Southwest, a Deregulation Winner

Southwest commenced operations back in 1971. From the outset it was planned to offer a high frequency, no frills service linking point A with point B. While this might sound fairly basic the coming of deregulation in 1978 meant that most of the majors were quickly moving to develop fortress hubs where they could theoretically (and often successfully) muscle out competitors and restrain the entry of potential new entrants.

To a large extent this played into Southwest’s hands as the airline instead preferred largely to continue flying point to point direct services at a time when many of its more powerful competitors were having their passengers transiting time wasting hubs that they never wanted to visit anyway. The other factors working for Southwest were its very low seat kilometre costs and aircraft utilisation that currently runs at 11. 5 hrs a day with an average turnaround time of just 20 minutes. Pushing the low seat kilometre costs are an all 737 fleet, a very productive and motivated workforce and aircraft configured in an all economy configuration enabling fares that average just under $70 a sector.

Frequency is the other tactical weapon in Southwest’s armory. It not only flies where people want to go and at a price that any competitor, no matter how big, cannot viably match but it also flies there many times a day. As a result it carried 19. 8m passengers in 1990, making it the 14th largest airline in the world on a pax uplifted basis. To achieve this Southwest operates over 1,100 daily flights from its Phoenix, Dallas and Houston hubs to 29 US cities using a fleet of 110 jets.

In its 20 years the airline has recorded an operating profit in all but two. One of those years was, not surprisingly, its launch year and the other was 1985 when the airline made a major tactical error in acquiring a failing Muse Air. The merger just didn’t work and, like many such corporate adventures, bled the successful acquirer to the point of recording a loss. Even today, in an airline environment where CEO’s (and staff) are literally slitting their wrists, Southwest is recording not only increasing patronage but also profits. In 1990 there were only two US carriers that were able to report an operating profit. One was giant American and the other Southwest. In that year only two airlines actually returned a nett profit, one was United, the other Southwest. And despite a surge in fuel costs by 29% the airline still hopes to record a net profit thisyear. In fact, during the height of the Gulf conflict, Southwest reported a fourth quarter net loss, only its second in 71 quarters.

So how does the airline do it?

To Southwest’s flamboyant founder and CEO, Herb Kelleher, the reasons are fairly obvious. His brand of aviation is inspired by fun. If his employees aren’t enjoying their work then they won’t perform and the carrier (which after all is really just another service industry) won’t deliver service and productivity standards required for a successful operation. Indeed, Southwest does most things differently to that of its rivals. It doesn’t serve hot meals, just light snacksand cold drinks. It doesn’t even offer seat allocation. The system used instead is commonly called “the cattle call” and is based on passengers getting a coloured tag when arriving at check in. Each tag represents 30 passengers and thus when boarding begins its essentially a first come first served system with the early arriving passengers better able to get the seat of their choice. And while this might sound frugal by Australian standards the reasoning revolves around getting an aircraft to pullback within 20 minutes of arrival. “With a seat allocation system we would never be able to achieve such rapid turnaround times,” claims Kelleher. In a more down to earth sense this also neatly translates to vastly increased aircraft productivity over the course of a day, or in Southwest’s case the equivalent of seven additional 737s at around $35m each.

The all 737 fleet is another reason the airline makes money, claims Kelleher. The savings to be had by operating just the one type of aircraft are enormous in terms of maintenance, crew training and scheduling. Southwest presently flies a fleet of 46 737-200s, 50 -300s, 10 -500s and has options against a further 107 of the Boeing twinjets. The airline would only ever move upwards to an aircraft like the 757 if it was constrained by airport access and this is considered unlikely as Southwest deliberately avoids entering such airports in the first place. Just another reason why it is successfully different from its competitors.

So, is Southwest, as financially successful as it is, in danger of being taken over by one of the majors? Hardly likely, claims Kelleher. The reasons are that the airline is just too different to successfully assimilate into any other carriers mode of operations. The slightest change in current operating methods, which are fairly unique by any standard, and the essence of the reasons for profitability amidst a turbulent industry would be in jeopardy. An example of just how competitive Southwest is was cited recently when industry giant Delta took on Southwest on the Albuquerque/LA route and even with load factors in the eighties was forced to withdraw from the market claiming it could not have made a profit even if all its planes had flown full. Though Southwest is now moving into California it is doing so on the basis of serving secondary airports rather than taking on the majors head on, as failing America West continually has.

Indeed the comparison between the two carriers is inescapable. While America West set out to literally conquer the world, even planning international forays into deepest Japan and Australia, Southwest concentrated on offering a service that essentially bypassed its major competitors and avoided airports prone to congestion, and thus delays and consequent loss of productivity, schedule erosion and increased operating costs. Indeed, the differences between the two carriers could not be more extreme when its comes to corporate ego and the result is that one is now struggling under Chapter 11 bankruptcy and the other is one of the most successful carriers in the world.

For Australia the comparisons are difficult. In many ways Eastwest closely resembles the one class, one aircraft type operation though for a number of reasons it has always struggled to make a profit. In other ways Compass is comparable with its all economy mega discount fares while Ansett and Australian are really too diversified as true multi class, multi type carriers to make a fair comparison.

The last word though might well be that the essence of Southwest’s success lies with a highly productive fleet flying largely hubby pass routes with its own style of service – a true niche carrier amidst a world of clones.