Southwest Airlines plotting new strategic course


#1

Carrier is taking a hard look at doing things it’s never done before

10:58 AM CDT on Thursday, August 2, 2007

By TERRY MAXON / The Dallas Morning News
tmaxon@dallasnews.com

Let’s say you’re sitting in your assigned seat, surfing the Internet while flying to catch a connecting flight to Europe. Today, you wouldn’t be flying Southwest Airlines Co. when you do any of that.

But in a few years who knows?

In a major re-examination of what makes it tick, Southwest is considering a lot of steps that would have been unthinkable in years past.

“Southwest has to modify its model because parts of it don’t work anymore,” aviation consultant Michael Boyd warns.

That means that it may begin assigning seats as soon as this winter. It is putting together the computer capability to handle international operations, either through connections with partners or flying the trips on its own. The Dallas-based carrier, which is looking at what amenities it needs to attract passengers, is readying a test of wireless Internet service on board its airplanes.

The big changes mirror what’s happening at the airline internally. Longtime chairman Herbert D. Kelleher, who gave up his chief executive job in 2001, will surrender his chairman’s job in May, and president Colleen Barrett leaves her executive job next July.

And Southwest, which prides itself on avoiding the massive furloughs that other airlines have endured, has offered buyout packages to 8,700 of its highest-paid operational employees.

The carrier has set a goal of increasing its annual revenue by $1 billion in the next few years by doing things it isn’t doing now.

The impetus for the rethinking is that its costs have grown significantly in recent years as it feels the impact of higher fuel prices and labor costs, even as it’s facing new challenges from its trimmed-down older competitors and threats from newer rivals.

In particular, its unit costs the expense of flying one airplane seat one mile have jumped 16 percent in two years, from 7.81 cents per seat mile in second quarter 2005 to 9.03 cents per seat mile last quarter. So Southwest is trying to raise its revenue to compensate for the higher costs.

“That’s the essence of our earnings challenge,” chief executive Gary Kelly told analysts on the airline’s July 18 conference call to discuss earnings.

“It’s not new. It’s not surprising. It’s not unexpected, and we have been working to transform Southwest’s revenue-generating capabilities to address that challenge and to enhance the low-fare Southwest brand.”

Which model?

Analysts say Southwest has to decide which elements of its competition it should follow. There are the ultra-low-cost carriers like Spirit Airlines Inc. and newcomer Skybus Airlines Inc. There are the higher-amenity low-cost carriers like JetBlue Airways Corp. and Virgin America.

And the older network carriers like American Airlines Inc. and Delta Air Lines Inc., once paralyzed by their operating expenses, have cut their costs to compete better against Southwest.

“They’ve been the darling, they’ve been the role model, they’ve been the intelligent one,” University of Portland business professor Rich Gritta said. “They did it with the brilliant operating strategy and the brilliant financial strategy. … You’ve beaten the easy teams. Now things are going to get harder.”

To consider the two low-fare futures that Southwest must ponder, look at the differences between Skybus Airlines and Virgin America.

Skybus, based in Columbus, Ohio, takes cheapness to new depths. It charges passengers $5 to check each bag. It charges for everything on board, including soft drinks. It more closely resembles the European airlines Ryanair Ltd. and EasyJet PLC than Southwest.

There is no assigned seating. If you want priority boarding, it’ll cost $10. If you want an e-mail notification of your flight status, it’ll cost you.

Virgin America, a new carrier set to begin flying Wednesday out of San Francisco, is on the other end of the scale. It will offer state-of-the-art television and music, including the ability to put together music playlists that you can call up on any Virgin America flight.

It has 110-volt power outlets at every seat. Each plane has a first-class section, with massagers built into each seat. Customers will be able to do computer chatting with passengers elsewhere in the airplane. Soft drinks are free.

“I think for Southwest, the most important thing is that it stay true to its 30-plus-year heritage of providing affordable transportation,” said travel analyst Henry Harteveldt of Forrester Research.

“Even if it chooses to charge extra for seat assignments, Internet access or anything else, it has to be in tune with the Southwest legacy of providing consistently good value to the customers,” he said. “That’s going to be a combination of attractive price and consistent delivery of the product.”

Seat assignment

One of the first changes is likely to come in the boarding process. Today, Southwest distributes boarding passes on a first-come, first-served basis, brings passengers aboard in groups A, B and C, and lets people sit in the first empty seat that suits their fancy.

Previously, low-cost competitors followed Southwest’s example with no assigned seats. But many of today’s rivals, including JetBlue and AirTran Airways, are assigning seats, and Southwest feels it is often at a disadvantage, particularly when chasing the higher-paying business traveler.

Southwest has tested a variety of options. By the fourth quarter, the airline is expected to announce some changes to the 36-year-old practice of first-come, first-served.

The airline could assign all seats. It could let passengers pay extra to get priority seating the right to get on before any passengers who didn’t pay for assigned seating. The priority seating could be for an assigned seat or the first choice in open seating.

Southwest concedes all possibilities and confirms none of them. But it has said it wouldn’t be making changes if the result would be higher costs and no increase in passengers or revenue.

Mr. Boyd, president of the Boyd Group Inc. in Evergreen, Colo., said Southwest has to go to assigned seats to remain competitive with other airlines. The lack of assigned seats hurts Southwest when it enters new markets.

“This stuff about people are going to love, love, love this?” Mr. Boyd said of assigned seating. “Horse manure. The markets where they have to expand, people don’t like it.”

Passengers can get seat assignments, along with in-flight TV and a more comfortable Airbus airplane, when they fly low-cost Frontier Airlines between Denver and Orlando, Fla.

“At Southwest, you get a humorous boarding announcement,” he said. “It’s hurting them.”

Stuart Klaskin, principal at KKC Aviation Consulting in Miami, sees Southwest charging for assigned seating or priority boarding.

“I don’t know if it’ll be pure assigned seating,” Mr. Klaskin said. “But maybe if you pay a fee from any fare or are booked in the highest class of fare, you get some priority of boarding.”

Retrofitting TV

Longer term, Southwest must decide how and if it wants to respond to onboard TV and music offered by JetBlue, Virgin America and others. Those carriers had the advantage of ordering new fleets with TVs from the outset; Southwest has to consider a solution that works with its 500 existing airplanes.

Southwest is readying a test of wireless Internet on some planes. It’ll give the carrier an idea about how popular it is and what technical issues it would face to extend the service over its entire fleet. Internet access could also provide the carrier a backdoor way to bring TV onboard.

On the issue of international service, the airline says it doesn’t yet have the technological capability in its reservations and operations systems to handle flights that go outside the U.S.

But by 2009, it should have the capability to begin feeding passengers to other airlines, starting with current domestic code-sharing partner ATA Airlines Inc.

Mr. Kelly told analysts July 18 that Southwest sees the potential for “hundreds of millions of dollars a year” from international code-sharing. The domestic code-sharing with ATA now brings Southwest about $40 million in annual revenue, he said.

“So if we can expand that offering into the near-international markets, we are very hopeful that that alone will produce a very sizable increase in incremental revenues,” he said.

The near-international markets Canada, Mexico and the Caribbean are mentioned most often for Southwest’s first international service, either through code-sharing or providing the service itself. The carrier hasn’t ruled out feeding passengers to carriers on other international routes to Europe or Asia, or, for that matter, someday flying internationally.

Industry consultants said Southwest should also rethink its policy of one airplane type, the Boeing 737. Southwest likes the simplicity of having a single plane for repairs and service, but different planes would give it access to more markets.

Mr. Boyd and Mr. Harteveldt said a smaller narrow-body jet like the Embraer 190 would open up smaller U.S. markets that currently aren’t large enough to support Southwest service. Mr. Gritta said if Southwest is serious about getting into international flying, it should consider the wide-body Boeing 787 that is to enter commercial service next year.

Mr. Klaskin applauded Southwest’s willingness to deviate from its traditional successful model.

“It’d be a lot easier to just keep doing what they’re doing. They could be the great holdout the low-cost, low-fare, short-haul, domestic, cattle car, plastic boarding pass airline. They could sail off into the sunset doing that,” Mr. Klaskin said.

“You know what? That’ll work well for another few years, no question. But they’re smart enough to know it’s not going to work forever. They’re smart enough not to get chained down by the public expectations of them.”

Birds of a feather

The numbers show Southwest is becoming more like its competitors, paying more for fuel and pilots, cutting employees and slowing growth.

82 cents Southwest’s fuel cost per gallon in second quarter 2004

$1.62 Southwest’s fuel cost per gallon in second quarter 2007

37% The share of Southwest’s operating expenses that goes to salaries and benefits

32% The share of American Airlines’ operating expenses that goes to salaries and benefits

12 The number of new cities served in the five years from 1996 to 2000

6 The number of new cities served in the five years from 2003 to 2007

89.9 Employees per airplane in 2002

66.5 Employees per airplane in 2007

SOURCES: Airlines; Dallas Morning News research

Link to story


#2

Mr. Boyd, president of the Boyd Group Inc. in Evergreen, Colo., said Southwest has to go to assigned seats to remain competitive with other airlines. The lack of assigned seats hurts Southwest when it enters new markets.

Yea, I guess the lack of assigned seats is why Southwest has so passengers in new markets. Look at Philadelphia and Denver, both relatively new markets. They are taking away market share from US Airways and United, the main airlines at those two airports respectively.


#3

Sounds like it’s time to “ring the register” on LUV.
(SELL! SELL! SELL!)

BOOYAH!


#4

And so it begins…

Southwest Airlines trims the lines waiting for seats

Web Posted: 08/07/2007 11:37 PM CDT

Melissa S. Monroe
Express-News Business Writer

The wait in line to board a Southwest Airlines Co. flight just got a little shorter in San Antonio.

The Dallas-based carrier started testing a new system here Tuesday that should cut down on passengers’ long waits to get their choice of unassigned seats on Southwest flights.

The seats still are unassigned, but passengers now are given assigned numbers in groups of A, B or C and get in line only after their letter and number is shown on an airport monitor or when it’s called by Southwest employees.

“It eliminates jockeying for the first spot in the line, and it allows people to go to the concessions or use the restroom,” said Susie Boersma, manager of airport improvement for Southwest Airlines.

Before, passengers would line up early within the letter groups to get the seat they wanted on the plane.

This created an atmosphere where people would hold their spot in line with luggage or they would wait in line for at least an hour, said Brandy King, a Southwest spokeswoman.

Southwest adopted the letter system about six years ago, King said, and plans to keep it because passengers are familiar with it.

However, the company stressed there still is open seating on the planes, and a person’s assigned boarding number is determined on a first-come, first-served basis when passengers check in online or at the airport.

Some passengers at San Antonio International Airport who were waiting to board a 2:30 p.m. flight to Dallas from San Antonio on Tuesday were curious to see how the new system worked.

Ellie Rucker, who was heading to Albuquerque, was sitting with a B10 boarding pass when the A group was in line. She said the new system might be a little bit easier on her legs.

“At least I don’t have to stand for 40 minutes,” She said. “Now, I can just sit here for as long as I want.”

Another passenger, Bryan Bulloch, who was standing in line with his family in the A group, said the new procedure seemed a bit more organized.

“At least now you know where you are going to be,” he said.

King said all of the airline’s 49 flights in San Antonio will use this new boarding system through the end of August. Southwest will analyze the results of the San Antonio test and make a decision on the best boarding and seating arrangements by the end of year, she said.

Along with the new boarding system, Southwest also is initiating family- and business-oriented perks in its seating areas here.

Four of its five gates in San Antonio now have larger, bright blue, cushioned chairs for business travelers, along with power stations with several outlets for charging cell phones and laptops. There also are kid-sized tables and chairs with games and a flat-screen television showing family movies.

Southwest tested assigned seating last year in San Diego, Calif., King said, but many passengers said they liked open seating. She said the airline has been looking at new boarding procedures to help increase customer satisfaction.

But at least one aviation analyst thinks Southwest needs to start assigning seats to help with customer satisfaction.

“People don’t like open seating. Southwest is dreaming when they say that,” said Mike Boyd, analyst with the Boyd Group in Evergreen, Colo. “The reality is, if they are going to compete going forward, they need assigned seating. That’s their biggest problem. There’s enough anxiety going through security without then wondering what type of seat you will get when you board.”

All about that link thang


#5

“People don’t like open seating. Southwest is dreaming when they say that,” said Mike Boyd, analyst with the Boyd Group in Evergreen, Colo. “The reality is, if they are going to compete going forward, they need assigned seating. That’s their biggest problem. There’s enough anxiety going through security without then wondering what type of seat you will get when you board.”

This is, of course, only an opinion unless he has hard data to back up what he is saying. With all of the flights I’ve taken on Southwest, I haven’t heard anyone gripe about the open seating.


#6

I think that these are all great ideas.

Seat Assignments:
Since all Southwest’s flights are open seating, I see many problems with this. On at least one flight a day, I notice problems during boarding. A few times I noticedthat a passenger would say that the seat next to theirs was taken, when really they just did not want anyone to sit next to them. Myself or one of my fellow flight attendants ask the passenger about and more times than not, the passengers confesses that they lied. I think that if Southwest had assigned seating, it would make the boarding process easier for the passengers and us, flight attendants.

Internet:
I think that having wireless internet onboard would be a great idea. Southwest has many business travelers during the work week (especially on routes to/from OAK, SJC, SFO to/from LAX, SAN, BUR, ONT, etc.) Many of them carry laptops on the aircraft to work on things during the flight. I think that is SWA had wireless internet, it would make the many business travelers that fly with SWA happier.

Movies/Music:
I think that music would be good to have onboard. However, I am not so sure with movies. Many of SWA’s flights are between 1.5 hours and 3 hours which is not really enough time to watch a movie. It would be good to have on the longer transcon flights (4+ hours)

Also, I think that Southwest should have snacks available for purchase on 3+ hour flights. Yes, SWA does serves a packaged light snack on flight 2+ hours in duration but sometimes on the transcon flights, passengers get very hungry because all they were served were some chips and peanuts. I think SWA should have sandwiches, etc. available for purchse on the longer flights.


#7

My $.02 on SWA which I fly a lot out of CMH.

Open seating: Doesn’t bother me at all when it’s just me, but it has caused some anxiety by my wife/family if we’re traveling together. Nobody wants to be split up so we have to make sure we get our boarding passes early. Of course, airlines like Airtran charge a premium to reserve your seats at time of purchase. If you buy the cheaper ticket, you pick your seats when printing your boarding pass (or checking-in if you don’t have a computer…). I would think if SWA let you pick your seats when you printed your boarding pass, that might work good enough. Of course the question that has to be asked…what exactly are the savings of not having assigned seats? Just some IT stuff??

Internet: Yeah, maybe. Personally I enjoy the break from email/phone calls for a couple hours a day.

Movies/Music: As mentioned in the above post, most SWA flights are fairly short so movies seem a bit much. Music or TV would be fine I guess, but really if you just give me a power plug for my laptop I can entertain myself and not worry about burning my battery.

Food: I really prefer to grab something at the airport where there’s a lot more selection than what will show up on a plane. Snacks are good enough for me unless we’re talking 5+ hours.

I tend to use SWA a lot mainly because of the routing. I will generally pick the airline that can get me there without making a connection over saving a few bucks. Connecting wastes my time, gets my luggage lost, and generally just opens up a lot more chances of a SNAFU.


#8

I like SWA for their low cost, great service and overall efficiency. I would rather see them compete by improving on those strengths as opposed to increasing their operating costs to be like the rest of the looser airlines.


#9

I agree with this.

If it comes down to more efficiency and lower prices (adjusted for inflation, of course), I’ll take that over inflight amenities like TV and full meals.

The one item I would like for longer flights is AC outlets. But if that comes at the cost of higher fares then I can live without it.


#10

I love the A,B,C seating because I make the effort to get an ‘A’ the day before and get to the airport early so I get in line early. I endure costs for doing so (getting up earlier, waiting longer at the airport at the gate) but am benefited by being able to get a seat near the front of the plane.

If I would then be assigned a number in my ‘A’ group that ensured I’d get on first without having to also wait in a queue at the A portal, that’s even better.

I also love the open seating policy because if one row looks haggard or is full of food crumbs because some kid was sitting there slobbering all over it, I can simply move to another row. I can also generally ensure no small child is sitting behind me because the families with little kids pre-board.

FWIW, I experienced my first SWA delay the last time I flew them (a couple weeks ago). I hope that’s not representative of their future (i.e. becoming like the rest of the airlines (aka crap).)


#11

I take SWA much less frequently than other airlines because of the open seating. While I check in on line to get an A boarding pass, I am often running late before a flight and can’t get to the airport in time to get in line and wait. So I usually pay more and fly other carriers who will ensure that I have a good seat. On short flights it’s not a big deal, but not worth it to me on long flights.

I must not be the only one who SWA has heard this response from if they are seriously considering changing their approach.


#12

I dunno, my feeling is if I’m late to the airport that’s my fault and at least I’m still going to get on in the same boarding group, albeit I won’t be first in line for that boarding group.

I still value the open seating very highly because of two things:

The ability to pick the seat when I am actually onboard and can view the seats and see their condition.
The ability to pick the seat when I am actually onboard and can view the occupants of the seats behind the row I’m considering, to see if there are any annoying little kids or coughing sick people sitting there.

To be forced into a certain seat at the mercy of those items would be much more stressful.


#13

Yesterday (3 Sep) was a perfect example of why I like SWA. I flew SWA1783 from OAK to GEG. The head flight attendant introduced the attendants as Larry, Curly, and Moe. He (Jeff was his real name) kept the passengers entertained during the safety briefings. He even threw (playfully) a pack of peanuts at me!


#14

You sure it was “playfully”? This is you we are talking about Dave…

:smiling_imp:


#15

Uh, you do have a point there…


#16

Quick tip learned these past couple of weeks. You can now get your boarding pass wirelessly (WAP / cell phone devices) and go to the Kiosk and “reprint”

You do not need a printer when checking in from the comforts of home, business or on your boat when you check in the day before :smiley:

Leaving from airports of the likes of KBWI and KPIT the last couple of weeks, I was in group A both times which I was never able to do before this feature was added.

Allen


#17

mobile.southwest.com

Got my A last Dec. while dining at a restaurant on S Las Vegas Boulevard.