Is Southwest Airlines Co. Losing Its Edge?

Historically, Southwest Airlines Co. (NYSE: LUV  ) differentiated itself from the legacy carriers through a combination of lower fares and better service. With these two big advantages, it was hardly surprising that Southwest consistently took market share from larger competitors like Delta Air Lines (NYSE: DAL  ) and American Airlines (NASDAQ: AAL  ) .

Today, Southwest still offers free checked bags (a rarity in the airline industry), and a very liberal ticket-change policy. However, it has given up some of its traditional advantages. Its average fare rose to $154.72 last year, compared to $126.12 in 2008. Part of this rise has been driven by longer passenger trips, but cost creep has also been a major factor.

Southwest's advantage over legacy carriers like Delta and American is disappearing. Source: The Motley Fool

Meanwhile, as Southwest has become more like the legacy carriers, it has given up its edge in operational performance. While Southwest Airlines still positions itself as a disruptive innovator in the airline industry, its superiority over competitors is much less certain now.

Reverting to the mean
Southwest has traditionally been one of the better airlines in terms of service quality, as measured by the annual Airline Quality Rating report. As recently as 2007, Southwest was in third place in the study, but for the last two years, it has posted a decidedly middle of the pack eighth-place performance.

The interesting thing is that most of the movement has happened around Southwest -- other airlines have gotten better and leapfrogged Southwest. In fact, Southwest's 2013 score of -1.06 was a big improvement over its 2007 score of -1.59 (smaller negative numbers are better).

However, US Airways raised its score from -2.94 to -0.88 in the same time period, jumping ahead of Southwest. American Airlines raised its score from -2.19 to -1.10, putting it on the verge of passing Southwest. Meanwhile, Delta Air Lines, which posted a score of -1.22 in 2010, the first year after it completed its merger integration, has since improved that to -0.59, putting it in the upper echelon.

Delta Air Lines has surpassed Southwest by a wide margin in the Airline Quality Rating rankings. Source: The Motley Fool

In other words, while other airlines have made great strides in avoiding late arrivals and handling baggage properly, Southwest Airlines has seen mixed results. For example, Southwest continues to receive the fewest complaints per passenger of any airline, but its on-time performance has suffered as it has begun serving busier airports, and its planes have become fuller.

Merger integration hits performance
For the most part, Southwest's problem has been that it hasn't improved as fast as other airlines. However, in 2013 Southwest actually saw a significant decline in its AQR score for the first time since 2007. Southwest's score dropped from -0.81 to -1.06 last year, while merger partner AirTran's score plummeted from -0.51 to -1.20.

Both Southwest units experienced significant declines in on-time performance, "bumped" more passengers due to overbooking, and mishandled more bags. Southwest also saw a slight uptick in customer complaints, although it remained the industry leader on that metric -- AirTran's customer complaints declined.

Southwest Airlines may be feeling some merger pains. Source: The Motley Fool

This deterioration in customer service metrics is a likely sign of merger integration problems. Southwest and AirTran began code-sharing last year, thereby connecting the two route networks, which had been operating separately before. It's now possible to buy tickets on Southwest's website for AirTran flights, and vice versa.

Connecting the two route networks opened up a big new revenue opportunity by creating more flight options for customers. However, it also increased the complexity of operating Southwest and AirTran -- and customers suffered.

Foolish final thoughts
Customer-friendly policies, like free checked bags and no change fees, still differentiate Southwest from the pack. However, the carrier's advantage over legacy carriers like Delta Air Lines and American Airlines is narrowing.

As Southwest finishes integrating AirTran and moves back to operating under a single brand, it will be critical for the company to improve its operational performance to make up ground on the legacy carriers. Otherwise, it risks becoming "just another big airline."

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Read/Post Comments (19) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 09, 2014, at 6:58 PM, AcuraT wrote:

    Delta's whole focus has been on operations while Southwest has kept the status quo with its formerly top performance. They improved, but Delta had taken innovative actions with its older fleet. While it is slightly less reliable than the other airlines with more mechanical issues, it also has on average 20 spare airplanes spread among its hubs every day. When a plane fails, they swap them and the flight is delayed, not canceled. If an aircraft has a problem overseas, they have spare engines at that airport and contracts with competitors repair crews to repair their planes and get them flying in a few hours, again resulting in a delay and not a cancelation.

    Delta now has the lowest cancelation rate in the industry of under 1% throwing out weather cancelations which impact everyone. For business passengers, they are winning customers because getting to your destination late is better than not at all. Southwest has not taken any of these actions and that is one of the big reasons there is a big gap in perception now.

  • Report this Comment On April 09, 2014, at 8:17 PM, TMFGemHunter wrote:

    I agree about Delta; they've done a really good job. But Southwest's problems aren't due to planes breaking down or anything like that.

    There's really two differences. First, other airlines are handling a lot fewer checked bags, whereas Southwest still has two free checked bags. That makes baggage handling much easier for other airlines relative to Southwest, and that's a major area where competitors have closed the gap.

    Second, Southwest schedules much faster turns than other airlines, but the execution isn't up to par. There are more flights into crowded airports where planes can get delayed. Once that happens, those delays can cascade through the system. Aside from airport-related delays, the big jump in load factor makes it a lot harder to get down to 30 min. between arrival and the next departure.

    Southwest is also increasingly turning airports like MDW into mini-hubs. Those can become delay chokepoints, because in my experience Southwest will hold flights for connections. So when one plane is late, it can delay a whole bunch of other flights.

    I think Southwest should consider adding 5-10 min. to its turn times. It might hurt utilization a bit, but it would make a lot of difference on delays. Just my opinion...

    Adam

  • Report this Comment On April 09, 2014, at 8:44 PM, Skcahill wrote:

    I fly southwest every week and the problem is that they do not cater to the business customer. They are constantly changing my flight times every 3 months or so and it is very disruptive to my business. They need to recognize where their bread and butter is coming from. With all the flight changes I am not sure who they are catering too but I think it is Southwest. Don't get me wrong I generally LUV them but the schedule changes have to stop. Scott

  • Report this Comment On April 10, 2014, at 9:26 AM, TMFGemHunter wrote:

    Scott: I don't know for sure, but I think that the schedule changes are integration-related. Management has said that there will be more schedule changes than usual in 2014 as they try to optimize the route network. Also, Southwest is expanding in Dallas, New York, and D.C. later this year, and it needs to free up planes for those flights.

    As a matter of fact, I think the Southwest fleet is shrinking by about two dozen planes this year due to the end of AirTran 717 service. Capacity will be roughly flat because the planes replacing those 717s are significantly bigger, but Southwest has to cut its number of departures, at least for a while.

    Adam

  • Report this Comment On April 10, 2014, at 9:40 AM, surreal wrote:

    With delays and fuller flights, there is another factor that will contribute to delays in the future. Southwest has added the larger 737-800 to its fleet carrying more passengers than the standard -700. It carries 175 passengers versus the -700s 143.

    While it doesn't seem significant, that's 32 more passengers clogging a jetway and the aisle on board - along with their carry-on bags! The additional two free checked bags will also take additional time to load. So yes, I would agree that Southwest needs to pad their turnaround time to account for their larger planes.

  • Report this Comment On April 10, 2014, at 10:28 AM, CCM wrote:

    Recently on multiple trips I have been booking, Southwest was clearly NOT the cheapest flight! Historically, they always were in the past.

    With other airline consolidations, they haven't kept up!!!

  • Report this Comment On April 10, 2014, at 10:46 AM, Tyeward wrote:

    I think that sometime in the future, Southwest is going to have to actually pick a city and build a hub, and just play the game the legacies are already playing. There are advantages to having a fortress hub that you control along with the ebb and flow of O&D traffic from contracts (corporate preferably). The saving grace about Southwest is that if it is forced to go that route, they already have the fleet size to readjust and make that happen. I have always thought that STL or PIT would be an excellent place for them to do it if need be, however I would lean more towards PHX as a start for something like that, because I seriously doubt that the New American will look to keep a redundant hub in between one of their cornerstone cities (LAX) and their mega hub (DFW). Who knows. I am a bit skeptical of my own thoughts pertaining to that, however I won´t say "never say never".

  • Report this Comment On April 10, 2014, at 1:21 PM, globeflyer wrote:

    For those who don't already know, Southwest's "bags fly free" was a product of it's computer systems not being able to process and charge for bags. To their credit, they used it as a marketing tool that really became popular. However, due to the merger, they have seen how much AirTran was making on bags and "insiders" are saying that it's only a matter of time (when,not if) before they start charging for bags. I look for SW to try to buy, or merge with, Alaska before long. They have to expand their niche or risk losing too much market share.

  • Report this Comment On April 10, 2014, at 1:48 PM, cwebb2327 wrote:

    I live in Dallas. True SW lets bags "fly free", however, I almost always find their airfares to be more expensive that competitors, with or without checked bags. No surprise they do not participate in the online services like Expedia or Kayak.

  • Report this Comment On April 10, 2014, at 4:25 PM, klouche wrote:

    I'm a longtime fan of LUV, here in Denver as they expand. If there's to be a mega-hub, Denver is it, which is one reason we live here. The no bag fees are seldom of use to me. However, one unique LUV perk is the companion status. But I've noticed that the fares may be higher, and soon it may be back to the mainstream (i.e. Kayak etc.) when companion status runs out.

  • Report this Comment On April 10, 2014, at 4:56 PM, TMFGemHunter wrote:

    @cwebb2327: I'm curious, are you usually booking nonstop flights or connections? I would generally expect Southwest to be cheaper for nonstops, but not necessarily for connecting flights. Southwest generally tries to focus on flights where it can fill planes with point-to-point traffic. It's more profitable to sell two separate non-stop tickets rather than use the same seats for one connecting passenger.

    Legacy carriers funnel all of their traffic through a relatively small number of hubs. The business model is built on getting connecting traffic just as much as dominating the local market. So it would make sense that legacy carriers would offer cheaper fares for one-stop flights.

    Adam

  • Report this Comment On April 10, 2014, at 4:59 PM, 24copper wrote:

    Fox New Alert......Southwest has actually been a so called "legacy' carrier for almost 10 years now disguised as a so called "low fare-discount carrier." And the traveling public have bought it for that long! My brother recently paid 600.00 to fly from ISP to FLL, one way!

  • Report this Comment On April 10, 2014, at 6:57 PM, rcarsia wrote:

    No more $39. advertisements. RT PHX to LA: $600! Are you crazy. They are not 'low fare' and keep the peanuts please.

  • Report this Comment On April 10, 2014, at 8:42 PM, Kelly15 wrote:

    The problem with southwest is...They are continuously changing their schedule. I use to travel it every week. but could not deal with their change in timings. http://goo.gl/zylex9

  • Report this Comment On April 10, 2014, at 9:00 PM, petehorsch wrote:

    "smaller negative numbers are better" and "-1.59 was an improvement over -1.06" are contradictory.

    -1.59 IS smaller than -1.06.

    I think you mean "greater negative numbers are better".

  • Report this Comment On April 11, 2014, at 9:22 AM, TMFGemHunter wrote:

    @24copper: Pretty much any airline today will let you pay a ridiculously high fare if you want to. I just checked flights from ISP to FLL for August, which is one of the busiest travel months: $109 each way.

    If you are buying a "business select" or "anytime" fare at the very last minute, I would imagine the fare could be hundreds of dollars higher.

    The gap between Southwest and legacy carriers has narrowed quite a bit, but Southwest is still somewhat cheaper on average. Plus, free bags and no change fees are valuable to many travelers (including myself).

    Adam

  • Report this Comment On April 11, 2014, at 12:17 PM, Inspectigator wrote:

    The airline industry is headed for, actually has begun, a significant transformation. Smaller carriers generally serve smaller markets, and are cutting service due to lack of pilots available for hire. The larger airlines are poaching pilots from smaller airlines, and smaller airlines are finding very few new American pilots are coming out of the training pipeline. This shouldn't be happening yet, as the major airlines aren't hitting their much feared pilot retirement bubble quite yet.

    The reason we are already seeing this shortage is that there are very, very few young Americans entering the 8+ year pilot training process. The internet is simmering with stories of how low airline pilot pay is, how difficult the job is, and how difficult and expensive the training is. Young Americans are choosing other training.

    There is plenty of training happening in America, but it is over 90% foreign pilots, sent here by foreign airlines who are deep into their pilot shortage. Young Americans that do get through that training (10% who start actually complete training) see much better pay overseas, and can't take a $15k/yr job at our regional airlines while paying off $200k or more in student debt.]

    So what does this mean for Southwest? Less competition and higher ticket prices at the smaller markets they specialize in. We are already seeing big increases in those prices and fuller planes. No pilot shortage of pilots for Southwest, as they are a career destination airline, unlike the regional and low-cost carriers. Other legacy carriers have moved over half their domestic flying to regional contactors, they are heavily exposed to trouble in that industry, and trouble is coming.

  • Report this Comment On April 11, 2014, at 4:53 PM, DellSpa wrote:

    SW is only a couple of years away from being just like the other carriers (mediocre). Their unique customer focus is getting more myopic as each year passes.

  • Report this Comment On April 13, 2014, at 2:26 AM, maxthrottle wrote:

    As a longtime employee of SWA, many of these observations are dead on correct. They have been a long time in coming, and are due in large part to the change in management that started back in 2005, and are now finally being made visible. I challenge one person to tell me what the current business model at SWA is? Is it short haul, high frequency, low cost mom and pop travellers? No. is it the business traveller? No. Is it international? no. We used to need less airplanes because our turn times were short. No we have longer turn times now, often up to 50 minutes with the flight time heavily padded, and our on time performance is worse. Baggage loss rates the worst in the industry, yet we don't carry more bags than previously. Before we cherished and celebrated our people. Now we want to outsource them, and a lot of employees are no longer feeling loved by the company they helped build.Every labor group's Union is now in contract talks, and these will not likely go well. Yes SWA is all grown up now, and one can expect to see many of the problems other heavily unionized companies have in the future at SWA. People can atttribute all these changes to a maturing of SWA, but most are the result of it's leadership.

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