Mission must be fulfilled

SOUTHWEST AIRLINES SUCCESS STORY

By Andreas Spaeth The story has begun one afternoon in 1966 in a solicitor’s office in San Antonio, Texas. Herb Kelleher had just helped his client Rollin King to wind up his unprofitable mini airline. King then had a new idea for a company: the founding of an airline for Texas on the whole. The two men went to the exclusive St. Anthony’s Club in order to discuss the idea further. Rollin Kings picked up a cocktail napkin and drew a triangle on it. He wrote “Dallas”, “Houston” and “San Antonio” on its corners. King explained to the lawyer that with this route network the airline would not come under the regulation of the Texan Civil Aeronautics Board (CBA), and Texas would offer great opportunity with its booming economy. Kelleher briefly closed his eyes and shouts, “Rollin, you are crazy! Let’s do it!” So Southwest Airlines was born. However, before the newly founded airline had been ready for take off over three years passed by because of legal disputes with authorities and other competitors. On 18 June 1971 everything was finally set: With three Boeing 737-200, 90 per cent of which was financed by the Seattle aircraft constructor, the newcomer started his business.

Today Herb Kelleher remembers, “We had to make people talk about us, because we did not have enough money for advertising. We had to be different from all the others. Southwest Airlines wanted to be known as an incredible fun company from the start”. First of all an amazing advertisement (ad) was placed to attract female flight attendants: A letter to the Hollywood actress Raquel Welch, the ideal of the Southwest Stewardess. 1,200 women from all over America sent in their applications for the 40 posts. Those who were successful were put into uniforms, which were at today’s standards misfits: Extremely short hot pants in bright orange and knee high go-go-girl boots as well as wide belts for emphazising the shapely bodies. The target group of the new company were businessmen, who were most of all promised “love”. The first ads, in which the word “love” appeared up to 18 times, announced, “There is someone up there, who loves you”. The cocktails on board were called “love potions”, staff served “love bites”, i.e. peanuts. The background was the home base of Southwest Airlines – the Airport Dallas Love Field.

Since it is much more closely situated to the Texan metropolis than the 1974 opened Mega-Airport Dallas Fort Worth, this advantage soon became the most important sales argument. While Love Field could be reached in a bit more than quarter of an hour from Downtown Dallas, it takes up to an hour to get to the international airport during rush hour. It was initially planned to close the old Love Field airport, as soon as the new one was opened. But after passing through all the official channels, Southwest was able to achieve that all Texan inland flights and all those into the directly adjoining states were still allowed to take off from here.

From the beginning Southwest flew according to two important principles, which were later significant for its success: tariffs were structured simply and very low – during the day a one-way ticket cost initially $20, later $26. During the evenings and nights the one hour lasting flights within the Texan city triangle cost $10, later $13. Apart from this Southwest achieved records as far as the turn around time was concerned: in 1972 the company gave itself only 10 minutes for turn around. Even today the Texans are far below half of the industry’s usual time with 20 minutes. After initial losses, Southwest Airlines were in the black in their second full year of business in 1973. Half a million passengers were being transported with only three aircraft.

Today, 26 years later, the niche- company has developed into one of the most successful airlines in the USA. Imitators all over the world have tried to copy Southwest’s extraordinary strategy. 1998 was the 26th profitable year. In the last seven years new record profits were achieved, a phenomenon in the economically battered airline industry. According to transported passengers (52.5 million in 1998), the airline is the fifth largest in the USA. She owns the biggest Boeing 737 fleet in the world. At the moment there are 283 aircraft, by the end of the year there will be 307. Southwest only serves 53 airports in 27 US states, while American Airlines has 200 inland destinations on its schedule.

Southwest transports seven per cent of all passengers in the USA, but on all her hauls the airline is penetrating the market intensively. “We usually start serving a new destination with twelve flights per day in the hope to increase the offer to 20 flights within a few years”, says Peter McGlade, Vice President Schedule Planning, in an interview with the FLUG REVUE. At the moment Los Angeles-Oakland, California is the leading destination with 27 flights daily in each direction. Packed flight plans like these are only possible with extremely short turn around times and only on airports, which are not overcrowded. With the exception of Los Angeles and San Francisco Southwest only serves secondary or alternative airports that are located near big cities like Chicago-Midway, Baltimore/Washington or Fort Lauderdale (instead of Miami).

A typical Southwest flight covers a distance of 1,200km and lasts 1 hour 20 minutes at the maximum. “We are just focussing on the local traffic and offer non stop flights to places people wish to go. We are not interested in transit passengers”, explains McGlade. In contrast to all the other big US airlines Southwest does not use a hub, but several regional centres: Most flights depart from Phoenix, followed by Houston-Hobby, Las Vegas and only then Dallas Love Field. A real hub would contradict Southwest’s philosophy: One would have to wait here for connecting flights, which might be late, and time wasting transfers could not be avoided. Despite this about 15 per cent of all passengers put up with a short stop, if they are able to get from coast to coast and back cheaply, maybe from Baltimore to Oakland. This costs $356 with Southwest, others demand $850.

There are, however, no seat reservations with Southwest. Boarding takes place in groups of 30. Early check-in means early boarding and a free choice of seats. Despite of reports Southwest does have an onboard service. Most times it is even better than that of big US carriers: Drinks are offered several times, passengers are given a whole can, not only a cup. Nibbles are the proverbial peanuts, during flights lasting over two and a half hours, little snack parcels are being served containing cheese corners, slices of cold meat and muesli bars. The distance between the seats is, compared with European imitators like Go and Ryanair (FLUG REVUE 6/99) very generous with 32 to 33 in (81.2 to 83.3cm) and even more extensive than with Lufthansa. The stewardesses, who are mostly good-tempered and always ready for a joke, are invaluable: “Passengers, who would like to smoke, are asked to take place in our lounge on the wings, where the film “Gone with the Wind” is shown”, was heard recently on a flight from Dallas to Houston.

Southwest and most of all its legendary boss Herb Kelleher, does not leave out any joke. For an ad he jumped in an Elvis costume. As well he has been seen as Al Capone, Rhett Butler or an Arabian Sheikh. So it does not come as a surprise that his own employees adore their Bourbon drinking head like a rock star. “They all want to touch him and want autographs, but he is just Herb,” Christine Turneabe wonders at her colleagues. “We are after all a fun loving organisation,” says Peter McGlade, who welcomes his visitors in shorts, sneakers and polo shirt. “However, everything is kept together by the way we run our business”.

The fact that humour is a driving force in Southwest has in the meantime been noticed by many communities and towns. Not less than 171 of them have tried in the last few years to attract the airline’s attention – quite often in unconventional ways. “Whatever you can think of – it has already been tried”, laughs Peter McGlade. Norfolk in Virginia for example has been fighting for a long time to win Southwest as new customer at its airport, up to now in vain. The first attempt was a huge billboard at Love Field (“Virginia is for lovers and Southwest Airlines”), then a special remake of a historic admiral’s hat for Herb and finally a framed empty ice cream cone (“something is missing here”). The town Sacramento, California, even cut its request for Southwest service into a wheat field close to the airport – and was granted.

“In some years we do not serve a new airport, in others three new ones”, explains Peter McGlade. “Finances have to be right, in that respect we are one of the most conservative companies of all”. Besides, Southwest has grown in regular courses: “We are aiming at ten to 15 per cent expansion per year, which has guaranteed us good continuity”, said McGlade. Growth is much stronger in Southwest’s new markets, – that explains the striving after the company’s recognition. Even the US Transport Ministry calls that the “Southwest Effect”. When the Texan planes in their desert colors appear prices fall tremendously while demand explodes.

Baltimore/Washington and Chicago/Midway for example: After the appearance of Southwest flight prices fell by 58 per cent on average, while the number of passengers for this flight rose by an incredible 1,500 per cent. Peter McGlade describes his company’s aim as follows: “We want to entice people out of their cars. The car has always been our main competitor”. Many companies based in the south of the USA will only open subsidiaries in cities that are served by Southwest. “We are like an engine for a region’s economy. Thanks to our low prices we create better connections with surrounding districts”, explains the Southwest Manager. The ticket prices between Dallas and Houston are typical examples: One-way-flights cost between $39 and $89, no Southwest flight was ever about $299. This is almost a third of the usual price.

The key to success is low production costs – at the moment 7.37 cents per seat mile, while other companies charge between eight and twelve cents. In order to achieve this the airline’s standard fleet of Boeing-737-Jets plays an important role. Southwest was launch customer for the 737-700 with transcontinental range. Like the 737-300 before the carrier has put in 137 seats, too. “The 737-700 is a very good aircraft, maybe the best in the 737 evolution, because it can be so flexibly employed on short and long haul flights,” praises Peter McGlade. There are fixed orders for 129 machines, by the end of 1999 25 will be in service. “At the same time we are reducing the amount of 737-200s to 30, all with hush kits”, explains McGlade. “They will be decommissioned in the followings years”.

The long range of the 737-700 is important because of the expansion on the East Coast, which is progressing now. “We have only just scratched the surface there”. In spring 1999 Southwest dared to serve the New York region with Islip in Long Island, 70km from Manhattan. While a non-stop flight across the whole continent from Baltimore to Oakland was only a test one year ago, Southwest is now offering longer distances like Baltimore-Las Vegas (3,400km, 5 hours 15 minutes). “However, our first priority will always remain short haul flights with high frequency”, days Peter McGlade.

Southwest Airlines is in every respect a very unconventional airline, which becomes obvious at the main administration office in Dallas Love Field: it is bursting with souvenirs of all kinds. The company has managed to keep a kind of American family sense among their 27,000 employees. Other companies try to achieve this artificially and often in vain. Southwest ranks at the very top among the desired job opportunities for many Americans because of its brilliant working atmosphere. 150,000 applications are received annually, 3,000 new members of staff are employed at the most, fluctuation is minimal. “Herb always says that this is a crusade rather than a job”, Peter McGlade explains. He has been working at Southwest for 17 years. “We all feel very familiar. This is a place you like. We are not only here to earn money, although we fortunately do that better than others. We are convinced that we can contribute something positive to the community”, the manager summarizes the credo behind the success. “We hope that our work really makes a difference for the world. We honestly believe in this”.

From page 28 of FLUG REVUE 7/1999

What Makes Southwest Airlines Fly

How does Southwest Airlines keep making money? After all, the airline industry overall is in a shambles. US Airways and United Air Lines are reorganizing in bankruptcy while American Airlines flirts with the same fate. As a group, the nation’s biggest air carriers have lost billions of dollars over the past several years, with no immediate recovery in sight.

The secret to its success, said Southwest chairman Herb Kelleher during a talk at Wharton April 22, is available for anyone, including its competitors, to see. It’s an obsession with keeping costs low and treating employees well and a commitment to managing the company during booms with an eye to the busts that will inevitably follow.

Do that, Kelleher said, and most of the rest takes care of itself. “To be successful in business, you need a sense of historicity and futurity,” he said. “What does that mean? Hell if I know, but it sounds good. Seriously, what I’m saying is, be prepared because the bad times are going to come. In our industry, it happened twice in the last decade. It happened twice in the decade before that, and twice in the decade before that.”

Though Kelleher was self-deprecating throughout his talk – he is famous for joking about his affection for whiskey – he did boast about his company’s preparedness for the recent airline industry slump. “After Sept. 11, we didn’t cancel any flights,” he said. “We didn’t furlough any employees.”

Southwest could do that because it had the lowest costs and strongest balance sheet in its industry, according to Kelleher. On Monday, the Dallas-based company reported its 48th consecutive profitable quarter, earning $24 million, or 3 cents a share, up 14% from the comparable quarter a year earlier. Its stock closed Tuesday at $15.67 a share. Over the last five years, its shares have gained 67%, compared with a 61% loss for the Dow Jones Airline Index. The company, Kelleher states, has made money every year for the last 30.

Close attention to costs produced those results, he noted. “Even in the best of times, we kept our costs low and questioned every expenditure. For years, I used to approve every expenditure over $1,000. Why? To encourage a cost-conscious culture. I couldn’t look at all of them, of course. But I would question them selectively, and that kept people paying attention.”

Low costs have given Southwest its market niche – and its competitive advantage – of having the nation’s lowest fares. And that, in turn, has created a phenomenon known in the airline industry as the “Southwest effect.” Airports served by Southwest have lower average fares than those that aren’t because other carriers feel compelled to match Southwest’s fares.

Compare, for example, two otherwise similar metro areas, Raleigh-Durham, N.C., and Charlotte, N.C. Southwest operates in Raleigh but not Charlotte, and Raleigh’s fares are typically half that of Charlotte, which is a hub for US Airways. And contrast both of those with Love Field in Dallas, which has the lowest average fares in the country. “What’s significant about Love Field?” Kelleher asked. “It’s served only by Southwest Airlines. If you’re going to be a low-fare airline, you have to charge low fares even where you don’t have competition.”

Concern about costs is also the reason that Southwest keeps its debt at the lowest level in the airline industry, with a debt-to-equity ratio of 25% (40% if airplane leases are included). “Interest is ugly,” he said. “The banks still want to get paid in bad times.”

If a CEO instills the right kind of culture, employees will work hard, too, at keeping costs low, Kelleher said. Consider the Southwest counter agent in Los Angeles who lent a stapler to a colleague at another carrier. “Our agent followed him over to his counter and said, ‘I want to make sure we get that stapler back because if we don’t it’s going to hurt our profit sharing.’”

The tale points to the second reason why Kelleher believes his company has succeeded: its treatment of employees. “It’s sometimes been held out to be a conundrum in business – ‘Who comes first, employees, customers or shareholders?’ We’ve never thought it was a conundrum. If employees are treated well, they’ll treat the customers well. If the customers are treated well, they’ll come back, and the shareholders will be happy.”

At Southwest, treating employees well doesn’t mean handing out big paychecks. In fact, the company’s wages are lower than competitors. But the airline makes stock options widely available, so all employees – not just executives – can share in the company’s financial success.

Southwest even has a policy that its officers receive pay increases that are no larger, proportionally, than what other employees receive. “And in bad times, we take reductions,” Kelleher said. “Every officer of Southwest Airlines is paid less today than in 2001.”

Good treatment also translates to a variety of non-financial measures. The most important of them is the company’s no-layoff policy. Kelleher says it ends up serving as a form of financial discipline because it prevents managers from hiring too many people when the industry is thriving. Having happy employees saves money, too. It has stemmed labor strife at Southwest, despite the fact that the airline is the country’s most unionized. “Once labor leaders realize that you’re trying to take care of your people, most of the edge [in contract negotiations] is gone.”

If Southwest’s strategy is easy to explain, it has proved hard to copy. US Airways, for example, tried with its MetroJet subsidiary, but failed. “They said they were going to be a low-fare airline, but they weren’t a low-cost airline.” The venture folded.

New York-based JetBlue Airways and Song, a new low fare-subsidiary of Atlanta-based Delta Air Lines, are currently trying the same approach. Kelleher isn’t concerned. “The one thing JetBlue has that we don’t is on-board TVs, but we have lower costs.”

Southwest has never shied away from doing things its own way. Early on, this meant flying only Boeing 737 jets, so that every pilot, crew member and mechanic would be familiar with every plane in the fleet. Lately, it has meant refusing to let its fares be published on travel websites such as Orbitz, Expedia and Travelocity. Southwest doesn’t want someone else to control its distribution of tickets, Kelleher said. Plus, “Orbitz is a consortium owned by our competitors. And they do charge for it; it ain’t free.”

Some industry analysts predict that a major air carrier will have to cease operations before the remaining companies can make money again. The thinking is that the industry simply has too much capacity – too many seats and too few travelers.

Kelleher disagrees. For him, as always, the key is costs. “Traffic depends on fare levels,” he said. “And you can bribe passengers to fly.” In other words, if fares are low enough, more people will take to the air. Southwest saw that after it initiated service between Baltimore and Chicago. Since then, overall traffic between the two airports has increased by more than 2,000%.

But he points out that for carriers to make money on lower fares, they will have to lower their costs. And that may prove difficult. After all, the airline business is one of the toughest in America. It’s capital intensive because planes are expensive. It’s labor intensive and requires highly skilled workers.

And it affords little wiggle room because its inventory – empty seats – expires every day when its planes take off. The industry is also highly regulated – by the Federal Aviation Administration and now the Transportation Safety Administration – and highly taxed. Airline-specific fees account for a third of the price of a Southwest ticket, Kelleher said. “I go to Washington and tell them, ‘You’re taxing us more than cigarettes and whiskey, and that’s a triple whammy for me.’”

But even in a tough, cyclical industry such as this one, a well-run company can make money for its shareholders, Kelleher maintained. Money magazine last year identified Southwest as the American company that has given the greatest return to shareholders over the last 30 years. According to Kelleher, “If you had invested $100,000 in 1972, it would have grown to $102 million by 2002.”

Publish Date: 6/4/03