Flying right

IN A TEXAS RESTAURANT nearly 40 years ago, Herb Kelleher and Rollin King sketched on a cocktail napkin a simple, triangular diagram with Dallas, Houston and San Antonio at its corners. That napkin was essentially Southwest Airlines' first business plan. Doubtless the two would have laughed if someone told them at the time that their airline, which had to battle just to win the right to fly in its home state, would one day be the most popular airline in the United States.

Start giggling. The Department of Transportation announced Nov. 16 that, in August, Southwest flew more passengers in the U.S. than any other airline, the first time the low-cost carrier has topped the monthly rankings. Southwest flew 8.7 million passengers in August, while American Airlines flew 8.5 million. Southwest's victory is all the more remarkable because it has no international flights, while American's count includes about 2 million international fliers.

But most remarkable is the industry graveyard that Southwest has navigated to get where it is. Since Congress essentially deregulated U.S. airlines in 1978, three giants with storied histories -- Pan Am, Eastern and TWA -- have gone out of business. In the last five years, several airlines have come perilously close to joining them. Meanwhile, Southwest has notched 33 straight years of profitability, and 2006 will surely be its 34th -- an industry record.

Of course, Southwest is not without problems. Ongoing labor negotiations with its high-paid pilots could become contentious, and Southwest's profit last quarter plunged about 75% from the same period last year. There are only so many new airports and routes that Southwest can break into and still manage to fill its airplanes. Meanwhile, "legacy carriers" -- the term for industry stalwarts such as American and United -- are emerging from bankruptcy as leaner, more agile competitors.

Still, there's reason to believe Southwest can iron out its kinks. Before it ever got off the ground in 1971, a troupe of bigger carriers nearly litigated Southwest to death. Months after it started service in Texas, Southwest had to shed one of its four Boeing 737s just to make payroll.

Now Southwest has about 470 planes, and it's safe to say the airline has changed the industry more than any new plane or federal regulation. Several other low-cost carriers -- most notably JetBlue -- have emerged with their own interpretation of Southwest's model, forcing legacy airlines to fundamentally change how they do business. There is even a term -- the "Southwest effect" -- to explain why fares fall when Southwest enters a market. And to think it all started on a cocktail napkin.

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