3-Southwest: Joining the legacy airlines?

Posted 3/13/08

A recent San Francisco Chronicle article on Southwest Airlines revealed some interesting information:

• Southwest is the largest air carrier in the United States, measured by domestic boardings. I believe American Airlines is bigger when it comes to revenue.

• Southwest would have lost money in 2007, and perhaps in other years, had it not been for its fuel hedging. The company has made forward purchases of fuel for a number of years, perhaps going back to 1991. These fuel hedges reduced operating costs by enough for the company to make a profit. In fact, Southwest has been profitable for 35 consecutive years, more than any other airline for sure. However, the fact that the company needed the fuel hedges to make money suggests that the legacy airlines have finally gotten their domestic costs and utilization rates to such a level that the low priced, low cost competitors are beginning to feel the squeeze. Jet Blue felt it as well. All the big domestic legacy carriers, with the exception of American Airlines, have gone through bankruptcy. Bankruptcy reduced their unit costs drastically.

• Southwest has the highest paid employees in the industry. This would undoubtedly surprise many people. How could a low cost, low priced competitor pay its employees more than the legacy airlines? The answer is that the unions at Southwest impose much easier work rules than do the unions at the legacy carriers. It is always work rules rather than rate of pay that mark the difference in costs in a unionized industry. This same phenomenon has occurred before. By the late 1980s, Nucor employees were paid substantially more than were the employees of the big integrated steel manufacturers. Nucor traded easy work rules for high annual total compensation for its employees and it grew in the process. So did its employees’ lifestyles.

• Southwest is making a big push for the business traveler. Most of us probably think of Southwest primarily as a leisure traveler airline. It certainly has been that. But business travelers pay a lot more per seat mile than do leisure travelers. Southwest has concluded it has to gain some of these customers, who are largely owned by the legacy airlines, in order to prosper in the future.

It seems pretty clear that Southwest is evolving toward a business model that looks just like that of the legacy airlines. Of course, the legacy airlines are returning the favor by offering services that are about what Southwest offers as well. As a traveler, I am not sure I like the result, but then most of the market must like it or it wouldn’t continue to exist.

 

Update 6/25/25:

Market shares shifted a great deal from 2008 until 2025. Southwest Airlines emerged the clear winner. In 2008, Delta (combined with Northwest Airlines in 2008) held roughly 20% of the market. American Airlines followed with 18%, then United at 16%. SWA rounded out the top four at 14%. Both Continental and US Airways held about 8% of the market.  By 2025, American Airlines (combined with US Airways in 2013) held 21% of the industry’s available seats, followed by SWA at 19%, Delta at 18% and United (combined with Continental in 2010) at 15%.

By 2020, SWA had become a clear leader in the industry. Over the years from 2008, even until 2025, SWA continued to offer a Predator product. The company offered low prices on its standard routes. As the legacy airlines began to close price gaps on base prices, SWA maintained a lead on pricing by offering ancillary products and services for free while the legacy airlines charged for such services as checking bags and changing flight arrangements. The three legacy airlines were in a collective Leaders Trap.

The mergers, which consolidated much of the industry from 2008 until 2025, simply delayed the rise of SWA. Delta merged with Northwest Airlines but still lost about two percentage points in market share. American Airlines acquired US Airways and then lost about 5 percentage points of the combined airlines’ share. United merged with Continental and lost nine percentage points of the original airlines’ could market share. Both American Airlines and United struggled to consolidate their acquired airlines. In the meantime, SWA gained five share points in this period, while the three legacy airlines lost a total of 16 share points.

Industry consolidation did not hurt SWA. But two major changes by the legacy airlines did: new lower price points and real-time pricing. In the first change, the three legacy airlines unbundled their product pricing to create new Stripper Price Leader products at lower prices. These lower price points removed previously free benefits in the base product in return for price savings. These removed benefits often remained available through optional pricing. With the creation of these new price points, the legacy airlines significantly reduced the pricing gap they had with SWA. In the second change, the three legacy airlines freed themselves from rigid rules and technological impediments to institute dynamic pricing. In 2025, the three legacy airlines could change their pricing in real time, even down to the level of the individual passenger.

These two major changes have gradually improved the market shares of the three legacy airlines and put new and uncharacteristic pressure on SWA. Southwest suffered losses in 2024 and 2025, while its competitors were profitable. Southwest is adapting to these strengthening competitors by becoming more like them in base pricing, fees and operating policies. Every day, SWA looks more like the other three legacy airlines. SWA still maintains their customer service focus and culture, which have granted them an unparalleled reputation for Reliability. So, they have reasonable expectations of maintaining their strong market share status.

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THE SOURCES OF STRATEGYSTREET.COM: For over 30 years we observed the evolution of more than 100 industries, many hostile.  We put their facts into frameworks applicable to all industries and found patterns.  Strategystreet.com describes the inductive results of these thousands of observations and their patterns.