Southwest Airlines Co. History

Company Perspectives:

The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.

Key Dates:

1967:

Company is incorporated as Air Southwest Co.

1971:

Airline launches first route, connecting Dallas, Houston, and San Antonio.

1973:

SWA posts first profit and begins RUSH cargo service.

1975:

Southwest goes public on the American Stock Exchange.

1976:

Company is renamed Southwest Airlines Co.

1977:

Shares migrate to the New York Stock Exchange.

1978:

Herb Kelleher becomes Southwest's outspoken new chairman.

1979:

SWA flies outside Texas to New Orleans.

1981:

Kelleher is named company president and CEO.

1982:

SWA begins flights to West Coast.

1990:

Revenues exceed $1 billion, making SWA a major airline.

1994:

Morris Air and Arizona One are acquired.

1996:

Online booking site is launched.

2000:

SWABIZ corporate booking tool is introduced.

2005:

SWA enters first ever codeshare arrangement, with ATA Airlines.

Company History:

Southwest Airlines Co. (SWA), the model for budget upstarts everywhere, has become the largest domestic airline in the United States, by number of passengers carried. More than 70 million passengers fly SWA each year to about 60 destinations around the country. Passengers have found that Southwest's rock bottom pricing creates almost a new form of transportation, more in competition with the automobile than other airlines. They are willing to forsake in-flight meals, baggage transfers, and other traditional frills for economically amenable wings.

The company flies only Boeing 737s, to simplify maintenance and training, and employee productivity is high. Planes are turned around for their next flight in just 15 minutes, one-third the industry average. Though the airline has boosted its wages and taken on other aspects of a traditional airline, such as its first codeshare arrangement, Southwest remains a maverick in the industry.

Beginning a Labor of Love

Southwest Air was founded in 1966 when a group of Texas investors, including Rollin King, M. Lamar Muse, and Herbert D. Kelleher, pooled $560,000 to form the Air Southwest Company. Incorporated in 1967, the company was envisioned as a commuter airline serving three cities within Texas: Dallas, Houston, and San Antonio. Although the Texas Aeronautics Commission (TAC), the regulatory body responsible for overseeing aviation within the state, granted the company permission to fly the routes it had requested in February 1968, three competing airlines filed suit to prevent the airline from getting off the ground. Kelleher, an attorney whose stake in the airline was a mere $20,000, took the case all the way to the U.S. Supreme Court, and in December 1970 this court ruled in favor of Air Southwest.

Six months later, after fighting numerous legal battles, changing its name to Southwest Air, and selling stock in the company, the fledgling airline began operations on June 18, 1971. Under the stewardship of President M. Lamar Muse, the airline offered six daily roundtrip flights between Dallas and San Antonio, and 12 daily roundtrip flights between Dallas and Houston. One-way tickets cost $20.

Courting the commuter, the company stressed "no-frills" convenience and, in reference to Love Field in Dallas, its home base, made "love" its promotional theme. Flight attendants were dressed in hot pants and go-go boots to serve "love potions" and "love bites" (also known as drinks and peanuts) to the company's clientele of mostly male business fliers. Southwest made much of its scantily clad women, whose pin-up-like images would eventually appear widely, including on the cover of Esquire magazine.

By the end of 1971, Southwest owned four aircraft, offered hourly flights between Dallas and Houston, and had inaugurated service between San Antonio and Houston, completing the last leg of a triangular route. In the following year, the company transferred its Houston service from Houston Intercontinental Airport to William P. Hobby Airport, located much closer to the city's downtown, in an effort to become more convenient to commuters. In 1973, Braniff Airlines began a fare war with Southwest over service from this airport to Dallas. Southwest resorted to giveaways of liquor, leather ice buckets, and 50 percent discounts on fares. The company also introduced cargo service between the airports it served and by the end of 1973 had notched its first profitable year, carrying over half a million passengers.

Still More Controversy in the 1970s

Southwest again found itself involved in legal controversy in 1972, when the cities of Dallas and Fort Worth and their Regional Airport Board filed suit to force the airline to move from Love Field to the newly constructed Dallas-Fort Worth regional airport, hoping that by charging higher landing fees and rent there, they could help offset the cost of the expensive project. While all the other airlines had signed a contract to move to the new airport in 1968, Southwest had not done so because it was not in existence at that time. In a big break for Southwest, a federal judge ruled in 1973 that the airline could continue to operate at Love Field in Dallas as long as the airport remained open. Thwarted, the Dallas City Council subsequently passed a law closing the airport to all scheduled airlines, but this law was thrown out in court.

In 1974, Southwest's competitors began moving out to the Dallas-Fort Worth Airport, leaving the airline with a monopoly on service from the cheaper, more convenient airport. After defeating yet another legal challenge, this one from the other carriers, Southwest was able to solidify its presence at Love Field and its newly renovated facilities at Houston's Hobby Airport, making its strong commuter service the basis for broader operations.

This expansion began in 1975, when the airline inaugurated service to the Rio Grande Valley, with four roundtrip flights each day to Harlingen. By the end of that year, the company had acquired a fifth plane, and its stock was listed on the American Stock Exchange under the ticker symbol "LUV." In the following year, Southwest laid plans to extend service to five other Texas cities and again found itself the object of hostile litigation by competitors.

In 1977, the airline put into effect its plan to offer service from Corpus Christi, Lubbock, Midland/Odessa, El Paso, and Austin. Its stock was transferred to the New York Stock Exchange, and the company issued its second and third quarterly dividends, the latter totaling seven cents per share. In May of that year, the airline exceeded the five million passenger mark.

Deregulated at Last

In 1978, Congress passed the Airline Deregulation Act, fundamentally altering the nature of the airline industry. Although Southwest was now legally free to greatly expand its operations, the company planned conservative growth to avoid the perils of taking on large debts.

In early 1978, the airline applied for permission to purchase a wholly owned subsidiary, Midway (Southwest) Airway Company, in order to inaugurate service from Chicago's Midway Airport to six midwestern destinations. Although it received tentative approval to do so, Southwest abandoned this ambitious attempt at expansion in August. Instead, the company added service to the mid-sized Texas city of Amarillo and the Jefferson County Airport. In July 1978, the company implemented its first fare increase since 1972, adding three dollars to the cost of a one-way ticket, and five dollars for a roundtrip fare. By the end of the year, the airline's fleet had grown to 13 Boeing 737 planes.

In March 1978, significant changes were made in Southwest's upper-level management. After a dispute with the airline's governing board, President M. Lamar Muse, who had largely shaped the company during its early years, was deposed by the board and replaced by lawyer Kelleher, who became chairman. In August, Howard D. Putnam, a United Airlines executive, became president and chief executive officer.

In 1979, Southwest introduced self-ticketing machines in many of its airports to speed up and simplify passenger ticketing, and the airline introduced service to New Orleans, its first destination outside Texas. In late December 1979, earlier opponents of Southwest's continuing use of Love Field won a partial victory in Congress. Speaker of the House Jim Wright, a Congressman from Texas, attached a rider to a federal trade law which forbade traffic between Love Field and any states other than Louisiana, Arkansas, Oklahoma, and New Mexico, the four states surrounding Texas. This severe limitation of Southwest's interstate flights from its hub forced the airline to conform to its established role as a commuter service for the energy belt, now in a severe depression. The airline inaugurated service to Oklahoma City, Tulsa, and Albuquerque in April 1980.

Earlier that year, Southwest was hit by a machinists' strike, which curtailed operations for several weeks. The company brought in temporary workers to keep 12 of its 18 planes flying, and the union eventually settled for what the airline had initially offered.

In 1981, celebrating its tenth year of operation, the airline introduced a multimedia advertising campaign featuring the theme, "Loving you is what we do," and produced an ad picturing six Southwest flight attendants, all purportedly "physical 10s," grouped around a birthday cake, promising, "You ain't seen nothin' yet." In June 1981, the airline was found guilty of sex discrimination in a class action suit filed by a man seeking a job as a ticket agent and ordered to cease its discriminatory hiring practices. Also in 1981, after a series of petition drives, stewardesses won the right in their new contract not to wear hot pants on the job.

In September 1981, President Howard Putnam resigned to become the head of Braniff International Airlines, and was succeeded as president and chief executive officer by Chairman Kelleher, who brought his flamboyant personal style to the job of running the airline. With Kelleher at the helm, the airline's pace of expansion picked up markedly, despite the nationwide recession and difficulties arising from an air traffic controllers' strike. In early 1982, Southwest introduced service from Kansas City, Missouri, to seven destinations. Just a few weeks later, the airline made its entry into the western air travel market when it began flights from San Diego, Las Vegas, and Phoenix. Additional California service was inaugurated that fall, when Los Angeles and San Francisco came on line.

The airline's steady growth continued in 1983, as it added customers, flights, and airplanes. The company ratified a two-tier wage system, secured a one-year pay freeze from its pilots' association, and signed contracts with several of its unions, including its mechanics and flight attendants. Service from Denver began in May 1983.

Stretching Out in the 1980s

In a departure from its previous policy of sticking to short-haul flights, Southwest inaugurated two routes between Texas and California--El Paso to Los Angeles and San Antonio to Los Angeles--as well as a major north-south California route from San Diego to San Francisco. Entry into these long-haul markets, coupled with bad weather throughout the Southwest region, curtailed profits somewhat during this period.

In 1984, helped by ongoing peace with its labor unions, Southwest continued to increase capacity and rack up steady profits, despite growing competition from Continental, Braniff, and Muse Air, founded by the former president of Southwest. In July 1984, the company implemented limited cost-cutting measures, paring back unprofitable flights and reducing new hires. The company took delivery on the first of a new generation of planes, the Boeing 737-300, and introduced service from another midwestern city, Little Rock, Arkansas.

The following year, Southwest further expanded its midwestern network of routes, adding flights to St. Louis and Chicago's Midway airport. The company unveiled its "Just Say When" promotion, touting itself as the most convenient way to travel. The airline also made its first big acquisition when it paid $60 million for Muse Air Corporation, a Houston-based competitor, to prevent another competitor, Continental Airlines, from snatching it up. Unlike Southwest, Muse Air offered longer flights and full service to its customers. Kelleher kept the full-service frills and renamed the airline Transtar. In its first year, the money-losing company was able to turn a small profit.

By 1986, Southwest had scheduled flights from 25 cities. The airline introduced a number of fare-cutting measures in efforts to maintain its market share in the heavily competitive post-deregulation airline industry. "Incredible Pair Fares," "Fly Now, Pay Less," programs, $25 tickets for senior citizens, and finally "Fun Fares" became part of the strategy to lure more fliers to the skies. In addition, the airline was waging a fare war at its Phoenix hub against America West Airlines, offering flights between California and Arizona for $25.

During the summer of 1986, the airline stepped up the hoopla surrounding its low fares, making "fun" its new corporate byword and implementing a "fun" uniform of golf shirts, surfer shorts, and tennis shoes, along with in-flight games and giveaways. In July, the golf shirts were replaced by red Southwest T-shirts asserting that "Southwest Fliers Have More Fun." In an effort to simplify ticketing, a drive-through ticket window was installed near the airline's Dallas hub in August 1986, and in October tickets became available through automatic teller machines at 7-Eleven stores in Corpus Christi, Texas.

By 1987, Southwest's full-service subsidiary Transtar was locked in head-to-head combat with Continental for service out of Houston's Hobby Airport. The competing airline hit Transtar with cheaper flights scheduled 15 minutes before and after every Transtar departure, and the Southwest subsidiary was soon draining off $2 million in losses every month. In August 1987, after suffering a net loss for the first quarter of the year, Southwest shut down Transtar. The Transtar debacle cut the company's year-end earnings by 60 percent.

Despite aggressive pricing, Southwest found its rapid expansion thwarted in some markets, as full-service rivals drove the airline out of Denver, hampered its ambitious plans for operations in Nashville, and continued to put up stiff resistance in Phoenix. In addition, the airline was fined $402,000 by the Federal Aviation Authority in 1987. Faced with the demands of business fliers, the company introduced its first frequent flier program. Unlike the programs of other airlines, which award prizes based on mileage accrued, Southwest's program was designed to reward the short-haul flier, allotting prizes on the basis of number of trips taken.

In 1988, Southwest President Kelleher announced plans to double the airline's size by 1994. His strategy for accomplishing this was to increase the frequency of flights between cities already on the Southwest route map and to open up new routes in California and the Midwest. In keeping with the airline's policy of flying out of airports that are close to urban centers, Southwest also switched its Detroit flights to Detroit City Airport from the more remote Metro Airport.

Also in 1988, as a sign of the ever growing airline's commitment to lightheartedness, Southwest painted one of its 737s to resemble a killer whale to celebrate the company's agreement to become the official airline of Sea World of Texas. Shamu One, named after Sea World's mascot orca, was eventually joined by Shamu Two and Shamu Three. When Federal anti-smoking regulations went into effect on all domestic flights, Southwest offered its passengers lollipops as a substitute for the now-banned cigarettes. Passengers on flights during the winter holiday season of 1988 reported that flight attendants were dressed as elves and reindeer, and that the pilot sang Christmas carols over the public address system while gently rocking the plane from side to side.

In the spring of 1989, Southwest began its planned assault on the California market and touched off a fare war with much larger carriers, such as American Airlines and United Airlines, when it introduced $19 fares from Oakland International Airport, in the San Francisco Area, to Ontario, a suburb of Los Angeles. Aiming to reach $1 billion in revenues for the year, Southwest planned continued expansion of its fleet of planes and added Indianapolis to its route map. In a novel pairing of businesses, the company offered, for a limited time, a free companion ticket to anyone buying a holiday meal at Kentucky Fried Chicken.

Prudence Prevails in the 1990s

As a result of its steady growth, Southwest entered the 1990s as a major airline, with a fleet of 94 planes serving 27 cities. Relying on conservative financial management, the company was able to avoid the pitfalls of debt that crippled many other carriers in the early 1990s, and despite suffering a loss in its fourth quarter, turned an overall profit in 1990.

Southwest took advantage of the misfortunes of its competitors in 1991, scooping up market share abandoned by ailing US Air in California and by bankrupt America West in Phoenix, and buying gates at Midway Airport from its defunct Chicago competitor, Midway Airlines. By year's end, Southwest had 124 jets flying to 32 cities.

By 1992, the company's concerted push into the California market had proven profitable, and Southwest became the second largest carrier in the state. The company looked to the Midwest as its next largest site of expansion. When the Department of Transportation began ranking airlines based upon baggage handling, customer satisfaction, and on-time performance, Southwest outpaced its larger, more expensive colleagues to win the first "Triple Crown" in 1992. Moreover, it kept winning them year after year. In 1993, when Southwest was expanding to the East Coast via Baltimore/Washington International Airport, Southwest was the only major carrier to take home a profit.

Southwest aggressively pursued non-traditional means of ticketing passengers. It sidestepped Apollo and other established reservation networks in lieu of more direct contact with travel agents. It dubbed its own network SWAT, for Southwest Air Travel.

Takeovers of Morris Air and Arizona One in 1994 expanded the company's network still further. The company continued to add routes to the Midwest and California. Southwest followed suit with its low-budget peers by eliminating paper tickets.

In 1995, the company reached $2.8 billion in operating revenues. Within five years, Southwest had added more than 10,000 employees to its roster. Southwest commemorated its 1996 silver anniversary with a special plane called Silver One. Internet ticket sales debuted along with new Florida service, which added the carrier's 50th city in 1997.

For the 25th consecutive year, the carrier posted a profit in 1997, $317.7 million. Due to its low fares, the carrier by entering a market could increase the volume of passenger traffic fourfold, and some businesses used the availability of Southwest service as a prime criterion in choosing new locations. The airline's 2,300 flights per day, impressive safety record, and status as a much admired corporate citizen suggested it would long remain one of the industry's legendary survivors.

Southwest continued its eastern push in the late 1990s, entering New York (Islip) and exploiting a void in the Raleigh-Durham market left by retreating American Airlines and US Airways. It was also adding long-haul flights to its network.

Taking Care of Business After 2000

In 2000, SWA introduced an online booking tool geared toward corporate travel offices called SWABIZ. This offered convenient access to Southwest's low fares rather than corporate discounts per se, an official told Business Travel News. Earnings were about $600 million on revenues of $5.6 billion in 2000.

In 2001, Southwest took legal action to prevent the Orbitz online booking site from displaying its fares. This move surprised some observers. Southwest complained of other airlines getting preferential treatment on the site, particularly the ones that owned Orbitz LLC. Southwest did allow the Sabre computer reservations system to list its flights, though reservations had to be made through Southwest.com.

The question of who would follow Southwest's inimitable leader and spokesman, Herb Kelleher, was resolved in June 2001. While retaining the office of chairman, he was replaced as president by the company's general counsel, James F. Parker, and as CEO by former executive vice-president for customers Colleen C. Barrett. (The two had previously worked together for Kelleher's law firm.)

Southwest was not immune to the effects of the September 11, 2001 terrorist attacks on the United States. Increased security following 9/11 made traveling by auto a more attractive choice for many. While its larger rivals laid off tens of thousands of workers, lost billions of dollars, and appealed for bankruptcy protection in the two years following the attack, Southwest remained profitable, avoided layoffs, and kept its employees working.

Southwest allowed the A&E Television Network to film a reality show on its planes beginning in 2003. The show was a clone of a British show centered on easyJet PLC, which itself was closely modeled after Southwest.

Success of the "major" airlines in wresting concessions from labor eroded one area of Southwest's relative competitive advantage as its own unions negotiated more lucrative compensation. Jim Parker retired as CEO in 2004 following contentious contract negotiations with the flight attendants' and mechanics' unions. He was succeeded by former CFO Gary C. Kelly.

After more than 30 years of consistently profitable growth, Southwest was flying more passengers than any other U.S. airline. Its 417 planes were making 2,900 hops a day to 59 destinations. Revenues continued to increase at a 10 percent clip, reaching $6.5 billion in 2004. The company's cargo business, from freight carried in its planes' belly holds, was small but growing, with $117 million in 2004. Earnings of $313 million were no record but were handsome compared to other airlines in the post-9/11 environment.

The airline continued to look for ways to cut costs. It trimmed its reservations staff as Internet booking became more popular. It installed winglets on its planes to cut fuel consumption and benefited greatly from hedging on oil prices.

Southwest entered the Philadelphia market in May 2004, mounting a robust challenge to a US Airways stronghold. The airline was also reviving a challenge to the decades-old law that kept Southwest from operating beyond adjacent states from Love Field. "Growth opportunities have become more precious," CEO Gary Kelly told Air Transport World. SWA entered its first codeshare agreement with the much smaller ATA Airlines in December 2004. This type of deal, common in the industry but surprising for the famously independent Southwest, allowed the two carriers to list and sell seats on each other's flights. Southwest also negotiated to buy six gates at Chicago's Midway Airport from ATA, bringing its total there to 25, and a 27.5 percent stake in ATA, which was in bankruptcy. The deal cost $117 million.

Moving into 2005, Southwest was facing many familiar challenges: rising oil prices, intense competition, cumbersome regulations. In the uncertain times that had legacy (traditional) carriers reeling, Southwest was still winging ahead with its ever-popular low-fare formula.

Principal Subsidiaries: API Terminal, Inc.; Southwest ABQ RES Center, Inc.; Southwest Jet Fuel Co.; TranStar Airlines Corporation; Triple Crown Insurance Ltd. (Bermuda).

Principal Competitors: AirTran Holdings, Inc.; AMR Corp.; Continental Airlines, Inc.; Delta Air Lines, Inc.; JetBlue Airways Corporation; United Airlines Inc.

Further Reading:

• Allen, Margaret, "SW Airlines' President Has a Customer-First Flight Plan," San Antonio Business Journal, August 31, 2001, p. 13.
• Brooker, Katrina, "Can Anyone Replace Herb?," Fortune, April 17, 2000, pp. 186+.
• Brown, David A., "Southwest Airlines Gains Major Carrier Status by Using Go-It-Alone Strategy," Aviation Week & Space Technology, March 5, 1990.
• Chakravarty, Subrata N., "Hit "Em Hardest with the Mostest," Forbes, September 16, 1991.
• "Corporate Case Study: Southwest Airlines Keeps PR Course with Flying Colors," PR Week (US), January 26, 2004.
• Donnelly, Sally B., "One Airline's Magic: How Does Southwest Soar Above Its Money-Losing Rivals? Its Employees Work Harder and Smarter, in Return for Job Security and a Share of the Profits," Time, October 28, 2002, pp. 45+.
• Flint, Perry, "Southwest Keeps It Simple," Air Transport World, April 2005, pp. 26+.
• Freiberg, Kevin, and Jackie Freiberg, Nuts! Southwest Airlines' Crazy Recipe for Business and Personal Success, Austin: Bard, 1996.
• Gibney, Frank, Jr., "Southwest's Friendly Skies," Newsweek, May 30, 1988.
• Gibson, Jane Whitney, and Charles W. Blackwell, "Flying High with Herb Kelleher: A Profile in Charismatic Leadership," Journal of Leadership Studies, Summer/Fall 1999, p. 120.
• Gruner, Stephanie, "Have Fun, Make Money: How Herb Kelleher Parties Profitably at Southwest Airlines," Inc., May 1998, p. 123.
• Jonas, David, and David Meyer, "SW Shines in Light of Biz Changes," Business Travel News, December 9, 2002, pp. 1+.
• Keating, Peter, "Rating the Airlines: The Best Airlines to Fly Today," Money, November 1, 1997.
• Kelly, Kevin, "Southwest Airlines: Flying High with 'Uncle Herb'," Business Week, July 3, 1989.
• Labich, Kenneth, and Ani Hadjian, "Is Herb Kelleher America's Best CEO?," Fortune, May 2, 1994.
• Levering, Robert, and Milton Moskowitz, The 100 Best Companies to Work for in America, New York: Doubleday, 1993.
• ------, "The 100 Best Companies to Work for in America," Fortune, January 12, 1998.
• Loeffelholz, Suzanne, "The Love Line," Financial World, March 21, 1989.
• McKenna, Ed, "Southwest's Cargo Turn: The 'Southwest Effect' Is Being Felt in Bellies, with Revenue Surging, Forwarders Praising," Traffic World, February 14, 2005, p. 30.
• Maglitta, Joseph, "Lean, Mean Flying Machines," Computerworld, July 11, 1994.
• Putnam, Howard D., The Winds of Turbulence, New York: Harper Business, 1991.
• "Southwest: After Kelleher, More Blue Skies," Business Week, April 2, 2001, p. 45.
• Southwest Airlines Co., Southwest Airlines History, Dallas: Southwest Airlines Co., 1991.
• "SW CEO: Crisis Opens Door," Business Travel News, November 8, 2004, pp. 1+.
• Taylor, John H., "Risk Taker," Forbes, November 14, 1988.
• Troxell, Thomas N., Jr., "Deregulation in Stride," Barton's, January 23, 1984.
• Walker, Karen, "The King of Low-Cost," Airline Business, June 1999, p. 38.
• Weber, Joseph, "These Two Airlines Are Doing It Their Way," Business Week, September 21, 1987.
• "Why Herb Kelleher Gets So Much Respect from Labor," Business Week, September 24, 1984.
• Zellner, Wendy, "Dressed to Kill ... Competitors," Business Week, February 21, 2005, p. 60.
• ------, "Striking Gold in the California Skies," Business Week, March 30, 1992.
• Zellner, Wendy, and Michael Arndt, "Holding Steady; As Rivals Sputter, Can Southwest Stay on Top?," Business Week, February 3, 2003, p. 66.

Source: International Directory of Company Histories, Vol. 71. St. James Press, 2005.

Directory of Sample Business Plans Directory of Company Histories Contact Us Advertise