3-Southwest: Joining the legacy airlines?

A recent San Francisco Chronicle article on Southwest Airlines revealed some interesting information:

• Southwest is the largest air carrier in the United States, measured by domestic boardings. I believe American Airlines is bigger when it comes to revenue.

• Southwest would have lost money in 2007, and perhaps in other years, had it not been for its fuel hedging. The company has made forward purchases of fuel for a number of years, perhaps going back to 1991. These fuel hedges reduced operating costs by enough for the company to make a profit. In fact, Southwest has been profitable for 35 consecutive years, more than any other airline for sure. However, the fact that the company needed the fuel hedges to make money suggests that the legacy airlines have finally gotten their domestic costs and utilization rates to such a level that the low priced, low cost competitors are beginning to feel the squeeze. Jet Blue felt it as well. All the big domestic legacy carriers, with the exception of American Airlines, have gone through bankruptcy. Bankruptcy reduced their unit costs drastically.

• Southwest has the highest paid employees in the industry. This would undoubtedly surprise many people. How could a low cost, low priced competitor pay its employees more than the legacy airlines? The answer is that the unions at Southwest impose much easier work rules than do the unions at the legacy carriers. It is always work rules rather than rate of pay that mark the difference in costs in a unionized industry. This same phenomenon has occurred before. By the late 1980s, Nucor employees were paid substantially more than were the employees of the big integrated steel manufacturers. Nucor traded easy work rules for high annual total compensation for its employees and it grew in the process. So did its employees’ lifestyles.

• Southwest is making a big push for the business traveler. Most of us probably think of Southwest primarily as a leisure traveler airline. It certainly has been that. But business travelers pay a lot more per seat mile than do leisure travelers. Southwest has concluded it has to gain some of these customers, who are largely owned by the legacy airlines, in order to prosper in the future.

It seems pretty clear that Southwest is evolving toward a business model that looks just like that of the legacy airlines. Of course, the legacy airlines are returning the favor by offering services that are about what Southwest offers as well. As a traveler, I am not sure I like the result, but then most of the market must like it or it wouldn’t continue to exist.

Posted 3/13/08

Update:

By 2020, Southwest was the far-and-away leader in domestic passengers.   In revenue passenger miles, American held a slight lead over Southwest.  SWA continued to maintain a cost and all – in pricing advantage over its legacy rivals.

The two best consultants in the world have spoken. Southwest is a preferred competitor offering many flights at prices competitors apparently cannot, or will not, meet.  By 2020, Southwest was the leader in domestic passengers, 20% to second place Delta’s 16%.  In revenue passenger miles, American held a slight lead over Southwest.

SWA continued to maintain a cost and all – in pricing advantage over its legacy rivals.  For the major fee generating services, Southwest is always less expensive than the 3 other legacy airlines.  Those 3 other airlines price major services the same.  There are also smaller services offered by airlines for a fee, including ticketing, seat selection, priority boarding and nonalcoholic drinks and snacks.  Again, Southwest is always the cheapest legacy airline.  The other 3 legacy airlines have not turned prices for these services into a commodity, where all prices are equivalent, but have allowed them to vary by route. This makes comparisons among airlines more difficult for consumers.  With high overall pricing for airline trips in 2022, there is little incentive for the legacy airlines to be price competitive with one another on the smaller services.

As most customers view Southwest Airlines as equivalent to the other three legacy airlines, the legacy airlines must respond to Southwest’s low prices, even if they are applicable only on ancillary fees. The three legacy airlines are in a Leaders Trap and are likely to continue to lose share, probably slowly, to Southwest. Get more perspective HERE.

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