SouthwestTurned 40Full ofYouthfulness       Wali Memon       walimemon.com
Southwest Turned 40                  Full of Youthfulness                                                                 ...
Southwest Turned 40                     Full of YouthfulnessNearby, Mike Van de Ven, the chief operating officer, is rolli...
Southwest Turned 40                      Full of YouthfulnessThrough mergers and global alliances, Delta Air Lines, which ...
Southwest Turned 40                      Full of YouthfulnessSince Southwest typically flies shorter routes and schedules ...
Southwest Turned 40                      Full of YouthfulnessThen came Southwest. From its modest beginnings, linking Hous...
Southwest Turned 40                     Full of Youthfulnessgovernment. The Department of Transportation marveled in a 199...
Southwest Turned 40                     Full of YouthfulnessRobert Jordan, Southwest’s vice president for strategy and net...
Southwest Turned 40                      Full of YouthfulnessBut some analysts say the airline has been slow to adapt in r...
Southwest Turned 40                     Full of YouthfulnessInitially, the company negotiated the spike better than most. ...
Southwest Turned 40                    Full of YouthfulnessSouthwest’s revenue rose by $1.6 billion in the first nine mont...
Southwest Turned 40                     Full of YouthfulnessThe acquisition fits into the company’s drive to attract more ...
Southwest Turned 40                     Full of YouthfulnessSouthwest to serve lower-traffic cities that would be uneconom...
Southwest Turned 40                       Full of YouthfulnessIt still strives to preserve its ethos by keeping a close ey...
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Southwest Airlines

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Southwest Airlines – Secrets of Success

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Southwest Airlines

  1. 1. SouthwestTurned 40Full ofYouthfulness Wali Memon walimemon.com
  2. 2. Southwest Turned 40 Full of Youthfulness 2 Southwest Turned 40 Full of Youthfulness Wali MemonIT’S halftime at Southwest Airlines’ annual Halloween party — a ritual meant to celebratethe carrier’s exuberant employees and freewheeling culture — and Gary Kelly is feeling abit wistful.“I was determined to be a man this year,” he says.Gone is the flamboyance of his previous costumes. He has attended as Edna Turnblad fromthe musical “Hairspray” (for which he had to shave his legs, don a wig and wear a pinkdress) and as Dorothy from the “The Wizard of Oz.” In one particularly memorableimpersonation, he was Gene Simmons of the hard-rock band Kiss.This year, Mr. Kelly, who also happens to be Southwest’s chairman and chief executive, isdressed as Woody, the friendly pull-string doll from “Toy Story.”“As long as you don’t mind being ridiculed all day,” he says of his Halloween outfits, “it’spart of the routine.”Wali Memon walimemon.com wali.memon@gmail.com
  3. 3. Southwest Turned 40 Full of YouthfulnessNearby, Mike Van de Ven, the chief operating officer, is rolling on the floor, posing for 3pictures, and greeting children and parents with a wide grin in his Buzz Light-yearcostume. “This shows you how little we have to do to run the airline,” says Mr. Van de Ven.“The less we do, the better it runs.”Southwest doesn’t quite fly on auto-pilot, but as it prepares for its 40th birthday next year,it is flush with success. Last year, it flew 86 million passengers, more than any other airlinewithin the United States. It operates 3,200 flights a day, owns a fleet of 544 planes andserves 69 domestic cities from Seattle to Fort Lauderdale, Fla., and from Lubbock, Tex., toBuffalo.When rival airlines were bleeding billions of dollars, Southwest was churning outconsistent profits as a low-cost carrier — even when fuel prices soared.And in September, in its boldest corporate move since it started flying outside of Texas,Southwest announced that it would buy AirTran Airways for $1.4 billion, increasing bothits revenue and its capacity by nearly 25 percent in a single stroke.Yet Southwest finds itself at a pivotal moment. Its success was built on a signature cocktailof low costs, low fares, frequent flights and a rapid expansion into new cities. But with highfuel prices, growth has been harder to find, and analysts have questioned whether theairline can sustain its singular operating style.Battered in part by Southwest’s growth, traditional airlines have restructured theiroperations over the last decade — often through painful bankruptcy proceedings — andhave narrowed the gap.Wali Memon walimemon.com wali.memon@gmail.com
  4. 4. Southwest Turned 40 Full of YouthfulnessThrough mergers and global alliances, Delta Air Lines, which acquired Northwest in 2008, 4and the more recently merged United Airlines and Continental are now more formidablerivals. They can offer their passengers access to cities across the United States along withconnections to the four corners of the world — something Southwest cannot do.Newer rivals, meanwhile, often modeled after Southwest, are thriving at the other end ofthe spectrum. Thanks to efficient operations, lower costs and an attention to customerservice, these carriers — such as JetBlue Airways and Allegiant Airlines — are threateningSouthwest’s dominance in the low-fare trade.“Southwest’s business has become more complicated than the simple model that servedthem so well for 39 years,” says William S. Swelbar, a research engineer at the InternationalCenter for Air Transportation at M.I.T.“They are at an inflection point. They are not a youngand nimble corporation anymore. This is now a mature company.”No longer the fiery start-up, Southwest now has the best-paid pilots, mechanics and flightattendants in the industry. Its unit labor cost — how much it pays its employees to fly oneseat for one mile — rose 22 percent from 2002 to 2009, while the same measure dropped34 percent at United, 7 percent at Continental, 26 percent at Delta and 11 percentat American Airlines.Southwest’s 5,600 pilots earned $171,000, on average, in 2009, or 20 to 40 percent morethan the average salary for pilots who fly bigger planes at those other airlines. The flip side,says Carl Kuwitzky, the president of the Southwest Airlines Pilots’ Association, is that thecompany expects its employees to be more productive.Wali Memon walimemon.com wali.memon@gmail.com
  5. 5. Southwest Turned 40 Full of YouthfulnessSince Southwest typically flies shorter routes and schedules more daily flights, pilots can fly 5one hour longer each day than at other airlines, he says. This efficiency becomes a crucialcomponent to the airline’s edge.“We work very hard for our company,” says Mr. Kuwitzky. “And we recognize that wesucceed if our company is successful.”Despite labor, Southwest still has lower overall costs than its traditional rivals. In thesecond quarter of 2009, Southwest’s advantage could be seen in its total costs per availableseat-mile. Those costs were 6 to 14 percent lower than at US Airways and American.(JetBlue and AirTran, on the other hand, have lower costs than Southwest.)Still, Wall Street remains skeptical. Southwest’s stock price, like those of most otherairlines, has languished. It has dropped 18 percent in the last five years — a generallyrough period for the industry as oil prices surged and the economy slowed.In an investment research note, analysts at Morgan Stanley recently asked a provocativequestion: “Is Southwest becoming a legacy airline?”“REMEMBER what it was like before there was somebody else up there who loved you?”In an ad from the early 1970s, a Southwest “hostess” — that’s what they were called at thetime — wearing skimpy hot pants stood in the middle of a runway while a low-flying jetwhizzed by and made a simple case for the new airline: We’re affordable.Until then, air travel was largely the province of a smaller, affluent class of Americantravelers and business types. Fares, regulated by the government, were high.Wali Memon walimemon.com wali.memon@gmail.com
  6. 6. Southwest Turned 40 Full of YouthfulnessThen came Southwest. From its modest beginnings, linking Houston, Dallas and San 6Antonio, it revolutionized air travel. Since 1971, the year of Southwest’s first flight, thenumber of air passengers has risen fourfold.Larded with much higher costs, incumbent airlines immediately recognized the threatposed by the scrappy new competitor, which once famously offered a fifth of Chivas Regalscotch to entice customers to pay a $26 regular fare from Dallas to Houston. (That wasinstead of the discounted $13 ticket that was priced to compete with Braniff InternationalAirways, now defunct.)“It was personal,” says Ron Ricks, a Southwest senior manager who witnessed some of theairline’s early struggles to expand into new airports. “But I realize now that it wasn’t reallypersonal for them. It was survival.”The airline also prospered by remaining relentlessly focused on low fares.“Southwest had a very profound impact on the industry,” says Robert Crandall, who ledAmerican Airlines in the 1980s and ’90s. “They disproved the notion that customerspreferred service to low prices. And to their credit, they have sustained that.”In the two decades after airline deregulation in 1978, Southwest developed a “cookiecutter” method of moving into a new city, sharply cutting fares and driving up traffic, saysMr. Ricks. “We are so consistent, it’s boring,” he says.The “Southwest effect” became a major reason that overall fares dropped in its newmarkets, and the phenomenon was studied in business schools and the halls ofWali Memon walimemon.com wali.memon@gmail.com
  7. 7. Southwest Turned 40 Full of Youthfulnessgovernment. The Department of Transportation marveled in a 1993 report: “The principal 7driving force behind dramatic fundamental changes that have occurred and will occur inthe U.S. airline industry over the next few years is the dramatic growth of low-costSouthwest Airlines.”Southwest continues to have that impact when it enters a new airport. After it beganservice to Baltimore-Washington International in 1993, fares dropped by 70 percent andpassenger traffic increased sevenfold. Traffic between Philadelphia and Providenceincreased by more than 800 percent, and one-way average fares fell to $44, a drop of 83percent, in the year after Southwest entered Philadelphia in 2004.The company started flying to Denver in January 2006. It now has 141 daily departuresthere, reflecting the fastest growth in its network. Frontier Airlines, based in Denver butwedged between Southwest and rising fuel costs, couldn’t keep up. It filed for bankruptcyin 2008, though it kept flying.In Las Vegas, Southwest effectively drove out most competition from US Airways, whichretreated to Phoenix. With 212 daily flights, Las Vegas is now Southwest’s top city.Competitors see Southwest as cold-blooded and ruthless.“Their approach is to search out weak companies and contest them out of business,” saysBryan Bedford, the chairman and chief executive of Republic Airways, which boughtFrontier out of bankruptcy last year. “It’s no different than Wal-Mart plunking a big-boxstore near a local family-owned grocery store; you either respond to the competition, oryou get out.”Wali Memon walimemon.com wali.memon@gmail.com
  8. 8. Southwest Turned 40 Full of YouthfulnessRobert Jordan, Southwest’s vice president for strategy and network planning, sees things 8differently.“We never like to say we kicked somebody out of the market,” he says. “Everybody makestheir own choices. But we can go into a new market, charge attractive prices and, given thatpeople love our products, gain new customers.“At some point, it becomes very hard for others to compete because they can’t make moneyat the prices we charge, and we can.”There’s also the whole Southwest road show that is a feature of nearly every trip: Someflight attendants joke with passengers, others play games and sing, or, in the case of oneflight attendant made famous in a YouTube clip, break into rap songs.On one recent flight to Las Vegas, when a flight attendant learned that a couple were goingto marry, she dimmed the cabin lights and led the whole plane in a loud toast.Despite the fun and games, Southwest continues to deliver on its basic promise, says WaltRose of New Orleans, who travels on the airline occasionally.“They can get comical sometimes — and that’s a major understatement — but we don’tmind it,” says Mr. Rose, on a Southwest flight from New Orleans to Midland-Odessa, Tex.“They are on time, they are reliable, and they fly where we want to go.”AS it reaches adulthood, Southwest insists that it can hold on to its teenage ways.“We still have an underdog mentality,” says Mr. Kelly, the C.E.O. “It’s not a comfortablecountry-club environment for us.”Wali Memon walimemon.com wali.memon@gmail.com
  9. 9. Southwest Turned 40 Full of YouthfulnessBut some analysts say the airline has been slow to adapt in recent years, by failing to 9update its reservation software, for instance, or not scheduling flights to some leisuredestinations favoured by Americans, such as Cancún, in Mexico, or the Caribbean Islands.That has allowed others, particularly JetBlue, to build a lucrative franchise in the Caribbean.“They were too paralyzed in their in-the-box thinking about their airline,” says MoGarfinkle, an airline consultant. “Maybe they got a little too comfortable in their niche. Theydidn’t appreciate that the world around them had changed.”While shunning radical change, Mr. Kelly rejects the notion that Southwest has beenstanding still.He points out that in the last year, the company has been in talks with its pilots to expandthe fleet with Boeing 737-800s. These new planes offer 40 more seats than the airline’scurrent 737s and will allow Southwest to fly longer distances. The move is significantbecause it helps pave the way for the airline to fly to Hawaii, and, for the first time, todestinations outside the United States.But getting overseas requires a tremendous amount of work for Southwest. Pilots need toendorse the move because it would mean a change to their contract. (Flightattendants agreed to the change last week.) Southwest also needs to update its software soit can, among other things, sell international tickets and provide passport information tofederal authorities — something that its antiquated system cannot do.While Southwest has ridden out spiking oil prices, it’s still an expense that could hampergrowth, especially as oil prices rise above $80 a barrel again.Wali Memon walimemon.com wali.memon@gmail.com
  10. 10. Southwest Turned 40 Full of YouthfulnessInitially, the company negotiated the spike better than most. It bought complicated 10financial hedges intended to mitigate the impact of high fuel prices, and gained a preciousadvantage over its competitors as oil prices soared.But the bet backfired in the fall of 2008, when the economy slowed and oil prices collapsed.The company lost $120 million, its first quarterly loss in more than 17 years. (It still turneda profit, however, for the full year.)Given its low operating costs — and an engrained philosophy not to furlough or lay offemployees or cut salaries — Southwest found that it could not cost-cut its way out of thecrisis.Instead, it needed to bolster revenue while keeping its capacity flat. So the companyfollowed a wider industry trend, by aiming to attract more business travelers with moreperks and by getting passengers to pay for new services, such as priority boarding.But here, too, Southwest sensed an opportunity to showcase its difference. While baggagefees generated roughly $1.7 billion for the industry in the first half of the year, Southwestdrew the line. It made its “Bags Fly Free” policy a centerpiece of its advertising andmarketing campaign.“A lot of people have been trying to pickpocket and nickel-and-dime their customers,” saysKevin Krone, the company’s head of marketing. “We don’t think it’s right.”The policy turned out to be a good business move.Wali Memon walimemon.com wali.memon@gmail.com
  11. 11. Southwest Turned 40 Full of YouthfulnessSouthwest’s revenue rose by $1.6 billion in the first nine months of 2010, compared with 11that period in 2007, even as its capacity declined by 1 percent. Part of that growth in sales,Southwest believes, came from new customers fleeing bag fees. Mr. Kelly calls his rivals’approach “a gift.”The policy yielded another advantage. It allowed Southwest to subtly shift the focus awayfrom its fares. Although it still offers low fares to many destinations, Southwest doesn’talways have the lowest fares every day on every flight, says Bob McAdoo, an airline analystat Avondale Partners.“Southwest can offer pretty good prices on their Web site, but if you buy in the traditionalbusiness markets, 6 to 10 days in advance, it is not inexpensive,” according to Mr. McAdoo,who says he recently saved $350 to fly from Kansas City to Portland, Ore., by takingContinental instead of Southwest.To attract more business travelers, Southwest also ironed out its chaotic boarding process,which had often been derided as a “cattle call.”While it still does not assign seats, Southwest set up new boarding groups, giving priorityto people who have checked in online. This allowed it to start charging to be in the earliestgroup to board.SOUTHWEST’S biggest challenge will be in merging with AirTran, which Mr. Kellydescribed as “the single best idea we have for the next years.”Wali Memon walimemon.com wali.memon@gmail.com
  12. 12. Southwest Turned 40 Full of YouthfulnessThe acquisition fits into the company’s drive to attract more business travelers. It opens the 12door to Atlanta, the world’s busiest airport, provides expertise on international flights andexpands its foothold in New York and Washington. It also brings the carrier into moredirect competition with big players like United and Continental, as well as American andDelta.But as Southwest enters more congested airports, especially in the Northeast corridor,analysts say it may suffer the same kinds of delays and performance shortfalls that plagueits rivals. Today, about a third of all Southwest’s passengers connect somewhere along itsnetwork. That is well below the 50 or 60 percent connection rates at the more traditionalhub-and-spoke airlines, but analysts point out that Southwest’s figure is growing.Earlier this month, the Justice Department requested more information about the merger,which would cement Southwest’s lead as the top domestic carrier. Southwest still expectsthe deal to close in the first half of next year.“Southwest got two big pluses from AirTran — 37 more destinations and taking out thelowest-cost carrier in the business,” says Robert Herbst, an independent analyst and aformer commercial pilot.The takeover will also mean some fundamental changes to another aspect of the vauntedSouthwest model. The airline currently flies a single type of airplane, the Boeing 737, whichallows it to minimize maintenance costs and pilot training.With AirTran, Southwest will inherit a fleet of 86 Boeing 717s that it will have to integrateinto its operations. Mr. Kelly says those planes will provide more flexibility, allowingWali Memon walimemon.com wali.memon@gmail.com
  13. 13. Southwest Turned 40 Full of YouthfulnessSouthwest to serve lower-traffic cities that would be uneconomical to serve with the larger 13737.Southwest will also have to absorb AirTran’s 8,000 employees into its highly unionizedwork force of 35,000.That aspect has prompted considerable worries among Southwest employees, who fearthat the merger will somehow dilute the company’s specific culture. Pilots often help cleanup a cabin to speed up operations. Flight attendants have been known to lend a hand ontheir day off.Thom McDaniel, the president of the Transport Workers Union Local 556, which representsthe company’s flight attendants, says the issue is among the most discussed among hismembers. “When we wear the same uniforms, we need to be part of the same company,” hesays.Mr. Kuwitzky, the pilots’ union president, says, “The Achilles’ heel of this transaction is howour company will be able to maintain our culture, and keep it alive for the next 40 years.”Few companies — and certainly fewer airlines still — have managed to foster such feelingsof loyalty from their employees.In the 1990s, at a time of rapid growth, it set up “culture committees” that helpedpropagate the “Southwest way” through the company.Wali Memon walimemon.com wali.memon@gmail.com
  14. 14. Southwest Turned 40 Full of YouthfulnessIt still strives to preserve its ethos by keeping a close eye on its hiring. Last year, for 14instance, it received 90,043 résumés but hired a mere 831 people, making it harder to get ajob at Southwest than to get into an Ivy League college.“Our culture is our biggest competitive strength,” says Mr. Van de Ven, the chief operatingofficer. “But we want to grow it, not protect it.”Southwest wears its history on its walls. The headquarters here in Dallas features wall-to-wall displays of about 100,000 photographs celebrating the airline’s history, follies andsuccesses. This bond culminates at Halloween, the biggest party of the year, and one ofeight corporate functions Southwest deploys to bring its employees together.NOW it’s a question of whether Southwest’s culture will continue to liberate it or will holdit back.“The traditions can hobble you; I absolutely concede that,” says Mr. Kelly. But he saysSouthwest is just as scrappy as ever.“We’re still a maverick,” he says.Wali Memon walimemon.com wali.memon@gmail.com

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