Southwest Airlines Company

founded: 1971

Contact Information:

headquarters: 2702 love field dr.dallas, tx 75235-1611 phone: (214)792-4000 fax: (214)792-5015 toll free: (800)435-9792 url: http://www.southwest.com

OVERVIEW

Southwest Airlines Co. is the United States' only major carrier that provides short haul, high frequency, point-to-point low fare service. Southwest was established in 1971 with three Boeing 737 aircraft serving three Texas cities: Dallas, Houston, and San Antonio. The fledgling carrier's business then took off, with Southwest becoming the fourth largest domestic airline. Today, Southwest flies 57 million passengers a year to 57 cities all over the Southwest and beyond, on over 2,700 flights a day. Customers can rest assured of flying the friendliest skies because Southwest has one of best overall productivity, service, and safety records in the industry. The airline maintains the lowest operating cost structure of any airline as well as economical fares.

Fiscal year 2001 marked Southwest's 29th consecutive year of profitability. Fortune magazine has consistently rated Southwest as one of the top ten places to work and one of the most admired companies and airlines in the world. Southwest also earned top ranking in the National Aviation Quality Rating study, conducted annually at the W. Frank Barton School of Business at Wichita State University and the University of Nebraska's Omaha Aviation Institute.

Three decades ago, Southwest Airlines reinvented air travel with its no-reserved-seats, no-frills, low-cost approach and groundbreaking, innovative management style. The airline, once viewed as a maverick, is now seen as a model in an industry struggling for survival since the terrorist attacks of September 11, 2001. The airlines stock exchange symbol is LUV, chosen to represent their home at Dallas Love field as well as the theme of their employee and customer relationships.

COMPANY FINANCES

Southwest Airlines announced fourth quarter earnings and its 29th consecutive year of profitability for year-end 2001. It was also the airline's ninth consecutive year of increased profits. Sales for the year totaled $5.5 billion, slightly down from year 2000 sales of $5.6 billion. The airline had an annual net income of $511.1 million compared to $625.2 million in 2000. Net income per diluted share was $.63 in 2001, down from $.79 per diluted share the previous year. In a 52-week period, the airline's stock ranged from a low of $11.25 to a high of $22.00. Accordingly, Southwest's employees earned $214.6 million in contributions to profit sharing and savings plans. The company's 2001 net income included a special pre-tax gain of $235 million from a federal grant received following the Air Transportation Safety and System Stabilization Act and special pre-tax charges of $48 million in the wake of the terrorist attacks on September 11, 2001.

Southwest Airlines' net income for fourth quarter 2001 was $63.5 million, down 58.9 percent from fourth quarter 2000 earnings of 154.7 million. Net income per diluted share was $.08 for fourth quarter 2001, compared to $.19 for the same period a year earlier. The company again benefited from a special pre-tax gain of $67 million from the federal grant, and the company's board of directors amended the profit-sharing plan to take that amount into consideration, increasing profit-sharing expense by $28 million. James F. Parker, vice chairman and CEO remarked, "We are grateful that the company's financial position has been stabilized. Our liquidity remains strong and our revenue trends improved in the fourth quarter."

ANALYSTS' OPINIONS

In 2001 some analysts believed Southwest would be the only airline to make a profit for the year as a whole due to the events that rocked the airline industry since events of September 11. In October 2001, its market capitalization rose to $11 billion, topping the combined equity valuations of American Airlines, United Airlines, Delta, Continental, Northwest Airlines and US Airways. As the strongest carrier, both financially and operationally, Lehman Brothers anticipated a strong performance for Southwest in 2002. They believed that Southwest would benefit from the weak environment by further strengthening its employee culture and would experience growth opportunities from other airlines' capacity reductions. Analysts at Merrill Lynch believed that Southwest's ability to report a profit in a weak environment was evidence of a strong business model. Its operating costs were less than predicted; and while capacity cuts at other major airlines were still occurring, Southwest's market share was already showing improvement. In December 2001, it ranked fourth next to the other major carriers.

HISTORY

Thirty years ago, a simple idea took flight: to create a new kind of airline; to get passengers to their destinations when they want to get there, on time, at the lowest price and making sure they have a good time in the process. A group of Texas investors including Rollin King, Lamar Muse, and Herb Kelleher pooled $560,000 to form the Air Southwest Company to serve commuters between three Texas cities: Dallas, Houston and San Antonio. Although the Texas Aeronautics Commission (TAC), the state regulatory body, granted the company permission to fly in February 1968, three competing airlines filed suit to keep the company grounded. Kelleher, an attorney whose stake in the company was a mere $20,000, took the case all the way to the Supreme Court, which ruled in favor of Air Southwest in December 1970. Six months later, after numerous legal battles, a name change to Southwest Airlines, and going public with its stock, the airline kicked off operations on June 18, 1971.

With President Lamar Muse at the helm, the airlines offered daily round-trip flights between Dallas and San Antonio and 12 daily round-trip flights between Dallas and Houston. A one-way ticket cost $20.00. Foregoing traditional frills, flight attendants wore go-go boots and hot pants and served "love potions" and "bites" (drinks and peanuts) to primarily business commuters. By the end of 1973, Southwest had racked up its first profitable year, carrying half a million passengers. Company expansion began in 1976, when the airline commenced service to the Rio Grande Valley. By year's end, it acquired a fifth plane, carried its five-millionth passenger, and its stock was listed on the New York Stock Exchange as "LUV."

In 1978, Congress passed the Airline Deregulation Act, legally freeing Southwest to greatly expand its operations. In 1979, Southwest introduced self-ticketing machines in many airports to simplify passenger ticketing, and introduced service to New Orleans. In September, 1981, president Howard Putnam resigned and was succeeded by the flamboyant Herb Kelleher. Kelleher picked up the pace of the airline's expansion despite a national recession and air traffic controllers strike. In early 1982, Southwest entered the western air markets and California.

As a result of steady growth, the company entered the 1990s as a major airline, with a fleet of 94 planes serving 27 cities. Counting on conservative financial management, the company was able to avoid the crippling debt of other carriers. In 1995 the company reached $2.8 billion in operating revenues, boasted its twenty-fifth year of posting a profit, and debuted Internet ticket sales. By 2000 service to New York, New Hampshire, and Florida were added.

STRATEGY

The secret to Southwest's financial success is its low-cost business model, which emphasizes modest debt and stockpiling cash. Southwest had $1 billion in cash on September 11, 2001, and access to a line of millions of dollars in credit, which it drew on on September 12, before other airlines lined up for aid. Its debt-to-capital ratio in 2001 was only 33.3 percent in an industry that averaged 71 percent, giving Southwest the heartiest finances of the country's ten largest carriers. Any economic slowdown was offset by the fact that Southwest currently provides 90 percent of all low-fare airline service within the U.S. In previous economic downturns, Southwest's traffic levels were sustained by an increase in cost-conscious air travelers.

FAST FACTS: About Southwest Airlines Company

Ownership: Southwest Airlines Company is a publicly owned company traded on the New York Stock Exchange.

Ticker Symbol: LUV

Officers: Herbert D. Kelleher, Chmn. of the Board; James F. Parker, VChmn. and CEO, 54, 2000 base salary $558,000; Colleen C. Barrett, Pres., COO, and Dir., 56, 2000 base salary $558,000; John Denison, EVP Corporate Services, 56, 2000 base salary $524,000; Gary C. Kelly, EVP and CFO, 45, 2000 base salary $361,000

Employees: 31,850

Chief Competitors Southwest Airlines is the world's biggest budget carrier, an alternative to full service carriers. Southwest is the fifth largest domestic airline, and its primary competitors are United Air Lines, American Air Lines and Delta. United Air Line's main subsidiary is United Airlines, the world's number one air carrier based on revenue and passenger miles. American Air Lines is the number two U.S. air carrier, followed by Delta Air Lines.

Southwest concentrates primarily on point-to-point rather than hub-and-spoke service in markets with frequent, conveniently-timed flights and low fares. The company's 360 airplanes provide service between 60 cities in 30 states across the nation. To maintain low maintenance and training costs, the airline uses only Boeing 737s. Southwest offers ticketless travel and operates its own reservation system, keeping office costs down. Southwest's average aircraft trip length in 2001 was 514 miles with an average flight duration of one and a half hours. At year-end 2001, Southwest had over 344 oneway, non-stop city-to-city flights. The company services many conveniently located satellite or downtown airports including Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore-Washington International, Burbank, Manchester, Oakland, San Jose, Providence, Ft. Lauderdale/Hollywood, and Long Island, airports which are generally less crowded than hub airports.

INFLUENCES

In the months following the September 11, 2001, terrorist attacks, there were sweeping changes in airline day-to-day business practices. In some cases, customers had to be patient while the airlines adjusted their daily business affairs. After September 11, the airlines received more than 50 new directives from the Federal Aviation Administration that had to be implemented within hours, sometimes creating a difficult learning curve for employees. Southwest met the challenge by making facility changes, adding new screening devices, and designating employees to help customers adjust to new procedures. These measures were designed to help enhance customer relations and reduce long lines.

When the federal government took over the responsibility of airport and airline security, another transition period took place. While a loose framework for the government takeover had been established, details were still being worked out. During this time, Southwest explored new technologies and methods while still providing the kind of customer service Southwest Airlines is known for to minimize inconvenience and maximize security.

CURRENT TRENDS

Southwest has always stood out by doing things its own way. For years the flight attendants' uniforms included hot pants when conservative suits were the industry norm. Its pilots are expected to clean cabins on busy days.

Illustrating the creative license Southwest gives the advertising agencies it works with is a whale of a tale, the Killer Whale custom-painted plane, Shamu One. The artscape was devised by the ad agency GSD&M. Championed by vice president and creative director Tim McClure, the project was to secure a promotional partnership between Sea World and Southwest. Those who knew were sworn to secrecy and the plan was dubbed "Project Friend." After three days of a sophisticated painting process in an isolated World War II hanger, the brand-new 737 was secretly flown to Ellington Air Force Base in Houston. Later that day, Shamu One made its spectacular debut in San Antonio flying over Sea World of Texas and dazzling hundreds of cheering spectators below. Shamu One then went on a 27-day tour that included each of Southwest's cities.

CHRONOLOGY: Key Dates for Southwest Airlines Company

1971:

With President Lamar Muse at the helm, Southwest takes off on its maiden voyage with service to three Texas cities

1977:

Southwest carries its five-millionth passenger; Southwest stock is listed on the New York Stock Exchange as "LUV"

1978:

Lamar Muse steps down as President; Howard Putnam is unanimously elected President and CEO; Herb Kelleher becomes permanent Chairman of the Board

1981:

Southwest celebrates a decade of "Love Southwest Style" with fun, games, and more savings

1982:

Herb Kelleher takes the reins as President, CEO, and Chairman of the Board; Southwest wings its way to new cities San Francisco, Los Angeles, San Diego, Las Vegas, and Phoenix

1990:

Southwest hits the billion dollar mark and becomes a "major" airline; Lone Star One takes off as Southwest's Twentieth Anniversary tribute plane

1994:

Southwest introduces ticketless travel in four cities; Morris Air is merged with Southwest; seven new cities open, including Spokane, Portland, and Boise

1997:

Southwest starts the year with service to its fiftieth city and accepts delivery of the first Boeing 737-700, the next-generation Boeing

2000:

The airline introduces "SWABIZ," a tool that assists company travelers; the company holds the first annual Phoeniz LUV Classic Golf Tournament, an addition to the same event held in Dallas every fall

2002:

Herb Kelleher steps down as CEO, chooses GC Jim Parker as his successor

Since the overwhelming public response to Shamu One, Southwest has spent $140 million in airplane billboards: Shamu Two and Three; Lone Star One, painted to represent the Texas flag; and two other "flag" planes, Arizona One and California One. The Lone Star was unveiled in 1991 to mark Southwest's twentieth anniversary. Arizona One and California One joined the fleet in May 1994 and August 1995. In June 1996, Southwest unveiled Silver One, the seventh of the painted planes, which featured a matching interior. Later additions were the Triple Crown One, dedicated to the company's employees; Nevada One, a high-flying tribute to the state of Nevada; and New Mexico One.

Southwest's painted planes offer more than good PR value," notes Tim McClure. "They have delighted people, children in particular, for years. And, while you generally don't think about the plane you're getting on, when people see these, they point them out. So I think it keeps the spirit alive out there. These planes speak to the Spirit of Southwest. What other company would have the guts to take the lead in painting one of these big monsters and having fun with it?"

CORPORATE CITIZENSHIP

Southwest Airlines is the proud sponsor of so me of America's favorite sports, including professional baseball, basketball, hockey and football. The airline was the Official Airline of Super Bowl XXXV. The company is also the Official Airline of the NHL and NHLPA. In 2001, for the first time, Southwest ran a series of commercials during prime-time sports to point out to fans and customers that when it comes to major league hockey, "Its Tougher Than It Looks."

The Ronald McDonald House program, the cornerstone of the Ronald McDonald Children's Charities, is the primary corporate charity of Southwest Airlines. The company sponsors the Southwest Airlines LUV Classic golf tournament, the proceeds of which benefit the Ronald McDonald Houses and has raised more the $4.8 million over the past 16 years. Business Ethics magazine lists Southwest Airlines among its "100 Best Corporate Citizens" and Southwest was listed in Hispanic-magazine's "Corporate 100" for providing minority opportunities. The Secretary of Defense presented the Employer Support of the Guard and Reserve (ESGR) 2001 Employer Support Freedom Award to Southwest Airlines. And First Lady Laura Bush sent Southwest a personal recognition letter celebrating the success of the Adopt-A-Pilot program, which has reached over 25,000 students since 1997.

MALICE IN DALLAS: THE BATTLE OF THE BUSINESS TYCOONS

Setting the scene: The Sportatorium, a wrestling palace in Dallas, March 1992. Cheerleaders chant, the crowd whistles and cheers. In one corner, a burly 37-year old weightlifter, dressed in pants and a dark shirt, wearing a confident scowl, and displaying a "Born to Raise Capital" tattoo on his massive arm. Strutting in to the blaring trumpets of the theme from Rocky is the opponent, a grinning, skinny 61-year-old cigar-chomping lawyer decked out in a t-shirt and red satin boxing trunks and accompanied by a handler carrying rows of airlinesized liquor bottles. This was expected to be a battle royal, a one-on-one battle of the biceps. Actually, it was just a friendly contest between Southwest Airlines CEO Herb Kelleher and Stevens Aviation chairman Kurt Herwald to decide the rights to a slogan.

Stevens Aviation had been using "Plane Smart" as its slogan a year before Southwest unknowingly began infringing by using "Just Plane Smart" in its ads. Instead of an expensive, drawn-out trial, the companies agreed to send their top titans to settle the dispute in an arm-wrestling match held in front of the media and employees. The best two out of three matches would win the rights to the slogan, and the loser would donate five thousand dollars to a charity of the winner's choice.

Round One saw "Smokin Herb Kelleher" send in a ringer, a one-time arm wrestling champ who bested Herwald. In Round Two, Kelleher was quickly thrashed by "Kurtsey Herwald's" ringer, a tiny customer service rep. Finally, it was Kelleher against Herwald, and in a matter of seconds, it was all over. Kelleher was defeated, but Herwald announced that Southwest could keep using the slogan.

Everybody won. The companies got publicity, the media got a great story, and two charities, The Muscular Dystrophy Association and the Cleveland Ronald McDonald House, got big checks. The companies' hijinks even caught the Oval Office's attention. Then-President Bush wrote them a note congratulating the pair for their charitable deeds, and comedic antics.

EMPLOYMENT

Southwest Airlines boasts a highly interactive corporate culture. In the company's 30-year history, it only had one strike. The airline values people as the company's greatest asset and designates much time and energy to hiring people with winning attitudes. Because Southwest Airlines is known as an exceptional place to work, many people apply for jobs yearly, giving them the edge in a tight job market. In 2001, the company received 194,821 resumes and hired 6,406 new employees. Once hired, Southwest provides a supportive work environment that gives employees freedom to be creative, have fun and make a positive difference. Although the airline offers competitive compensation packages, they feel its employees' sense of pride in their team accomplishments that keeps the Southwest spirit alive and productive. Although many companies ban inter-office romance, the airline boasts 928 married couples on staff.

For these reasons, Southwest Airlines was included on Fortune magazine's annual "Best 100 Companies to Work for in America" ranked in the top five for over four straight years. In May 1998, Southwest was the first airline to win the coveted Triple Crown for a month: Best On Time Record, Best Baggage Handling, and Fewest Customer Complaints. Since that time, the company has won it more than thirty times, as well as five times annually from years 1992 through 1996. At Southwest, prices are low, but morale flies high.

SOURCES OF INFORMATION

Bibliography

freiberg, kevin and jackie. "nuts! southwest airlines'crazy recipe for business and personal success." austin: bard press, inc., 1996

mcnulty, sheila. "southwest airlines: short on frills, big on morale." 30 october 2001. available at http://www.financialtimes.com.

shaw, daniel. "the quiet man: flamboyant herb kelleher is a tough act to follow as southwest airlines chief. but jim parker gets high marks in tough times." corporate counsel., march 2002.

"southwest airlines co." gale group, march 2002. available at http://galenet.galegroup.com.

"southwest airlines co." hoover's online, 20 march 2002. available at http://www.hoovers.com.

southwest airlines co. home page, 2002. available at http://www.southwest.com.

"southwest airlines reports fourth quarter earnings and 29th consecutive year of profitability." prnewswire, 17 january 2002.

For an annual report:

on the internet at: http://www.southwest.comor write: southwest airlines co., investor relations, po box 36611, dallas, tx 75235

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. southwest airlines' primary sic code is:

4512 air transportation, scheduled

also investigate companies by their north american industry classification system codes, also known as naics codes. southwest airlines' primary naics code is:

481110 scheduled air transportation