Blazing its Own Trail

Southwest Airlines is continuing to prosper despite various challenges – and, as David Armstrong explains, it continues to do things in its own way


Boeing 737-7H4 N778SW (c/n 27883) photographed at Denver International Airport. Southwest Airlines introduced a revised colour scheme in 2014.
Angelo Bufalino/AirTeamImages

In the topsy-turvy world of civil aviation, there are few things more predictable than this: the pioneering US low-cost carrier Southwest Airlines (SWA) will make money. It happened again in 2016, as the carrier earned a profit of $2.24 billion on recordhigh $20.5 billion revenues, buoyed by a strong fourth quarter during which the Dallas-based company rode robust holiday passenger numbers into the black.

Southwest achieved all this despite widespread anxiety in global aviation, an industry shaken by terrorist attacks, the uncertain impact of Brexit and wobbly national economies in many nations, including normally fast-growing China and the 46-year-old carrier’s home, the USA.

Southwest’s Chairman and Chief Executive Officer is 61-year-old Gary C Kelly, a 30- year veteran of the company who assumed the top job in 2008. He acknowledges civil aviation faces headwinds in the near-term, but insists that prudent management will continue to pay off for his company, which launched services in 1971 with three aircraft, serving only the state of Texas.

A number of Southwest’s aircraft wear distinctive special liveries, including 737- 7H4 N918WN (c/n 29843), pictured here at Las Vegas, which has a livery called Illinois One.
Adrian Jack/AirTeamImages

Southwest’s senior leaders stress the underlying financial fundamentals of Southwest Airlines, which helped create the low-cost carrier business model, are solid.

Last year Tammy Romo, Chief Financial Officer and Executive Vice President, said: “With $3.6 billion in cash and short-term investments, our cash flow from operations has been strong, and capital spending was at manageable levels.’’ (At the end of 2016, cash reserves dropped slightly to $3.4 billion.) Southwest also has a $1 billion available line of credit, she noted.

Continued Profitability

Southwest Airlines, which has LUV as its stock market ID on the New York Stock Exchange, has been in the black for 44 consecutive years and returned dividends to stockholders for 162 consecutive quarters. Lifted in part by low fuel prices, it reported a profit of $2.4 billion back in 2015 (up from $1.2 billion in 2014), on then record-high operating revenues of $119.6 billion, before recording modest gains in 2016. Although 2016 was a profitable year for major US carriers, for many profitability is novel. Not so, for Southwest.

SWA is the fourth largest US carrier. As measured by passenger traffic, it is the largest airline in the US domestic market and the world’s largest (transporting 145 million passengers in 2015). It ies the world’s largest fleet of all-Boeing jetliners – 724 Boeing 737s in several iterations. In peak travel season, it operates some 3,900 daily departures to 98 US cities and seven Latin American countries.

All told, 97% of Southwest’s passengers fly on domestic routes; its fledgling international service, launched in 2014, accounts for the remaining 3%. Kelly says that number will grow, chiefly in Mexico and sun-bleached Caribbean leisure travel markets – including Cuba, where Southwest began service late last year. In the near term, SWA’s small international footprint limits its exposure to global turbulence.

One of the first Southwest 737 MAX aircraft, N8705Q (c/n 42558), at Boeing’s Renton facility in January. Norwegian will be first to put the 737 MAX 8 into service, but with 200 737 MAX 8s on order, Southwest will be one of the major operators of the updated 737.
Joe Walker

In good times and bad, Southwest deliberately sets itself apart from other carriers. It is not a member of the International Air Transport Association. It charges no fees for changing flights. It features open seating. It has long resisted calls by stock analysts and others to charge lucrative fees for all checked luggage, instead allowing two free checked bags and building its customer-focused brand with humorous, high-profile ‘Bags Fly Free’ television adverts.

Although SWA’s fares have risen in recent years, its ticket prices are lower than those of all but bare-bones competitors such as Spirit Airlines and Frontier Airlines on many routes. It follows a shrewd strategy that positions Southwest as the traveller’s friend, attracts loyal repeat customers and generates steady revenues and profits. Southwest is an unusual example of ‘American exceptionalism’ in that it is exceptional even in America.

Southwest flies the world’s largest all-Boeing 737 fleet – 724 aircraft in several iterations, including 737- 8H4 N8643A (c/n 42524) pictured at Seattle- Tacoma.
Dipankar Bhakta/ AirTeamImages

As outlined by senior Southwest executives last summer in an investor day briefing and questions and answer session at the New York Stock Exchange, the airline said it plans to move forward with deliberate speed on a variety of fronts in 2017.

One Res

One of SWA’s most important and costly initiatives, dubbed One Res, is the modernisation of its outdated reservation system. “We’re estimating the capital spend on our reservation system will be about $500 million,” said Tammy Romo. “The corresponding benefits of our new system are significant, and we will be able to recoup our $500 million investments by 2020.’’ With initial stages of One Res rolled out in December 2016, Southwest has set a target date of May 9, 2017 for complete implementation.

For many travellers, technological upgrades to SWA’s outdated, overburdened reservation system can’t come soon enough. That was illustrated last July, when Southwest’s computers crashed, stranding tens of thousands of travellers and causing cancellation of 2,300 fights. The crisis, caused by a faulty data centre router, lasted from July 20 to 23. Smartphone videos of grounded flyers slumped in airport terminals, comforting squalling children, dolefully picking at tepid fast-food and queuing at customer help desks flooded social media – ever alert to moments of drama and trauma.

Business-travel specialist Joe Brancatelli cast a cold eye on the carrier. “Boy, this has been a lousy week for Southwest Airlines,” commented the New York-based Brancetelli, a sometimes-caustic critic of the airline industry. “A computer meltdown on Wednesday continues to mess up its flyers something awful. The airline was just 45% on-time Wednesday with 571 cancellations, a dreadful 14.4% of its schedule. Yesterday was even worse: just 35% on-time and 22.6% of its fight schedule. Today is terrible, too. As of 11:00, according to, it had cancelled more than 275 fights and there are already more than 700 delays. As usual, Southwest is closed-mouthed and tells passengers and journalists virtually nothing about its problems.”

Another colourful Southwest special is 737-7H4 N280WN (c/n 32533), seen at Fort Lauderdale Hollywood International, wearing its Missouri One livery.

It wasn’t closed-mouthed for long. Southwest spun into full crisis-control mode, apologising profusely and allowing stranded passengers to rebook at their original fares. Nevertheless, it was a big black eye for an airline that is usually praised for having one of the US airline industry’s best on-time records (85%) and unfailingly cheery, peppy customer service. One Res is designed to prevent a major computer crisis from happening again.

Arrival of the MAX

Many of Southwest’s technological and operational challenges have been exacerbated by rapid growth, especially in the six years since SWA bought rival AirTran Airways and expanded its fleet by 25% by incorporating AirTran’s aircraft. Gary Kelly says expansion will slow briefly this year to consolidate growth; retire older, slower 737-300 and 737-500 Classics; and allow employees with what he terms “change fatigue” to catch their breath.

Southwest has delayed delivery of 67 Boeing 737 MAX 8s to slow capital expenditure (capex), explains Romo. “The impact of our capex from the changes was to defer $1.9 billion of aircraft capex beyond 2020,” she said last July. The first of a total of 200 Boeing 737 MAX 8s Southwest has on order are expected to start arriving in July 2017.

That is two months after Norwegian Air is scheduled to take delivery of the very first 737 MAX. Southwest, which has a longstanding business relationship with Chicago’s Boeing, is the designated launch customer for the 737 MAX, a single-aisle jetliner that can fly 400 nautical miles (740km) farther than vintage 737s, offers greater fuel efficiencies and needs less-frequent maintenance.

Although the Norwegian low-cost carrier has stolen the march on SWA by taking delivery of the first 737 MAX before Southwest, Kelly insisted to Bloomberg News: “We’re the launch customer, regardless of when we take the first delivery.’’

Southwest’s Chief Operating Officer and Executive Vice President Mike Van de Ven adds: “We’re the ones that have done the service-ready operational validation for Boeing. We’re the ones working very closely with Boeing to make sure it’s operating as everyone intended.”

Underserved Markets

Even as Southwest has throttled back spending and the pace of fleet expansion, it continues to launch services to what it regards as underserved domestic and international markets. In 2016, Southwest began services at California’s Long Beach International Airport, strengthening its hand in the Los Angeles Basin, where it claims 30% of the USA’s second-largest market. Elsewhere in California, Southwest has added new fights at Oakland International Airport and Mineta San Jose International Airport. Andrew Watterson, Southwest’s Senior Vice President, Network and Revenue, notes:

“As GDP grows, it generates demand for air travel, and as air travel grows on your routes, it eventually gets to the point we need new frequency, you plot one in and it works. One of those is San Jose. San Jose to BWI [Baltimore-Washington International], unserved. Who would have known that the Silicon Valley was not connected to Washington, DC?’’ Launched late last year, Southwest’s daily non-stop fight connects the American high-tech capital of creative disruption to its tumultuous capital of political gridlock.

Like all American carriers of size, Southwest recently began flying from the US state of Florida to Cuba. Washington banned direct fights to Cuba in the 1960s. When last year then-President Barrack Obama gave the go-ahead to resume direct fights, Southwest launched services to Cuba’s premier airport, Havana’s Jose Marti International, and several provincial airports. SWA also flies from Fort Lauderdale, Florida, where it has 18% overall market share, to Havana twice daily, and operates a daily fight between Havana and Tampa, Florida, where it has 38% share.

SWA is one of eight US carriers approved to serve Cuba, so the Cuban market is fragmented. In any case, the resumption of aviation and travel ties between the two neighbouring nations may have more symbolic and emotional resonance than financial importance.

Australia’s CAPA Centre for Aviation notes potentially troublesome infrastructure at Cuban airports, including, “prolonged time for security screening [and] the lack of amenities such as kiosks and e-boarding”. The Sydney consultancy also warns: “Many of the secondary airports US airlines plan to serve are leisure destinations that cater to tourists from other global regions.”

The new administration of President Donald Trump is another wildcard, as Cuba is a flashpoint in American politics, especially among the conservative core of Trump’s supporters. Even so, Southwest wasted no time in attempting to get the new president’s support for its Latin America expansion plans. In January, Southwest asked the US Department of Transportation to grant the airline landing rights at Mexico City’s Benito Juarez International Airport, as part of Trump’s self-proclaimed ‘America First’ commercial and political agenda.

Domestic Expansion

Southwest is on former ground with ambitious expansion at airports and other facilities at home. In 2014, it finished extensive expansion at Dallas’s Love Field (the inspiration for the airline’s LUV stock market ID), where it claims 90% of passenger traffic. Also in 2014, Southwest opened a training and operational support building there housing its three-yearold network operations centre.

In 2015, Southwest opened an international concourse at Houston Hobby International. It’s building a new concourse at Fort Lauderdale International and modernising terminal 1 at Los Angeles International (LAX). The Los Angeles project, scheduled to be completed in the second quarter of 2018, is budgeted at $500 million, according to Van de Ven.

Southwest 737s on stand at Los Angeles International. The airline claims 30% of the Los Angeles Basin, the USA’s second-largest market, and is currently modernising its facilities at the airport in a project scheduled to be completed in the second quarter of 2018.
Simon Willson/AirTeamImages

Also under construction is a new office building at Dallas Love Field that Southwest calls Wings. The company expects to open the Wings building in the first quarter of 2018. Wings will eventually be home to 18 flight simulators, according to the airline.

While all this is unfolding on the ground, Southwest is upgrading its customer experience in the air, rolling out Heart, a programme that features a new logo, a fresh aircraft livery, a new interior aircraft design festooned with vivid colours, cabin crew uniforms designed in part by Southwest cabin crews, and seats made with reclaimed leather salvaged from cabin interior makeovers. It plans little imminent change for its in-flight entertainment system, which highlights free, live television.

Most Southwest passengers take shorthaul flights averaging two hours and two minutes to domestic destinations. Basic Wi-Fi connectivity and uninspiring snacks such as bagged pretzels and peanuts are fine with them, so long as flight schedules are timely and fares are reasonably priced. At times the cabin experience, though always friendly, evokes Southwest’s roots as a no-frills budget carrier.


Despite all SWA’s success, gimlet-eyed Wall Street aviation industry analysts are convinced that profitable, popular Southwest is leaving money on the table. The first change they’d like to see is jettisoning the ‘Bags Fly Free’ policy. In a 2014 interview with, Standard & Poor Global Market Intelligence analyst Jim Corridore described initiating checked-baggage fees for Southwest flights as a no-brainer, terming subsequent ancillary revenues “low-hanging fruit”.

Southwest management begs to differ. Loyal Southwest flyers don’t want to be squeezed by “bespoke” add-on fees, they say, and could lose trust in the airline that’s taken decades to build.

The company’s stance has at times led to acrid critiques by Wall Street insiders, eyes firmly fixed on the bottom line. In an earnings call with industry analysts in July 2016, things got personal between an outspoken analyst and CEO Gary Kelly. JPMorgan Securities analyst Jamie Baker, directing a barb at Kelly, declared: “The impression investors have is that your priorities at the moment might be somewhat out of order. The impression is that passengers come first, then labour unions, then shareholders.”

Kelly promptly defended the carrier’s business acumen and its corporate culture. “We want to protect our brand,’’ he said. “It’s a really good brand. We don’t want to begin to pull threads that could cause the whole thing to unravel. We’ll want to be careful about that.”

Inside the company, Southwest presents itself as one big, happy family, made up of all 53,000 employees. But that doesn’t always work for workers. Contentious contract negotiations this decade with pilots, flight attendants and mechanics dragged on for more than four years, sometimes spilling over into public view. In May 2016, fuming members of the Southwest Airlines Pilots’ Association were barred by the city of Chicago from renting space on a billboard at cityowned Midway Airport – a major SWA hub – to complain about their stagnant wages. The billboard message was to read: “Shareholder returns: $3.1 billion. Pilot raises: $0.’’ Pilots said they had not had a pay rise since 2011.

That changed late last year, when Southwest signed wage-boosting contracts with major employee groups, including pilots. Management maintains that prudent spending is needed to make Southwest’s business model work; low costs make low fares possible.

Such conflicts notwithstanding, Southwest distributed $586 million through its longstanding employee profit-sharing scheme for 2016. The 2016 payment averaged about $13,000 per employee, according to the company.

As it has grown from a quirky, entrepreneurial start-up into an established player, Southwest has become somewhat more conventional. SWA has raised fares but they remain competitive. It has squeezed 9-12% more seats into aircraft to accommodate high load factors (84% in 2016). It has introduced Business Select with upgraded seats and amenities, inaugurated a branded credit card and, since 2011, operated profit-spinning points programme Rapid Rewards.

Even so, Southwest remains proudly different from US legacy carriers and many newer low-cost carriers. Always a maverick, the Texas airline blazes its own trait.