Southwest Airlines: The Hottest Thing in the Sky

Through change at the top, through 9/11, in a lousy industry, it keeps winning Most Admired kudos. How?

By Andy Serwer

February 23, 2004

It's a little strange how some folks still think about the airline business. There are the big players, they'll tell you, like Delta, United, and American. And then you have the smaller fish. The low-cost carriers, led by that wacky Southwest Airlines, which they mention almost as an afterthought.

Now, hang on a minute. Let's look at those "industry leaders" and ask: Big like how? Well, United parent UAL filed the largest bankruptcy in aviation history ($25 billion in assets) in December 2002. That's big. American is weighted down with nearly $18 billion of debt on its books. That's pretty big. And finally, the three large airlines lost a total of some $5.8 billion last year. That's big too.

Now let's look at Southwest Airlines. Last year the company earned $442 million—more than all the other U.S. airlines combined. Its market capitalization of $11.7 billion is bigger than that of all its competitors combined, too. And last May, for the first time, Southwest boarded more domestic customers than any other airline, according to the Department of Transportation. Sure, the majors still have more revenue—Southwest, with about $6 billion in sales in 2003, ranks only No. 7 in that department—and they have more planes and carry more passengers when you include their overseas routes. And yes, some analysts question whether Southwest's amazing growth trajectory can continue. But, bottom line: Is there any question which company is the leader of this industry?

No wonder Southwest has landed in the top ten of FORTUNE's Most Admired Companies in each of the past six years—a distinction shared only by Berkshire Hathaway, General Electric, and Microsoft. Its accomplishments would be estimable in any industry. (Southwest was the nation's best-performing stock from 1972 through 2002, according to Money magazine, up a gravity-defying 26% per year.) But that Southwest has achieved this measure of success in the snakebit airline biz is nothing short of astonishing. What's more, Southwest has sustained that success—and its grip on the top ten list—even nearly three years after its eccentric founder, Herb Kelleher, stepped down as CEO (he's still chairman) and after a swarm of upstart airlines, from JetBlue to Ted, have tried to horn in on its formula.

To figure out how, you could do worse than go back to the airline's conception. Southwest famously began 33 years ago when Kelleher (a lawyer by training) and a partner drew up a business plan on a cocktail napkin. Through decades of battling the big airlines, Southwest hasn't really changed its original formula. It enters markets in which traditional airlines hold sway and then blasts them with much lower fares. Southwest flies "point to point" (city to city), ignoring the hub-and-spoke model of most other airlines. It flies only 737s. It serves no meals, only snacks (peanuts, mostly). It charges no fees to change same-fare tickets. It has no assigned seats. It has no electronic entertainment on its planes, relying instead on relentlessly fun flight attendants to amuse passengers.

That formula has so far proved unbeatable. Consider Southwest's success against just one old-line competitor: US Airways. According to analysis by Michael Roach, an industry consultant with Unisys R2A, a division of the technology company, when Southwest entered the San Francisco-Southern California markets in the late '80s, US Air had a 58% market share in those routes. By the mid-'90s, Southwest had driven US Air completely out of them. In the early '90s, Southwest entered Baltimore Washington International Airport (BWI), where US Air had a significant hub; now US Air is down to 4.9% of the traffic at BWI, while Southwest ranks No. 1 with a 47% share.

While it's hard for Southwest to play the underdog these days—and it certainly isn't sneaking up on anybody anymore—it's still the industry maverick. No matter what its competitors say or do, no company walks the talk quite like Southwest. It's iconoclastic, quirky, and sometimes just plain bizarre. Southwest has so much insouciance, in fact, that it has allowed itself to become the subject of a reality TV show on cable channel A&E called Airline. ("We all have our baggage" is the tagline.) The cameras follow Southwest employees—who don't always come across as sugar and spice—as they deal with all manner of crisis: Nasty, staggering drunks. Passengers who stink like Limburger cheese. Chicago thunderstorms. (And yes, the show has been successful enough that A&E wants to renew for next season.) Hard to imagine most admired company Wal-Mart subjecting itself to that kind of scrutiny!

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