from growth. It increased its capacity less than 2% over that three-year period as it struggled with high fuel prices and focused on integrating its AirTran acquisition.
Having more or less completed the AirTran acquisition by the end of 2014, Southwest has returned to growth in 2015. Fortuitously, Southwest is doing so just as it is reaping a big tailwind from lower fuel costs. In other words, Southwest couldn't have picked a better time to start growing again.
Return to growth
Last fall, Southwest revealed plans to accelerate its capacity growth rate to 6% in 2015. To some extent, this growth plan was driven by the company's ability to return to a more normal aircraft usage pattern after having many planes out of service due to the AirTran integration. But it also reflected attractive growth opportunities.
The biggest of these -- representing about half of Southwest's projected 2015 growth -- was the opening of Dallas Love Field to long-haul flights, which occurred last October. American Airlines (NASDAQ: AAL) has absolutely dominated the Dallas-Fort Worth air travel market for the past decade because of restrictions that sharply limited long-haul flights at Love Field, Southwest's home airport.
However, Southwest was convinced that there was massive pent-up demand for long-haul flights out of Love Field. The new routes performed so well in their first few months that Southwest acquired two more Love Field gates in late January in order to expand further. In a classic version of the "Southwest Effect," lower prices have also stimulated traffic for American Airlines in the Dallas-Fort Worth market.
As a result of getting the extra gates in Dallas, Southwest now expects its full-year capacity to rise about 7% year over year. It also expects to grow capacity by at least 5% next year because of the impact of annualizing the new routes added during 2015.
Rising profitability
Growth usually puts pressure on an airline's profitability in the short run. It can take a couple of years for demand to fully ramp up as customers discover the new flights and change their travel patterns.
However, thanks to the massive drop in fuel prices -- and to a lesser extent, improved efficiency -- Southwest reported a stellar 17.4% operating margin last quarter. This was up by more than 10 percentage points year over year despite Southwest increasing its capacity by 6.0%.
A great time to grow
Southwest's stellar Q1 results show the wisdom of targeted growth in the current domestic airline market. Costs are falling because of the sharp drop in oil prices since last summer, while domestic travel demand remains robust.
Southwest hopes to hold unit revenue flat this year. Even if it falls short of this ambitious target, it will still be better off than if it had adopted a modest growth rate. After all, it is earning a very high 25.6% return on invested capital. When a company is earning a very strong return on invested capital like that, investing in growth is clearly in shareholders' best interests.
There are still plenty of doubters
Not all Wall Street analysts see it that way, though. Southwest Airlines CEO Gary Kelly still had to fend off a couple of questions during the earnings call about why the company was growing so quickly.
What really seems to be happening is that American Airlines and its legacy peers have reduced their capacity plans recently in order to bolster their unit revenue, and some analysts were hoping Southwest would follow suit.
Southwest isn't facing the same pressures as the legacy carriers, though. For example, passenger unit revenue declined 1.7% last quarter at American Airlines, whereas it was flat at Southwest. For Q2, American expects its passenger unit revenue to decline 4%-6%, while Southwest expects a more modest decline of perhaps 2%.
American Airlines has been fairly up-front about the fact that Southwest's rapid growth in Dallas (and elsewhere, to a lesser extent) is one of the factors depressing its unit revenue right now. But from Southwest's perspective, this is very profitable growth. As long as it is earning a better than 20% return on invested capital, Southwest should keep pushing the pace on expansion -- regardless of the impact on its competitors.
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The Southwest Corridor light rail project is now expected to cost $2 billion — $341 million more than the prior estimate, the Metropolitan Council said Monday.
Most of the additional cost was attributed to ground conditions along the route and soil contamination in St. Louis Park and Hopkins.
"The additional costs for the Southwest LRT Project pose significant challenges for our funding partners and taxpayers," Met Council Chair Adam Duininck said in a statement on the new cost estimate. "I will be talking to our funding partners, local communities and legislative leaders to determine the future of this project — all options are on the table."
The Met Council said that additional testing and engineering work filled in planning for the project, from a 1 percent level of detail to a 30 percent level of detail. Those new details include:
• 80 percent increase in retaining walls identified, as well as bridges and connecting roads.
• Redesign to accommodate poor ground conditions along the length of the corridor.
• Redesign to accommodate wetlands, flood plains and drainage areas, primarily in Eden Prairie.
• Acquire 137 acres of property, up by 11 acres from 126.
• Redesign to address rail safety requirements, including five gated LRT crossings and five shared freight rail and LRT crossings.
Gov. Mark Dayton said he was "shocked and appalled" to learn of the big jump in the line's expected cost.
"The continuing escalation of the costs to design and build this line raise serious questions about its viability and affordability," Dayton said in a statement, adding the Met Council board "should quickly review other options for providing much-needed public transit to this region of the metro area."
Duininck said he has asked planners to look for cost savings on the project to reduce the increase.
Trains are now expected to start rolling on the Minneapolis-to-Eden Prairie line by 2020 instead of 2019.
The ballooning costs are the latest in a series of obstacles for the project, which had an estimated price tag of $1.25 billion just two years ago. Since then, it has faced a series of delays due to opposition from Minneapolis residents concerned it would harm nearby lakes and a popular recreation trail.
The city and the Metropolitan Council eventually agreed to bury the trains in a $130 million dollar tunnel as they pass between Cedar Lake and Lake of the Isles. The Met Council struck a separate deal with the Minneapolis Park Board, which was concerned that the trains would detract from the scenic channel of waters between two lakes.
In addition to the problems raised by the latest cost estimates, the project also faces two lawsuits — one from a group of Minneapolis residents, and another from the owner of a Minnetonka apartment complex.
The new details and cost estimates are scheduled to be included in a Supplemental Draft Environmental Impact Statement, originally scheduled for January of 2014, now expected in May.
The Met Council has already spent $59 million on project planning.
Light rail is still the best option to meet transit needs in the southwest metro, but the project's expenses need to be reduced, Hennepin County Commissioner Peter McLaughlin said.
McLaughlin supports the southwest light rail project but acknowledged the jump in expected cost is a "huge setback. We're going to have to find ways to make the thing work."
Published: April 28, 2015 2:36 pm
Southwest Airlines canceled nine early-morning Baltimore flights Tuesday — five departures and four arrivals – in reaction to the civil unrest that hit the city Monday evening, the carrier said.
“This allowed us to ensure adequate staffing and gave Southwest employees (and customers) the opportunity to make arrangements for school being cancelled, and potentially, that transit could be closed,” a Southwest spokeswoman said Tuesday afternoon.
“Operations and staffing are business-as-usual now, and we do not anticipate additional cancellations,” she said.
Southwest operates between 215 and 220 weekday departures at Baltimore-Washington International Thurgood Marshall Airport.
Rioting and looting broke out Monday in Baltimore after the funeral of a black man who suffered injuries while in police custody and subsequently died. The Maryland governor has called out the Maryland National Guard, and a curfew is in effect. Public schools, other institutions and some businesses were closed Tuesday.
HOUSTON (KTRK) --
Police are investigating a murder at southwest Houston hotel.The crime scene is located at the Sun Suites Inn in the 3100 block of West Sam Houston Parkway South.
Witnesses tell Eyewitness News they heard an argument followed by four gunshots.
Detectives are still trying to piece together details of the shooting.
Keep checking back on this page to get real-time updates as this story unfolds. To get alerts for breaking news, download the ABC-13 news app for iPhone or Android. You can also get breaking news alerts sent to you by email.
(Copyright ©2015 KTRK-TV/DT. All Rights Reserved.)
Chairman and CEO Gary Kelly listens to a question during the opening last year of Southwest Airlines’ system operations center in Dallas. (Terry Maxon/DMN)
Naysayers may point out that Southwest Airlines chairman, president and CEO Gary Kelly was paid more than $5 million in cash, stock and other compensiation in 2014.
Related
Fortune Magazine offers the counterpoint: His pay is modest compared to heads of other companies.
As a result, Fortune put him at the top of five CEOs that it calls the most underrated.
“Kelly’s pay is still relatively modest,” Fortune said. “His base salary is well below his peers, at his request. And the company has the chutzpah to award a discretionary cash bonus, recognizing, as many companies do, that sometimes things come along that aren’t recognized by ‘official’ objective bonus plans. The discretionary bonus is not large, a few hundred thousand dollars. This all adds up to restrained pay for exceptional performance.”
The magazine noted that he got a 25 percent pay raise in 2014, while total stockholder return was 126 percent, net income grew 51 percent and the return on capital was 16 percent,.
“Since Gary Kelly was appointed as CEO, Southwest has outperformed every one of its rivals: Jet Blue, United Continental, American Airlines, Virgin America, Delta,” Fortune said.
Although Fortune doesn’t mention it, Kelly is having to deal with the unhappiness of labor groups that have been negotiating new contracts for years. But it noted that Southwest employees will divide up $355 milllion in profit sharing based on 2014 profits.
“That’s the equivalent of five weeks’ pay for the average employee and represents the largest total dollar amount Southwest has ever allocated to the plan,” the magazine said.
As it so happens, CEO #2 on Fortune’s list is Brad Tilden, Alaska Air Group’s president and CEO.
“Who is responsible for Alaska Air’s good fortune? Bradley Tilden, who has been piloting the company as CEO for almost three years. The stellar performance at Alaska Air has led to a pay bump for Tilden of only 18%, from $2.9 million to $3.5 million in 2014, according to figures provided by Equilar.,” Fortune said.
“Tilden’s base salary is set below the 25th percentile for the industry; in other words, three-quarters of his peers are paid more than he is. Most companies target their CEO’s pay in the 50th percentile or higher,” it noted.
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