Can you imagine if only one of those “doodles” that you have drawn while on the telephone had turned into a multi million-dollar business? Can you see your picture on the cover of Fortune magazine? Rollin King and Herb Kelleher, the creators of Southwest Airlines could.
What began as a conversation between attorney Herb Kelleher and his client Rollin King, with a drawing on the back of a cocktail napkin, has become one of the worlds most successful business testimonials.
Both men saw the need for an intrastate airline in Texas. Current airlines only offered service to the smaller metropolitan areas as an extension of a long flight from elsewhere in the country. These flights were scheduled at the convenience of the airline, not the customer. They were frequently late and were high priced; making them unwanted by businesspersons traveling within the state of Texas. What these two men proposed was a “local” airline that would serve the three major metropolises of Texas: Dallas, Houston, and San Antonio. Their goal was to offer a low fare, reliable service to meet the needs of the state’s business traveler. Even though it seemed to be a good plan, who could have imagined the road that lay ahead.
The year 1968 marked the beginning of the legal turmoil that would plague Southwest for years. Since WWII, the Civil Aeronautics Board (CAB) had regulated the airline industry. Their jurisdiction only applied to airlines that flew across state lines. Southwest’s application to start a new airline was approved by the Texas Aeronautics Commission in 1968. Other airlines, such as Braniff and Texas International, kept Southwest out of the air and in the courtroom until the Texas Supreme Court ruled in favor of Southwest’s start up. Even so, legal barriers continued to make Southwest Airlines a mere dream until the United States Supreme Court upheld the Texas Supreme Court’s decision in December of 1970.
Although Kelleher had absorbed most of the cost of the legal obstacles, Southwest’s bank account had been drained from the original $543,000.00 to a mere $142.00. They had no employees, no planes, no managers, and virtually no money. In January 1971, they hired M. Lamar Muse as president of Southwest Airlines. Through his efforts, Southwest was able to develop a management team and raise money. (Most of Southwest’s management team had been rejected or forced into early retirement by other airlines!) A much needed stroke-of-luck allowed Southwest to purchase three brand-new Boeing 737 airplanes.
When Southwest was finally about to take off, Barriff and Texas International Airlines threw a last minute roadblock-a restraining order stopping Southwest from entering into service. Kelleher immediately contacted the Texas Supreme Court, who reversed the restraining order, and Southwest Airlines was born.
They operated for nearly two years without recognizing any profits. Only one of the three legs of service seemed to be doing OK. Muse decided to try to fill every seat on the less successful flights by lowering the fares to $13.00. The Texas based giants, Barriff and Texas International, matched the price and the Texas air-war began. Through the use of innovative marketing techniques, and the “Ten Minute Turnaround” (an idea of fully unloading and reloading an airplane within ten minutes) allowed Southwest to build a loyal customer base that led to their first year of profits in 1973. Since then, they have never looked back.
With the deregulation of the airline industry (which dismantled the C.A.B) and Kelleher replacing Muse as president in 1978, Southwest was now able to expand to areas outside of Texas. It began expanding to Louisiana, westward to Arizona and California. It remained in the Midwest with flights in Oklahoma and Kansas. However, Chicago was an area of tremendous potential. Operations in Chicago’s Midway Airport were limited due to the fact that only four gates were available for Southwest’s use. When Midway Airlines folded in 1991, the same determination that made Southwest what it is today came through again to allow the airline to capitalize on a golden opportunity. Realizing that time was of the essence, Southwest quickly negotiated an agreement with the city of Chicago and was able to acquire the gates that Midway Airlines had vacated. Southwest’s profitability had enabled them to commit at least $20 million to developing the smaller airport and alleviate the city’s concern of the airport’s economic future. This commitment by Southwest again built a loyalty among its customers.
Another accomplishment for Southwest was the “Triple Crown” trophy which recognized Southwest’s record of the best on-time performance, least number of mishandled bags, and least number of customer complaints within the airline industry. They have maintained this achievement for four consecutive years and have become known as the leader in the industry for fundamental changes. It is no wonder, with this kind of service record and customer loyalty, that Southwest Airlines is one of the most profitable airlines in the world today. Where will they go next?
In 1996, Kelleher began thinking about whether or not to expand into Florida. There are only two alternatives to discuss about the proposed expansion and each one has its advantages and disadvantages. Let’s look at those alternatives now. In the end, someone will decide, and again, airline history will be made.
Expanding into Florida offers many advantages to Southwest Airlines. Among tourists it is known for its large shoreline of popular beaches, its many theme parks such as Walt Disney World, and as a hub for other vacation departures such as its many cruise-lines. It is probably one of the most sought after vacation spots in the United States tourists. By integrating this service with existing routes and with Southwest’s loyal customer base it is highly likely that they would choose Southwest instead of using a competitor to travel to Florida.
Its geographical layout of the state also offers some opportunities similar to those in Texas and California. Intrastate service would be successful provided Southwest continues its record of low fares and dependability. Focusing on business travelers have proven successful in the past and should continue into the future.
Southwest has already established its name and reputation in the airline market and has a favorable rating among its customers. Entrance into this new market could very easily increase its market share and expand its current customer base.
With all of these advantages, increased profits would be the expected outcome. If Southwest maintained its current record of low fares, dependable service and continue to meet the needs of its customers; there should be no reason for Southwest not to be able to operate efficiently and profitably in Florida.
However, Florida is a new market with already established competition. Entering into a new market is costly, and you can be assured that the current competition will do everything they can to slow or stop this expansion. Many of these airlines are already tied into the available tourist opportunities (i.e. “The Official Carrier of Walt Disney World”). The competition will be intense. Can Southwest afford the initial expansion costs and effectively compete at the same time, or will this be a venture that offers growth without profits?
As seen in Chicago, there is no guarantee that gates will be available for Southwest. Chicago proved to be profitable, but there was an element of luck involved. Northwest Airlines had the gates leased by contract and could have made it more difficult or expensive for Southwest to acquire those much needed slots. This could happen in Florida also. Should Southwest force itself to operate from limited space, it will be dangerously close to damaging its “Triple Crown” reputation. By losing that recognition could erode its market share in markets other than the proposed Florida market.
In order to keep its operating costs low; Southwest has flown in or out of a smaller airports in the major cities (i.e. Love Field vs. Dallas/Ft. Worth International or Midway Airport vs. Chicago’s O’Hare International). Will this be possible in Florida? If not, Southwest would be forced to pass on the increased expense to the customer and not be able to provide the expected ‘low-fare’. Again, this scenario would also be unfavorable in the long run.
Another question that must be answered is if the current air travel market in Florida is already saturated. Will Southwest be able to keep their planes filled? Or on the other hand, would more planes have to be bought in order to service this new market? Either option would be costly.
By avoiding the expense of enter the Florida market, it could be possible for Southwest to lower fares in existing operations. They could also decide to increase their profit margins. By doing this, they would be able to keep their fleet of aircraft modern and well maintained. This would reinforce their record of safety and customer satisfaction. If they chose to do so, they could pass on the extra profits to their stockholders in the form of increased dividends or potential capital appreciation. Doing so would send a strong signal of financial strength and stability to its current and potential investors.
If Southwest chose not to pursue this opportunity for growth, they could focus on their current operations. This would allow them to improve their already well known brand name. Again this should lead to increased market share and profits.
Another advantage of just maintaining their current area of operations is less risk. Should they expand, they run the risk of not producing enough revenue to cover the costs of this expansion. They would have to use profits from other sectors to allow them to continue to operate in Florida. This type of action would pose a serious risk to Southwest’s financial stability in itself. However, just maintaining their current level of business should keep them a profitable company well into the future.
There are also a few disadvantages to staying out of the Florida market. They would run the risk of appearing weak to their competitors and potential investors if they choose not to grow. This could lead to aggressive marketing strategies by other airlines, which would force Southwest to follow suit. These “airwars” could diminish Southwest’s profits, and prevent them from being able to take advantage of a similar expansion opportunity in the future.
They would also be turning down an opportunity to increase their share of the market in the air travel industry. By doing this, their competitors would be allowed to become stronger and possibly keep Southwest out of the Florida market in the future.
After evaluating both alternatives, it would be our decision to pursue the Florida expansion. There would be some risk involved; however, the potential losses by not expanding outweigh those risks. There is something to be said by just perfecting and already good operation, but Southwest has been successful in past expansions and by sticking to the basic fundamentals that made them what they are today; they should be successful in Florida as well. If Mr. Kelleher were to call and ask our opinion today, we would say, “Move over Mickey. Here we come!”