Time of transition for Southwest Airlines

December 19, 2009

In the not too distant future, Southwest Airlines, the company that made its reputation by playing industry contrarian may look more like the competition. In an interview, Southwest chief executive Gary Kelly told me the airline has matured to the point, "we have to be more than just a low fare carrier." (view the complete transcript on my website www.christinenegroni.com)

The transition became most evident earlier this year when Southwest broke its self-imposed exile and began flying to major airports like New York’s LaGuardia and Boston's Logan. In 2010, it plans another significant shift when it offers international service through code share flights to Canada on WestJet and Mexico on Volaris.

“Southwest has been a unique entity in the airline industry because they have been so non-traditional," said John Cox an independent airline consultant. "They are seeing the wisdom of becoming more traditional. Whether that will work, remains to be seen."

Perhaps the most important and least seen change in Southwest policy was its fare hikes. Kelly touted the decision in a speech to the Wings Club in New York last Thursday. New technological implementations on the airline website he said, enabled it to charge “higher average fares” while keeping more folks on the website actually booking tickets. While Southwest raises fares and every legacy airline advertising low, low, low ticket prices, the definition of a low fare airline is getting fuzzy.

“If you go back to two or three years ago, the legacy carriers were able to charge 30% more than Southwest would charge,” said Bob Herbst, who runs the website airlinefinancials.com. That’s no longer the case. “So many tickets are purchased via the internet, the lowest fare is the airline that makes the sale. The public is a lot smarter now when they book an airline,” Herbst said, “There’s a lot more level playing field.”

That is a point, Kelly seems to get. “We have a whole array of low fare competitors out there. Every single legacy airline posts low fares, the world is different and we have to adjust accordingly.” Kelly said, “Competition has changed and customer expectations have changed.”

So it was a case of role reversal when legacy carriers imposed baggage fees and Southwest, ostensibly the “no frills” carrier maintained its bags fly free policy. Did passengers notice? Kelly says yes. By his calculations the decision contributed to a 1% increase in market share this year.

“If you shift one percent,” from the legacy carriers to Southwest, that’s worth $800 million, he told me.

These dramatic departures have some employees worried and no one explains why better than John Gadzinski, a veteran Southwest pilot. When he first arrived at the airline, he told me it “recognized they didn’t own 747s and they were never going to be a flag carrier and fly to China, but Southwest could do the short haul domestic market ten times better than anybody else.”

And for 38 years the Southwest formula has meant uninterrupted profitability and such sustained growth that it now boasts more flights and more passengers than any other other U.S. carrier. But is Southwest at risk of busting its britches?

“The dream of all the employees is that Southwest matures and grows older like the actor who played Opie”, Gadzinski said. “You know how Ron Howard. never stops being a good guy? He was always true and honest and when he made movies, he made good movies. He never got into drugs or mistresses or any of that crap. When you look at the legacy carriers, the Americans the Uniteds the USAirs, you start seeing management practices that strayed from the core values.”

The missionary of that message seems to be Gary Kelly who told me the airline is in the process of a company-wide re-characterization of its identity. All the while, Kelly insists, remaining true to its quirky self. “There are so many things we want to tell our customers because we are not just one thing,” Kelly said.

All of this is significant to more than the 35,000 employees of Southwest, even more than the 100 million passengers who fly the airline, according to consultant John Cox.

“The business community has recognized that this scrappy upstart is more than a successful company. It has revolutionized an industry.”