Network Solutions: Blessed by low costs and hedges in decades past, Southwest’s key weapon now? Its network

March 24 2014This morning in Albany, N.Y., a B737-700 will begin its workday at 6 a.m. as Southwest Airlines flight 2582 to Baltimore. From there, it will fly to Cleveland and then—after a 25-minute rest—to Chicago Midway and then to Des Moines, Iowa, and then to Las Vegas. From Las Vegas it will make its second visit of the day to Chicago—one of 10 daily Southwest flights from Las Vegas to Chicago, connecting the airline’s two busiest airports—before ending the night at Greenville-Spartanburg, S.C., 16 hours and seven flights after the day began.

Of course, no one will be aboard all seven flights. Most passengers will be aboard just one. But along the way, this aircraft will provide nonstop flights in markets where no other nonstops exist. And because 600 other B737s will simultaneously work through their own “flight lines” of six, seven or eight flights, also providing the only nonstop service in markets large, small and in between—think St. Louis-Kansas City, four daily flights each way, and a hundred others like it—this B737 and its hardworking colleagues will provide a network of countless connecting opportunities that any “network airline” could scarcely imagine.

Many people equate Southwest with simplicity. And maybe that’s true of its onboard product or even, to some degree, of its fleet. But Southwest’s network? On the contrary, it’s the most complex airline network in the world, complete with a dozen hubs to rival those of any legacy airline, plus dozens of other airports where passengers can also connect—connections possible thanks to an extraordinary density of flights. Southwest operates more than 3,500 flights a day—concentrated at fewer than 100 airports, according to Diio Mi—which, just by virtue of their ubiquity, happen to connect well to one another. Why is this so important? Because it’s the No. 1 force driving Southwest’s current profits—profits sustained despite a shrinking cost advantage largely beyond its control and despite contrarian pricing and distribution decisions within its control.

In the 1990s, as Southwest grew beyond its namesake region of the U.S., its massive cost advantage enabled it to crush bloated legacy competitors everywhere. Revenue was an afterthought when it showed up in places like Baltimore, where the US Airways hub was doomed because Southwest could profit even with $19 fares to places like Cleveland. In the 2000s, bankrupt legacy carriers restructured and closed much of the non-fuel cost gap against Southwest. But Southwest had used its billions of dollars of 1990s profits to purchase billions…

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