Southwest Tells Airports to Keep Costs Under Control

One of the questions that I was really interested in asking Bob Jordan, EVP Planning and Strategy for Southwest Airlines (LUV), at the airline's media day last week was about airport costs. Airports and airlines should both want more profitable flights to serve more customers, but it's fairly common for airports to act against those interests. Bob and I discussed how Southwest views this issue.

As you would probably suspect, airport costs aren't the number one issue for airlines in deciding whether to start service at an airport. As Bob says, "if we're not there, the number one component is 'Is the passenger base there? Are the fares there?' Airport costs are a big component, but if you don't have the passenger base, it doesn't matter."

But they are important in determining how many flights can profitably operate at an airport. It's something of a guessing game until the airline actually starts service, but at that point they become even more important. In a business where margins are razor-thin, a couple of dollars increase in costs can make or break a flight.

How are airports faring on a macro level? Not well. According to Bob, "airport costs are one of our worst performing cost categories. After fuel, the rise in our airport costs are the worst cost category we have and we are not happy about that."

Why is it that airport costs are rising so rapidly? Much of it is because airports feel the need to build more than is necessary to keep an airport functioning well. Though it was hard to get Bob to name bad examples, he was happy to talk about airports doing the right thing.

Baltimore put $400 million or more into a new terminal but then, based on where we thought growth plans were going, they changed. The facts changed. Baltimore reacted and shut off square feet that we don't need and lowered their costs pretty dramatically as a way to do something for Southwest.
Working with airlines closely can mitigate some of the cost problems, as Baltimore is showing. This doesn't, of course, mean that airports shouldn't be building. It just means they should only build when necessary and they should build smartly. Take a look at Dallas/Love Field, for example.
A great example is half a mile across the runway at Love Field. . . . We're putting half a billion into the airport, so we've worked really cooperatively with the Department of Aviation, the City to design a facility that's gonna be wonderful, very cost effective. The per passenger costs afterwards are still going to make a lot of sense. They'll still be some of the lowest in our system, and they're letting us manage parts of the project because we can do it more efficiently.
Which airports are getting a failing grade in this respect? Bob wouldn't say, unfortunately. You would think he'd want to be more vocal about it to make examples of what airports should not be doing. If anything is going to make an airport notice, it's hearing it from the largest passenger carrier in the U.S., an airline that most airports dream of having come in with flights.

I started rattling off the names of some airports which have had expensive construction projects recently, and he did go back to one.

You named Sacramento as an example that, on a cost basis has been much harder to deal with. Costs are rising despite the facts.
And that was probably the closest I was going to get toward a condemnation. That was pretty tepid. If you're not familiar with it, you can read more on the Sacramento airport expansion project.

But we can talk about what's a good project and what's a bad project all day. Ultimately, what does Southwest want from an airport?

We're looking for folks who run and manage the airport the way we run our business. If fuel costs go through the roof, we're not going to sit idly by and do nothing . . . . Airports have got to do the same, they've got to be responsive. The other thing they can't do is, they've got to modernize, but they've got to be responsible. . . . The funding mechanisms, like PFCs [passenger facility charges which are included in the price of the ticket] aren't free buckets of money. They get passed on to the consumer.
We all know that airports want to get more service, so they better be listening to what Southwest and others are saying if they want to have a shot.

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Photo via Brett Snyder