SW Shines In Light Of Biz Changes

Jim Parker in mid-2001 took the Southwest Airlines CEO reins from longtime industry icon Herb Kelleher. Despite the economic slump and the traffic declines following Sept. 11, 2001, Southwest remains the healthiest major carrier in the country. BTN editors David Jonas and David Meyer last month spoke with Parker about struggling network competitors, vibrant low-cost competitors and Southwest's appeal to business travelers.

BTN: How has Southwest become more appealing to business travel buyers?

Jim Parker: We have always had a strong component of business travelers on Southwest. People sometimes mistakenly think that because we are a low-fare airline that we are not oriented to business travelers. That is absolutely wrong. Going back to our roots, we were created as an idea to provide a better level of service at a better price for the business traveler.

BTN: What is the business mix now?

Parker: Unfortunately, we have no way of knowing why people are flying. It is particularly hard to tell on Southwest because historically we have a lot of leisure customers flying at our full fare levels—because they are so low and affordable—and conversely we have a lot of business travelers who book in advance and fly on advance purchase tickets because they are so readily available. We have seen some weakness, overall and industrywide, in business travel. That is certainly what our competitors are reporting. We have seen some of that at Southwest over the past year since Sept. 11, 2001. We have also seen a tendency among business travelers to look even closer for bargains and to look for advance purchase discount fares and so forth. When people ask when things will get back to normal, meaning back to the year 2000 bubble, I tell them what is happening right now is the norm and what was happening back in 1998-2000—when a lot of people were traveling and not caring about cost—was abnormal. The normal situation is people looking for value, better service at a lower cost. That is the type of environment that Southwest is built to prosper in. Overall, of course, there has been a general weakness in the economy, and in particular with respect to airline travel. That will improve over time, barring any unanticipated events.

BTN: Because of the nonrefundable ticket policies imposed by the majors, combined with your expanded coverage, have you had individual corporate travel buyers come in and discuss options?

Parker: I cannot cite any specifics, but anecdotally we know that on the part of business travelers in general there has been increased interest in our Internet product Swabiz. People are looking for easier access to Southwest Airlines and, fortunately, our business product gives them that. There is interest even with the understanding that we don't offer corporate discounts as such, but simply offer low fares on a consistent basis.

BTN: Southwest has become more of a player for the business travel community as you expand transcon flying. Can you give us an update on that development?

Parker: We are not changing our basic philosophy. We continue to be predominantly a short-haul carrier, but overall we are a low-fare, low-cost, high-quality carrier. That is a formula that we have found adapts well to mid- and long-haul markets. We have just started our first pure transcon service, although it was not anything revolutionary for us, but evolutionary. The Baltimore/Washington-Los Angeles nonstop is only 50 miles longer than the Providence-Phoenix nonstops we have been running for quite some time, so we knew we could do that successfully. It will continue to be one element of what we do, but not the primary element. We will continue to be predominantly a point-to-point carrier, but we can and will be adding long-haul, point-to-point service as well.

BTN: Southwest seems to be developing these pseudo-hubs, BWI comes to mind. Are there other airports around the country that can fall into that category?

Parker: We don't use terminology like pseudo-hubs, we don't think of it that way and don't schedule it as a rolling hub or any other kind of hub. We know we'll have maybe 25 percent or so of our total customers being through or connecting customers, but we really look at the local market. The 737-700 is such a flexible airplane and gives us the ability to take the point-to-point concept and expand it even on transcon routes, so we can continue to look at it as point-to-point service even though it may be over a much longer distance. When we add BWI-San Jose, for example, we are really doing that as a point-to-point market. We know there will be some people making connections at either end, but that is not the primary focus. And in Baltimore, when we schedule new routes to New England or to Florida, we are not looking at that as a connecting point, but trying to serve the point-to-point market. As we see traffic patterns develop, we will add new nonstop service, as we are doing now between New England and Florida on a nonstop basis, in part to take some pressure off an intermediate point like Baltimore and have more seats available in the nonstop local markets.

BTN: Speaking of BWI, what has been the impact on Southwest of US Airways' overall shrinkage as it reorganizes?

Parker: I don't think there has been an immediate impact other than in a number of markets from which they withdrew, and the BWI market, where we are expanding. We probably would have been expanding in those markets anyway. There is a level of demand there for low-fare service that we will be filling for quite some time. For that reason, BWI will continue to be a focus of our growth. Other than that, we have seen shrinkage from all the big airlines.

BTN: Especially United Airlines. What would a United Chapter 11 filing mean for Southwest?

Parker: We certainly do not wish bankruptcy on any of our competitors. While bankruptcy may enable the airline to reduce its cost structure in some ways, it also has a lot of negatives. Everything from raising capital to attracting customers becomes more difficult. I would not want to try to run a business that is in bankruptcy because so much of your attention is focused on day-to-day issues of survival rather than on building a company for the long term. If you look at the history of airline bankruptcies, a lot of airlines have gone into bankruptcy and emerged still operating, but none have ever truly regained the kind of financial vitality that would allow them to say with assurances that this is a company that is market-leading with the financial strength to survive the kinds of ups and downs you see in the airline industry. A company that comes out of bankruptcy may survive the next up period, but survival during the next down period always would be in question. From the Southwest standpoint, there are some challenges in competing against an airline that does not have to pay its bills. On the other hand, from the standpoint of competing for customers, customers would prefer to fly on a financially stable airline.

BTN: Which brings us to JetBlue. There was an interesting little battle between your airlines in California. Does that foreshadow more head-to-head competition between low-cost carriers?

Parker: It really wasn't too much of a battle. There were some fares out there that we responded to and matched, as we would normally do in response to a competitor. On a point-to-point basis, we do not compete anywhere with JetBlue right now. In a broader sense, there are some markets where we compete, just not on an airport-to-airport basis. I don't think it would be a wise business strategy by anybody who is trying to raise capital in this environment to go into competition with a low-fare airline, especially Southwest. There is plenty of room for a lot of people to grow and there will be competition, but in the immediate future there won't be much point-to-point competition between low-fare airlines.

BTN: Southwest has excelled for so long because it has been able to grow at a consistent rate and drive more traffic. With that in mind, and considering less than robust growth plans, largely economy-related, how can you sustain your model?

Parker: We are a growth company and will continue to grow. Our normal goal is to grow capacity by 8 percent a year. We are not adding new cities this year, and at this point there are no plans to do so next year. But there are many new cities that desire Southwest service. In addition to that, there are huge opportunities to add service between cities that we already serve, places that we have never served on a nonstop basis, such as Chicago to the West Coast and our transcon service.

BTN: Southwest finally got into the self-service kiosk game this summer. Can you update us on deployments and address some of the snags we have read about?

Parker: In the course of the past year, we have for the first time done away with plastic boarding passes and introduced the ability to issue boarding passes at the ticket counter as well as the gate. That was a step toward introducing our new kiosks, which have already been put in at a few airports and will be rolled out over the course of the next few months to our major airports. Ultimately, they will be systemwide. If customers do not have any bags to check, they do not have to interface with a customer service agent at all, either at the ticket counter or the gate. We still will focus on great customer service and customers probably will want to stop by just to say "Hi" to our friendly customer service agents. The kiosk problems we are having are nothing major. They are not as much snags as it is us being cautious not to overload the systems we have in place. We are taking it in our typical, gradualistic, step-by-step approach and rolling them out in a deliberate manner.

BTN: What are some other Southwest developments of interest to the business traveler?

Parker: I mentioned Swabiz, which is being constantly updated and improved, and that will happen for awhile as we respond to customer requests for new services. Another thing of interest to everybody is the freshness of our fleet. We continue to add new airplanes as we retire some of our older ones. I mentioned the efficiency of the 737-700 and the new dimension it gives us in terms of offering long-haul, point-to-point service, along with the all-leather interior and expanded leg room, which are of interest to our business customers.

BTN: How many of those new planes are you taking on?

Parker: We have 418 additional aircraft on order, option or by way of purchase rights with Boeing between now and 2012. We will add 18 this year and announce the accelerated delivery of some of those aircraft.

BTN: Switching gears to distribution, has Southwest made any decisions about how to deal with so-called "screen-scrapers?"

Parker: We don't authorize that and we try to prevent it where we can. We have filed occasional lawsuits to prevent it from happening and have taken steps technologically when needed to prevent the unauthorized distribution of our fare and schedule information.

BTN: Have you given any thought to how changes to GDS regulations, and development of Orbitz, would impact your distribution strategies?

Parker: So much has happened since they started the process of reviewing the GDSs. I don't know where they will go with it. On Orbitz, I do not think it has had the anticipated benefits for our competitors. We learned to compete with it very well by offering low fares on a consistent basis to our customers, reminding them that the place to always get those low fares is Southwest.com.

BTN: Considering Southwest's position to use only one GDS—Sabre—and to not participate in Orbitz, you have an outside perspective on recent airline-GDS developments. How do you see it shaking out?

Parker: I do not know where it is going to end up. I think it will continue to evolve. Right now, it is a pretty competitive world out there among the Internet GDSs—if that is the right term. From a customer standpoint, that is a pretty good thing. It would be a bad thing for the customer if you had one, all-powerful Internet distributor of information about airlines. That really is what we have feared most out of Orbitz: that it would clear the playing field, become so dominant that it would have the ability to display information in any manner it chose and to extract concessions and fees of any magnitude it chose from airlines that wanted to have access to the traveling public. That would be a bad thing for the traveling public.

BTN: Can you update us on labor negotiations?

Parker: In August, we negotiated a contract extension with our pilots that ratified by a 68 percent margin. The mechanics just ratified a new contract that extends through 2005. We have made an offer to our fleet services employees to extend their contract by two years to 2008. We are presently in negotiations with two groups: customer service employees whose contract became amendable in November and the flight attendants whose contract became amendable in May. We are very pleased with where we stand.

BTN: You have been successful in hedging against fuel price hikes. How do you hedge against a seemingly imminent war in Iraq?

Parker: The only thing you can do is prepare your business for any eventuality, and that is what we do by keeping our costs low and our operation efficient. Of course, we do have $2 billion in the bank to protect us against any unexpected events.