If a single US airline were to be picked out for its sheer likeability, then that airline would have to be Southwest Airlines. This darling of the industry consistently puts smiles on the faces of its employees, its passengers, bankers, analysts, shareholders, and even former Department of Transportation inspector general Mary Schiavo, who smiles at very few in the airline industry these days.
The smiles are there with good reason. Southwest has posted 24 consecutive years of profitability - a US record - and has won frequent accolades for its on-time performance and service. Its rock-solid safety record prompted Schiavo to put Southwest at the top of her recently published 'most safe' US airlines list. And within this environment it is not surprising that employee morale remains high, an enviable achievement for its chairman, president and chief executive officer, Herb Kelleher, who epitomises the energetic, no-bounds spirit of the airline.
Added to that, it is often pointed out that Kelleher is a close personal friend of arch business rival Bob Crandall at American Airlines, so it is not hard to imagine that this charismatic leader manages even to put a smile or two on the faces of his enemies.
Yet Southwest has, untypically, seen capacity growth fall to under 10 per cent in recent months - which the carrier itself admits is a 'tad slow' - and there are some tough issues hanging over the airline, most notably uncertainties about the US ticket tax, fresh, low-fares competition at its Texas home base from the Mesa Air Group, and increasing pressure to serve longer haul routes. In this light, can the Southwest halo continue to glow so brightly?
Southwest began operations in 1971 with three Boeing 737-200s and the now infamous route network between the three Texan points of Dallas/Love Field, San Antonio and Houston, that was allegedly dreamt up by Kelleher and co-founder Rollin King with the aid of a cocktail napkin and a few bourbons. From the start, it was clear that this was going to be no ordinary airline and Kelleher no ordinary CEO. Kelleher's taste for the zany led to all the early outrageous ploys. Advertisements for flight attendants appealed to actress Raquel Welch to apply 'because we believe you typify the girls we're looking for - warm, personable and great-looking in hotpants'. In return, the advert promised 'good pay, a training programme and airplanes full of terribly interesting men.'
But these were more than mere gimmicky publicity stunts. Kelleher tapped into the mood of the 1970s with hotpants for flight attendants, a garish red and orange livery for the aircraft, and drinks labelled 'love potions' which could be acquired with 'love stamps'. His airline was profitable within two years, and has been ever since.
Today, Southwest is the fifth largest airline in the US in terms of passengers carried (50 million in 1996). It operates 243 B737s and flies to 50 cities. The airline has orders for 63 Boeing 737-700s, for which it is the launch customer, and expects to take delivery of the first four of these aircraft by the end of this year in addition to 15 more -300s. A load factor of 66.5 per cent, unit costs of 7.5 cents per available seat mile and a 1996 net income of $207.3 million - up 13.5 per cent on the previous year - make Southwest the envy of many airlines, but most especially the other low-fare, low-cost operations that adopt many of the strategies Southwest pioneered, such as ticketless travel and peanuts-only service.
Nevertheless, Southwest has problems which it needs to address and signs are beginning to emerge that the airline is looking at possible fundamental changes in its operations so that it can continue to grow profitably. The question is, can this be achieved without harming the Southwest aura?
Gary Kelly, the airline's vice president and chief financial officer, has no doubts. 'We are a growing company, but we have been able to maintain a very strong balance sheet,' he says. 'We have numerous growth opportunities at this time and, with any luck, we will be able to continue growing. I would not be surprised to see us double in size in the not too long timescale.'
What the company is being uncharacteristically shy about are the details of that planned growth. 'There are lots of new opportunities around,' says Kelly, 'but we like to do it slowly so we can manage those opportunities. In the southwest part of the US we are pretty well developed and California is pretty far along. The northwest, midwest and east coast, however, are less developed, particularly east of the Mississippi River. We are happy to put flights in there, but the industry is very competitive and we are always very financially conservative. We won't do anything that might imperil our balance sheet.'
Kelly says Southwest's gift for flexibility means that it will be able to accelerate its growth rate as soon as the right opportunity occurs. 'For example, in 1991, when USAir pulled out of its airports in California, that provided an entry for us. You cannot predict that type of opportunity, but Southwest is best placed to make the most of it.'
Kelly does not foresee the Southwest spirit being traded for growth. 'I think the company culture is a major strength in our growth,' he says. 'There are 24,000 people employed here today, so we already are a big company. The culture just seems to get stronger for us. Growth is invigorating so long as it is not out of control. It brings in fresh faces with fresh enthusiasm - people who want to be here.'
Expanding eastwards brings dangers, however. Southwest has always been cautious about spreading into territories where the airports are crowded and where it might be unable to gain a dominant position. Southwest likes market dominance. It has the number one market share in 80 to 90 of the top 100 markets it serves, and a 60-70 per cent overall market share in those same markets. While the airline has been 'very pleased' with its relatively recent entry into the highly competitive Florida market, competition along the east coast becomes more fierce the further north an airline goes. It also becomes more difficult to find uncongested airports - Southwest, with its point-to-point routes, tends to avoid hubs - and the weather becomes more unreliable. Crowded airports and bad weather are serious challenges for an airline that prides itself on its 10-minute turnaround.
Still, Southwest is quietly venturing into new territories. It is building Nashville, Tennessee, into a major connecting point between the east and west coasts, as well as between major northern cities and Florida. In doing so, the airline is also lengthening its average trip distance, although it plays down this fact. Southwest's average length of passenger haul has crept up from 498 miles in 1991 to 546 in 1996, but Kelly insists that the focus will remain on the carrier's shorthaul market niche, with the vast majority of passengers making flights lasting only one hour and not seeking connections.
But Nashville is seeing a relatively high level of connecting traffic - about a third of all passengers - and is enabling people to travel from coast to coast with just one stop, yet still at an attractive fare. However, that means a flight of up to five hours between Nashville and some of the California destinations, during which Southwest is serving only crackers and its trademark peanuts.
Vivian Lee, analyst at BT Securities in New York, believes these longer routes pose a dilemma for Southwest. 'It is quietly searching and looking at a number of new opportunities, but longer haul routes open up a different can of worms for someone like Southwest because then it has to consider food and different operating issues. The quick turnaround, for instance, which Southwest pioneered, does not really get you anywhere if you go into the long-haul markets. Growth keeps your costs down at first, when everybody has a hunger for that growth, but later, when you have seniority of employees and their wages to consider, it's not so easy to keep costs low,' says Lee. 'I think we are at an extremely interesting crossroads for Southwest right now, but Kelleher always has something up his sleeve.'
Lee believes that it will become increasingly difficult for Southwest to enjoy a wide gap between its own costs and those of competing airlines. This is because many of the strategies it pioneered, such as a single fleet type and ticketless travel, have become the standard for others.
Lee says the complexity of Southwest's situation makes it a tougher proposition for the analysts. 'There are very different conditions today,' she observes. 'This is in part because of ValuJet. Startup conditions are now very different in the US and I think you will not see another Southwest get started. But I think you will see Southwest continuing to exhibit all kinds of unique examples of leadership. Herb is a master tactician and has always had a keen sense of adaptability. He has not lost that. But the market has become more stable so he will have to pull out some more tricks.'
Susan Donofrio at NatWest Securities in New York also believes that Southwest will maintain its focus while adapting to new marketing environments. 'My only concern is that Southwest keeps an eye on its cost structure, but it has taken a number of cost initiatives which point to that so I think it should continue to keep its edge,' says Donofrio. 'Its stage length is increasing, which is interesting and should be good as long as it does not impede its turn times, which is most important. Its dependability and low cost structure are essential and it should never lose those.'
Kelly agrees that low costs are vital. Excluding higher fuel prices and a jet fuel tax, Southwest's unit costs increased by 3 per cent last year, which Kelly says the airline was not pleased about. 'We have to be low-cost. It does not make sense to have low fares if you don't make money,' he says. 'But our costs are very much in control for 1997.' Kelly points out that fuel prices have come down since last year and are looking much more healthy for 1997, and he expects the -700 to improve fuel efficiency.
More outside of Southwest's control is the introduction of new competition in its home state of Texas. On 6 May, Mesa Airlines was scheduled to open a regional jet network out of Fort Worth's Meacham Airport. Kelly remains unruffled at the prospect. 'We don't draw much business from that part of the Dallas-Fort Worth metroplex,' he says. 'The quality of service that we offer is superior to what is being talked about by Mesa and we think the 737 is a very superior product to offer. We feel very good about where we are now; although there is going to be more competition in the region, we expect it to impact Dallas-Forth Worth Airport rather than us.'
Kelly also is confident that the hot debate over whether to replace the current 10 per cent flat-rate ticket tax with an air traffic control user fee will eventually settle on a solution less disastrous for Southwest than appeared likely last year. The user fee system being proposed by seven US airlines, including American Airlines, Delta Air Lines, Northwest Airlines and United Airlines, would burden Southwest with additional annual costs of around $250 million, effectively wiping out its profit.
Kelly points out that while the proposed plan would provide a financial benefit for all the seven airlines campaigning for it, because of their higher fares, it would negatively affect low-cost, low-fare carriers. 'An independent analysis would very clearly demonstrate that Southwest is by far the lowest cost carrier and we have been very successful - that cannot be disputed,' says Kelly. 'So you have to assume that we are the targets of the user fee campaign. That is without trying to sound paranoid. But I don't think it will be successful. I think Congress has seen through that and does not want to penalise one airline this far.'
Donofrio agrees with Kelly's optimism, saying that she would be 'surprised' if the user fee proposal was implemented in its entirety because it would thwart low-cost, low-fare competition and create more market concentration for the seven carriers that support it.
Which leaves just one more prickly question mark over the seemingly fearless Southwest. What will happen when Kelleher, so closely allied with Southwest, finally relinquishes his post? Kelleher himself has predicted, in his usual joking style, that the airline will disappear in a nanosecond. More seriously, he acknowledges that 'plans are being made', but they are kept confidential to avoid undignified battles for the top that might harm Southwest.
'Kelleher has more charisma than any CEO in the airline industry, so he is critical,' says Lee. 'His succession has a lot of questions about it. But I think I know the company as well as anybody and they have two levels of leadership with some really strong people. No one else will be Kelleher, but I don't think he has got to be 100 per cent of the focus on team spirit; that is carried out by teams of people.'
Not that Kelleher regards this as an imminent problem - he fully expects to be in the flying peanut business for another ten or 15 years.
Source: Airline Business
