It started over 30 years ago with a simple drawing of a triangle on a cocktail napkin; today Southwest Airlines, headquartered at Love Field in Dallas, is the 4th largest major airline in the US.
With his entrepreneurial spirit, attorney Herb Kelleher got together for cocktails with Texas businessman Rollin King , to discuss the first three cities (Dallas, Houston and San Antonio) they would fly passengers to;and Southwest Airlines, "triangle of love" became a reality. Keeping their focus simple, the rest is history as they say. Get your passengers to their destinations on time, make sure that they are paying the lowest fares, and do it all while having fun. Southwest continued to add triangles to their flight pattern until it finally flew beyond the Texas borders to serve a total of 58 cities in 30 states.
When you take a look at Southwest's mission statement, which includes the phrase "the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit," its employee promise declaring "above all, employees will be provided the same concern, respect, and caring attitude within the organization" and add the fact that Southwest is based at Love Field, the "triangle of love" becomes more apparent.
What's Fueling Southwest?
Fuel management at Southwest Airlines is broken up into two groups: fuel purchasing and fuel operations. "The way we look at it is our fuel purchasing team buys the fuel and then ships the fuel to the airport, then it's our responsibility to store the fuel and see that it gets to the aircraft clean and dry. That's our primary goal," states Glenn Hipp, Director of Fuel Operations. Generally the airlines don't own their own fuel farms (fuel storage facility), however, at Southwest, they sometimes do. Southwest has four fuel farms: three in Tulsa, Oklahoma; Burbank, California; and Houston, Texas and one under construction in Sacramento, California. With a definite tone of percipience, Hipp reasons, "Why pay someone else rent when we can own the primary airline storage facility, lease space in it to other carriers to store their fuel and reduce all of our overall costs." Certain parameters are required by Southwest of both the airport and the carriers to uphold the mulit-million dollar investment. The first is that the airport agrees that Southwest's will be the only facility at that location. The second is that rather than having a fixed cost, the carriers cost for fuel per month, including Southwest's, will float depending on the expenses incurred at that facility. The third is the cooperation of the other carriers serving the airport.
Though fuel prices are going up, making it problematic for all of the carriers, Hipp notes that Southwest has an advantage with it's strong hedge position and fuel purchasing folds looking for spot purchases out in the market. In today's economy the practice of hedging can only work if you have credit and capital. Unfortunately, there are a number of carriers right now with neither the credit nor the capital who cannot hedge, hence paying much higher costs. As Hipp states, "It's the first time in my career the fuel prices skyrocketed at the same time the economy tanked for the airlines and they just didn't have the money they needed to hedge." Hipp is confident that fuel prices are going to come down in the summer, nonetheless he believes it has been an unusual year for fuel prices and has been surprised at the direction of the market.
According to Hipp, his fuel operation group's biggest contribution to the success of Southwest was a major transition from hydrant trucks to stationary hydrant carts beginning in 1996. Compared to fueling trucks, the hydrant carts are more cost effective when it comes to maintenance, more practical when it comes to saving time and safer because there are no fuel trucks requiring registered drivers and vehicle insurance, driving from one plane to another. The stationary cart also gives the baggage handlers the ability to operate unhindered by the presence of a fuel truck in the vicinity. Southwest has a homogenized fleet of 737s that always park in the same spot, thus utilizing the carts to a better advantage than other carriers can. In addition, almost two years ago, Southwest Airlines fuel operations was instrumental in getting manufacturers to improve the carts and find a way to automate the information from the cart and transmit that information back to the base station. "We went out to the manufacturers and said we are going to buy 100 carts. We said here are the things we have to have. So they got very creative. I don't want to say we changed the industry for carts but we definitely came up with a new design that is specific to Southwest, and it's very popular," states Hipp.
Build it and they Will Come
Most major airports were built after World War II making the original existing fuel storage facilities inadequate and risky, and creating a dilemma or, depending from which vantage point it is viewed, an opportunity for airlines, airports and oil companies. As Hipp adroitly points out, "It's way outside the realm of what these small operators can provide in capital for fuel storage facilities." Owing to this, departments like Hipp's have had to carefully scrutinize and determine where they need additional storage, at what capacity to build it appropriate to increased activity at that particular airport and how to build it cost effectively.
Another issue that Hipp and his counterparts are facing that directly affects fuel purchasing and hedging is the question of future storage and whether or not to build a facility larger than necessary. "I will tell you that we have several locations, probably more than ten, where the fuel storage at the airport is currently inadequate and we are actively working to figure out how to solve that problem." says Hipp. "How to either increase the existing fuel storage or replace that fuel storage. And should [it] be replaced by the airport, by the fuel contractor, by the Oil Company or by Southwest?"
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Analysts expect all other major carriers and low-cost airlines to report losses, though regional carriers, which fly on behalf of other airlines for set fees, remain in the black.