Airline Cruising for Market Share
Southwest Airlines’ founder and chairman, Herb Kelleher, once said his airline’s focus should never be just gaining market share from rivals, because that can lead to big losses. “Market share has nothing to do with profitability,” he said.
But after Sept. 11, Southwest is trying to gain both market share and stay profitable--especially within California, where Southwest already is the leading airline with its frequent, short-hop service and low fares.
The plunge in air travel after the terrorist attacks left other major airlines bleeding cash, prompting them to slash flight schedules and jobs. They included United Airlines, which is folding a reduced version of its Southwest-like service in the West, Shuttle by United, into the rest of its system.
Yet Southwest, despite conceding that it’s also losing money every day, is keeping its frenetic schedule largely intact. In doing so, the carrier hopes it can endure the industry’s slump, garner some of the business that its competitors are abandoning and still operate in the black.
It’s a risky move that could imperil Southwest’s stunning record of being profitable every year since it was founded in 1971. But Southwest’s cash reserves of $1.5billion and its low operating costs mean the airline’s financial situation “should be ample to see us through the current crisis,” said Gary Kelly, Southwest’s chief financial officer. Southwest operates one type of aircraft and does not offer passengers meals.
Kelly also said Southwest isn’t targeting California for market-share gains simply because of United’s woes or at the expense of Southwest’s growth elsewhere in the nation. “We’re not intending to be exploitative,” he said. “We don’t want our success to be dependent on the failure of our competitors.”
Regardless, Southwest is set to win a bigger chunk of the market in the West, observers said. “It’s logical to assume that if one competitor cuts back, the other one is going to pick up market share,” said Brian Harris, an analyst at Salomon Smith Barney in New York.
Initial evidence of Southwest’s effort could emerge today, when the airline posts its third-quarter results. Despite the post-Sept. 11 losses, the Dallas-based airline is expected to earn about $81 million, or 10 cents per diluted share, according to analysts surveyed by Thomson Financial/First Call.
Southwest earned $184.3 million, or 35 cents a share, in the third quarter of 2000, on sales of $1.5 billion.
“I can’t predict with any real comfort yet whether we’ll be profitable in the fourth quarter,” Kelly said. For now, he estimated that Southwest is losing about $1 million a day, an improvement from the $3 million to $4 million a day the carrier lost immediately after the attacks.
Southwest stands to reap additional business nationwide, as all the airlines pare their schedules. Southwest itself has slightly trimmed some flights on its busiest routes but still operates 2,700 flights daily, a sizable portion of which serves 12 Western cities.
In the early 1990s, Southwest ruled the skies over the region. American Airlines, the main division of AMR Corp., took a stab at Southwest by opening a hub in San Jose, but a recession and an industry slump prompted American to all but abandon the intra-California market in 1993.
Then came United’s Shuttle in 1994, which also was directly aimed at grabbing market share from Southwest within the West and at feeding more passengers to United’s transcontinental and transpacific routes.
The Shuttle built a major network, reaching 500 daily departures that served more than 20 cities. And although Southwest continued to have an estimated 50% of the intra-California market, the Shuttle lifted United’s share to nearly 30%.
To be sure, United will still serve most of the Shuttle’s cities, but with less frequency and in many cases with smaller airplanes. Overall, United’s daily departures from Los Angeles International Airport are falling to 105 from 178 starting Oct. 31, though an additional 24 daily flights will be handled by United Express, a regional carrier operated by SkyWest Inc. that feeds United’s system.
“United is not ceding anything to our competitors,” said Mark Liberman, United’s Western regional vice president. “We’re going to compete for the short-haul travelers in California and other Western states.”
In staying the course, Southwest has another goal: To preserve the employee culture that the airline--which has never had a layoff--has worked so hard to nurture. The culture prizes its workers’ humor, service and teamwork.
“Southwest’s management has made a decision that ... the costs to its corporate culture are too high” if it slashes its schedule and eliminates jobs, Salomon’s Harris said.
Kelly agreed. “We need every last employee we’ve got to continue building this company,” he said. “We don’t want to retrench; we want to keep building.”
But Southwest’s plan could backfire. Passenger traffic could stay soft. The added security measures at airports could hamper Southwest’s hallmark ability to quickly turn around its planes, a key factor in Southwest’s profitability.
Still, “if anybody can pull it off, they can,” said Ron Kuhlmann, vice president of Roberts, Roach & Associates, an industry consulting firm in Hayward, Calif. “Southwest’s [business] model is such that they can keep their costs low, and I believe they can ride it out.”
Southwest’s stock fell 26 cents to $15.18 a share Wednesday, while UAL tumbled $1.79 to $16.85, both on the New York Stock Exchange.
