Southwest Air
Considers Shift
In Its Approach
By MELANIE TROTTMAN
Staff Reporter of THE WALL STREET JOURNAL
For 32 years Southwest Airlines has used a simple formula: low costs, low fares and no frills more enticing than snack packs.
Now, looming competition from a growing group of younger, sleeker low-cost carriers -- offering everything from first-class cabins to live TV -- is making Southwest look dated. To keep up, the Dallas-based airline is considering changes that could amount to a shift in strategy.
"The world is changing and they're admitting that they might have to change with it," says analyst Sam Buttrick of UBS Investment Research. "They now have to factor in the presence of more credible discounters offering more than just a low fare."
"We are trying to keep in step with customer needs and requirements and also competitive changes," agrees Southwest Chief Financial Officer Gary Kelly. But he characterizes the process as merely tinkering with tactics underneath the carrier's basic strategy of low fares, high-frequency flights and good service.
One way Southwest has kept its costs low is flying only one type of plane, the Boeing 737 fitted with up to 137 seats. But recently the airline began considering buying smaller, 100-seat Embraer 190 jets to expand into smaller markets. JetBlue Airways, a three-year-old New York low-cost carrier that flies Airbus A320s with 156 seats, has already said it will start taking delivery of up to 200 Embraer 190s in 2005 to expand in the Midwest and mid-Atlantic.
Southwest also is considering adding in-flight entertainment, a costly undertaking. JetBlue offers free live-satellite TV. Denver-based Frontier, a 10-year-old low-cost carrier, offers TV on some planes for $5. And 20-year-old America West Airlines, Southwest's primary low-cost competitor, is considering an alternative source of TV after a deal fell through just before signing.
Already, Southwest is making changes in its route map. The nation's sixth-largest airline will start serving Philadelphia in May, a bold and unusual move for a carrier that typically avoids busy airports ruled by major carriers (US Airways, in this case). Some industry watchers see that step as a pre-emptive strike against other low-cost airlines that may have been eyeing Philadelphia as US Air weakens. Southwest's chairman denies that, but Mr. Kelly has said, "We do have some fast-growing competitors, and there is a competitive advantage to being first to a market."
Southwest is still the dominant low-cost carrier, with 9.8% of domestic passenger traffic as of June 30, about double its share 10 years earlier, according to the U.S. Transportation Department's Bureau of Transportation Statistics. Still, the six other airlines classified by the bureau as low-cost -- JetBlue, AirTran, Spirit, ATA, Frontier and America West -- have been gaining ground more quickly as a group, more than tripling their market share to 11.9% through June from 3.6% in 1993.
JetBlue has led the recent surge. Through the first 10 months of the year, Southwest flew 2,451 more flights than it had a year earlier -- while JetBlue added 19,484 flights.
Passengers clearly like the frills now found on some low-fare carriers. Merrill Wertheimer, a retired Zale Corp. executive in Dallas and 16-year Southwest customer, tried Frontier last summer on a route Southwest doesn't serve and appreciated the live TV and reserved seating. "If there's a competitor in the market that offers more services, then I'd say Southwest loses," he says.
So far, Southwest doesn't compete much head to head with JetBlue, AirTran and Frontier, but that is likely to change as those carriers expand. Meanwhile, some higher-cost carriers are jumping in with lower-cost units. Delta Air Lines's Song sells meals and promises a video monitor on each seat by early next year, and UAL Corp.'s new low-cost carrier, called Ted, will have a jazzy look and offer audio and video programming.
These newer low-cost carriers can offer amenities and keep fares low partly because they have young, lower-paid work forces and typically fly newer planes that are more fuel-efficient and require less maintenance. Some also have covered added costs with fees, such as the $5 Frontier charges for use of its in-flight TV. Meanwhile, America West is seeking third parties to provide in-flight TV and purchase-on-board food service.
The changes Southwest is considering could be risky. They could drive up the airline's already rising operating costs at a time when, Mr. Kelly says, "pressure is relentless" to keep ticket prices low. TV alone would cost "many millions" of dollars upfront and many millions more in connection and operating costs, he says, adding that Southwest must consider how it could defray the expenses.
Operating the 100-seat jets would cost more, too, says Mr. Kelly, who estimates per-seat costs would be 15% to 25% higher than those for the current fleet. To make up for that, Southwest would gamble that passengers in smaller, underserved markets -- where most of the small jets would be deployed -- would be willing to pay higher fares. He maintains that the current review has more to do with the fact that the Embraer 190 is new than with competitors' moves.
Even as it mulls change, Southwest is holding on to certain ways of doing business. It isn't considering first-class seating, which AirTran and America West offer, or assigned seats or on-board food sales. Two years ago, though, it did start retrofitting its fleet with leather seats, a 10-year project. And because its operations are so efficient, it still has a huge edge on its unit costs, which are the lowest among the nation's 10-largest carriers and below those of most low-cost airlines.
"We're not yet in the environment where all else is equal," says Mr. Kelly. "We think the driving factor in choosing an airline is the fare."
Write to Melanie Trottman at [email protected]
Considers Shift
In Its Approach
By MELANIE TROTTMAN
Staff Reporter of THE WALL STREET JOURNAL
For 32 years Southwest Airlines has used a simple formula: low costs, low fares and no frills more enticing than snack packs.
Now, looming competition from a growing group of younger, sleeker low-cost carriers -- offering everything from first-class cabins to live TV -- is making Southwest look dated. To keep up, the Dallas-based airline is considering changes that could amount to a shift in strategy.
"The world is changing and they're admitting that they might have to change with it," says analyst Sam Buttrick of UBS Investment Research. "They now have to factor in the presence of more credible discounters offering more than just a low fare."
"We are trying to keep in step with customer needs and requirements and also competitive changes," agrees Southwest Chief Financial Officer Gary Kelly. But he characterizes the process as merely tinkering with tactics underneath the carrier's basic strategy of low fares, high-frequency flights and good service.
One way Southwest has kept its costs low is flying only one type of plane, the Boeing 737 fitted with up to 137 seats. But recently the airline began considering buying smaller, 100-seat Embraer 190 jets to expand into smaller markets. JetBlue Airways, a three-year-old New York low-cost carrier that flies Airbus A320s with 156 seats, has already said it will start taking delivery of up to 200 Embraer 190s in 2005 to expand in the Midwest and mid-Atlantic.
Southwest also is considering adding in-flight entertainment, a costly undertaking. JetBlue offers free live-satellite TV. Denver-based Frontier, a 10-year-old low-cost carrier, offers TV on some planes for $5. And 20-year-old America West Airlines, Southwest's primary low-cost competitor, is considering an alternative source of TV after a deal fell through just before signing.
Already, Southwest is making changes in its route map. The nation's sixth-largest airline will start serving Philadelphia in May, a bold and unusual move for a carrier that typically avoids busy airports ruled by major carriers (US Airways, in this case). Some industry watchers see that step as a pre-emptive strike against other low-cost airlines that may have been eyeing Philadelphia as US Air weakens. Southwest's chairman denies that, but Mr. Kelly has said, "We do have some fast-growing competitors, and there is a competitive advantage to being first to a market."
Southwest is still the dominant low-cost carrier, with 9.8% of domestic passenger traffic as of June 30, about double its share 10 years earlier, according to the U.S. Transportation Department's Bureau of Transportation Statistics. Still, the six other airlines classified by the bureau as low-cost -- JetBlue, AirTran, Spirit, ATA, Frontier and America West -- have been gaining ground more quickly as a group, more than tripling their market share to 11.9% through June from 3.6% in 1993.
JetBlue has led the recent surge. Through the first 10 months of the year, Southwest flew 2,451 more flights than it had a year earlier -- while JetBlue added 19,484 flights.
Passengers clearly like the frills now found on some low-fare carriers. Merrill Wertheimer, a retired Zale Corp. executive in Dallas and 16-year Southwest customer, tried Frontier last summer on a route Southwest doesn't serve and appreciated the live TV and reserved seating. "If there's a competitor in the market that offers more services, then I'd say Southwest loses," he says.
So far, Southwest doesn't compete much head to head with JetBlue, AirTran and Frontier, but that is likely to change as those carriers expand. Meanwhile, some higher-cost carriers are jumping in with lower-cost units. Delta Air Lines's Song sells meals and promises a video monitor on each seat by early next year, and UAL Corp.'s new low-cost carrier, called Ted, will have a jazzy look and offer audio and video programming.
These newer low-cost carriers can offer amenities and keep fares low partly because they have young, lower-paid work forces and typically fly newer planes that are more fuel-efficient and require less maintenance. Some also have covered added costs with fees, such as the $5 Frontier charges for use of its in-flight TV. Meanwhile, America West is seeking third parties to provide in-flight TV and purchase-on-board food service.
The changes Southwest is considering could be risky. They could drive up the airline's already rising operating costs at a time when, Mr. Kelly says, "pressure is relentless" to keep ticket prices low. TV alone would cost "many millions" of dollars upfront and many millions more in connection and operating costs, he says, adding that Southwest must consider how it could defray the expenses.
Operating the 100-seat jets would cost more, too, says Mr. Kelly, who estimates per-seat costs would be 15% to 25% higher than those for the current fleet. To make up for that, Southwest would gamble that passengers in smaller, underserved markets -- where most of the small jets would be deployed -- would be willing to pay higher fares. He maintains that the current review has more to do with the fact that the Embraer 190 is new than with competitors' moves.
Even as it mulls change, Southwest is holding on to certain ways of doing business. It isn't considering first-class seating, which AirTran and America West offer, or assigned seats or on-board food sales. Two years ago, though, it did start retrofitting its fleet with leather seats, a 10-year project. And because its operations are so efficient, it still has a huge edge on its unit costs, which are the lowest among the nation's 10-largest carriers and below those of most low-cost airlines.
"We're not yet in the environment where all else is equal," says Mr. Kelly. "We think the driving factor in choosing an airline is the fare."
Write to Melanie Trottman at [email protected]
