One Airline's Magic

SOUTHWEST AIRLINES
Jim Parker, chief executive of Southwest Airlines

Most folks know Buffalo, N.Y., for its chicken wings, but in the airline business it's famous for ferocious winter storms that bring air travel and sometimes all travel to a frozen halt. That's what happened last December when Buffalo was buried under a record 7 ft. of snow. Southwest Airlines, with its lean scheduling system, was hit harder than most. One of its planes got stuck so long it came due for a routine maintenance check. Without it, the plane wouldn't be allowed to fly and that would cost Southwest tens of thousands of dollars in lost revenue. What to do?

Johnny Bomaster, 38, had an idea. A certified maintenance-check mechanic for Southwest, he lived just seven miles from the Buffalo airport but couldn't reach it over roads clotted with snow. So he tossed his toolbox onto the back of a snowmobile and zoomed through the drifts to the stranded plane. By next morning, when the runways and roads had been plowed and passengers were streaming through the terminal, Bomaster had thoroughly checked the plane and allowed it to take off fully loaded. (A new storm then stranded him at the airport for an additional 24 hours.)

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Bomaster and workers like him are a big part of the reason that amid record losses by its competitors, Southwest last week reported $75 million in earnings for the third quarter and stands as the only profitable U.S. airline among the top eight. AMR, parent of American Airlines, the world's largest, just reported a third-quarter loss of $924 million. U.S. Airways is reorganizing under bankruptcy protection, and industry experts expect it will soon be joined by United Airlines. Delta has announced that "to survive for the long term" it will lay off an additional 7,000 to 8,000 employees, meaning it will have lost nearly a quarter of its work force since Sept. 11. Among major carriers, Alaska Air, ranked ninth by operating revenues, is expected to report that it is in the black, along with No. 6, Southwest.

How does Southwest do it? The answer starts with lower costs. The Air Transport Association reports that other major airlines (American, United, Delta, Northwest, Continental, U.S. Airways, America West and Alaska) had unit costs measured in cost per seat for each mile flown nearly 100% higher than Southwest. A study by the consulting arm of Unisys concluded that the other majors would need to cut spending a staggering $18 billion just to level the playing field with Southwest. The airline "has long-term, systemic advantages the other carriers can likely never match," says Vaughn Cordle, an airline pilot who heads his own consulting firm, AirlineForecasts.

Although starting pay for some positions at Southwest lags behind that of other carriers, Southwest has traditionally made up that deficit with generous profit sharing and stock options based on shares that have dropped 24% so far this year, after almost doubling in value over the past five years. The company is valued at $10.8 billion, more than the other major U.S. airlines combined. And employees own more than 10% of Southwest's outstanding shares. Southwest also offers something even scarcer than a valuable stock: job security. While the other majors are shrinking their service and laying off workers, Southwest is adding routes and flights, accelerating delivery of planes, hiring workers and scooping up market share from its rivals.

To be sure, Southwest in the third quarter earned only about half as much as it did in the same period in 2001. Its top executives aren't certain whether the airline will be able to stay profitable for the final three months of 2002. And Southwest's pay advantage is shrinking. In recent months, as workers at other airlines have been forced to make pay concessions, Southwest unions have been signing new contracts for pay hikes.

But Southwest's core advantage isn't that its employees get paid less for their work; rather, it's that they work more for their pay. They work more productively, more flexibly and more creatively like Johnny Bomaster. Southwest pilots routinely fly nearly 80 hours a month; United pilots fly just over 50 hours, even in a busy month. Southwest pilots are paid for each trip, not each hour, so they have a strong interest in keeping flights on schedule. And because a big chunk of their compensation comes in the form of stock options, they tend to watch costs like bean counters. Air-traffic controllers say Southwest pilots are constantly pushing to get quicker routings to their destinations. On occasion pilots have even pitched in to help ground crews move luggage a step virtually unheard of at Southwest's bigger rivals.

Flight attendants at Southwest work as many as 150 hours a month, compared with 80 hours at many other airlines, says union president Thom McDaniel. Southwest attendants are required by contract to "make a reasonable effort to tidy the airplane" between flights, a chore that other major airlines pay contractors to do. According to an airline labor expert, senior flight attendants at United get as many as 52 vacation days (compared with 35 days for veterans at Southwest). And they never have to clean up after the passengers.