Southwest Airlines Co. - Company Profile, Information, Business Description, History, Background Information on Southwest Airlines Co.

2702 Love Field Drive
P.O. Box 36611
Dallas, Texas 75235

Company Perspectives:

Southwest Airlines is a symbol of freedom. Since 1971, our low fares have given millions of Americans the freedom to fly. From our flag to our open seating, from our all-jet fleet to our declaration of freedom, our Southwest Spirit illuminates our past, guides our present, and forges our future.

Southwest Airlines Co. is the nation's low fare, high Customer Satisfaction airline. We primarily serve shorthaul city pairs, providing single class air transportation, which targets the business commuter as well as leisure travelers. The Company, incorporated in Texas, commenced Customer Service on June 18, 1971, with three Boeing 737 aircraft serving three Texas cities--Dallas, Houston, and San Antonio. At year-end 1997, Southwest operated 261 Boeing 737 aircraft and provided service to 52 airports in 51 cities throughout the United States. Southwest has the lowest operating cost structure in the domestic airline industry and consistently offers the lowest and simplest fares. Southwest also has one of the best overall Customer Service records. LUV is our stock exchange symbol, selected to represent our home at Dallas Love Field, as well as the theme of our Employee and Customer relationships.

History of Southwest Airlines Co.

If there is a model for success in budget air transportation, it is Southwest Airlines Co. Others have been more profitable--ValuJet, for example, but they have failed to match Southwest's record over time; most budget start-up airlines have the life span of fruit flies, try as they might to emulate Southwest, where the average fare costs about $75 and covers 400 miles.

The company flies only Boeing 737s, to simplify maintenance, and employee productivity is high: planes are turned around for their next flight in just 15 minutes, one-third the industry average. Despite complaints from travel agents, the airline eschews the use of a reservation system to avoid paying the required fees. With its unique operating philosophy, Southwest is a maverick in the airline industry.

Passengers in half of the United States have found that Southwest's rock bottom pricing creates almost a new form of transportation, more in competition with the automobile than other airlines. They are willing to forsake in-flight meals, baggage transfers, and other traditional frills for economically amenable wings.

Beginning a Labor of Love

Southwest Air was founded in 1966 when a group of Texas investors, including Rollin King, M. Lamar Muse, and Herbert D. Kelleher, pooled $560,000 to form the Air Southwest Company. Incorporated in 1967, the company was envisioned as a commuter airline serving three cities within Texas: Dallas, Houston, and San Antonio. Although the Texas Aeronautics Commission (TAC), the regulatory body responsible for overseeing aviation within the state, granted the company permission to fly the routes it had requested in February 1968, three competing airlines filed suit to prevent the airline from getting off the ground. Kelleher, an attorney whose stake in the airline was a mere $20,000, took the case all the way to the U.S. Supreme Court, and in December 1970 this court ruled in favor of Air Southwest.

Six months later, after fighting numerous legal battles, changing its name to Southwest Air, and selling stock in the company, the fledgling airline began operations on June 18, 1971. Under the stewardship of President M. Lamar Muse, the airline offered six daily roundtrip flights between Dallas and San Antonio, and 12 daily roundtrip flights between Dallas and Houston. One-way tickets cost $20.

Courting the commuter, the company stressed "no-frills" convenience and, in reference to Love Field in Dallas, its home base, made "love" its promotional theme. Flight attendants were dressed in hot pants and go-go boots to serve "love potions" and "love bites" (also known as drinks and peanuts) to the company's clientele of mostly male business fliers. Southwest made much of its scantily-clad women, whose pin-up-like images would eventually appear widely, including the cover of Esquire magazine.

By the end of 1971, Southwest owned four aircraft, offered hourly flights between Dallas and Houston, and had inaugurated service between San Antonio and Houston, completing the last leg of a triangular route. In the following year, the company transferred its Houston service from Houston Intercontinental Airport to William P. Hobby Airport, located much closer to the city's downtown, in an effort to become more convenient to commuters. In 1973, Braniff Airlines began a fare war with Southwest over service from this airport to Dallas; Southwest resorted to giveaways of liquor, leather ice buckets, and 50 percent discounts on fares. The company also introduced cargo service between the airports it served and by the end of 1973 had notched its first profitable year, carrying over half a million passengers.

Still More Controversy in the 1970s

Southwest again found itself involved in legal controversy in 1972, when the cities of Dallas and Fort Worth and their Regional Airport Board filed suit to force the airline to move from Love Field to the newly constructed Dallas-Fort Worth regional airport, hoping that by charging higher landing fees and rent there, they could help offset the cost of the expensive project. While all the other airlines had signed a contract to move to the new airport in 1968, Southwest had not done so because it was not in existence at that time. In a big break for Southwest, a federal judge ruled in 1973 that the airline could continue to operate at Love Field in Dallas as long as the airport remained open. Thwarted, the Dallas City Council subsequently passed a law closing the airport to all scheduled airlines, but this law was thrown out in court.

In 1974, Southwest's competitors began moving out to the Dallas-Fort Worth Airport, leaving the airline with a monopoly on service from the cheaper, more convenient airport. After defeating yet another legal challenge, this one from the other carriers, Southwest was able to solidify its presence at Love Field and its newly renovated facilities at Houston's Hobby Airport, making its strong commuter service the basis for broader operations.

This expansion began in 1975, when the airline inaugurated service to the Rio Grande Valley, with four roundtrip flights each day to Harlingen. By the end of that year, the company had acquired a fifth plane, and its stock was listed on the American Stock Exchange under the ticker symbol "LUV." In the following year, Southwest laid plans to extend service to five other Texas cities and again found itself the object of hostile litigation by competitors.

In 1977, the airline put into effect its plan to offer service from Corpus Christi, Lubbock, Midland/Odessa, El Paso, and Austin. Its stock was transferred to the New York Stock Exchange, and the company issued its second and third quarterly dividends, the latter totaling seven cents per share. In May of that year, the airline exceeded the five-million passenger mark.

Deregulated at Last

In 1978, Congress passed the Airline Deregulation Act, fundamentally altering the nature of the airline industry. Although Southwest was now legally free to greatly expand its operations, the company planned conservative growth to avoid the perils of taking on large debts.

In early 1978, the airline applied for permission to purchase a wholly owned subsidiary, Midway (Southwest) Airway Company, in order to inaugurate service from Chicago's Midway Airport to six Midwestern destinations. Although it received tentative approval to do so, Southwest abandoned this ambitious attempt at expansion in August. Instead, the company added service to the mid-sized Texas city of Amarillo and the Jefferson County Airport. In July 1978, the company implemented its first fare increase since 1972, adding three dollars to the cost of a one-way ticket, and five dollars for a roundtrip fare. By the end of the year, the airline's fleet had grown to 13 Boeing 737 planes.

In March 1978, significant changes were made in Southwest's upper-level management. After a dispute with the airline's governing board, President M. Lamar Muse, who had largely shaped the company during its early years, was deposed by the board and replaced by lawyer Kelleher, who became chairman of the board. In August, Howard D. Putnam, a United Airlines executive, became president and chief executive officer.

In 1979, Southwest introduced self-ticketing machines in many of its airports to speed up and simplify passenger ticketing, and the airline introduced service to New Orleans, its first destination outside Texas. In late December 1979, earlier opponents of Southwest's continuing use of Love Field won a partial victory in Congress. Speaker of the House Jim Wright, a Congressman from Texas, attached a rider to a federal trade law which forbade traffic between Love Field and any states other than Louisiana, Arkansas, Oklahoma, and New Mexico, the four states surrounding Texas. This severe limitation of Southwest's interstate flights from its hub forced the airline to conform to its established role as a commuter service for the energy belt, now in a severe depression. The airline inaugurated service to Oklahoma City, Tulsa, and Albuquerque in April 1980.

Earlier that year, Southwest was hit by a machinists' strike, which curtailed operations for several weeks. The company brought in temporary workers to keep 12 of its 18 planes flying, and the union eventually settled for what the airline had initially offered.

In 1981, celebrating its tenth year of operation, the airline introduced a multimedia advertising campaign featuring the theme, "Loving you is what we do," and produced an ad picturing six Southwest flight attendants, all purportedly "physical 10s," grouped around a birthday cake, promising, "You ain't seen nothin' yet." In June 1981, the airline was found guilty of sex discrimination in a class action suit filed by a man seeking a job as a ticket agent and ordered to cease its discriminatory hiring practices. Also in 1981, after a series of petition drives, stewardesses won the right in their new contract not to wear hot pants on the job.

In September 1981, President Howard Putnam resigned to become the head of Braniff International Airlines, and was succeeded as president and chief executive officer by Chairman Kelleher, who brought his flamboyant personal style to the job of running the airline. With Kelleher at the helm, the airline's pace of expansion picked up markedly, despite the nationwide recession and difficulties arising from an air traffic controllers' strike. In early 1982, Southwest introduced service from Kansas City, Missouri, to seven destinations. Just a few weeks later, the airline made its entry into the western air travel market when it began flights from San Diego, Las Vegas, and Phoenix. Additional California service was inaugurated that fall, when Los Angeles and San Francisco came on line.

The airline's steady growth continued in 1983, as it added customers, flights, and airplanes. The company ratified a two-tier wage system, secured a one-year pay freeze from its pilots' association, and signed contracts with several of its unions, including its mechanics and flight attendants. Service from Denver began in May 1983.

Stretching Out in the 1980s

In a departure from its previous policy of sticking to short-haul flights, Southwest inaugurated two routes between Texas and California--El Paso to Los Angeles and San Antonio to Los Angeles&mdash well as a major north-south California route from San Diego to San Francisco. Entry into these long-haul markets, coupled with bad weather throughout the Southwest region, curtailed profits somewhat during this period.

In 1984, helped by ongoing peace with its labor unions, Southwest continued to increase capacity and rack up steady profits, despite growing competition from Continental, Braniff, and Muse Air, founded by the former president of Southwest. In July 1984, the company implemented limited cost-cutting measures, paring back unprofitable flights and limiting hiring. The company took delivery on the first of a new generation of planes, the Boeing 737-300, and introduced service from another Midwestern city, Little Rock, Arkansas.

The following year, Southwest further expanded its Midwestern network of routes, adding flights to St. Louis and Chicago's Midway airport. The company unveiled its "Just Say When" promotion, touting itself as the most convenient way to travel. The airline also made its first big acquisition when it paid $60 million for Muse Air Corporation, a Houston-based competitor, to prevent another competitor, Continental Airlines, from snatching it up. Unlike Southwest, Muse Air offered longer flights and full service to its customers. Kelleher kept the full-service frills and renamed the airline Transtar. In its first year, the money-losing company was able to turn a small profit.

By 1986, Southwest had scheduled flights from 25 cities. The airline introduced a number of fare-cutting measures in efforts to maintain its market share in the heavily competitive post-deregulation airline industry. "Incredible Pair Fares," "Fly Now, Pay Less," programs, $25 tickets for senior citizens, and finally "Fun Fares" became part of the strategy to lure more fliers to the skies. In addition, the airline was waging a fare war at its Phoenix hub against America West Airlines, offering flights between California and Arizona for $25.

During the summer of 1986, the airline stepped up the hoopla surrounding its low fares, making "fun" its new corporate byword and implementing a "fun" uniform of golf shirts, surfer shorts, and tennis shoes, along with in-flight games and giveaways. In July, the golf shirts were replaced by red Southwest T-shirts asserting that "Southwest Fliers Have More Fun." In an effort to simplify ticketing, a drive-through ticket window was installed near the airline's Dallas hub in August 1986, and in October tickets became available through automatic teller machines at 7-Eleven stores in Corpus Christi, Texas.

By 1987, Southwest's full-service subsidiary Transtar was locked in head-to-head combat with Continental for service out of Houston's Hobby Airport. The competing airline hit Transtar with cheaper flights scheduled 15 minutes before and after every Transtar departure, and the Southwest subsidiary was soon draining off $2 million in losses every month. In August 1987, after suffering a net loss for the first quarter of the year, Southwest shut down Transtar. The Transtar debacle cut the company's year-end earnings by 60 percent.

Despite aggressive pricing, Southwest found its rapid expansion thwarted in some markets, as full-service rivals drove the airline out of Denver, hampered its ambitious plans for operations in Nashville, and continued to put up stiff resistance in Phoenix. In addition, the airline was fined $402,000 by the Federal Aviation Authority in 1987. Faced with the demands of business fliers, the company introduced its first frequent flier program. Unlike the programs of other airlines, which award prizes based on mileage accrued, Southwest's program was designed to reward the short-haul flier, allotting prizes on the basis of number of trips taken.

In 1988, Southwest president Kelleher announced plans to double the airline's size by 1994. His strategy for accomplishing this was to increase the frequency of flights between cities already on the Southwest route map and to open up new routes in California and the Midwest. In keeping with the airline's policy of flying out of airports that are close to urban centers, Southwest also switched its Detroit flights to Detroit City Airport from the more remote Metro Airport.

Also in 1988, as a sign of the ever-growing airline's commitment to lightheartedness, Southwest painted one of its 737s to resemble a killer whale to celebrate the company's agreement to become the official airline of Sea World of Texas. Shamu One, named after Sea World's mascot killer whale, was eventually joined by Shamu Two and Shamu Three. When Federal anti-smoking regulations went into effect on all domestic flights, Southwest offered its passengers lollipops as a substitute for the now-banned cigarettes. Passengers on flights during the winter holiday season of 1988 reported that flight attendants were dressed as elves and reindeer, and that the pilot sang Christmas carols over the public address system while gently rocking the plane from side to side.

In the spring of 1989, Southwest began its planned assault on the California market and touched off a fare war with much larger carriers, such as American Airlines and United Airlines, when it introduced $19 fares from Oakland International Airport, in the San Francisco Area, to Ontario, a suburb of Los Angeles. Aiming to reach $1 billion in revenues for the year, Southwest planned continued expansion of its fleet of planes and added Indianapolis to its route map. In a novel pairing of businesses, the company offered, for a limited time, a free companion ticket to anyone buying a holiday meal at Kentucky Fried Chicken.

Prudence Prevails in the 1990s

As a result of its steady growth, Southwest entered the 1990s as a major airline, with a fleet of 94 planes serving 27 cities. Relying on conservative financial management, the company was able to avoid the pitfalls of debt that crippled many other carriers in the early 1990s, and despite suffering a loss in its fourth quarter, turned an overall profit in 1990.

Southwest took advantage of the misfortunes of its competitors in 1991, scooping up market share abandoned by ailing US Air in California and by bankrupt America West in Phoenix, and buying gates at Midway Airport from its defunct Chicago competitor, Midway Airlines. By year's end, Southwest had 124 jets flying to 32 cities.

By 1992, the company's concerted push into the California market had begun to become profitable, and Southwest became the second largest carrier in the state. The company looked to the Midwest as its next largest site of expansion. When the Department of Transportation began ranking airlines based upon baggage handling, customer satisfaction, and on-time performance, Southwest outpaced its larger, more expensive colleagues to win the first "Triple Crown" in 1992. And it kept winning them year after year. In 1993, when Southwest was expanding to the East Coast via Baltimore/Washington International Airport, Southwest was the only major carrier to take home a profit.

Southwest aggressively pursued non-traditional means of ticketing passengers. It sidestepped Apollo and other established reservation networks in lieu of more direct contact with travel agents. It dubbed its own network SWAT, for Southwest Air Travel.

Takeovers of Morris Air and Arizona One in 1994 expanded the company's network still further; the company continued to add routes to the Midwest and California. Southwest followed suit with its low-budget peers by eliminating paper tickets.

In 1995, the company reached $2.8 billion in operating revenues. Within five years, Southwest had added more than 10,000 employees to its roster. Southwest commemorated its 1996 silver anniversary with a special plane called Silver One. Internet ticket sales debuted along with new Florida service, which added the carrier's 50th city in 1997.

For the 25th consecutive year, the carrier posted a profit--$317.7 million--in 1997. Due to its low fares, the carrier's entering a market could increase the volume of passenger traffic fourfold, and some businesses used the availability of Southwest service as a prime criterion in choosing new locations. The airline's 2300 flights per day, impressive safety record, and status as a much-admired corporate citizen suggested it would long remain one of the industry's legendary survivors.

Additional Details

Further Reference

Brown, David A., "Southwest Airlines Gains Major Carrier Status by Using Go-It-Alone Strategy," Aviation Week & Space Technology, March 5, 1990.Chakravarty, Subrata N., "Hit 'Em Hardest with the Mostest," Forbes, September 16, 1991.Freiberg, Kevin, and Jackie Freiberg, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success, Austin, Bard, 1996.Gibney, Frank, Jr., "Southwest's Friendly Skies," Newsweek, May 30, 1988.Keating, Peter, "Rating the Airlines: The Best Airlines to Fly Today," Money, November 1, 1997.Kelly, Kevin, "Southwest Airlines: Flying High with "Uncle Herb'," Business Week, July 3, 1989.Labich, Kenneth, and Ani Hadjian, "Is Herb Kelleher America's Best CEO?" Fortune, May 2, 1994.Levering, Robert, and Milton Moskowitz, The 100 Best Companies to Work for in America, New York: Doubleday, 1993.------, "The 100 Best Companies to Work for in America," Fortune, January 12, 1998.Loeffelholz, Suzanne, "The Love Line," Financial World, March 21, 1989.Maglitta, Joseph, "Lean, Mean Flying Machines," Computerworld, July 11, 1994.Putnam, Howard D., The Winds of Turbulence, Harper Business, 1991."Southwest Airlines--A Brief History," Airlines History, Dallas: Southwest Airlines, 1991.Taylor, John H., "Risk Taker," Forbes, November 14, 1988.Troxell, Thomas N., Jr., "Deregulation in Stride," Barton's, January 23, 1984.Weber, Joseph, "These Two Airlines Are Doing It Their Way," Business Week, September 21, 1987."Why Herb Kelleher Gets So Much Respect from Labor," Business Week, September 24, 1984.Zellner, Wendy, "Striking Gold in the California Skies," Business Week, March 30, 1992.

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