MIAMI – Southwest Airlines completed a successful transition to its new Amadeus Altéa Passenger Service System (PSS) on Tuesday, representing the culmination of a three-year project in conjunction with Amadeus IT Group.
The rollout encompassed 101 airports across nine different countries, merging the PSS for Southwest’s domestic and international flights (international flights had already been managed by Altéa since July 2014) which moving forward will be managed through the Altéa functionality.
The project for the PSS cutover was staffed by a team of more than 1,500 people from both Southwest and Amadeus, and May 8 was the final deadline after which flight bookings would all be managed by Altéa (a change that rolled out on December 6, 2016). According to various news reports and customer feedback, Southwest only experienced minor issues during the cutover.
“Transitioning to a single reservation system is a transformational milestone for Southwest, and in fact, it’s the single largest technology initiative in our Company’s history. I want to congratulate and thank thousands of our Employees and our partners who have worked tirelessly and diligently for several years to bring this home,” said Gary Kelly, Southwest Airlines CEO. “Our deepening partnership with Amadeus makes way for a bright future through new tools that empower our People to do what they do best, which is to provide world famous Hospitality.”
The new PSS will enable Southwest to make several operational and customer experience improvements, including the enabling of red-eye flights, reduced connection times, better inventory management in different fare classes, easier management of ancillary revenues, variations on the flight schedule based on the day of the week, and automated rebooking during flight disruptions.
Southwest expects the new PSS to drive $500 million in incremental annual pre-tax earnings, and truthfully I believe that it may be underestimating the payoff by $50-75 million
“Southwest is the largest carrier of passengers within the United States, and we are delighted they entrusted Amadeus with developing the new cornerstone of its business,” said Luis Maroto, CEO of Amadeus. “We pride ourselves in developing innovative and customized technologies to help our airline partners adapt and evolve their products to reflect the needs of travelers, and we are proud to be collaborating with this leading U.S. airline.”
Teams from both Amadeus and Southwest will continue to work on the project behind the scenes to ensure that the cutover is successful over an extended period and provide longer run support.
Part of a longer run shift in Southwest’s business
PSS changes aren’t very “sexy” but for a business that was built on an exceedingly simple infrastructure like Southwest, they are certainly transformational.
Over the past 10-15 years, Southwest has radically shifted its business, transitioning away from a purely point to point driven almost ultra low-cost carrier (ULCC) into a more hybrid, network carrier that has middle-of-the-pack fares and a relatively more ancillary based business model. Put simply, Southwest ran out of “low hanging fruit” for growth (adding new routes and new cities) in the mid-2000s, and its ultra-useful fuel hedge positions ran out soon after.
Lack of growth is often a death knell for ULCC business models, who will naturally see costs rise as their fleet and workforce mature.
Normally the way to counteract that is with more growth and expansion to spread fixed costs across. But Southwest really didn’t have that pathway in 2010 or so, so it had to shift its business model to generate more revenue. One way it did that was by creating new revenue opportunities, adding ancillary products and moving into airports that it wouldn’t have previously like Washington Reagan and New York La Guardia.
The other thing Southwest embraced was the opportunity created by the other legacy carriers choosing the fee-driven business model. They turned their business in a direction that was widely perceived as customer unfriendly, which allowed Southwest to build a brand (enabled by Bags Fly Free) that positioned it as the customer-friendly airline.
PSS enabled business model changes to fit into those categories
The automated rebooking ability and the unrelated decision to end overbooking both definitely fit into the category of making Southwest more customer friendly. Southwest has always been relatively better (along with JetBlue) at the human aspect of airline customer service. Now its (fantastic) customer-facing team members will finally have the tools to match for tough operational situations.
But the big payoff here is really in terms of creating new revenue opportunities for Southwest. Red-eye flights are a huge area where Southwest, which currently flies a ton of short haul flights on either coast (e.g. from the Bay Area to the LA Basin or from Baltimore Washington to Chicago Midway), can increase revenue generation and improve its cost structure by increasing aircraft utilization. Within 3-4 years Southwest could be operating 50-60 red eye flights.
The only tradeoff here is that Southwest might not be able to add that much capacity due to Wall Street constraints, but it can easily fund that growth by making selective day of week cuts through the other major operational shift enabled by the new PSS.
Many of Southwest’s leisure-oriented markets don’t need as many mid-week flights, while more business oriented flights could do with fewer flights on Monday/Friday. For the first time in a while, Southwest will be able to match its larger airline peers in rationalizing the schedule to better match demand patterns on a day of week basis. This will improve margins by allowing Southwest to eliminate its lowest yielding flights.
The shorter connections will also be useful in increasing demand, though its overall impact will be limited because Southwest doesn’t have as much of a banked schedule at its hubs like Denver and Chicago Midway. Southwest could also do well with a little bit more inventory management that holds back more seats for closer-in bookings. Even with Southwest’s fare caps, this will improve fare mix and growth revenue.
Across the board, the new Altéa PSS will enable Southwest to grow revenues and earnings substantially.