Southwest Airlines plotting new strategic course

Carrier is taking a hard look at doing things it's never done before


Aug. 2--Let's say you're sitting in your assigned seat, surfing the Internet while flying to catch a connecting flight to Europe. Today, you wouldn't be flying Southwest Airlines Co. when you do any of that.

But in a few years -- who knows?

In a major re-examination of what makes it tick, Southwest is considering a lot of steps that would have been unthinkable in years past.

"Southwest has to modify its model because parts of it don't work anymore," aviation consultant Michael Boyd warns.

That means that it may begin assigning seats as soon as this winter. It is putting together the computer capability to handle international operations, either through connections with partners or flying the trips on its own. The Dallas-based carrier, which is looking at what amenities it needs to attract passengers, is readying a test of wireless Internet service on board its airplanes.

The big changes mirror what's happening at the airline internally. Longtime chairman Herbert D. Kelleher, who gave up his chief executive job in 2001, will surrender his chairman's job in May, and president Colleen Barrett leaves her executive job next July.

And Southwest, which prides itself on avoiding the massive furloughs that other airlines have endured, has offered buyout packages to 8,700 of its highest-paid operational employees.

The carrier has set a goal of increasing its annual revenue by $1 billion in the next few years by doing things it isn't doing now.

The impetus for the rethinking is that its costs have grown significantly in recent years as it feels the impact of higher fuel prices and labor costs, even as it's facing new challenges from its trimmed-down older competitors and threats from newer rivals.

In particular, its unit costs -- the expense of flying one airplane seat one mile -- have jumped 16 percent in two years, from 7.81 cents per seat mile in second quarter 2005 to 9.03 cents per seat mile last quarter. So Southwest is trying to raise its revenue to compensate for the higher costs.

"That's the essence of our earnings challenge," chief executive Gary Kelly told analysts on the airline's July 18 conference call to discuss earnings.

"It's not new. It's not surprising. It's not unexpected, and we have been working to transform Southwest's revenue-generating capabilities to address that challenge and to enhance the low-fare Southwest brand."

Which model?

Analysts say Southwest has to decide which elements of its competition it should follow. There are the ultra-low-cost carriers like Spirit Airlines Inc. and newcomer Skybus Airlines Inc. There are the higher-amenity low-cost carriers like JetBlue Airways Corp. and Virgin America.

And the older network carriers like American Airlines Inc. and Delta Air Lines Inc., once paralyzed by their operating expenses, have cut their costs to compete better against Southwest.

"They've been the darling, they've been the role model, they've been the intelligent one," University of Portland business professor Rich Gritta said. "They did it with the brilliant operating strategy and the brilliant financial strategy. ... You've beaten the easy teams. Now things are going to get harder."

To consider the two low-fare futures that Southwest must ponder, look at the differences between Skybus Airlines and Virgin America.

Skybus, based in Columbus, Ohio, takes cheapness to new depths. It charges passengers $5 to check each bag. It charges for everything on board, including soft drinks. It more closely resembles the European airlines Ryanair Ltd. and EasyJet PLC than Southwest.

There is no assigned seating. If you want priority boarding, it'll cost $10. If you want an e-mail notification of your flight status, it'll cost you.

Virgin America, a new carrier set to begin flying Wednesday out of San Francisco, is on the other end of the scale. It will offer state-of-the-art television and music, including the ability to put together music playlists that you can call up on any Virgin America flight.

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