Southwest Airlines - Flying for peanuts

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Life at Southwest might be a little bit dull without Herb Kelleher at the helm, but new chief Jim Parker plans to keep the profits, the party and the peanuts rolling

Karen Walker/DALLAS

In one of the industry's most speculated-about leadership handovers, Southwest Airlines' chairman, chief executive (CEO) and cheerleader Herb Kelleher will next month relinquish his CEO role to Jim Parker.

Executives at the Dallas-based low-cost airline - one of the world's most financially successful - are playing down the effect of this transition, emphasising their 'business as usual' message. Yet 70-year-old Kelleher's unique business style and zany cultural leadership qualities will be hard to match.

His successor, Parker, does not intend to try. While Kelleher has become an industry icon, infamous for his taste for bourbon and dressing as Elvis Presley, Parker admits: "I don't look good in an Elvis suit." Parker underlines his point: "I am not Herb. There is not another Herb and it would be a huge mistake to try and imitate Herb. We will just try and do our best and that is what we all do at Southwest anyway."

Yet the flamboyant Kelleher and the quietly spoken Parker have more in common than it first seems. Both are lawyers - Parker is Southwest's vice president general counsel until he takes up his vice-chairman and CEO promotion on 19 June - and they have worked together closely since Parker, 54, joined the airline in 1986.

Parker can also match Kelleher's talent for fast and dry remarks. Asked his opinion on Boeing's proposed Sonic Cruiser aircraft, he replies: "It makes a good picture. But it does not look like a Dallas-to-Houston aircraft at this time."

On how the airline plans to progress after the new executive team is put in place in June, Parker is confident: "There will be no change in the course of direction of Southwest. We have a very successful business model and a deep management team that Herb has put in place. We are a young and rapidly growing company. But we have tremendous depth and stability in our management team."

The 'new' management team, in fact, is anything but. Each one of the executive team has been with the company at least 13 years. The new second-in-command, Colleen Barrett, who will be promoted from vice-president customers, to president and chief operating officer, has been part of Southwest management and a guiding force for Kelleher since 1978.

Peanut policy

Both Barrett and Parker are keen to keep the fundamentals of Southwest's business model intact. The carrier is set to continue double-digit growth over the next few years, offering its low-fares, point-to-point service across the USA. The no-food, lots of peanuts policy - Southwest handed out 90.9 million bags of peanuts last year - will stay intact too. "We have no plans to fly internationally, not even to Mexico or Canada." confirms Parker. "There are too many business opportunities in this country,"

Instead, he plans to continue adding more of the long domestic sectors introduced by Southwest in the late 1990s. Parker says that such routes, including some coast-to-coast services, are proving "extremely popular and successful" and adds: "We are seeing strong load factors in our medium- and long-haul markets. We will add more long-haul service and we are studying right now whether we will add another city this year." Growth will focus predominantly on the US east coast region. "It was the most over-priced, under-served market before we went there and that's what we look for," he says.

Growth will be supported by the Boeing 737-700, for which Southwest was launch customer in 1997. The 100th -700 was delivered in April. The airline plans to receive 25 more of the type by the end of this year and retire four 737-200s, giving Southwest a fleet of 365 737s.

"We have the right under contract with Boeing to convert any -700s into -800s," Parker points out. "It's possible, but it's not something we have chosen to do at this point. The -700 is superb and flexible so it would be my first choice to continue to do that."

All new -700s will be delivered in the 'canyon' blue, red and yellow Southwest livery unveiled earlier this year - a bold departure from the brown and gold scheme that had become Southwest's signature, but was looking worn. The new all-leather interior also comes with greater legroom. "We could have put in six extra seats for 143 seats. But we decided it was more important not to do that and to give a little bit of extra legroom and pitch. That was our business decision and we won't change that," says Parker.

But Parker admits challenges lay ahead for Southwest as for the rest of the US airline industry. Labour issues, red ink and congestion-related delays have dominated the US scene recently and Southwest is not immune to these difficulties. Contrary to what many believe, Southwest has a highly unionised workforce and benchmark pay-rise deals, such as those set by Delta Air Lines and United Airlines, are persuading all labour groups they can negotiate for more.

"We have historically also had some contentious negotiations with those groups. When you are talking about money you will get candid discussions," notes Parker. "This environment is more challenging for airlines than it has ever been, probably forever, because employees have very high expectations and hopes that were elevated by the United deal. This had very significant ripple effects through the industry."

Southwest management is in talks with its ramp operations and provisions agents union, whose contract became amendable 15 months ago and who have already rejected what Parker calls "an excellent offer". "It was disappointing," admits Parker. "But we have had worse situations and we will go out and negotiate a new contract." In August, Southwest's mechanics union's contract also becomes amendable.

On-time slippage

Southwest, which regards punctuality as its hallmark, has seen that slip over the past year. Even though its point-to-point service tends to deliberately by-pass the USA's most congested hubs, Southwest's on-time ranking was hit last year and the airline scored a mediocre fifth place out of the 10 US majors in the Department of Transportation's official listings.

The airline blames high load factors as wellas congestion at many of its western-USA destination airports. To tackle congestion it is experimenting with a dual-airbridge system that allows passengers to be boarded and unloaded simultaneously via the front and rear of its 737s. If successful, this system could be adopted permanently, although the prototype airbridge system under test has had teething problems. The airline, famous for its 20min gate turnarounds, is also massaging some of its schedules where greater connection time is needed and is dropping some three-stop connecting services.

The congestion issue is being attacked at a political level and will give Kelleher, who will remain as chairman, a chance to promote his new role. He intends to spend much of his time in Washington DC overseeing the airline's government affairs interests as well as providing "strategic thinking" for the airline. Kelleher is already making noises in those political circles about congestion and the lack of new runway programmes across the USA.

Whatever the problems, Southwest holds a trump card against its US rivals: money. Whether faced with an economic downturn or tackling operational issues, Southwest's enviable low costs and highly-disciplined approach to spending leaves it hands-down the USA's most financially successful airline, with 28 years of solid profitability under its belt.

The carrier shows no signs of spoiling this record under Parker. In the financial first quarter of 2001, with most US carriers suffering in the face of an economic slowdown, Southwest's performance was once again one of the few stellar bright spots. Earnings were up 26.6% to $121 million, revenues increased 15% to $1.4 billion, and the airline has a healthy $685 million cash in the bank. With those sorts of Wall Street-pleasing figures, Parker should relish his role as chief.