"Southwest Still Soaring as Other Airlines Stall"

Sunday, October 6, 2002

Southwest Still Soaring as Other Airlines Stall
Rivals and analysts are watching closely to see in which markets the
carrier will land next
By JAMES F. PELTZ
The Los Angeles (CA) Times


DALLAS -- Since last year's Sept. 11 terrorist attacks, the nation's
airlines have had to deal with jittery passengers, increased security
and mounting losses in the wake of a steep downturn in travel.

And then there's the carriers' ever-present domestic concern: the
fun-loving, irreverent and always-profitable Southwest Airlines.

While other airlines are bleeding billions of dollars and shrinking
fast, Dallas-based Southwest--the nation's sixth-largest carrier and the
biggest in the California market--is poised to eat their lunch by taking
more of their passengers and market share.

Donald Carty, chairman of American Airlines and its parent AMR Corp.,
said as much when he recently noted that American must adapt to "an
environment where ... lower-cost competition represents a much bigger
slice of the marketplace."

Moreover, if the competition thought that legendary Southwest co-founder
Herb Kelleher would disappear after he retired as chief executive in
mid-2001, they were wrong. Despite keeping a very low public profile,
Kelleher, who remains chairman, is calling many of the shots at
Southwest along with his successor, Chief Executive Jim Parker, and
Southwest President Colleen Barrett.

One of those shots is where Southwest will expand next, or whether it
will create more longer nonstop flights to supplement its core
short-haul service. Industry experts foresee an expansion of service
into the Chicago and Florida markets. "It's not a decision either one of
us [Parker or Barrett] is going to make, because it's one of the things
that Herb kept," Barrett said of Kelleher, who declined to be
interviewed. "He kept strategic planning, he kept fleet planning.

"I'm sure he will discuss things with us," she said with her tongue
partly in her cheek, "but they've always been his call in the end."

Kelleher, 71, is the charismatic, zany force who created the culture,
the business model and the financial discipline that has set Southwest
apart during its 31-year history. And he's the one who taught Southwest
to take unrelenting aim at other airlines during their times of woe to
garner more business for the carrier.

Southwest relishes moving into a city or route that's underused or has
been abandoned, launching flights with its cheap ticket prices and then
turning a profit thanks to its remarkably low operating costs. That,
too, is one of its trademarks. It's the reason Southwest has not only
doubled in size since 1995, but also has doubled its share of total U.S.
passenger traffic to 8% from 4% in that period.

In 1991, for instance, US Airways pulled out of several California
cities. "We said, 'We'd love to be in Sacramento,' " recalled Gary
Kelly, Southwest's chief financial officer. "So boom, we went in." That
helped launch Southwest's dominance of the intra-California market.

In the last year, the airline grabbed even more passengers in the West,
after UAL Corp.'s United Airlines abandoned its West Coast shuttle
program, and in Baltimore and other Eastern cities after US Airways
grounded its Metrojet division.

Southwest's low fares have never been more popular than during the
current travel slump and are another significant reason the bigger
carriers--with their higher costs and typically higher fares--are on the
ropes. With the growing help of the Internet, both business and leisure
travelers increasingly are searching for the cheapest fares, playing
right into Southwest's hands.

"They are sitting on a kind of treasure trove," said Ron Kuhlmann, vice
president of aviation consulting firm Unisys R2A in Hayward, Calif.

Southwest's senior managers avoid talking publicly about exploiting
their competitors' troubles, in good part because Southwest--with 2,800
daily flights to 58 cities--has its share of problems. Its passenger
revenue is down 9% for the first half of the year, and its profit is
less than half what it was a year ago. Southwest's famous on-time
performance has slipped noticeably in recent months, which the carrier
blames mostly on increased security measures and bad weather.

The company's stock also has plummeted 43% since it peaked at $22 a
share in late February--it closed Friday at $12.48 a share--as investors
fret that the factors whipping the big carriers will impede Southwest's
growth. Even so, Southwest's total stock market value of $9.7 billion
remains twice that of all other major airlines combined.

Southwest's executives acknowledge that the industry shakeout gives
their airline another opportunity to build up while the others are
tearing down. Southwest still has the money, the planes, the people
and--most of all--the will to swoop in wherever other carriers pull out.

"Adding new cities is something we have historically done, and we will
do it in the future," Parker said. "But we've never taken on more than
we could sustain."

A Variety of Problems

Airlines with the biggest troubles include US Airways, which is in
bankruptcy proceedings and plans to slash hundreds of flights as it
overhauls its system. United is teetering toward Chapter 11 and probably
will retrench regardless of whether it stays out of Bankruptcy Court.
Industry leader American also has announced plans to trim its flight
schedule, ground jetliners and eliminate 7,000 jobs.

Their outlooks seem to grow dimmer by the day. The prospect of a war
against Iraq, with its attendant surge in jet-fuel prices and a further
drop in travel by skittish passengers, has pummeled airline stocks to
levels not seen in two decades. Airline executives, meanwhile, recently
went to Capitol Hill seeking more federal aid in the form of relief from
soaring insurance and security costs.

As the other large carriers shrink, Southwest wants to keep growing,
though Parker and other executives are careful not to suggest where the
airline will expand next. That could well depend on where those other
airlines pull back. "If one of our competitors reduces service in a
market, it [that city] may very well rise to the top of the list," Kelly
said.

"More nonstops is another way we can grow," Parker said, referring to
Southwest's bold strategy of expanding beyond its basic short-run
flights with routes that span the continent--a direct volley at larger
network airlines such as American and United. Last month Southwest
launched its first nonstop transcontinental service, from Los Angeles to
Baltimore.

"Southwest is replacing traditional network carriers," analyst Ray Neidl
of Blaylock & Partners said in a recent report.

But Southwest won't just jump into any new airport or route, cautioned
Kuhlmann of Unisys R2A. Southwest always has avoided, where possible,
congested airports because they impede its efficiency, so "I don't
expect Southwest will go into Boston or San Francisco," he said. (It
flies to Providence, R.I., and Oakland instead.) Likewise, "in a lot of
their short-haul markets they're pretty much maxed out" in terms of
daily service, such as Southern California to the San Francisco Bay
area, he added.

Instead, "I would expect Southwest is going to exploit further its
Chicago Midway-West Coast" service, and it might add more routes to
California and the West from its growing presence in Fort Lauderdale and
Orlando in Florida, Kuhlmann said.

U.S. carriers lost more than $7 billion last year, slammed by the
recession, a precipitous drop in business travel, the general travel
downturn after the terrorist attacks, rising jet-fuel costs and by
higher labor contracts that they approved. The figures would have been
worse without a $15-billion federal bailout organized after Sept. 11
that included $5 billion of cash grants disbursed among the carriers.

The other airlines slashed their operations and laid off more than
80,000 workers to save cash. Southwest neither trimmed its system nor
laid off employees--it has never had layoffs--and still finished 2001
with profit of $511 million (including one-time gains and charges) on
revenue of $5.6 billion.

Many in the industry expected air travel to improve as this year
progressed, but it hasn't. Analysts predict that the industry, which
also is grappling with increased security and insurance costs, could
lose $7 billion this year.

Southwest earned $124 million in the first half of this year and is
expected to turn a profit for all of 2002. Barrett said a profit
provides value not just to stockholders but to Southwest's 35,000
employees.

"A non-growing company is the quickest way to have morale go to pot,"
she said.

Southwest's big competitors have tweaked their operations before during
financial slumps, but their condition is so grave this time that they're
talking about a radical overhaul of the way they do business. Airlines
such as American and United spend 10.5 cents to 11.5 cents to fly one
passenger one mile. Southwest's cost: 7.4 cents.

That's why Southwest can price its seats so low and still make money.
There are other reasons. Southwest flies only one type of plane, the
Boeing 737, which saves on maintenance and training costs. Those planes
are used more productively--Southwest quickly turns them around at
airports so the jets spend more time in the air--with paying
passengers--than on the ground.

Experienced Executives

For Parker and Barrett, learning their new jobs has been a baptism by
fire. They had succeeded Kelleher as CEO and president, respectively,
only three months before the terrorists struck New York and the Pentagon
and U.S. air travel was briefly grounded for the first time.

But they had the advantage of being longtime Southwest executives who
had worked closely with Kelleher and each other.

They toil in windowless offices, just as Kelleher did--he once said the
sure sign of a bureaucrat is someone preoccupied with the window space
they have--at Southwest's headquarters at Dallas' Love Field. Every few
minutes, a Southwest jet touches down in front of the building's main
entrance.

Parker is an engaging and easy-going 55-year-old who had been
Southwest's general counsel. He spends much of his time focused on labor
and financial matters and politely answering the recurring questions
about how he compares with the heralded, fun-loving Kelleher.

"Nobody can be another Herb Kelleher, and I haven't even tried," he
said.

Kelleher, for his part, has refused most interview requests since
passing the baton, to keep the focus on Parker instead of him. "Herb has
made it easier by not having a high profile during this period, and that
was very thoughtful," Parker said.

Barrett, the highest-ranking woman in the airline industry, began as
Kelleher's legal secretary in the 1960s and has been with him since. She
often is described as the alter ego of "Herbie," as she calls him, but
Barrett also has worked with Parker for years, so "there has been no
change for me" since Parker became CEO, she said.

A self-described "communication freak" who nonetheless chooses her words
carefully during interviews, Barrett, 58, doesn't dispute suggestions
that she oversees Southwest's famed culture and customer service, among
other things. So Sept. 11 presented her with an enormous test, because
she believed she had to tell her upbeat employees to cool it.

"For the first time ever since our inception, I believe, I actually put
out a request ... that we needed to basically squash our humor" for a
while, Barrett recalled in her modest office, which is chock-full of
arts, crafts and memorabilia.

"My feeling was that emotions were very raw" and not receptive to
Southwest's style, Barrett said.

But Southwest was the first airline to resume advertising after the
attacks, and it wasn't long before it returned to its fun-loving ways.

But there's been nothing funny about the depressed level of ticket
revenue at Southwest and throughout the airline industry.

"Times are really, really scary," Barrett said. "People aren't willing
to pay a whole lot more to travel." Yes, Southwest specializes in
selling low fares, but even Southwest needs to nudge prices higher and
get more people on its 737s to generate its profit of old.

"The challenge," Parker said, "will be to get them back in the habit of
paying us enough where we can make a reasonable profit," which is likely
to make Southwest's rivals anything but upbeat.


 Do you have an opinion about this story?
Share it with other readers in our CAA Discussion Forums

http://www.californiaaviation.org/cgi-bin/dcforum/dcboard.cgi?conf=DCConfID8

*****************************************