With subsidies ending, what’s next for Southwest in Wichita?

With the Kansas Affordable Airfares subsidy ending next June for Southwest Airlines, many are wondering what it will mean for the airline and Wichita Eisenhower National Airport. (June 3, 2015)
With the Kansas Affordable Airfares subsidy ending next June for Southwest Airlines, many are wondering what it will mean for the airline and Wichita Eisenhower National Airport. (June 3, 2015) File photo

Times are good for the nation’s airlines.

Planes full of passengers, fewer competitors and more fees have been pushing the industry’s profits higher.

In 2014, domestic airlines reported a combined profit of $8.7 billion after coming off a $10.5 billion profit in 2013, according to the U.S. Bureau of Transportation Statistics.

In the first quarter of 2015, domestic airlines had a combined profit of $2.9 billion, the transportation statistics data said.

And the second quarter of 2015 was a particularly good one for an important airline serving Wichita.

In late July, Southwest Airlines said it posted net income of $608 million in the second quarter, its highest-ever quarterly profit.

The problem is, Southwest Airlines isn’t making a profit on two of the three routes it flies in Wichita. And the subsidy program that supports Southwest is in its third and final year.

Airport officials and some experts say Southwest, billed as the nation’s largest low-fare carrier, is key to holding down airfares at Wichita Eisenhower National Airport. Without its presence in the market, the other three major carriers could send their fares to and from the city’s 2-month-old terminal soaring.

And if the past two years are any indication, that concern could become reality next June, when a local-state subsidy program ends.

‘Very close look’

Since Southwest entered the Wichita market in June 2013, the Texas-based airline has struggled to make a profit on two of the three routes it flies.

The airline that for years had been wooed and wished for by community and business leaders is now a month into the third and final year of the Kansas Affordable Airfares subsidy program, aimed at offsetting Southwest’s losses as it established service here.

The Kansas Affordable Airfares program paid out $6.5 million in fiscal 2014 and $5.2 million in fiscal 2015, according to information provided to The Eagle from Sedgwick County, which administers the Southwest subsidy.

According to data from Sedgwick County, the airline lost more than $3.3 million on its Wichita-Chicago route and more than $2.3 million on its Wichita-Dallas route in fiscal 2015, which ended on June 30.

That’s on top of $6.8 million in earlier losses: $3.4 million on the Chicago route and $3.4 million on the Dallas route in fiscal 2014.

According to the data, Southwest’s Las Vegas route made a nearly $58,000 profit in fiscal 2014 and a nearly $352,000 profit in fiscal 2015.

Unless the airline manages to reverse its losses on the Chicago and Dallas routes in the next 11 months, “they’re going,” said Colorado-based airline industry consultant Mike Boyd. “They may deal with it for awhile … (but) Wichita doesn’t work for Southwest.”

For Southwest, it’s a matter of making the best use of the Boeing 737s in its fleet, said New York-based airline analyst Robert Mann.

“The issue is really going to be with the limited resources that Southwest or any airline has is what’s the best and highest use of those assets and where should they be deployed to achieve that highest and best result,” Mann said. “So absent the subsidy … you’ll have to look at the unsubsidized route results against what else is possible with the use of those aircraft or that aircraft time.

“And on that basis, Wichita may not continue to be served.”

A Southwest official did not directly answer what the airline would do given the losses so far and the end of the subsidy on June 30, 2016.

“With the Affordable Airfare program set to expire next year, we’re taking a very close look at the current market conditions and making sure we’re providing the right amount of service for the current demand,” Southwest spokesman Dan Landson said in an e-mail to The Eagle.

He said the airline considers the economics of potential routes and customer demand as part of that examination.

“We have a responsibility to maximize our fleet and operate on profitable routes,” Landson said.

Officials involved in the Kansas Affordable Airfares program said extending the plan is not an option, at least not in the immediate future.

Jason Watkins, government relations consultant to the Wichita Metro Chamber of Commerce, said that when chamber and elected federal, state and local officials met with Southwest CEO Gary Kelly several years ago to encourage the airline to come to Wichita, the subsidy was intended to be only a short-term benefit.

“Mr. Kelly made clear, ‘We’re not an airline that runs on a subsidy,’ ” Watkins said.

Mann, the airline industry analyst, said that’s consistent with what he knows about Southwest’s operations.

“Most of the subsidy that was originally AirTran subsidy, service to those markets has been extinguished,” Mann said. “Southwest doesn’t seem to be real interested in serving markets that truly exist via subsidy.”

Even though Southwest hasn’t widely incorporated the use of subsidies in its business plan, Landson said they have been beneficial in Wichita.

“The Affordable Airfare program was a great way for us to start operating in the Wichita market,” he said in the e-mail. “They’ve proved to be helpful especially when it comes to lowering fares on certain routes.”

Higher fares?

Fares are the larger factor when talking about Southwest in the Wichita market, airport officials said.

And it’s not just the promise of Southwest’s lower fares; rather, it’s the effect Southwest has on competing fares to the same destination.

“Southwest is important to our region as it is the only low-fare carrier in the industry that can impact fares to a majority of destinations,” Valerie Wise, the city’s air service and business development manager, said in an e-mail to The Eagle. “Having Southwest in our market forces all (Eisenhower airport) airlines to compete on fares to similar destinations.”

According to information Wise provided to The Eagle, fares from Wichita to Dallas-Fort Worth decreased 44 percent between 2012 and 2014. The other carrier operating on the route is American Airlines.

And fares on flights between Wichita and Chicago O’Hare International Airport – on flights operated by United Airlines – decreased 24 percent in the same period, the information from Wise said.

Wise said the concern is what happened in recent history when Eisenhower lost its low-fare carriers providing service to Denver and Atlanta.

In the case of Denver, when Frontier Airlines discontinued direct flights from there to Wichita, fares increased 83 percent between 2012 and 2014. Frontier’s competition on that route was United.

Fares also swung higher on the Wichita-to-Atlanta route when AirTran, which was acquired by Southwest, ended its service. Between 2012 and 2014, fares increased 71 percent.

“Those markets are a good illustration of what happens without low-fare competition,” she said.

Dean Headley, a Wichita State University professor and co-author of the national Airline Quality Rating, said it’s almost certain history will repeat itself should Southwest find itself unable to reach profitability on its Wichita-to-Dallas and Wichita-to-Chicago routes.

“We in Wichita have been shown more than a few times that if you don’t have a low-fare carrier, we’re in trouble,” he said.

Southwest’s exit could also be problematic from the standpoint that Southwest is “technically the last of the low-fare carriers” with the size to serve a smaller airport such as Wichita, he said.

That’s a point with which Boyd, the industry consultant, agrees.

But Boyd said he thinks that while fares to and from Wichita could rise, the increases will not be wildly high.

“Don’t look for suddenly you have to get a bank loan,” he said. “That’s not the case.”

Should Southwest exit Wichita and leave the Air Capital with three major airlines – American, Delta and United – that wouldn’t be such a bad thing, Boyd said.

That’s because those airlines are among the largest in the world. And global connectivity matters more than low fares, he argued, especially in the conduct of business between companies.

“The name of the game is not fares anymore,” Boyd added. “The question is can business people get to Wichita from the rest of the world, and the answer is yes.”

Reach Jerry Siebenmark at 316-268-6576 or jsiebenmark@wichitaeagle.com. Follow him on Twitter: @jsiebenmark.

Most passengers

Following are the airlines serving Wichita Eisenhower National Airport, ranked in order by number of passengers between January and May 2015. Passenger figures include regional airlines operating service for American, Delta and United.

United Airlines: 179,258

American Airlines: 130,889

Delta Air Lines: 119,546

Southwest Airlines: 117,107

Allegiant Airlines: 31,225

Source: Wichita Airport Authority

Related stories from Wichita Eagle