Southwest Focuses on Fundamentals

CEO Gary Kelly says maintaining credibility is his primary concern.


The airline industry weathered plenty of turbulence last year, owing to soaring fuel prices in the spring and summer that compelled many carriers to raise prices and implement unpopular and even controversial surcharges, such as fees for luggage and inflight meals. Even though oil prices plunged in mid-summer, the industry suffered a sharp decline in passenger traffic, as the global financial crisis prompted consumers and corporations to curtail their travel spending. Through it all Southwest Airlines Co. management did an impressive job of staying on course and delivering a smooth ride; for that, investors name Southwest the Most Shareholder-Friendly Company in the Airlines sector.

“Their focus on their business model is the strongest driver for their shareholder-friendliness,” asserts one portfolio manager. “They have a clear strategy that they’ve maintained for decades, yet they’re addressing the current economic situation.”

Gary Kelly, the Dallas-based airline’s chief executive officer, says maintaining credibility is his primary concern. “Any time that circumstances are difficult, it puts that much more stress on providing the right information,” he says. “We work hard to establish a baseline understanding of Southwest Airlines’ vision and who we are, and we do the best we can to set reasonable expectations.”

Southwest not only resisted the industry trend to pile on surcharges, but also mounted a hugely successful “Bags Fly Free!” advertising campaign last fall to woo passengers away from competitors. The airline’s total revenues jumped 11.8 percent last year, to $11.0 billion, but higher costs caused its net income to plummet 72.4 percent, to $178 million. Even so, the company managed to rack up a 36th consecutive year of profitability.

In January the airline announced several cost-cutting initiatives designed to increase profitability, including reducing the number of new planes ordered from 22 to ten and eliminating 196 flights. Southwest also added an important performance benchmark, passenger revenue per available seat mile, to its monthly reporting, becoming only the second airline to do so. (Continental Airlines was the first.) Year-over-year per-seat revenue rose 6 percent in January, the airline reported.

“Southwest does a uniquely good job of running its business,” says one shareholder.

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