Taking Stock

In the over 30-year period since deregulation, the existence of the air carrier industry has been characterized by a cyclical “feast or famine” roller coaster ride. Short periods of prosperity have always been followed by periods of stress and financial loss. Each one of these cycles has been precipitated by overriding economic and political conditions, punctuated by high fuel costs, all of which have been largely beyond the control of airline management.

The business model that existed during the period of CAB control beginning in the 1930s, the model the legacy airlines operated under when deregulation began, has been tested and has now been found to be unworkable in the new competitive environment of deregulation. This was not true during the early years of deregula­tion, when the incumbent airlines’ economies of scale (size, experience, computer reservation
systems, gate and slot ownership, and control of the hub and spoke system) did, in fact, inhibit the success of new entrant airlines.

The predominance of the legacy airlines dur­ing the years immediately following deregulation turned out to be a transitional phase in the pro­gression of the industry away from government control. But the challenges of a never-ending stream of new entrant airlines continued to apply pressure to the business model of these airlines, which were still constrained by high labor costs, high fixed costs, low fares, and ever-increasing debt incurred in an effort to continue to exist.

Southwest Airlines brought to the contest a new business model, one which during the more recent period of commercial aviation experience has provided an example to new entrant airlines, and has been instructive to the legacy carriers as well. The “Southwest Effect,” as its way of doing business and culture have been termed, has come to define how an airline can be run profitably in the deregulated world.11

Although Southwest is 82 percent unionized, its employees do not belong to the same unions as the legacy airlines, whose labor contracts are the product of adversarial negotiations of long standing. Southwest’s employee relations are

more personal and informal, and have produced a loyal workforce that views the airline’s success as its own. But perhaps most important is the fact that the various classes and crafts of workers are permitted under their labor contracts to perform cross-functional tasks. One of the sacred cows of railroad style union contracts is that employees are prohibited from performing work that belongs by contract to others’ crafts. A mechanic may not change a light bulb. A clerk may not use a broom. At Southwest, with the use of an incentivized pay structure, everyone pitches in to get the job

done in the quickest and most efficient way pos­sible. This results in much higher productivity. As an example, in 2000 the total labor expense at Southwest, measured per available seat mile, was 25 percent lower than at American and 58 percent lower than at USAir. This business model has produced the lowest operating expense in the industry, calculated on cost per available seat mile, 12.96 cents, compared with Delta Airlines’ 14.76 cents. But the gap is beginning to narrow.

The Southwest model has always used only one type of aircraft, the Boeing 737, which has

resulted in reduced maintenance costs and train­ing costs of pilots and mechanics. Southwest flies into secondary airports rather than primary air­ports where possible, which lowers airport land­ing fees and costs and, along with a non-standard general boarding procedure, results in a compara­tively low turn-around time. It has avoided hub and spoke costs and delays by employing a point – to-point networking system. This allows much higher equipment utilization.

The “no frills” airline group that has emulated many of the practices modeled by Southwest has come to be known as the “low-cost carriers” (LCCs). There have been many new entrants in this category into the domestic air carrier com­munity since deregulation in 1978, but at least 20 have failed, including People Express, ATA Air­lines, and MetroJet. Among the survivors of this group are AirTran, Allegiant Air, Frontier, Jet­Blue Airways, Spirit Airlines, and Virgin Amer­ica. Some of these airlines fly only domestically, and some both domestically and internationally.

Primary among this group is JetBlue, which was founded by a nucleus of former Southwest Airlines employees. While following the basic low – cost model of Southwest, JetBlue offered some dis­tinguishing amenities such as television monitors at every seat and satellite radio. It was kick-started in 1999 when the FA A awarded it 75 slots at its home base at JFK, and it began service in February 2000. As mentioned above, JetBlue was one of the few airlines that recorded a profit during 2001. JetBlue has not been as consistently profitable as Southwest, but it does maintain a certain cache among flyers and the airline community. It has also received high passenger satisfaction awards.

The other notable among the FCCs was AirTran, which operated Boeing 717 and 737 aircraft, headquartered in Orlando, Florida. In March 2012 the government approved the pur­chase of AirTran by Southwest and the merger process is under way. Since Southwest prides itself on operating only the Boeing 737, one of the initial problems with the merger was that AirTran flew both the Boeing 737 and the 717.

Fatest developments indicate that all of the AirTran 717s will be leased to Delta Airlines. Thus Southwest is intent on keeping its opera­tions limited to the Boeing 737.