Forever Young: With a selective embrace of change and some good luck, Southwest re-lives the good old days

Many airlines, like many people, become more resistant to change as they age. Take Southwest, now in its 40s. Many of its policies and practices are no different now from when it was a high-flying youngster: It still doesn’t charge for bags, still doesn’t charge for ticket changes, still doesn’t offer assigned seating, still doesn’t fly anything but B737s, still doesn’t have a premium class, still doesn’t sell through online travel agencies and still doesn’t interline or codeshare with other airlines.

But even as a new generation of whippersnappers grab the spotlight with their ultra-low costs and ultra-high profit margins, Southwest is hardly just sitting around at the roadside bar with Bruce Springsteen, trying to recapture its glory days. Instead, it’s as profitable today as it ever was, and many times larger too, amassing more than $1b in net profits on almost $10b in revenue during just the first six months of this year. Its operating margin during that time: a monstrous 20%. Only three U.S. carriers did better: Alaska, which is a lot smaller than Southwest, and Allegiant and Spirit, which are even smaller still. Fans in the many baseball markets Southwest serves might call the carrier the Bartolo Colón of the airline industry: older than 40 but still a big winner.

How so?

Thanks somewhat to luck. Aside from Allegiant, Southwest is America’s least international mainline carrier. In 2015, that’s a good thing. More than 97% of its available seat miles (according to Diio Mi data) are deployed in the booming U.S. domestic market, where there’s no worry about foreign exchange volatility—or foreign airline competition, for that matter. Revenue trends, Southwest said as recently as Sept. 18, remain strong.

Cheap fuel, of course, is another stroke of extremely good fortune—more so for Southwest, arguably, than for most of its rivals. Why? Because without the big revenue premiums network giants can command, Southwest still depends on unit-cost advantages—advantages that are harder to maintain when its highly paid workforce and aging fleet aren’t growing. For the past several years, high fuel costs limited Southwest’s growth opportunities and thus swelled its non-fuel costs (because it couldn’t, for example, keep average labor costs in check by hiring many new employees at the bottom of the wage scale). But its dominant domestic network came to the rescue on the revenue side. Well now, along comes cheap fuel to suddenly make expansion more attractive. Sure enough, Southwest is pressing on the accelerator, growing ASMs a whopping 12% y/y this quarter and enjoying all…

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