Southwest's 7 secrets for success

CRJDriver

Well-Known Member
Southwest's 7 secrets for success
The airline stays profitable by keeping things simple



By Joe Brancatelli
updated 12:49 p.m. CT, Sun., July. 20, 2008

What’s the airline-industry jargon for unconventional wisdom? Southwest Airlines.

By some estimates, the country's major carriers have consumed perhaps $100 billion in capital during the past decade, but Southwest Airlines continues to be profitable. It's been in the black for 33 consecutive years and, last week, for the 127th consecutive quarter, it paid a modest dividend. Its balance sheet, with about $3 billion in cash on hand and $600 million in available credit, is the envy of an otherwise fuel-price-ravaged industry.

Its competitors among the network carriers — American, United, Delta, Continental, Northwest, and US Airways — are shrinking passenger capacity by more than 10 percent and grounding hundreds of aircraft starting in the fall. Southwest will add a handful of daily flights. It will take delivery of another dozen aircraft next year and still plans to grow by 2 percent to 3 percent. And Southwest now carries more passengers annually (101 million last year) than any other U.S. carrier, a nifty trick for an airline that didn't fly outside Texas at the dawn of deregulation in 1978.

Even the fickle financial markets, which have long discounted Southwest's relentless growth and steady profits, have finally taken note. As oil prices doubled in the past year, share prices of the six network carriers have slid, with the drop-offs ranging from 76 percent to 94 percent. Southwest's decline has been more modest, within a point of the Dow's 21 percent 52-week drop. As a result, Southwest's market capitalization yesterday (about $9.7 billion) is now more than the combined $5.7 billion market cap of its Big Six competitors.

What does Southwest know that no one else in airlines does? It keeps things simple and consistent, which drives costs down, maximizes productive assets, and helps manage customer expectations.

One plane fits all
Unlike the network carriers and their commuter surrogates, which operate all manner of regional jets, turboprops, and narrow-body and wide-body aircraft, Southwest flies just one plane type, the Boeing 737 series. That saves Southwest millions in maintenance costs — spare-parts inventories, mechanic training and other nuts-and-bolts airline issues. It also gives the airline unique flexibility to move its 527 aircraft throughout the route network without costly disruptions and reconfigurations.

Point-to-point flying
Network carriers rely on a hub-and-spoke system, which laboriously collects passengers from "spoke" cities, flies them to a central "hub" airport, and then redistributes them to other spokes. Not Southwest. Most of its flying is nonstop between two points. That minimizes the time that planes sit on the ground at crowded, delay-prone hubs and allows the average Southwest aircraft to be in the air for more than an hour longer each day than a similarly sized jet flown by a network carrier. Southwest's avoid-the-hubs strategy also pays dividends in on-time operations. According to FlightStats, Southwest's 78 percent on-time performance in June is eight percentage points higher than the industry average and higher than that of any of its major competitors.

Simple in-flight service
Business travelers haven't always loved Southwest's über-simple service, but it's looking better and better as competitors cut back. There is just one class of service, a decent coach cabin that is slightly more spacious than those of Southwest's competitors. There are no assigned seats. There have never been meals, just beverages and snacks. Keeping it basic allows Southwest to unload a flight, clean and restock the plane, and board another flight full of passengers in as little as 20 minutes compared with as much as 90 minutes on a network airline. Airline efficiency experts say that the savings allow each Southwest jet to fly an extra flight per day. Extra flights mean extra revenue.

No frills, no fees
As other carriers have rushed to remove perks and pile on fees and restrictions, Southwest has kept its customer proposition streamlined and transparent. The airline only sells one-way fares and only in a few price "buckets." That not only keeps costs down — complex fare structures are expensive to manage — it convinces fliers that they are getting value for money. Prices are all-inclusive too. Southwest doesn't have fuel surcharges, doesn't charge for standby travel or ticket changes, and continues to permit travelers to check two pieces of luggage free. And since every seat on every flight is virtually identical, travelers know exactly what they will get when they make a purchase.

Strong management
The public face of Southwest Airlines for a generation — hard-drinking, chain-smoking, always-leave-'em laughing Herb Kelleher — finally stepped away from the carrier earlier this year. Kelleher's bonhomie masked the discipline that Southwest has had throughout its history. The airline has always avoided fads and eschewed anything that increased costs or complicated the basic travel proposition. When it has changed — last year it ended its infamous cattle-call boarding process to favor its most frequent fliers and highest-fare customers — it has done so without slowing down the movement of aircraft. Management ranks are lean, but well compensated and, most importantly, productive. I once calculated that the top executives of Southwest generated 10 times more revenue per dollar of compensation than did the C-suite types at some of the network carriers.

A relatively happy workforce
Network carriers have railed for decades about the power of their employee unions. But guess who's the most unionized carrier in the nation? Southwest, of course. The airline says that 87 percent of its employees belong to a union. Southwest hasn't had a strike in decades, and now that the network carriers have whacked away at salaries and benefits, Southwest staffers are generally the highest paid in the industry. But since Southwest has about 30 percent fewer employees per aircraft than its network competitors, it has the lowest non-fuel C.A.S.M. (cost per available seat mile) of any of the major carriers.

Aggressive fuel hedging
Rampaging fuel prices now represent around 40 percent of an airline's costs, but, as usual, Southwest Airlines has been ahead of the curve. Since 1999, the airline's aggressive fuel-hedging program has saved it an estimated $3.5 billion. In the first quarter, for example, it paid $1.98 a gallon for fuel, approximately a dollar less than its network competitors. And Southwest's future position is admirable: It is 70 percent hedged at $51 a barrel through the end of the year and 55 percent hedged at the same price next year.

In a world of $140-a-barrel oil, suggesting that any airline is a guaranteed winner is beyond hubris. But this much can be said: Southwest Airlines is sitting on a pile of cash and fuel hedges and has a proven and easily adaptable service model. And history shows that Southwest has comfortably survived every airline-industry downturn, then grown rapidly and profited hugely when the business cycle turns.
 

meritflyer

Well-Known Member
They left out the introduction of the Business Select option for us suit-and-tie folks.

It puts the legacy folks to shame.
 

DeltaAVL

New Member
Did I once hear that WN was owned by an oil/energy company or something and that the company would be even more profitable if it weren't running the airline?

Maybe I'm dreaming.
 

Baronman

Well-Known Member
Gimme a break. Fuel hedging should be the #1 thing on that list. Wouldn't they have lost money last year had it not been for the money they made off their bread and butter fuel business?
 

Gonzo

Well-Known Member
Gimme a break. Fuel hedging should be the #1 thing on that list. Wouldn't they have lost money last year had it not been for the money they made off their bread and butter fuel business?
I think you miss the point of hedging. SWA uses hedging for planing the cost of flights. They know how much a flight is going to cost six-nine months from now. That way they know how much a ticket needs to cost to make money. SWA doesn't care if it is hedged at $50 or $110 it is all about planing and hedging gives them the edge.
 

greaper007

Well-Known Member
Point to point my ass, to get from DTW to ELP, I go DTW-MDW-BNA-SAT-ELP
Sure, but there are still a lot of point to point flights in the system. Especially if you live in Florida, Texas, California.....

The point of the article is SWA's efficiency. My Dad's been a SWA pilot since the early 80s so I got to grow up traveling on them. All I can say is that after flying on SWA for years coming to my first regional doing Airways and United stuff, the difference in efficiency is mind-blowing. Another thing my Dad is probably one of the worlds most cynical angry people, but he loves his job. I've never heard him say anything bad about SWA, I think that's a testament to the airline right there (as compared to the crew rooms I hang out in).

They're making money by exploring the same smart efficent path they've been exploring for years. They just spotted the trend in oil before anyone else and took a chance on it.
 

Boris Badenov

Let's get this thing on the hump!
People have been saying "yeah, but" to SWA's success for decades now. Yet they're still making money, and everyone else is still losing it. When I fly, if I have a choice I go SWA. I'm always mystified by the dislike that some people have for them.
 

greaper007

Well-Known Member
People have been saying "yeah, but" to SWA's success for decades now. Yet they're still making money, and everyone else is still losing it. When I fly, if I have a choice I go SWA. I'm always mystified by the dislike that some people have for them.
My thoughts exactly.
 

MarkE

Murrrrrph!
People have been saying "yeah, but" to SWA's success for decades now. Yet they're still making money, and everyone else is still losing it. When I fly, if I have a choice I go SWA. I'm always mystified by the dislike that some people have for them.
Same reason I dislike Brad Pitt. He's better looking and has more money than me. :)
 

killbilly

Vocals, Lyrics, Triangle, Washboard, Kittens
They left out the introduction of the Business Select option for us suit-and-tie folks.

It puts the legacy folks to shame.
A-freakin-MEN! :yeahthat::yeahthat:


Biz Select is the greatest thing since the turbine engine.
 

USMCmech

Well-Known Member
The point of the article is SWA's efficiency.

All I can say is that after flying on SWA for years coming to my first regional doing Airways and United stuff, the difference in efficiency is mind-blowing.

They're making money by exploring the same smart efficent path they've been exploring for years. They just spotted the trend in oil before anyone else and took a chance on it.
The main "secret" is that they work SMARTER than their competors. Planing long term, and maximizing efficency in the short term.

Rember a few years back when everybody was asking why Southwest hadn't jumped on the RJ bandwagon? All the airlines knew that oil prices would be climbing, but only SWA had the cash and credit to take advantage of it. Imagine if they had bought a huge fleet of RJs and had spent much of that cash on jets.

Oh, wait!

That's what Jetblue did.

Slow and steady growth dosen't make big headlines or stock gains, but the tortise is wining this race.
 

The Gardener

Terrafirma Phobic
I flew SW twice last month and was very happy with them. meanwhile you couldn't buy my a ticket on American or Frontier!

They are also quite efficient at praying on the weak. Good business on there part.
 

Airdale

Well-Known Member
That was a good article. I think getting hired at SWA would probably be the toughest thing to do in this industry, but I guess I can dream. :)

They are proof that the rest of the industry knows nothing about running a business.
 

E6BAV8R

Well-Known Member
They're making money by exploring the same smart efficent path they've been exploring for years. They just spotted the trend in oil before anyone else and took a chance on it.
Everyone knew oil was eventually going to rise. None of the legacies had the cash $$ on hand to go out and buy $100 million in fuel in early 2000; and it's even worse today.
 
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