The Fountain of Youth: Southwest is profiting like its younger self again. But for how long?
Three years into the new decade, America’s most successful airline of all time was no longer—by its own lofty standards, anyway—so successful. In 2012, for the second straight year, Southwest had underperformed the U.S. industry average with mid-single-digit operating margins, conjuring uncomfortable worries that its future might never be as bright as its past. Then things started to improve, and by 2015, Southwest was producing profits that even its old self would have envied.
The good old days are back. But how long will they stay?
Conditions were indeed getting uncomfortable for Southwest by 2012. Once a manageable problem thanks to the industry’s best hedge book, expensive fuel was now a big problem. Non-fuel costs were rising too. So was a crop of young ultra-LCCs with more flexible labor contracts. With a 2010 takeover of AirTran came unwanted B717s and a losing battle against Delta in Atlanta. The AirTran integration work, meanwhile, was progressing at a snail’s pace, leaving even codesharing synergies untapped. The cost gap with legacy carriers was narrowing further as American joined the ranks of carriers using bankruptcy to restructure. Southwest’s information technology was becoming woefully out of date—that was the reason it couldn’t codeshare not only with its own subsidiary AirTran but with Volaris and WestJet, which lost patience and found other partners. It was also the reason it couldn’t, for years, implement frequent flier program changes that promised hundreds of millions of dollars in benefits.
In the meantime, Southwest let JetBlue outbid it, by a few million dollars, for newly available slots at New York LaGuardia and Washington Reagan, which could have similarly yielded the kind of big revenue it needed to offset its cost issues—no IT constraints to blame for that. And it rejected tactics that were working wonders at just about every other airline, most importantly charging bag fees. Southwest itself now looked to be the real “legacy carrier,” slow to adapt and resistant to change.
Just as importantly, Southwest was still an exclusively domestic carrier at a time when the promised land for U.S. airlines was overseas. What were then the Big Four (later the Big Three) were adding routes intercontinentally. JetBlue and Spirit were harvesting profits in the Caribbean. Alaska was striking gold in Hawaii. And Southwest—this too partly because of technical limitations—was confined to a domestic economy still struggling with post-recession growth, lacking slots at key northeastern airports and unable to expand from its home city Dallas due to an old protectionist law.
But even as its earnings sputtered, Southwest was planting important seeds for future success. It finally did revamp its Rapid Rewards program, bought larger B737s, chased corporate fliers by selling through global distribution systems and downsized Atlanta. When American had to…
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