Taken from AIR, Inc.'s Flying Through Time Publication

Southwest Airlines from its inception stirred its competitors' ire with fares designed to lure passengers from their cam. The Texas-based airline through time always remained true to its short-haul, low-fare niche.

Rollin King started Southwest Airlines down the highway of time, but it was Herb Kelleher, the genius of the crossroads, who rescued the company in its times of trial and spirited the short-haul, no-frills carrier onto the fast lane. M. Lamar Muse was the airline's muse for a while. Then Kelleher took over that role, too.

King, while shutting down a small commuter airline he owned in 1966, began exploring the idea of a bigger carrier to serve Texas' three largest metropolitan areas. King completed his marketing and feasibility studies and decided in early 1967 to go forward with a company. He asked Kelleher, his attorney, to take the necessary legal steps to incorporate. Kelleher, initially skeptical of King's idea, agreed to do the legal work anyway, gratis.

Kelleher, however, became so enthralled with the idea he invested his own money in it. Kelleher arranged for initial capital and filed an application with the Texas Aeronautics Commission (TAC) for the new airline, named Air Southwest Co., to fly between Dallas and Houston, Dallas and San Antonio and Houston and San Antonio. (The company's application did not fall under jurisdiction of the Civil Aeronautics Board since the business plan called for Air Southwest to fly only within the state of Texas.)

TAC approved the application on Feb. 20, 1968, but the next day three airlines, Braniff, Trans-Texas (later Texas International) and Continental, obtained a temporary restraining order preventing the commission from giving Southwest a certificate. These airlines argued in court that Southwest's proposed markets already were saturated and would not support added competition. Southwest lost this trial and its appeal to the state Court of Civil Appeals. Kelleher, undismayed, appealed to the Texas Supreme Court which, in March 1970, overturned the lower court rulings and decided in Southwest's favor.

The original complainants still were unwilling to share Texas with an upstart and took their case to the U.S. Supreme Court. But, the high court refused to hear the appeal and finally, in December 1970, Southwest could refocus its energies on raising the capital to begin operations. Muse became Southwest's president the following month.

Muse inherited a company with only $142 in the bank and bills totaling more than $80,000 in the winter of 1971. Paying the bills and raising enough capital to get the airline off the ground was the immediate task. Muse succeeded on all points after garnering $6.5 million from a stock offering and $1.25 million in promissory notes. The carrier took off on June 18, 19 7 1, after one final legal thrust from Braniff and Texas International. The name under which it flew was Southwest Airlines, the same name formerly carried by the commuter King shut down five years earlier.

Five years: That's how long it took to create Southwest Airlines under airline regulation. There was no basis for the Braniff-TI-Continental legal action without regulation, and- voices favoring deregulation began to sound.

Kelleher, King and Muse recognized their decision to make Southwest an intra-Texas short-haul carrier put them in direct competition with the automobile. Their answer: make flying both quicker and cheaper than driving. Old-guard airline people thought the strategy quixotic: Airline fares could not be cheaper than driving, and Southwest's short routes could not be quicker.

But Muse and Co. were inspired. The airline flew with only a single class of passenger seat and very low fares, point-to-point. Destinations, each with only a 10-minute stop, were at airports close to business centers to attract the frequent traveler. Thus, Dallas' Love Field and Houston's Hobby Airport became the focal points of Southwest's operations.

Southwest's innovative two-tier fare system began after only five months in the air. The idea was born of the necessity of ferrying planes from Houston back to Dallas for servicing. Rather than fly empty planes, Muse charged $ 10 for a ticket to catch an evening flight to Dallas. Southwest had to turn people away by the end of the second week.

The first six months of operations, though successful, must have seemed like a gimmick to competitors Continental, Texas International, Braniff and American. Southwest's operations from the outside had all the signs of a sweatshop. Morale was high on the inside-so high that from its inception Southwest established the best productivity per employee in the airline industry.

Southwest entered 1973 with a two-tier fare system of $26 by day and $13 by night. Even these low fares were not low enough in the San Antonio-Dallas market, so Southwest dropped its fares on that route to $13 a seat, night or day. Angered, Braniff responded with $13 one-way daytime fares on Southwest's most lucrative flights, Dallas to Houston. The blow infuriated Southwest's management. The company had less than $350,000 in cash and management felt Southwest would go out of business if it reduced its fares to match Braniff’s.

Muse challenged Braniff by raising public consciousness of the stakes. He began a campaign-the cornerstone of which was newspaper advertising in Dallas and Houston that began, "Nobody's going to shoot Southwest Airlines out of the sky for a lousy $13!" Southwest offered passengers a choice: Pay the matching Southwest fare of $13 or pay the full fare of $26 and receive a gift. The gift was liquor. Braniff withdrew from the Dallas Love-Houston Hobby market a little more than two months later.

Southwest survived its first major challenge by vanquishing a competitor, realizing its first quarterly profit and becoming the largest-volume distributor of Chivas Regal, Crown Royal and Smirnoff in Texas. Meanwhile, Kelleher kept busy preparing Southwest's defense against a lawsuit: The cities of Dallas and Fort Worth wanted to force Southwest to move from Love Field to the soon-to-open Dallas/Fort Worth International Airport. A federal court ruled in July 1973 that Southwest could operate at Love Field while the field remained open. The cities appealed, and in January 1975, the U.S. Supreme Court let the original decision stand.

The TAC's approval of Southwest's request (of July 1973) to add Harlingen, Texas, as a destination landed the carrier in court again the very next month when Texas International sought a restraining order against the new service. Southwest started flying the route under TAC authority as the litigation began its slow march. Meanwhile, a strike grounded Texas International, weakening TI's arguments against the Southwest service. Then came a federal indictment of TI and Braniff for conspiring to put Southwest out of business. A district court in October 1976, no doubt influenced by the strike and indictment, sustained the TAC's decision to allow Southwest to serve Harlingen.

Southwest had 517 employees and six B-737-200s by the end of 1976. Revenues and net income grew from $2.13 million and a loss of $3.75 million, respectively, in 1971 to $30.9 million and a profit of $4.94 million in 1976. Southwest proved an airline could profit while providing quality air transportation at low fares. Congress hailed Southwest's track record as an example of a deregulated airline industry. Southwest, the argument went, accomplished its wonders despite regulatory barriers to free-wheeling competition; imagine what the industry could accomplish if the government removed those barriers.

President Jimmy Carter signed the Deregulation Act in October 1978 and Southwest took advantage of the act's provision that a carrier could enter one route a year without CAB permission. It immediately added Houston-New Orleans to its route system and, in January 19 79, requested approval to fly from Dallas to New Orleans. The Dallas-New Orleans request caught the attention of Jim Wright, majority leader of the House of Representatives. Wright's concern was that service at Dallas/Fort Worth International could face threats if interstate travel took place out of Love Field. When the CAB approved Southwest's request, Wright responded with a bill (which later became law) to restrict passenger service from Love Field to states adjacent to Texas.

Muse resigned in 1978 after a dispute with the board of directors, and founded his own airline, Muse Air, in 1981. Kelleher became chairman of the board and Howard Putnam, formerly at United, became the new president.

Muse's departure did not affect Southwest. The company earned profits in 1978, 1979 and 1980, respectively, of $17 million on revenues of $81 million; $16.7 million on revenues of $136.1 million; and $28.4 million on revenues of $213 million. The company had 1,839 employees and a fleet of 23 B-737s by the end of 1980.

Putnam's tenure at Southwest ended in late 1981 when he left to become president of Braniff. Kelleher became Southwest's president and guided the carrier into Kansas City, Las Vegas, Los Angeles, Phoenix, San Diego and San Francisco. He increased the fleet to 37 aircraft to handle the expansion.

Southwest bought rival Transtar in 1985, which Lamar Muse originally founded in 1981 under the name Muse Air. Transtar accumulated more than $50 million in losses trying to compete against Southwest in its strongest markets. Transtar remained a subsidiary of Southwest until June 1987 when Southwest shut it down because it was not profitable. Southwest reported a 1987 profit of only $20.2 million on sales of $778.3 million primarily because of Transtar's poor performance.

Southwest led the airline industry in productivity in 1987 by carrying 2,344 passengers per employee (nearest rival: USAir, with 1,499 per employee), employing just 74 people per aircraft (against Braniffs 75, Continental's 91 and American's 157) and placing second to long-haul Braniff in revenue passenger miles per employee.

Southwest, given such productivity, began 1988 confident its lackluster 1987 performance was no index of its potential. Southwest finished the year with a record $57.9-million profit on sales of $860.4 million. Fellow airline CEOs during the year chose Kelleher to chair the Partnership for Improved Air Travel. The broad-based, Washington-headquartered organization formed to develop a better understanding of the needs of the air travel system and to build private and public support to ensure the needs are met.

Southwest's success also attracted the attention of some of the nation's largest news networks. CBS's 60 Minutes, Turner Broadcasting's Cable News Network and NBC's Today Show featured Southwest in major stories in 1989. Texas Monthly magazine profiled Kelleher in its April 1989 issue. Southwest's ability to deliver quality (if bare-bones) service at the industry's lowest prices, the charismatic nature of Kelleher's leadership and the fact that Southwest could accomplish such large profits on such puny fares while paying high wages attracted the attention. Southwest has its own unions-SWISA (Southwest Independent Stewardesses Association) representing flight attendants, SWAPA (Southwest Airlines Pilots Association) representing pilots-but no labor-management conflict.

Morale at Southwest may be the best in the airline industry. Kelleher constantly tells his employees how much he loves them-in his 1989 message to shareholders he called them the "finest, most loving and lovable people in the airline industry"-and the Southwest labor force seems to reciprocate Kelleher's sentiments. The esprit de corps helps Southwest achieve a productivity that its competitors find killing because such low fares can result.

Southwest, like America West, achieved "major airline" status by the end of 1989, earning $1.02 billion in revenues. America West was a child of deregulation; Southwest, one of deregulation's forerunners. America West used the freedoms of deregulation to build itself around a hub at Phoenix; Southwest helped create those freedoms by behaving from the start as though a free market already existed.

Southwest's consistent first-place rankings in productivity, on-time performance and passenger satisfaction together with its high profitability make it one of the U.S.'s most successful airlines. Only the master of motivation himself, Herb Kelleher, could hustle a $47.1-million profit out of the business climate of fare battles, recession, war and terrorism fears, and revenue-eating fuel prices that wracked the airline industry in 1990.

The spiraling costs and cutthroat competition (much of it initiated by Kelleher) in the fourth quarter of 1990 knocked Southwest Airlines into the red-a $4.6-million loss on sales of $301.6 million. But that lone quarter of very slight loss propelled Southwest's gung-ho employees into further selfsacrifice. Already enjoying the lowest costs in the industry, Kelleher got from his employees in January 1991 a new cost-savings program: Employees volunteered a part of their salaries to help buy fuel for Southwest aircraft.

Southwest added its 30th destination (Burbank, Calif.) during 1990, but refocused its energies on short-haul markets, the hallmark of its success. Kelleher continued to pester America West in its own back yard, Phoenix. Through all this, Southwest had total revenues in 1990 of $1.19 billion, a 19-percent increase over the $1 billion in revenues of 1989.

In short, very little changed at Southwest in 1990 despite industry turmoil that saw the demise of Eastern and the bankruptcies of Continental and Pan Am (not to mention desperate maneuvering at TWA and cash shortages at Northwest and USAir). It finished the year as the same lean, hungry and efficient carrier that made Southwestern U.S. markets some of the nation's most competitive ever since deregulation in 1978.

Shrewd financial planning during profitable periods allowed Southwest to expand its route system when opportunities arose-even during a recession. Cost-cutting measures instituted in mid-1989 in anticipation of a recession also helped fuel the expansion. "We have a lot of liquidity; we can sustain a loss and we're planning to conduct 1991 just like any other year," said Kelleher in an interview.

Southwest increased operations steadily by 10 percent from 1985 through 1990, but in 1991 it grew 16 percent with added flights in the Midwest and California. Southwest quickly moved into vacant facilities at Oakland Airport when USAir reduced about a third of its flights in the California corridor. And when Midway shut down, 20 midwestern cities in 1991 begged the Dallas-based airline for replacement service. Southwest launched a bid for Midway gates and related airport facilities at Chicago's Midway Airport in October 1991, but lost to Northwest. Midway ceased operations and liquidated when Northwest backed out of an agreement to buy the bulk of Midway's assets. Southwest then picked up eight additional gates at Chicago's Midway Airport and added daily flights between Midway and Indianapolis and Cleveland to existing service between Midway and Detroit, Kansas City, Mo., Nashville and St. Louis.

Despite these large gains, Southwest maintained its commitment to grow at a deliberate pace. Sacramento, Calif., was the only new city added to Southwest's service structure in 1991 despite service requests from more than 50 cities. Southwest began service in Cleveland in February 1992, and Columbus, Ohio, became the airline's 34th city in IS states in June 1992. The company gauges the potential of new city service via a proven formula before opening in new areas. "We use it [the formula] to determine where we think we can stimulate the most new traffic in the shortest period of time," Kelleher said in an interview. "We have a limited number of airplanes coming in and, after we satisfy existing service responsibilities, we might have three or four additional airplanes we can use to open new cities. Maybe we could be profitable in six new cities, but we pick the two that will do the best for us so we get the highest immediate return."

Overall, Southwest in 1991 was the largest airline operating from Kansas City in terms of daily flights. It increased market share at St. Louis by 18.6 percent and ranked first or second in terms of originating boardings at 27 of the 34 airports the airline served at year-end. Southwest was the only major passenger airline to post a profit in a year when the industry lost $2 billion. The airline recorded a 1991 net profit of $26.9 million, a decline of about 42.8 percent from 1990.

A strong 1992 balance sheet allowed Southwest to buy aircraft while other, larger airlines canceled orders and options and scaled back operations. The airline negotiated a $250-million low interest rate line of credit in late 1991, and in the first quarter of 1992 it sold new stocks to raise another $88 million in equity capital. Southwest took delivery of 13 new B- 737s in 1992 and agreed that year to buy 34 new B-737-300s in an order valued at $1.2 billion.

Southwest's third-quarter 1992 net earnings jumped 71 percent with a net profit of $26.9 million. Southwest recorded its 20th consecutive year of profitability in January 1993, with a fourth-quarter 1992 profit of $27.2 million and a year-end profit of $103.6 million compared to $26.9 million the previous year.

The Southwest officers responsible for the carrier's operations, maintenance and decision-making at the time of publication are Herbert D. Kelleher, chairman, president and chief executive officer; Gary A. Barron, executive vice president and chief operations officer; Gary C. Kelly, vice president of finance and chief financial officer; Paul E. Sterbenz, vice president of flight operations; and John A. Vidal, vice president of maintenance.