=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SF Gate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/chronicle/archive/2001/12= /26/BU91185.DTL ---------------------------------------------------------------------- Wednesday, December 26, 2001 (SF Chronicle) Southwest flying high in downturn/No-frills airline singed, but not burned,= by recession Stephanie Stoughton, Boston Globe Dallas -- Southwest Airlines has always been the country's quirkiest carrier, with its chain-smoking founder, corny cabin jokes and no-frills flights. But amid the recent turbulence, the nation's seventh-largest airline is bucking the prevailing industry trends by resuming growth, planning for a full-year profit and watching its market value eclipse those of its giant rivals. No carrier can boast that it has escaped the dramatic effects of the industry's global downturn, which was exacerbated by the terrorist hijackings. Southwest is no exception. Although passengers are starting to return to the air, the slumping economy and staggering security costs continue to hurt the Dallas company's bottom line. But Southwest has emerged as a leader in the industry's recovery, and one now enjoying unusual support from its employees, customers and investors. Workers praise the company for trimming expenses without layoffs and flight reductions, in spite of punishing declines in passenger traffic after Sept. 11. Wall Street loves Southwest, too: The carrier's shares quickly rebounded following the terrorist attacks, while its competitors' stocks continued to languish. By last week, Southwest's market value had soared past $14 billion, topping the combined stock values of American Airlines, United Airlines, Delta Air Lines, Continental Airlines, Northwest Airlines and US Airways. Southwest's stock closed down 18 cents to $18.65 per share on Monday. Investors have long seen Southwest's business model as one of the industry's strongest because of its discount fares, low operating costs and the lowest debt-to-capital ratio among the major airlines. Southwest has a cash stockpile of more than $2 billion. All of this has contributed to the company's strong performance on Wall Street and a faster turnaround in its business than its rivals since the attacks. POPULAR WITH THE PUBLIC Passengers have also cheered on the company by refusing to cash in refun= ds and pledging to purchase Southwest's shares following the terror attacks. In letters to the airline, they shared post-Sept. 11 stories about flight crews who calmed nerves and helped stranded travelers. One letter described the flight attendant who softly sang the national anthem over the intercom after passengers on Southwest Airlines Flight 247 from St. Louis to Salt Lake City had settled nervously in their seats. "The pilot paused at end of the runway to allow the song to finish, the passengers burst into applause, (and) then we were off, soaring into the night sky," the customer wrote. "It was a moment I'll remember always." Gazing at the ticker symbols, big players that once dismissed their smaller competitor recognize that Southwest can afford to pick some of them off. Southwest executives say this is an unlikely event, though. They remain uninterested in absorbing giant carriers wallowing in debt and flying with incompatible business models. "Why would we do that?" Southwest Chief Executive Officer James F. Parker said incredulously. "It's not a market share game. We have the ability to grow from within." Instead of helping the airline spread its wings, a big merger would lead to Southwest's "own demise," he said. Southwest executives and analysts credit the company's streamlined operations for the airline's continued success in a difficult economic environment. Unlike other airlines, Southwest flies only the Boeing 737, which keeps pilot training and mechanical costs at a minimum. Flying short- and intermediate-haul flights into smaller facilities like Manchester Airport and Providence's T.F. Green Airport translates into smaller landing fees and speedier in-and-out flight service. CARRIER CUTS COSTS Frequent fliers on Southwest know better than to arrive with empty stomachs. That's because the low-fare carrier feeds them only peanuts and other snacks. It also keeps costs down by refusing to assign seats or wait for late passengers. The airline boasts that it can unload and reload a jet in 20 minutes, though that has become a challenge because of beefed-up security measures. Southwest also enjoys smooth employee relations. It prides itself on hiring loyal staff with a flair for customer service and pilots who will deign to pick up trash after flights. In return, Southwest has never laid off a worker since it was founded 30 years ago by Rollin King and Herb Kelleher. Even after Sept. 11, the airline refused to resort to layoffs or furloughs, instead compensating for weaker sales by delaying the delivery of 19 Boeing jets. Southwest has so far managed to avoid the industry's financial quagmires, which could lead to the collapse of a few weaker carriers in 2002. Overall, the industry's capacity, or available seat miles, fell 15 percent domestically in November because of schedule cuts. In sharp contrast, Southwest's capacity increased 7 percent last month. The carrier's load factor, or percentage of seats filled, was 65.3 percent, which was deceptively lower than the industry average of 68.2 percent. Unlike other airlines, Southwest refrained from cutting flights systemwide and even opened up for business in Norfolk, Va. However, the company acknowledges it "bought" back passengers with aggressive fares. READY FOR RECOVERY Analysts say Southwest's healthy finances put it in a position to grow rapidly once the U.S. economy improves. Last week, Southwest said it would accept delivery of two of the deferred Boeing aircraft. It will use the jets to supplement service in five cities. "If the industry recovers by mid-year 2002, Southwest should recover before then," said James D. Parker, an analyst with Raymond James & Associates in Atlanta. "Remember that the industry took out 20 percent of their business, but Southwest took out none. . . . That will leave of lot of business for Southwest and other low-fare carriers." Michael Dyment, a partner at the consulting firm Andersen, said Southwest will also benefit when major airlines raise fares after months of discounting. "The economy will come back, the passengers will come back, and the airlines will try to manage demand by increasing prices," Dyment said. "Then, Southwest will come in and expand at a much faster rate." Southwest has not ruled out revamping its business to include transcontinental flights -- a terrifying prospect for its rivals, which have been forced to lower fares in overlapping markets. The irony is not lost on CEO Parker, who says the powerful airlines should have thought twice before supporting federal taxes and security fees based on flight segments, which hurt carriers flying shorter routes. "What they did is shift our business model," Parker said. Before any major expansion, though, Parker and his team must wait for sales to rebound. In the third quarter, Southwest's net income dropped 18 percent to $151 million compared with the year-earlier period, even after a pretax gain of $169 million from the federal airline rescue package. Operating revenue fell almost 10 percent to $1.34 billion in the quarter ended Sept. 30. "I don't know if you can get business back to normal in this environment= ," Parker said. "The emotional effects are diminishing. But the economic effects continue to linger." With December traffic unpredictable until the last week of the year because of holiday travel, the company is not promising to post a profit in the last three months of the year. But "odds are we will lose money" in the quarter, said Gary Kelly, Southwest's chief financial officer. =20=20=20=20 ---------------------------------------------------------------------- Copyright 2001 SF Chronicle