March 2008 - According to Southwest Airlines executives, the iconic carrier has been focused on the business traveler since it first took to the skies in 1971. But for much of Corporate America, it took a while for the "low-cost carrier" to register on the radar. As it was amassing accolades, spawning imitators the world over and building a profitable streak unprecedented in the airline industry, Southwest often was neglected by business travel purchasers and managers: It didn't fly to enough relevant markets. Its no-frills approach turned off some business travelers. It didn't participate in the distribution channels favored by the travel management community. Its careful control over the placement of its fares and inventory didn't allow for easy comparison shopping between airlines. Perhaps most importantly in the eyes of procurement professionals, it didn't negotiate.
Some of those factors slowly have changed over the years. By the beginning of the current decade, Southwest had spread its wings from coast to coast, solidified its reputation as a foil to the oft-maligned legacy airlines and even launched a dedicated corporate travel Web portal. But the carrier's efforts to evolve into a viable business travel supplier--and grow revenues through higher-priced ticket sales--clearly took flight in late 2007.
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Company: Southwest Airlines Co. |
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Headquarters:
Dallas |
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Network:
64 U.S. cities
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Largest airports, by daily departures:
Las Vegas, Chicago Midway, Phoenix, Baltimore-Washington, Oakland
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Daily flights:
3,300
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Fleet:
520 Boeing 737 aircraft (as of Dec. 31, 2007)
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Employees:
34,378 (as of Dec. 31, 2007)
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2007 financial performance:
$645 million net profit, 35th consecutive year of profitability |
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2007 revenue passengers:
88.7 million
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2007 passenger revenue:
$9.5 billion |
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2007 ontime performance:
First among major U.S. carriers
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Alliance participation:
None; shares codes with ATA Airlines
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The carrier designed a fare category with the business traveler in mind and launched a marketing campaign to match; delved deeper into a multi-channel distribution strategy; expanded its corporate sales force; and conveyed its willingness to cut deals with corporate clients. Now, procurement professionals can attempt to secure financial compensation for shifting share to Southwest and, perhaps for the first time, formally consider the airline as a preferred supplier.
Will the new strategy work? Southwest's impeccable track record in the volatile commercial airline sector will prompt many to give it the benefit of the doubt. Should it succeed, the marketplace impact of one of the largest, most successful airlines doing battle against traditional business suppliers for corporate travel dollars could be enormous.
The early, limited feedback from the travel management community, however, has been less than spectacular. Some question the wisdom behind messing with a tried-and-true model, but these are early days for Southwest's renewed focus on the business market and many are watching to see how this story unfolds.
A Texas Three-Step to a Coast-to-Coast Leader
Southwest's maturation to this point is the stuff of legend. It began 37 years ago by serving Dallas, Houston and San Antonio; by the middle of this decade it had become one of the domestic market's largest carriers. Along the way, it built a reputation for being an industry maverick simply by focusing on efficiency and shunning the practices of its competitors. It stayed away from congested airports, focused on a single fleet type, offered no bells or whistles, maintained relatively harmonious labor relations and didn't do anything to unnecessarily complicate its operations.
That, according to the airline, has allowed it to maintain low fares--often, but not always, the lowest on a given route. In 1993, a report prepared
for the U.S. Department of Transportation coined the term "Southwest Effect" to refer to price reductions and traffic increases observed in markets where Southwest, or a similar competitor, began service.
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| 1971 |
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Launches service between Houston, Dallas and San Antonio
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| 1973 |
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Achieves first profitable year
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| 1979 |
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Expands service outside of Texas
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| 1985 |
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Begins service at Chicago Midway |
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| 1989 |
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Becomes a "major" U.S. carrier by exceeding $1 billion in annual revenue |
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| 1993 |
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Begins service on the East Coast at Baltimore-Washington Intl |
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| 1996 |
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Becomes largest U.S. airline to offer Internet purchasing |
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| 1997 |
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Expands network to 50 cities |
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| 1998 |
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Experiments with transcontinental flights |
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| 2000 |
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Launches Swabiz online portal for corporate customers |
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| 2003 |
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Tops the domestic originating passenger rankings for the first time; becomes last major U.S. carrier to stop paying commissions to travel agencies for domestic ticket sales |
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| 2004 |
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Expands network to 60 cities by beginning service in Philadelphia; acquires certain assets from bankrupt ATA Airlines |
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| 2005 |
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Begins sharing codes with ATA Airlines |
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| 2006 |
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Begins service at Washington Dulles, re-enters Denver market |
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| 2007 |
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Launches new Business Select fare category; expands corp. sales force and number of distribution channels; publicly conveys plans to negotiate discounts with corp. clients |
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At the same time, Southwest has performed admirably in DOT's customer service rankings. For example, between September 1987 (when the government started to track data) and December 2007 (the latest data available at press time), Southwest recorded ontime performance of 82.1 percent--best in the industry and nearly three percentage points better than any competitor measured over the 20-year time period.
How did this no-frills airline--with an obvious appeal to price-conscious leisure travelers--attract the briefcase-toting crowd? According to longtime industry observer Terry Trippler: frequency. "They don't come into a market with one flight. They come in with two or three or 10 flights to several destinations," Trippler explained. That, he said, has prompted some in Texas to describe Southwest as "their corporate jet."
Kevin Krone, Southwest vice president of marketing, sales and distribution, described that approach as "core Southwest playbook." Frequency helps the airline be efficient, he said, but also gives customers "lots of options and a lot of capacity to satisfy demand."
Others pointed to the airline's simplicity and efficiency, as well as its steady expansion to an increasing number of airports. "They have grown from a niche carrier in a lot of client programs to definitely more of a regular option, because they are covering so many more markets," said Bob Brindley, vice president of BCD Travel's Advito consultancy.
Of course, Southwest's low fares are not lost on price-conscious business travelers, either. "They hold a significant amount of pricing power and have had a significant impact on pricing in most markets," said Brett Zabel, CWT Solutions Group global project manager. "For the business traveler, it has generally driven down average fares and has made it easier to do a lot of segments in those markets without spending a lot of money."
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"They have grown from a niche carrier in a lot of client programs to definitely more of a regular option."
— Bob Brindley, vice president of BCD Travel's Advito consultancy
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Tom Gleason, CEO of HRG North America--and a longtime executive at American Airlines, where he competed against Southwest every day--said smaller companies particularly gravitated toward Southwest when they were unable to secure favorable deals with the legacy airlines.
"It is the one carrier that never left its comfort zone," Gleason said.
But this decade, Southwest has shown greater willingness to adapt. In 2000, it launched the Swabiz corporate portal, allowing corporate customers to book directly with the carrier and collect data on booking activity. Today, the airline claims that two-thirds of
Fortune 500 companies are enrollees.
Additionally, Southwest began operations in a growing number of primary airports in business markets (Denver and Philadelphia, for example); initiated its first cross-selling pact with another airline when it began sharing codes with ATA Airlines (a company Southwest helped bail from bankruptcy protection); and altered its boarding process (to mixed reviews). It also has added a top tier to its loyalty program and began participating in additional global distribution systems--changes that, in some ways, make Southwest resemble its traditional competitors.
Despite these business model tweaks, Southwest has remained profitable. During a "significantly more challenging year" than CFO Laura Wright anticipated, the airline in 2007 raised passenger revenue 8 percent, to $9.5 billion, carried nearly 6 percent more customers and grew total traffic by almost 7 percent. Its net income jumped by almost $150 million from 2006, to $645 million.
Aggressively B2B
Southwest late last year embarked on a new campaign to court higher-paying business travelers and the managed travel market. "When we analyzed where we were and how the Southwest product was evolving, a lot of people were thinking about us one-dimensionally," Krone said. "That is just not accurate."
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"A lot of people were thinking about us one-dimensionally. That is just not accurate."
— Kevin Krone, Southwest vice president of marketing, sales and distribution
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Holly Hegeman, founder and editor of industry financial weekly
Plane Business Banter, said the strategy shift mostly stems from a need to increase revenues and appease investors. "The stock price has been fairly moribund for the past several years," according to Hegeman. "While Southwest continues to make profits, it is not making the kind of returns it had been previously. They are pressured to increase revenues because they are doing about as good as they can on the cost side."
Indeed, the B2B focus coincides with concerns over a softening economy and sky-high oil prices--just as the positive effects of Southwest's legendary fuel hedging begin to wane.
Exactly how does the airline intend to raise revenues? In November 2007, it unveiled Business Select fares, which are refundable fares offered, on average, between $10 and $30 higher than the highest pre-existing fares. They guarantee customers will be among the first to board--seen as a must-have perk within the carrier's open seating environment--and will provide bonus loyalty program credits and a free inflight cocktail.
That differentiation, Krone said, is "truly a value-add, which mostly justifies in everyone's mind the need to pay for it. It is not a veiled attempt to just raise fares and call it a different name." Between their Nov. 8, 2007 introduction and Dec. 31, 2007, the new business fares generated $7 million in incremental revenue, according to CFO Wright. That introduction followed Southwest's publicly discussed plans to build deeper relationships with corporations and a tripling of its corporate sale force, to 15 people.
"In the past, if corporations said, 'We need a discount in order for Southwest Airlines to be part of our preferred airline program,' we closed that door because we were not willing to investigate what that would look like for them," said Rob Brown, Southwest director of corporate sales and distribution. "Moving forward, we want to walk through that door with them and better understand what that will look like."
Brown said all ideas are on the table, including citypair-specific discounts, market-specific ones and systemwide arrangements. Such deals could be complemented by top-tier loyalty program membership for travelers, which would provide them with all-important priority boarding.
What does Southwest want in return? "An opportunity to grow the relationship that we have," Brown said. "We'll look at everything, but flight segments and how often they are flying Southwest--those are the things that are most important to us."
Starting Simple
In the infancy of its corporate discounting strategy, Southwest has not necessarily wowed travel buyers.
"You're going to see discounts probably south of 10 percent," said Advito's Brindley, noting that some bids in which his team has been involved included both a systemwide offer and a focus on certain key markets. "Carrier discount programs usually start simple. That is where the mainline carriers started. That is where the international carriers started. It wouldn't surprise me that they would start out by putting a simple volume deal in place."
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Southwest is "asking for market share, and their expectations are fairly high compared with competitors; not excessively high, but significantly high."
— Brett Zabel, CWT Solutions Group global project manager
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"The depth of discounts that they are offering is not significant yet," added CWT's Zabel, who has generally seen systemwide discounts in exchange for either volume or marketshare commitments. "They are asking for market share, and their expectations are fairly high compared with competitors; not excessively high, but significantly high. They are being conservative in the start so they can assess how much they are potentially diluting their revenues versus how much additional traffic they would gain by having corporate discounts in place."
Meanwhile, sources suggested Southwest may be encouraging (or perhaps insisting) that clients use the Swabiz corporate Web portal as a prerequisite for negotiated discounts. Though Swabiz bookings do not incur transaction fees, many buyers dislike the direct channel because it eliminates comparison shopping and complicates such travel management processes as data aggregation and traveler tracking.
Mandating Swabiz "would be a show stopper," according to one travel procurement professional whose company is located in a key Southwest market.
Southwest's Brown acknowledged that "we'll look at the most economically beneficial channel for both us and the customer." Direct bookings through an airline's Web site generate less cost than reservations via such third-party systems as GDSs. "But a lot of time we'll see what channel works best for their travel policy, and we'll try to get that incorporated," Brown said. He insisted that Swabiz is not a prerequisite for a negotiated deal.
Overcoming that perception may be one challenge. Convincing customers that its Business Select fares provide enough value for the added cost and that its corporate discounts are competitive versus the other big guys are others.
"The savings opportunities are very small," said Mitch Cwanger, air practice leader for American Express Advisory Services. "In those markets where Southwest has sufficient frequency to get into a corporate managed program, the fares clients are paying on contracted airlines are already at very low price points."
As such, many clients may not want to risk defaulting on commitments to Southwest's competitors, which "can take them to the higher-priced destinations that Southwest cannot," including overseas cities, Cwanger added.
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There is "a big danger" of introducing complexity "any time that you take something that has worked pretty darn successfully for 36 years and tinker with
the message."
— Plane Business Banter founder and editor Holly Hegeman
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In the bigger picture, all these new tactics leave some observers wondering if Southwest has strayed too far from its roots. "Any time you take something that has worked pretty darn successfully for 36 years and tinker with the message of low fares and simplicity," said Plane Business Banter's Hegeman, there is "a big danger" of introducing complexity.
For example, Southwest in 2007 began listing fares and inventory in sibling GDSs Galileo and Worldspan (in addition to Sabre) as a means to distribute its product more widely throughout the business travel community. The catch is that the travel agencies using those systems are being asked to pay $1.25 per segment to subsidize the fees that the GDSs charge the airline. Agencies could, in turn, pass that cost to their customers. "We have people who are literally willing to pay to get Southwest," Krone said. "It is important to their business and their efficiency, and we were able to structure a deal with Galileo that made us available to them, at their request, at a very modest cost."
Southwest executives said volumes through the Galileo channel have been building, despite some travel agencies refusing to pay the $1.25 and finding other ways to book Southwest tickets. "It is early on, and I understand the impact of change, but I think things will smooth out in that regard," Krone said.
From a corporate relationship standpoint, Advito's Brindley suggested customers would be patient and allow Southwest to work out any kinks in its discounting strategy. "Southwest is trying to learn that part of the business; they are doing something they have never done before," Brindley said. "They are viewed as one of a group of low-cost carriers that keeps the mainline carriers honest, so there is a natural affinity from a procurement perspective for the low-cost carriers."
Others are not so sure. "I'm not totally convinced that Southwest understands the corporate business traveler or that they have changed their processes to better work with managed travel programs," said one Fortune 500 travel manager. "Time will tell."
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2000 |
$85.87 |
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2001 |
$83.46 |
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2002 |
$84.72 |
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2003 |
$87.42 |
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2004 |
$88.57 |
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2005 |
$97.83 |
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2006 |
$104.40 |
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2007 |
$106.60 |
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Source: Southwest Airlines financial reports
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To the Internet and Beyond
Make no mistake, Southwest is not in any imminent danger of losing its powerhouse status in the industry. Compared with the mainline carriers, it is reliable, well-respected and, of course, consistently profitable. And it won't remain stationary as the industry changes around it.
Coming this year, Southwest, like other airlines, will begin testing inflight Internet connectivity, and Krone said more enhancements are on the way. It will adjust its schedule by cutting dozens of flights in some markets while adding service in major business centers like Denver. It also will participate in the potential consolidation of the industry, possibly by picking up assets as the mainline carriers merge with one another.
"There is no lack of demand for more Southwest service," CEO Gary Kelly recently told analysts. "We are primed to look at whatever opportunities become available in 2008. It is going to be a wild year. The industry is in terrible shape, and we're in great shape."
The Boyd Group Inc., an aviation consulting firm, said Southwest is positioning itself "as an airline perfect for business travelers," while also posing a serious threat to its rivals. "Think of Southwest as a bear that just came out of hibernation," Boyd wrote in a January message on its Web site. "It's hungry, cranky and in a very bad competitive mood--except it has great customer service."
