Southwest's Secret Is Out

September 26, 1994|By Suzanne Wooton | Suzanne Wooton,Sun Staff Writer

For a long time, Southwest Airlines stood in a class by itself, a low cost, no-frills airline that lured passengers with rock-bottom fares, yet made money while other major carriers suffered huge losses.

But the big guys have been taking notes. And the darling of the airline industry -- whose ticker symbol on Wall Street is LUV -- is now getting real competition as major carriers cut their costs and offer discount fares.

"They don't have the monopoly on low cost anymore," said Jon Ash, director of Global Aviation Associates in Washington. "Now we're seeing some restructuring that will allow the big carriers to survive and put a lot of pressure on low-cost carriers."

And investors, apparently afraid that the growing competition will erode Southwest's profits, have reacted strongly. Since the first of the year, Southwest's stock has dropped 38 percent. It reached a high of $39 on Feb. 3 and closed Friday at $23.50. "That's a big, big drop even in a typically volatile airline market," Mr. Ash said.

Reacting to lower-than-expected August traffic figures, several analysts recently cut their third-quarter earnings estimates for Southwest by 3 cents.

Today, Southwest is no longer the nation's only profitable airline. After four straight years of devastating losses, several major airlines are beginning to make money again.

But while some are barely eking out profits, Southwest posted $154.3 million in earnings in 1993, up from $97.4 million the previous year.

Still, the environment is far different from a year ago when Southwest's zany Chairman Herb Kelleher breezed into Baltimore to launch the carrier's first East Coast service.

From the time it set up shop at Baltimore-Washington International Airport, competition mounted. USAir added flights in the markets Southwest serves and matched its prices. And it initiated a quick turnaround program -- patterned on Southwest's own -- to cut costs and boost revenues by keeping planes in the air more.

It was entirely predictable that carriers, losing billions, would ultimately emulate the only one making money. While imitation may be the sincerest form of flattery, Southwest could have done without it.

"It's welcome to the real world, Southwest," said Alex C. Hart, airline analyst for Ferris, Baker Watts in Baltimore. "They've got a number of somebody elses playing their game now."

On Oct. 1, United will unveil its low-cost shuttle service in the middle of Southwest's lucrative California market. Dallas-based Southwest currently controls about half the intra-California market. In response to United, it recently added another 15 flights a day in California, bringing its total daily departures there to 519.

Southwest says the other carriers, now offering low fares, are still stuck with higher costs. Indeed, Southwest spends roughly 7.5 cents to fly a passenger one mile while other major airlines average 9 cents to 10 cents.

While Southwest's stock price has plummeted, many other major airlines have seen their stock prices hold their ground or improve, according to Mr. Hart. "The market's going to reward the guy that's turned it around," he explained.

With low fares dominating the industry, Southwest may be losing passengers to other airlines. So far this year, most of the major airlines are doing a better job of filling up their planes, Mr. Hart said.

To attract new passengers, "Southwest must continue to search out new markets where others don't have a good foothold with low fares," Mr. Hart said.

At the company annual meeting in May, Mr. Kelleher said that any customers Southwest loses in a given market will be offset by new passengers in areas where it's adding service. At Baltimore, it has more than doubled its number of daily flights from eight to 20, and added several cities to its schedule.

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