Slate's Bizbox
moneybox: Commentary about business and finance.

Soaring Southwest

By Rob Walker
Posted Thursday, Aug. 23, 2001, at 11:30 PM ET

In a recent "Moneybox" about the nose-diving fortunes of the airline business, I mentioned in passing that the most profitable carrier around these days is Southwest Airlines, but that it's such a different animal than the majors that it would be best to put off further examination for another column. And here we are.

As that earlier item noted, this is a lousy period for most of the big carriers; almost all of them posted losses in the most recent quarter. What's different about Southwest? Why is the former regional carrier continuing to soar, while some of the biggest carriers are watering down their Saturday-night-stay restrictions and making other conciliatory moves, and US Airways seems to teeter on the brink of disaster?

Maybe the best place to start is Southwest's cost structure. (Much of the data that follows comes courtesy of Jonathan Schrader, who covers Southwest and other airlines for Morningstar, the market data and research firm perhaps best known for its mutual fund ratings.) A favorite measurement in the airline business is "cost per available seat mile"—CASM. In the most recent quarter, Southwest had a CASM of 7.68 cents. That is, this was the amount it spent, broken down per seat per mile flown. The average CASM among big carriers (counting Southwest) was 10.41 cents. The highest was US Airways, at 12.13 cents.

Why are Southwest's costs lower? First, it's been fairly successful at hedging its fuel costs. (The big airlines all vary in the aggressiveness of their hedging strategies.) Second, its entire fleet consists solely of 737s, which cuts training costs, maintenance costs, and inventory costs. And third, it pays its employees less, and gets more out of them, than its competitors. Employee costs are the biggest that an airline faces, and Schrader has done an interesting calculation (which he notes is not perfect, but useful even so), taking the amount earmarked for wages and salaries on each carrier's recent quarterly numbers and dividing that by overall revenue. The average figure was 37.4 percent. The highest was American Airlines, at about 44 percent. The lowest was Southwest, at 30.46 percent. How has Southwest managed to get more out of its employees for the money? Answering this veers into the realm of intangibles—co-founder and longtime honcho Herb Kelleher forged a unique culture of loyalty and trust, etc. Kelleher himself went on at some length in a recent Fortune story about the airline's "warrior spirit" and so forth. (The magazine says Southwest has been profitable every year since 1973; it's been public since 1977.) The one remark from that story that rings truest: "Manage in good times so that you're ready for bad times." The company has been vigilant about controlling costs even when profits were up—something not all airlines can say.

The cost side of the equation is especially critical to Southwest, which in addition to low CASM, has a comparatively low RASM—that's revenue per available seat mile. Figures for the last quarter: 9.45 cents at Southwest, compared to a 10.18 cent average; US Airways is again the highest at 12.04 cents. (But obviously that's cold comfort to US Airways, since this revenue figure is lower than the corresponding cost figure. Not good.) Low ticket prices, famously, are the core of Southwest's competitive strategy.

The critical related point is that Southwest has put much greater emphasis on consumer flyers, as opposed to business travelers. The latter group typically have a corporate relationship with a big carrier that has a vast (hub-based) network in place. (As discussed in that earlier Moneybox, the big carriers get much of their profit from soaking business travelers on last-minute fares. The Saturday-night stay rule, which some big carriers have lately relaxed, has the effect of making lower fares available only to vacationer types but keeping them high for business travelers on quick trips.) While Southwest now covers a good deal of the country, its emphasis is on point-to-point flights between U.S. cities, as opposed to the vast interconnected web that a corporate client might want. I fly Southwest fairly often, so here I can speak directly to another appeal: The fare structure is pretty much transparent, and there's far less play between an early fare and a last-minute one.

A related benefit to both consumers and the airline is a focus on wasting as little time as possible on the ground (planes generate revenue only when flying, after all). Thus Southwest usually operates out of secondary airports (such as Love Field in Dallas and Midway in Chicago) rather than delay-prone hubs, and it seats people with a general-admission-type system that seems to make boarding work more quickly.

Now, what this leaves as an open question is why Southwest seems to have thrived more than any other regional carrier, since any of them could presumably have hit on a similar set of strategies. Yet Midway, a North Carolina-based carrier, is filing for bankruptcy protection. And US Airways, another ex-regional with national ambitions, is beset with pessimism about its future. Part of the answer is that Southwest's startup costs are well behind it, and it has the critical mass to withstand price wars that Midway lacked. In fact, Southwest's arrival in Midway's backyard was a source of trouble for the latter firm. US Airways' most obvious problem is its costs—the carrier already spends more than most of its rivals and now faces a showdown with its unions. (Another interesting point mentioned in this Fortune sidebar is that Southwest managed to strike an unusual 10-year pact with its pilots, while shorter deals are the norm.) It's possible that in a stronger economy US Airways could raise fares back into profitability, but that seems like a long shot; the more likely scenario is that the airline either finds a way to cut its costs or go the way of Eastern.

Does all this mean that Southwest holds the secret to airline success and will never be overtaken by a competitor or fall on hard times? Of course not. Hindsight is easy, and who knows what might buffet the airline business next. But at the moment the market thinks highly of Southwest, valuing the company at more than $13 billion—more than American, United, and US Airways combined—and it's not hard to see why.

Print This ArticlePRINTDiscuss this in The FrayDISCUSSEmail to a FriendE-MAIL
Share on FacebookPost to MySpace!Share with MixxDigg ThisShare with RedditShare with del.icio.usShare with FurlShare with Ma.gnolia.comShare with SphereShare with Stumble Upon
Rob Walker writes the Ad Report Card for Slate.
Join the Fray: our reader discussion forum
What did you think of this article?
POST A MESSAGE | READ MESSAGES

Reader Comments From The Fray:


[Notes from the Fray Editor: The Fray certainly likes Southwest—readers also mentioned their advertising, and even the uniforms--"Last week I flew American Airlines. The stewards were dressed in uniforms that looked as if my mom, eager to please, sewed uniforms using what she was sure is an attractive style."]


WN [Southwest's industry airline code] works because they treat their people like human beings instead of 'disposable units of labor.' They don't have a constant adversary relationship with their workforce draining their morale and productivity. I did over 20 years with another regional airline that was 'taken over' by a major carrier. We were a great company to work for until the major started using their shill management team to rape the company and its employees. Like one unnamed Japanese manager said about good management, "I treat the workers like people and they react like people. How hard is that?"

They have rationalized their fleet and business plan, something the majors could learn from. They don't try to be the airline of choice for the business elite, with the average Joe and Jane as afterthoughts. In this case, egalitarianism works for WN. Good for them. I hope they eat UA, AA and the others alive.

--Gregg

(To reply, click here.)


 Given the increasing resemblance of the airline experience to Greyhound in terms of comfort, savoir-faire and customer service, of course price becomes paramount, that is the only defining characteristic left. Actually, from what I have heard, Southwest actually tries to make flying fun, so what do their competitors have to offer us?

--Rich Mahady

(To reply, click here.)


I am a business traveller who actually prefers Southwest. Others in my firm balk at the thought of the "cattle call" boarding, smaller planes and lack of food service. I counter with:
--Arrive early enough to check in at the gate and get a low numbered boarding pass. People don't seem to start storming the gate until about halfway through the second boarding party.
--Although smaller planes don't have the interior space as their larger counterparts (duh) the SWA planes are plenty spacious.
--I would prefer to bring the food of my choice on board than suffer through most airline food.
--Southwest is friendly. Seriously friendly. From their reservation operators to their flight attendants, the mood is laid back, casual and nice. I like that.
--They have a lot of flights daily to everywhere I need to go. Of course, it's still impossible to get the first flight into Sacramento on a Monday, or the 4 pm flight out, but that's ok. There are enough other flights both ways so I am not too terribly inconvenienced.
And finally
--Their fares are great. How can you beat that?

It'd be nice if more airlines, even the big guys, started taking notes.

--Bgeorge

(To reply, click here.)

 (8/24)

Washington Post
The Washington Post
OPINIONS
Topic A: Obama's Speech
| Pundits and diplomats respond.
Robinson: Sunshine in BerlinToles: The World ?'s ObamaTelnaes: Meanwhile, McCain