Southwest Airlines Soars as Others Go Broke
Company attributes its success to a low-cost structure, hard work, standardized service
DALLAS — IN just three years, airlines in the United States have lost $10 billion, more money than the industry has earned since the Wright brothers invented power-driven flight in 1903.
Eastern Airlines and Pan American World Airways ceased operations. Declaring bankruptcy has lifted the heavy load of debt service from Trans World Airlines, Continental, and America West Airlines, allowing them to keep flying.
"Will we ever get our domestic earnings back? I'm hesitant to conclusively answer that because I'm afraid the answer is no ... and we're talking about two-thirds of the company," Stephen Wolf, chairman of United Airlines, the nation's second-largest, told analysts last month.
Congress has authorized a 15-member panel representing airlines, passengers, and government to find a remedy within 90 days.
That's fine with Southwest Airlines Company, says chief financial officer Gary Kelly, as long as the panel recommends helping "the industry and not just the few" - meaning not just the many. Alone among "major" ($1 billion in revenues) US carriers, Dallas-based Southwest made money in 1992 - as it has for the past 20 years.
Demand exists for air travel, but not at a price at which other airlines can make a profit, Mr. Kelly says. He recommends that the panel consider cutting taxes and regulation on the industry.
For instance, half of the industry's operating loss last year came from the increase in the federal tax on tickets. The tax had been 8 percent until 1990, when it rose to 10 percent, even as the recession bit potential travelers in the wallet. Airlines had to absorb the increase to keep prices attractive. Costly regulations
On the regulatory side, Kelly says, is the government's costly mandate to phase out older, noisier jets by the end of the decade. The panel should weigh that against other regulatory goals and choose the most important, rather than try to accomplish them all.
But Southwest is not too concerned. Kelly says the airline is well prepared for the 1990s - "the Wal-Mart decade" - by its strategy of cautious expansion and a low-cost structure born of short, point-to-point flights, standardization, and a highly productive work force. In contrast to layoffs elsewhere, this year Southwest will add 1,000 employees to its staff of 11,400. Last year the carrier interviewed 50 applicants for each position it filled.
"We work very hard at identifying the right kind of person who has the right attitude - you can't teach attitude," Kelly says. "Mainly they have to be prepared to work very hard and do whatever it takes for the customer and do it with a smile."
Speaking of applicants, more than 50 cities have asked Southwest to provide service - an indication of remaining expansion potential. "We're only in 36 cities right now, and it's taken us 22 years to get to that point," Kelly notes. "If we thought that the 50 would be instantly profitable and with no risk, then we would go out and get the aircraft required to do that."
Instead, Southwest will grow its fleet of 150 jets by a mere dozen a year, using two of every three to satisfy demand growth in existing markets. California is particularly hot. "It just keeps growing. We put in flights; they come out full," Kelly says. East Coast congestion
The East Coast will be developed last because airport congestion there would prevent Southwest's saturation service that wrings the most out of its fixed costs at an airport.
Too much has been made of the fuel-efficiency of the Boeing 737s that Southwest flies, Kelly says. His company's fleet is probably no more efficient than its competitors' fleets. And since most of the fuel is used during takeoffs, Southwest has a higher average fuel burn because its flights are shorter.
On the other hand, short flights allow Southwest to forego serving meals, with the associated cost and ground time. "You put on the Cokes, you put on the peanuts," Kelly says. Even on one of its longer trips, the 1,800-mile Nashville-Phoenix run, "bring a bag lunch," a reservations agent advises.
Also, Kelly says, Southwest's emphasis on short flights means that only one type of aircraft is needed. This standardization simplifies training of pilots, flight attendants, and maintenance personnel. And it spills over into such expense areas as flight simulators. Southwest needs only two. "There's no way to calculate" the savings from standardization, he says.
In contrast, when USAir bought PSA (Pacific Southwest Airlines) in California, crews would show up for a flight and discover that the aircraft type did not match their training. "They literally could not fly it," Kelly says.
Southwest also chose not to follow the hub-and-spoke system used by other airlines. That system brings in a bank of flights to the hub all at once. "You wait for the last passenger," Kelly says, then everyone changes planes and they fly out again.
Although United's Mr. Wolf said that Southwest Airlines "would be happy to feed United" if his carrier turned over domestic routes to Southwest, Kelly denies that will happen. If Southwest ever tied itself to a spoke-and-hub system, it would lose the flexibility that lets it get jets airborne again within 15 minutes of landing.
Whereas 60 percent or more of passengers on other airlines make a connection, 80 percent of Southwest's passengers are finished after one flight. That points to a difference in target markets: Southwest primarily serves price-sensitive leisure travelers, whereas the other airlines focus on the expense-accounted business travel.
If Southwest merely aimed to take passengers away from other airlines, it would undercut them by $50 or so when starting competing service. Instead, it may charge $300 less in order to attract people who could drive instead and "the people that are just sitting in their house not doing anything this weekend. At a price you'll get people to fly you," Kelly says. "We find that when we go into a market that has had high fares, we can triple or quadruple the [total airline] traffic within a year."
All these factors add up to the "rock bottom" cost in the industry, Kelly says, and without scrimping on wages and benefits. "We pay our employees the same as everybody else if not better, but they work twice as hard - literally work twice as hard in terms of what they produce," he says.