Southwest's 7 secrets for success

By Joe Brancatelli

updated 1:49 p.m. ET July 20, 2008

What’s the airline-industry jargon for unconventional wisdom? Southwest Airlines.

By some estimates, the country's major carriers have consumed perhaps $100 billion in capital during the past decade, but Southwest Airlines continues to be profitable. It's been in the black for 33 consecutive years and, last week, for the 127th consecutive quarter, it paid a modest dividend. Its balance sheet, with about $3 billion in cash on hand and $600 million in available credit, is the envy of an otherwise fuel-price-ravaged industry.

Its competitors among the network carriers — American, United, Delta, Continental, Northwest, and US Airways — are shrinking passenger capacity by more than 10 percent and grounding hundreds of aircraft starting in the fall. Southwest will add a handful of daily flights. It will take delivery of another dozen aircraft next year and still plans to grow by 2 percent to 3 percent. And Southwest now carries more passengers annually (101 million last year) than any other U.S. carrier, a nifty trick for an airline that didn't fly outside Texas at the dawn of deregulation in 1978.

Even the fickle financial markets, which have long discounted Southwest's relentless growth and steady profits, have finally taken note. As oil prices doubled in the past year, share prices of the six network carriers have slid, with the drop-offs ranging from 76 percent to 94 percent. Southwest's decline has been more modest, within a point of the Dow's 21 percent 52-week drop. As a result, Southwest's market capitalization yesterday (about $9.7 billion) is now more than the combined $5.7 billion market cap of its Big Six competitors.

What does Southwest know that no one else in airlines does? It keeps things simple and consistent, which drives costs down, maximizes productive assets, and helps manage customer expectations.

One plane fits all 
Unlike the network carriers and their commuter surrogates, which operate all manner of regional jets, turboprops, and narrow-body and wide-body aircraft, Southwest flies just one plane type, the Boeing 737 series. That saves Southwest millions in maintenance costs — spare-parts inventories, mechanic training and other nuts-and-bolts airline issues. It also gives the airline unique flexibility to move its 527 aircraft throughout the route network without costly disruptions and reconfigurations.

Point-to-point flying 
Network carriers rely on a hub-and-spoke system, which laboriously collects passengers from "spoke" cities, flies them to a central "hub" airport, and then redistributes them to other spokes. Not Southwest. Most of its flying is nonstop between two points. That minimizes the time that planes sit on the ground at crowded, delay-prone hubs and allows the average Southwest aircraft to be in the air for more than an hour longer each day than a similarly sized jet flown by a network carrier. Southwest's avoid-the-hubs strategy also pays dividends in on-time operations. According to FlightStats, Southwest's 78 percent on-time performance in June is eight percentage points higher than the industry average and higher than that of any of its major competitors.

Simple in-flight service 
Business travelers haven't always loved Southwest's über-simple service, but it's looking better and better as competitors cut back. There is just one class of service, a decent coach cabin that is slightly more spacious than those of Southwest's competitors. There are no assigned seats. There have never been meals, just beverages and snacks. Keeping it basic allows Southwest to unload a flight, clean and restock the plane, and board another flight full of passengers in as little as 20 minutes compared with as much as 90 minutes on a network airline. Airline efficiency experts say that the savings allow each Southwest jet to fly an extra flight per day. Extra flights mean extra revenue.

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