The worst sort of business is one that grows rapidly,requires significant capital to engender the growth , and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.
-Warren Buffett in A 2008 LETTER TO BERKSHIRE HATHA WAY SHAREHOLDERS
Some of the best minds in business have entered the commercial airline industry and failed. Included in this group is Warren Buffett, who invested in U.S. Air during the 1990s and was unsuccessful in saving the airline. Since the inception of commercial flight, more than 200 airlines have tried and failed in the commercial airline industry. These companies are a reminder that this business is tumultuous, complex, and in many cases, futile. Herb Kelleher, one of Southwest Airlines’s founders, illustrates his awareness of how difficult it is to achieve any modicum of profitability in this industry with his comment, “If the wright brothers were alive today Wilbur would have to fire Orville to reduce cost.”
Financial distress in the airline industry can be tied to the high costs incurred by the airlines to offer their services and low costs demanded by customers to travel. In an already extremely challenging industry, Southwest costs incurred to meet safety regulation on its aircraft, and a dispute with a labor union.
These issues make the current and future decisions of the company more critical than ever. Fortunately for Southwest, the current president and CEO has a vast amount of experience within the company.
Key Leader
Gary C. Kelly replaced Herb Kelleher, one of the founders and chairman of the board, as president when he resigned in May 2008. Kelly began his 22 year career with Southwest in the finance department as controller. In that time, he has risen to the top of Southwest Airline, holding positions such as vice president of finance, executive vice president, chief financial officer, and vice has been instrumental in Southwest’s recent success.
History of Southwest
Southwest Airlines, originally known as Air Southwest, was founded by Rollin King and Herb Kelleher. Southwest took its first flight in June 1971, serving three major cities: Dallas , Houston , and San Antonio. Within the first two years Southwest suffered decision : lay off employees or sell the aircraft. This established the company’s “no layoff policy” that is still in force.
Southwest was able to sustain a four-aircraft schedule using only three aircraft by untilizing the “ten-minuteturn.” Southwest turned its first annual profit in 1973. Southwest’s expansion strategy flourished after 1973. By 1977 Southwest operated six airplanes and had transported five million customers. New flight desinations were added such as Rio Grande Valley, Austin, Corpus Christi, El Paso, Lubbock, and Midland/Odessa. Between 1979 and 1980, Southwest established its first interstate service to New Orleans and Albuquerque, followed by Oklahoma City and Tulsa. Southwest expanded west in 1982, when it added service to Phoenix, Las Vegas , and San Diego.
In late 1984 the first 737-300 was added to its fleet and was used to serice flights to Chicago Midway and St.Louis.
In 1986, Southwest opened a new multi-million dollar training center for flight crews. Since customer satisfaction was Southwest’s main focus, it began a frequent flyer program, “The Company Club,” in 1987 , In 1988 , Southwest won its first monthly Triple Crown award for having the best on-time record, best baggage handling and fewest customer complaints. All of its achievements allowed it to reach the billion-dollar revenue mark and become a major airline by 1989. In 1990 , Southwest created its corporate culture committee to take the lead in preserving the airline’s unique culture.
Southwest began to offer service to many new cities such as Nashville, Sacramento, Cleveland, and Columbus, and finally entered the east coast market in 1993 when it offered service to Baltimore/Washington International Airport. With the acquisition and intergration of Morris Air in 1994, the company was able to add service to seven new cities, including Seattles, Spokane, Portland, Salt Lake City , and Boise. That same year southwest became the first airline to introduce Ticketless Travel in four cities , which eventually expanded system-wide in January of 1995. Later in 1995, Southwest became one of the first airlines to have its own Web site, and the following year the Ticketless Travel system debuted online.
After 25 years of service, Southwest owned a fleet of 243 aircraft and it saw an opportunity to introduce a fuel cost management program. The Asian market plummeted in 1998, causing jet fuel cost to drop to 35 cents per gallon. Southwest tool advantage of this opportunity and hedged its fuel costs. Within two years fuel cost had increased as crude oil increased from $11 to $34 per barrel.
Further expansion, tangible asset improvements, and technology upgrades continued between 1999 and 2006. Southwest expanded to serve locations such as Long Island and Releigh-Durham. It teamed up with IBM to introduce approximately 250 self-service check-in kiosks. This project was “part of a nationwide effort to reduce the amount of time Southwest customers spend in line and to improve the airport experience. By 2004 , Southwest was offering online boarding passes via its Website, allowing passengers to go directly to the departure gates without having to stop at the ticket counter. Customer convenience increased even more in 2005, when Southwest “extended online check-in to 24 hours prior to departure.” By 2006 , Southwest was ranked number one among airlines in customer satisfaction.