What Southwest Airlines Should Do Next

The local airline’s founder writes the next chapter of success for the company that defied the odds.

When Southwest Airlines made its inaugural flight on June 18, 1971, experts predicted that the company wouldn’t last more than 90 days. Thirty-two years later, Southwest is the industry’s only profitable major company and the only major airline that didn’t lay off a single employee after 9/11.

In Southwest Passage: The Inside Story of Southwest Airlines’ Formative Years, the airline’s founding president and CEO, Lamar Muse, offers a definitive account of its scrappy beginnings. The practices that ensured the airline’s success were largely his own. In the following excerpt, Muse offers some words of wisdom for sustaining the company in this beleaguered market.

ONE OF THE MAJOR ECONOMIES WE enjoyed during the 1970s and early ’80s that has not been available since Southwest’s expansion to both coasts was the single base for all cockpit crews and flight attendants as well as aircraft maintenance operations. That single base was also a major factor for building the great group spirit that permeates the Southwest organization. Today’s pilots, flight attendants, and mechanics living and working in or out of Phoenix, Seattle, Baltimore, and so forth, can’t have the feeling of family that is present in employees located in Dallas.

A wonderful opportunity presented itself a couple of years ago when Legend Airlines began operations out of Love Field in Dallas. They were using reconfigured DC-9s that seated only 56 passengers to provide service destinations beyond the "neighboring states restriction" created by the Wright Amendment applicable only to Dallas’ Love Field. At that time, Mr. Bob Crandall of American Airlines put tremendous pressure on the City of Dallas and Southwest Airlines to obtain two of Southwest’s gates at Love Field so that they could offer a competing service.

I strongly suggested to Herb Kelleher that agreeing to help Mr. Crandall could be a real bonanza for Southwest to at least partially reverse the multiple-base problem, and at the same time substantially cut Southwest’s unit costs and increase profits—all at American’s expense. My suggestion was to tell Crandall that Southwest would give American the exclusive use of two of its gates at Love Field if he would provide the same consideration to Southwest at one of its D/FW terminals. Of course, Crandall would immediately want to know what the hell Kelleher wanted with two of his gates at D/FW. After hearing the answer, he probably would have decided that he didn’t want to fly out of Love Field as badly as he thought he did.

The plan? Ultimately, fly one trip in and out of D/FW from each gate each hour throughout the day and night, a total of 48 arrivals and departures, to and from every major city served by Southwest outside the permitted area of the Wright Amendment. Each inbound flight would be operated by a crew going off-duty and would leave with a fresh crew, both of which would be Dallas-based. All aircraft due a major maintenance function would be ferried to Love Field and BUSINESS
replaced by a fresh aircraft from that maintenance facility. Just the major savings of eliminating a flock of crew bases and their attendant costs for supervision, reserve crews, and overnight accommodation, together with the centering of all major maintenance functions at Love Field, would go a long way toward paying the direct flight costs of these trips.

Revenues would be secondary, but very substantial, creating abnormally high profit margins. There are 13 cities on or near the West Coast that could be given service at a one-way unrestricted fare of $99, as could seven cities in the U.S. northeast. Seventeen additional cities in a belt beginning in south Florida, extending through the Midwest, and ending in Tucson, Arizona, could be served at a one-way unrestricted fare of $79. These cities would account for 37 of the 48 daily roundtrips, leaving 11 roundtrips as second roundtrips for the most promising markets or for convenience of crew scheduling. The flexibility that this type of operation would provide for aircraft utilization, maintenance, and crew scheduling, and the consolidation of a much larger proportion of the total employee complement in the Dallas area, would perform miracles for both unit costs (which is the name of the game) and morale (which makes things tick). Without question, the longer-haul, low-fare trips into D/FW would sustain average passenger load factors in excess of 80 percent, and the night trips particularly would be loaded with mail and cargo.

Possibly because of the source of this recommendation, nothing ever came of my proposal, and eventually American got two undesirable gates over in another wing at Love Field. However, my plan is just as good (or bad) today, maybe even more so. Now that Herb has released his titles of president and CEO, just maybe there could be a more unbiased response sometime in the future. The stockholders should certainly hope so.

Be all that as it may, Southwest is a fabulous success story of which Herb and every other Southwest employee, past and present, should be and rightfully are very proud. What began as a little three-aircraft airline, which Harding Lawrence of Braniff Airways—as well as many other so-called experts—forecast would not last more than 90 days back in 1971, came through something as debilitating to an industry as 9/11 without laying off a single employee or canceling a single flight other than during the three days following 9/11 forced upon the company by the FAA. And Southwest achieved a market capitalization exceeding that of the rest of the industry combined during the recent difficult period. A lot of people have got to be doing something right. As Herb has often said, "It’s not so important that you do things right, but rather that you do the right things," or words to that effect.

After 9/11, Southwest’s management did not forget lessons we learned in the early days about leverage in the airline business—that is, that you can add service to an existing base at very low cost. On the other hand, if you are forced to cut service, the reduction in costs is negligible, causing break-even load factors to rise very rapidly and employee morale to hit bottom. In other words, the airline industry is a capital-intensive, high-fixed-cost business in which leverage can make or break you. It’s too bad the rest of the industry, with their 10 to 20 percent cuts after 9/11, have never learned that basic fact.

It is therefore my considered opinion that, at this point in time, Southwest has the potential for the greatest profitable growth of its 31-year operating history if it will just take advantage of it by accelerating delivery of new aircraft rather than the current practice of delaying such deliveries and parking brand-new aircraft in the Arizona desert. Such action would permit the company to begin serving the pick of the many markets that have been cut back or abandoned by other companies. That action, together with a DFW operation, would, within a relatively short period of time, double Southwest’s net income and resultant market capitalization once again.

The serious drawbacks to accomplishing that goal are twofold. First, top management of the company is in a state of flux and will continue to be until the new president finishes receiving all the honors she is collecting and has fulfilled all the invitations to speak before women’s groups she will receive, at which time hopefully she will relinquish her honorary position and permit the company’s executive vice president-finance, Gary Kelly, to assume the all-important position of president and chief operating officer. The company’s formative years were under the direction of a CEO with a financial background, then it passed for three years to an expert in marketing, who incidentally was smart enough to bring along with him a finance man, and during the last 21 years the company has been controlled by a couple of attorneys, both from the same firm. It is time to get back to basics, get costs under control, be the low-fare carrier in fact rather than fiction, and stay the course.

The second drawback is, as usual, our federal government. Bureaucrats capitalized on the events of September 11, 2001, to put a burden on the airline industry as well as our nation that effectively makes Bin Ladin’s al-Qaeda network the winner. The airlines had absorbed for the last 28 years the security costs required of them by the FAA because a nut named D.B. Cooper decided to jump out of a Boeing 727-100 with a parachute, creating 27,000 jobs for people who would otherwise have most likely been on welfare, and establishing a new "security" division for the Federal Aviation Administration. That was child’s play though, compared to what has occurred as a result of 9/11. Instead of 27,000 minimum-wage employees, we are now going to have 72,000 "government security agents" making several times the rate of pay previously standard for the positions. The majority of the 27,000 will qualify for the new positions, since (1) the government doesn’t fire people, and (2) so that they won’t have to fire them, the requirement of a high school education has been eliminated.

It seems to me that Peter’s Laws should come into effect at this time. Number 15 says, "Bureaucracy is a challenge to be conquered with a righteous attitude, a tolerance for stupidity, and a bulldozer when necessary." All that is needed is a senior industry executive who has credibility—and the guts to tell the government to butt out.

From the book Southwest Passage: The Inside Story of Southwest Airlines’ Formative Years, by Lamar Muse, available at www.eakinpress.com. Reprinted with permission of Eakin Press, Austin.

Photo Courtesy of Southwest Airlines