Southwest: 'No More Cattle Calls'

Under pressure from trimmed-down rivals and high oil prices, the pioneering airline is changing the practices that made it an industry highflier

by Christopher Palmeri

Southwest Airlines (LUV), the carrier famous for its cattle-car boarding process and lack of first-class amenities, now wants to reach out to the Gucci loafer and Hermes tie crowd. On Nov. 7 Southwest introduced a new fare structure that will give preferential treatment to customers who pay more for their tickets. The following day the company will roll out a new boarding process nationwide that assigns each passenger a number indicating when they can get on the plane, sparing customers the need to line up an hour before a flight to get the best seat. "No more cattle calls," says Chief Executive Officer Gary Kelly.

Over the next few months, Southwest will be upgrading the Spartan waiting areas at its gates with cushy leather chairs featuring built-in outlets for plugging in computers and recharging cell phones. By January, 2009, the company hopes to offer international connections to Mexico and the Caribbean as well as in-flight media options—perks that appeal to hardened road warriors.

Business Model Update Is Overdue

Two factors are driving the radical changes: tougher competition and higher oil prices. Many of Southwest's competitors have gone through bankruptcy, allowing them to cut labor costs and shed unprofitable gate and plane leases. The result is that the airline's cost advantage over rivals has shrunk, and its pilots and flight attendants are now the highest paid in the industry. At the same time, the price of oil is nearing $100 a barrel (BusinessWeek, 11/7/07), driving up Southwest's costs. The top brass recognizes that the airline needs to adapt to the new realities of the industry. "We've had oil price spikes in the past," says Herbert Kelleher , co-founder and chairman. "This time I don't think anyone expects prices to come down. It radically changes the way you look at things."

The outlook this year isn't pretty. Southwest's earnings are expected to decline about 15% in 2007, to $510 million, on sales of $9 billion, even as many of its rivals are reporting profit gains. "Their business model is ten years out of date," says aviation industry consultant Michael Boyd. "But the good thing is management knows that and is doing something about it." The company is using financial hedges to protect against rising fuel prices, but current hedges must be entered into at today's higher prices.

Kelly, a company veteran who took over as chief executive in 2004, has made wringing more revenues from the existing business a top priority. He has throttled back expansion plans and hopes to generate more than $1 billion a year in what he calls ancillary revenues.

Customer Reaction Is Mixed

From Day One Southwest had shunned assigned seats as a way of speeding the turnaround time at the gate to as little as ten minutes. But the long lines that resulted as passengers waited to board were the No. 1 customer complaint for decades. Southwest tested the use of assigned seats in San Diego last year and the result was predictable—it added to the boarding time and many passengers complained that they liked being able to choose their seats. Employees suggested assigning passengers a specific number when they checked in twenty four hours before a flight so that they would know ahead of time in what order they would board.

The switch to a more organized boarding process gave Southwest an opportunity to gin up some more revenue. The company has introduced a new "business select" fare class—passengers who pay this higher ticket price will automatically get the first numbers on the boarding list. They'll also earn frequent-flier credits more rapidly and will get a free drink on board.