When it comes to being a role model, Southwest Airlines is virtually perfect, and imitators from around the globe have followed its low-cost lead. But as times get tougher even Southwest is debating whether to alter its no-frills approach
Much like that mythical child who wanted to be just like daddy when he grows up, the world's low-cost carriers are learning the hard way that this is no easy goal.
Take, for instance, the generation of low-cost, low-fares Southwest Airlines wannabes. Nearly every low-fare start-up in the USA since deregulation comes out of the box vowing that it will be just like Southwest, and nearly every one of those start-ups fails to do so, falling far short of the Dallas-based discount king's immeasurably strong brand value, its rare corporate culture and above all the carrier's profitability.
Southwest was the first and arguably still the world's best low-cost carrier. Deregulation in Europe and greater freedoms in Asia and the Middle East have seen an explosion of low-cost players. As the low-cost ranking shows nearly three-quarters of the top 40 largest carriers started operating in the past seven years.
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Southwest is still the model to which every other low-cost carrier aspires |
Only the US carriers, Canada's WestJet, plus European giants easyJet and Ryanair, were up and running before 2000. Although easily the fastest growing industry sector, as the 2006 Airline Business rankings showed, low-cost carriers represented just under 10% of the traffic carried by the world's leading 200 carriers.
However, their market influence is far greater, causing network carriers to radically overhaul their short-haul strategies and making low fares the norm on these routes. But being influential is obviously not enough. The business model must make a good return.
The figures for the more established players show they are broadly succeeding with operating margins for several above 10%. However, for the newer carriers and every US airline except Southwest, profits fall short. For those just out of the box this is understandable as they invest heavily in building that all-important critical mass.
There are two elements at play in the advance to respectable profitability. The first is market maturity. The second is the degree to which the carrier deviates from the pure no-frills model and modifies it to offer service features. These can come with a pricetag, but not always.
How Southwest gets its strengths tells a great deal about the nature of the market and its maturity. The carrier is now the largest domestic airline in the USA, with more domestic seats available than any other airline and with 397 non-stop city pairs.
Much has been written about Southwest's unique corporate culture, in which the airline's workers don't have to be asked or told what to do to get the aircraft turned around quickly and to keep the passengers happy. The tale of the Southwest pilot helping load luggage is not apocryphal: it is fact.
But the airline has another tremendous and nearly insurmountable advantage: like that admirable parent or ancestor, it has been around a lot longer. Southwest is now in its 36th year of operations, having started flights in 1971. And the carrier is in its 34th consecutive year of profitability.
In its top 100 markets or city pairs, Southwest's market share averages 65%. In other words, if you want to start a low-fares airline, be careful, because Southwest is probably already a big player in almost any city you'd think about serving. Ryanair and easyJet are beginning to adopt this role in Europe.
Southwest's great success also stems from it straying from its basic model only reluctantly, as is demonstrated by the soul-searching it had to do when it began longer distance and transcontinental flights in the late 1990s. Ryanair and now Gol of Brazil epitomise the zeal that sticking to the basic formula of low costs and basic service brings. Quite simply their figures show this approach makes the most money.
But with fuel costs now at permanently high levels Southwest is thinking about tweaking the model again, but only if it can preserve its culture, says chief executive Gary Kelly. It may alter its no-frills model by adding on-board entertainment and on-board sales.
But after a year or two of thinking about even thinking about making these kinds of changes, Kelly is right to be cautious. Southwest's incredible legacy means that Kelly knows more than anyone that as the tribal elder, he has a role to maintain.
Source: Airline Business
