Southwest's challenges grow By Dan Reed, USA TODAY DALLAS =97 They don't talk much anymore about the trophy at Southwest=20 Airlines. It's the one they shamelessly created and awarded to themselves = =97=20 five times =97 for winning the industry's triple crown: best on-time record;= =20 fewest mishandled bags; lowest ratio of customer complaints. The hardware,= =20 at headquarters here, symbolizes the Southwest of the 1990s: aggressive,=20 frequently irreverent, a little insecure and relentlessly self-promoting.=20 But it's been six years of hard-to-manage, double-digit annual growth since= =20 Southwest last won it. Today, Southwest is bigger and so are its problems:= =20 In July, the triple-crown winner plunged to No. 8 on the on-time rankings=20 list, with 31 daily flights making the FAA's problem list by being late at= =20 least 70% of the time. The post-Sept. 11 security changes have been a=20 bigger headache for Southwest than anybody else. Some disgruntled frequent= =20 flyers have bolted to rivals. And its unions say it's about time they get=20 top pay from the industry's top performer. In 11 years, Southwest has gone from 124 airplanes, 9,800 workers and 1,200= =20 daily departures to 370 jets, 35,000 people and 2,800 daily departures. As smallest of the 10 major U.S. airlines in 1991, it was a nimble gnat=20 flying circles around the big guys and annoying =97 but not threatening =97= =20 them. Today, it's one of the big guys, No. 4 in passengers boarded. That=20 makes it a more formidable threat to conventional rivals. But it also=20 brings on many of the problems that have dogged the others. So far,=20 operating in the red isn't one of them. Southwest has remained profitable = =97=20 barely =97 since last year's terrorist attacks. But without an unusual March= =20 Easter holiday travel weekend, Southwest likely would have posted a small=20 first-quarter loss instead of a modest $21.4 million profit, analysts say.= =20 On Thursday, it is expected to report a thin third-quarter profit of about= =20 5 cents a share, down 80% from the third quarter of 2000 (considered a=20 better comparison because of the terrorist attacks in 2001). This year=20 should still end up being Southwest's 30th-consecutive profitable year. But= =20 there's growing concern on Wall Street that air travel demand is weakening= =20 again, which could push Southwest into the red in the fourth quarter. That= =20 would be its first quarterly loss since first quarter 1991. Cautious=20 Southwest CFO Gary Kelly says the quarter is too close to call. Southwest's most visible problem, as with all airlines, is the drop in=20 demand for air travel the past 18 months. While fallout from the terror=20 attacks gets part of the blame, Kelly says more of it goes to general=20 economic weakness and specifically the collapse of the late '90s technology= =20 and telecom bubble. The airline industry saw similar low levels of demand=20 during the short recession in the early '90s. "But we've never seen as big= =20 a downward swing over such a short period of time," he says. Industry=20 observers and insiders increasingly speculate that demand might never=20 return to the levels of the late 1990s, when Southwest's low-fare strategy= =20 seemed almost unnecessary because so many people were willing to pay=20 whatever rivals charged. That's why many now hold up Southwest's low-fare,= =20 low-cost business model as the new ideal. UBS Securities analyst Sam=20 Buttrick suggests that a decade or more from now, as much as 50% of demand= =20 for air travel in the USA will be met by low-fare, low-cost operators, of=20 which Southwest is likely to be preeminent. Kevin Mitchell, head of the=20 Business Travel Coalition, an advocacy group representing large=20 corporations' travel departments, thinks low-fare, lost-cost carriers can=20 grab as much as 35% of the market, up from the current 18%, by the middle=20 of this decade. Even then, making money won't be as easy for Southwest as=20 it once was. Its own growth and the government's new airport and airline=20 security measures have eroded its hallmark simplicity. That makes Southwest more difficult to manage and less appealing to its=20 bread-and-butter customers. Environment changes Budget conscious business travelers used to love Southwest, not only for=20 its prices, but because it was so easy to buy a ticket at the last moment,= =20 move from curb to gate in minutes, and be on their way. No muss. No fuss.=20 No more. Southwest now is "synonymous with standing in line," complains=20 Mitch Petty, 36, a computer consultant from Houston who used to be a loyal= =20 Southwest flier. Sure, Southwest's low-tech, lightly staffed airport=20 systems required the unsophisticated to stand in several lines to buy=20 tickets and check bags. And everybody had to queue up to board. But Petty=20 appreciated the prices, and he had learned to use short cuts Southwest had= =20 rigged to make things easier for its frequent customers. New security=20 procedures short-circuited the short cuts and lengthened the lines. Petty=20 switched to Continental last winter and hasn't returned. Thousands of=20 others have done the same. "Southwest is trying. They have made some=20 improvements lately," he says. "I may eventually go back to them. But the=20 (security) policies have been more detrimental to them than to any other=20 airline." Those procedures were a nightmare for every airline, but none=20 more than Southwest. Because it has never assigned seats, Southwest didn't= =20 have the technology needed to track passengers every step, from curb to=20 seat, easing the security jams. For other airlines, which have the tracking= =20 technology, the new security meant an easier re-programming task. Dave=20 Ridley, vice president of ground operations, agrees that Southwest's=20 relationship with its customers was harmed as the airline scrambled to=20 adapt. Since early summer, though, the airline has been providing "about as= =20 convenient an airport experience as we possibly can provide, given the=20 factors that are within our control." Random gate screenings of passengers previously cleared through security=20 checkpoints have been especially harmful. Factors that figure prominently=20 into who gets selected for gate screenings include last-minute and one-way= =20 ticket purchasers, a description of Southwest's best customers. Being=20 singled out for gate screening might be embarrassing and frustrating, but=20 on other carriers, there's no real penalty because seats are assigned. But= =20 Southwest passengers board on a first-come, first-seated basis. Getting=20 pulled out of line for gate screening pretty much dooms a traveler to=20 boarding last and getting stuck in a much-dreaded middle seat.=20 Broad-shouldered former jock Charles Jones, development director at Kendall= =20 College in Evanston, Ill., says that's too high a price and that he came=20 close to deserting Southwest last spring before it began making=20 improvements to limit, if not eliminate, the problem. Losing customers such= =20 as Jones is huge for Southwest. A frequent flier for 17 years, he flew more= =20 than 3 million miles on American between 1985 and 1995, earning executive=20 platinum frequent-flier status. But in the mid-90s, he took a job in the=20 dot-com start-up world and fell in love with Southwest. "Earning the right= =20 to be upgraded to first class was something you used aspire to," he says.=20 "But it's not that way anymore." Southwest's low fares and "the fact that=20 they were always on time" made it an attractive option to Jones and=20 thousands of others. Ridley says July's drop in on-time ranking was largely= =20 the result of other carriers improving their showings =97 in part because=20 they reduced their flight numbers. "The fact that Southwest has continued=20 to be No. 1 in fewest customer complaints continues to be the truest=20 measure" of consumer satisfaction with the airline, he says. Higher-ups take note Still, Southwest's embarrassment is obvious. After the July numbers came=20 out, on-time operations became a matter of intense management interest. In= =20 September, Ridley says, the carrier completed 88% of its flights on time.=20 Insiders say growth is at least partly to blame for the delay problems,=20 putting the airline increasingly in conflict with its preference for older,= =20 smaller airports where, the theory used to be, it could execute its famous= =20 20-minute turnarounds flawlessly. Now, some of those facilities have become= =20 congested, often by Southwest's own burgeoning schedule. Its expansion into= =20 the Midwest and Northeast in the past decade also has exposed Southwest to= =20 more potential weather delays. Increased spending on airport personnel and= =20 systems is helping solve the problem, Ridley says. Compounding Southwest's= =20 operational challenges are more complex labor issues. Its employees,=20 two-thirds of whom have been with the company less than eight years, are=20 weary of being in the bottom half of the industry in pay even though their= =20 airline produces the highest returns. The airline's mechanics, represented= =20 by the Teamsters, ratified a new contract last week, but only after=20 rejecting a prior deal. Pilots just agreed to a two-year contract extension= =20 that will move them closer to what their counterparts at major airlines=20 earn. In both cases, CEO Jim Parker, who doubles as the airline's chief=20 negotiator, had to give more than he initially said the airline could= afford. Kelly understands the rising cost pressures better than anyone. But the=20 expensive new labor contracts were necessary to keep the airline moving=20 forward, he says. Jon Weaks, pilots union president, agrees with Kelly on=20 the need to maintain both labor peace and relatively low costs. When he ran= =20 for office two years ago, Weaks' theme was "we don't want to become another= =20 big airline." But that has little to do with pay rates. He says the quality= =20 of communications between management and labor deteriorated as the=20 workforce grew. Intense, sometimes painful conversations have improved=20 communications. And that's important "if you want to maintain the=20 relationships with your people that are at the very center of your ability= =20 to keep your cost advantage over the other guys," Weaks says. Ridley says=20 the issues facing Southwest are all just part of the process of maturing.=20 "Herb Kelleher used to say that Southwest was a gangly adolescent," he=20 says, quoting the airline's legendary, semi-retired co-founder. "I think of= =20 us now as a maturing adult that has a lot of youthfulness left in us." 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