Southwest Airlines Business model: Low cost, low-fare Competitive outlook: Evolver, Uncertain Of the three carriers covered in this post, Southwest Airlines is perhaps the most vulnerable to understanding its overall strategic fit in serving the domestic US market, along with its slowly growing trans-border market served via subsidiary carrier AirTran. The harsh reality is, Southwest is the oldest low-cost carrier and the largest domestic US carrier. It celebrated its 40th birthday earlier this decade, and operates a fleet of nearly 700 aircraft. While it's cost base is still below that of JetBlue's at 6.76 cents for 2012, it's passenger unit revenue growth was relatively flat at 2.6%, while JetBlue's was 3.6%. Couple this with pressure mounting from legacy US carriers that have been able to lower their unit costs through Chapter 11 reorganizations and consolidation, and the situation is slightly worrisome. When American Airlines filed for bankruptcy in November 2011, Southwest CEO Gary Kelly sent out a memo to all employees that great customer service could not overcome high costs, and that lowering them became a high priority for the airline. Revenue growth is also going to be a huge area of consideration. As stated above, much of Southwest's areas of critical need can be exposed by pointing towards competitor JetBlue. From a product perspective, JetBlue offers up-sells and frills that appeal to the business traveler: priority boarding, seat selection, extra legroom, security-screening, second checked bag and some premium products such as movies. Southwest offers few similar, overlapping amenities, and also misses out on revenue by not charging for change and cancellation fees, although it recently stated plans to implement a no-show fee. Passengers traveling on subsidiary AirTran branded flights still pay luggage fees, which the carrier will continue to collect until both airlines are fully integrated. No final decisions have been announced as to which checked bag policy will prevail over the other once they are merged. Network growth is also a challenge. Unlike JetBlue, and to a lesser degree, Spirit, Southwest's growth into international markets is retarded by a much more conservative mindset and roll-out strategy. International services can only be supported on AirTran's infrastructure, but the carrier is slowly building up new services to markets in Mexico and the Caribbean from a diversified portfolio of gateway cities in California, Colorado, Florida, Illinois and Texas. However, many of the new nonstop city parings announced have pre-existing competition. Finally, the AirTran acquisition was strategic in allowing Southwest to expand its network in a low-profile manner, launching its first international push and gaining access to Atlanta. However, the acquisition has not been painless; Southwest has cut many of AirTran's services to under-performing, smaller markets and de-hubbed Atlanta. It has also removed AirTran's Busin.

1. Southwest Airlines
Business model: Low cost, low-fare
Competitive outlook: Evolver, Uncertain
Of the three carriers covered in this post, Southwest Airlines is
perhaps the most vulnerable to understanding its overall
strategic fit in serving the domestic US market, along with its
slowly growing trans-border market served via subsidiary
carrier AirTran.
The harsh reality is, Southwest is the oldest low-cost carrier and
the largest domestic US carrier. It celebrated its 40th birthday
earlier this decade, and operates a fleet of nearly 700 aircraft.
While it's cost base is still below that of JetBlue's at 6.76 cents
for 2012, it's passenger unit revenue growth was relatively flat
at 2.6%, while JetBlue's was 3.6%. Couple this with pressure
mounting from legacy US carriers that have been able to lower
their unit costs through Chapter 11 reorganizations and
consolidation, and the situation is slightly worrisome. When
American Airlines filed for bankruptcy in November 2011,
Southwest CEO Gary Kelly sent out a memo to all employees
that great customer service could not overcome high costs, and
that lowering them became a high priority for the airline.
Revenue growth is also going to be a huge area of
consideration. As stated above, much of Southwest's areas of
critical need can be exposed by pointing towards competitor
JetBlue. From a product perspective, JetBlue offers up-sells and
frills that appeal to the business traveler: priority boarding, seat

2. selection, extra legroom, security-screening, second checked
bag and some premium products such as movies. Southwest
offers few similar, overlapping amenities, and also misses out
on revenue by not charging for change and cancellation fees,
although it recently stated plans to implement a no-show fee.
Passengers traveling on subsidiary AirTran branded flights still
pay luggage fees, which the carrier will continue to collect until
both airlines are fully integrated. No final decisions have been
announced as to which checked bag policy will prevail over the
other once they are merged.
Network growth is also a challenge. Unlike JetBlue, and to a
lesser degree, Spirit, Southwest's growth into international
markets is retarded by a much more conservative mindset and
roll-out strategy. International services can only be supported
on AirTran's infrastructure, but the carrier is slowly building up
new services to markets in Mexico and the Caribbean from a
diversified portfolio of gateway cities in California, Colorado,
Florida, Illinois and Texas. However, many of the new nonstop
city parings announced have pre-existing competition.
Finally, the AirTran acquisition was strategic in allowing
Southwest to expand its network in a low-profile manner,
launching its first international push and gaining access to
Atlanta. However, the acquisition has not been painless;
Southwest has cut many of AirTran's services to under-
performing, smaller markets and de-hubbed Atlanta. It has also
removed AirTran's Business Class product offering, which may
have deflected loyal traffic away from AirTran towards legacy
competitors.
Still, there are plenty of major bragging points. Southwest
celebrated its 40th consecutive year of profitability in 2012
with a $421 million net profit. The carrier won rights to build
an FIDS facility at Houston Hobby airport in 2012, and has
exciting fleet modernization plans on the way. That being said,

3. the scales may be balanced at the moment right now, and as
CAPA states, "Southwest will have to prove its relevancy in the
US market."

4. JetBlue Airways
Business model: "Hybrid"
Competitive outlook: Survivor, contender.
JetBlue Airways has gone up against the odds and created a
home for itself in the Americas by positioning its brand
uniquely between legacy carriers and discount airlines - and
serving that sector profitably. It has grown beyond merely
focusing on transcontinental and east coast network growth out
of its primary base at New York JFK airport by expanding
rapidly in Boston, the Caribbean and upper Latin America. In
fact, JetBlue has given the boot to American Airlines in both
Boston and San Juan, Puerto Rico by establishing itself as the
#1 carrier at both airports by seat capacity (both Boston and San
Juan were once considered hubs for American). At Boston,
JetBlue commands roughly 30% of the overall market share, and
in San Juan, JetBlue holds 31.4% of the overall share, according
to CAPA.
Network growth has been balanced between leisure and business
markets. In Boston, for example, JetBlue has added a portfolio
of destinations appealing to the Caribbean and Latin American
VFR (visiting friends and relatives) market, along with new
service to domestic US markets such as Dallas/Ft. Worth,
Denver, Raleigh-Durham and Philadelphia. Boston to DFW and
Philly are particularly interesting given that these two markets
are (or were once) dominated by legacy carriers American and

5. US Airways, with each respective carrier commanding
extremely high profit margins on these monopoly routes.
Southwest attempted Boston-Philadelphia in the past to create
fare pressure on US Airways, but was ultimately driven out of
the market.
JetBlue's cost structure is slightly above that of Southwest
(arguably, the two airlines are each others' fiercest rival
carriers). Unit costs at JetBlue for Q42012 stood at 7.58 cents,
versus Southwest's at 6.76 cents. However, one could argue
that JetBlue can out-edge Southwest in R/ASM growth because
it is much more nimble in terms of reaping benefits from faster
network growth (see below section under 'Southwest').
International markets are a particularly huge driver in this arena
as leisure destinations can take as little as 6 months to reach
maturity, compared to 2 years for business markets, according
to CAPA.
Finally, JetBlue's differentiated product mix has retained
loyalty of its customers, a tried-and-true trademark that seemed
to lose industry popularity years ago. Unlike its legacy and
ultra-low cost peers which have resorted to complete product
un-bundling, charging passengers for virtually every ancillary
service saide from the base fare of a ticket, JetBlue still offers
freebies in the form of a checked bag, complimentary
refreshments and live satellite television without a extra
charges. Up-sells are also available through the purchase of of
extra legroom seating, priority boarding and expedited security
screening. Compare this to United Airlines, which, despite
charging for most of these frills, still has the most bloated cost
structure of all US carriers at 12.3 cents, a third higher than
JetBlue's.
All of these items considered, JetBlue posted a $128 million
profit for 2012, a 49% year-over-year increase from 2011,
whereas United lost $723 million. While the two carriers are

6. still completely different models at the end of the day, it is
clear which carrier has the superior financial strength based on
network planning, structural growth and passenger mix. As long
as JetBlue can hold its own in this lucrative niche, it's long-term
prospects seem pretty good for now.