Copy of

Sustaining the Airline Low Fare/Low Cost Model

In the past I have addressed the granular details for designing a low fare/low cost airline model. I will share some perspectives on concrete choices that enable sustainability of this model.

The key elements of my experience on how an airline can be sustainable; factually occurred over a thirty five year time period.

It is remarkable because :

1) Industry leading low unit costs were consistently produced over this time period.

2) Provided above average incomes for all work groups.

3) Created the lowest fares and substantial flight capacity when customers needed it.

How was this accomplished?

Every aspect of the operation had interconnected efficiency. Each input component and process impacted the gearing of everything else. Operational design discipline would not permit one-offs or compromises that could permanently impair fundamental objectives of the system. Anything that created a negative long term cost consequence was avoided.

First and foremost, safety was always primary in every process and decision.

A strong positive corporate culture accentuates everything, but breaks down and becomes an empty ritual if it does not support alignment with financial and operational excellence.

There are many areas that are important, but I believe the following are the most critical as they create long term cohesion and credibility within the company. In a large service oriented business, perception is reality for employees and customers. A long time common sense commitment was applied at Southwest: The Golden rule - "Do onto others as you would have them do onto you"

The following details behaviors that set the standard for success.

1) Executive Compensation Compensation needs to be in alignment within the total organization. Perceived disproportionate compensation sets up internal workgroup confusion. If senior management is perceived as "entitled", then why should other workgroups not feel likewise. Even if the business model is practiced with efficiency, the company will develop untenable higher unit costs. An Industry may perform where capacity and fares are in balance to produce strong profits. It does not mean that the marketplace is actually being well served.

A) Locating a Headquarters for a service oriented firm with a large system of service staff and huge capital equipment costs becomes very difficult to recruit and retain appropriately compensated leadership in a high cost city,

B) Incentives for senior management are recognized as appropriate but the optics are still very important. Stock Option Programs with a ten year vesting schedules that includes a heavier vesting weighted towards the final five years is ideal. It aligns with enhanced share-holder value as well as creating a prosperous and growing financial environment for employees through stock linked profit sharing, long term career expectations, and advancement opportunities.

C) Restrict the reliance and justifications of Compensation Surveys which tend to accelerate increases in senior compensation levels which inevitably impress represented work groups to do likewise. It can set off a circular process that raises costs to such a degree that traffic/revenue diminishes resulting in a smaller, less prosperous company as well as greatly reduced customer satisfaction.

2) Mergers are toxic to successful low cost carriers. Besides the obvious challenges from blending two different cultures, the structural long term effects are worse. The smaller or weaker carrier purchased, usually has a group of people that have in fact been diminished. Their compensation and loss of opportunity from negative corporate performance and the sacrifices imposed on them leaves the group demoralized. the merger entitles them to make it right for themselves from the new "richer" firm that they are part of. The result is higher costs and a gradual increase in excessive work rule increases. Overall, the efficacy of the new airline is weaker than if growth had occurred organically.

3) Stock Buybacks. Having a program to enable appropriate capital allocation when the stock price is abnormally low due to exogenous circumstances is reasonable. Otherwise, there are always profitable opportunities for the strongest low cost carrier in the industry.

4) Avoid Bureaucracy. Do not justify staffing increases in the operation or management based on activity increases other than necessary for pilots and flight attendants. Retain the entrepreneurial spirit by evolving work processes. Breaking up elements of responsibility into new job responsibilities manufactures irrelevant internal competition, and eventually leads to justification for new levels of managing the management hierarchies. Create an environment that challenges critical thought and judgement. Refrain from easy justifications when times are good, because as Herb Kelleher always said "These good times will always be followed by bad times". Plan how to do well when it is bad.

5) Following these disciplines creates an advantage that no carrier presently has. This approach produced a model that created the environment to succeed in Short Haul Markets. The highest level of efficiency will result in a marked difference in reduced departure related costs (not in-route costs) which is most critical for short haul service. This model typically produced unit costs 40-50% lower than the combination. In short haul markets this resulted in 300-500% local traffic increases. This was an advantage that no other carrier could compete with. Establishing a strong set of short haul markets in a city gives a definitive competitive advantage in building a dominant position in a given city.

6) Retain Humility as a senior executive. Remember that we have been enabled through nurture and or born with talent that we did not usually earn. Recognizing that utilizing these gifts not only for ourselves but for others in the firm enhances the benefit to all and the communities we live and serve in. We are presently faced with a broad cultural crisis with increased inequality. It can only lead to instability and eventual failure of the culture. Choosing to be part of the solution is the right thing to do if you have a religious commitment in your life. If not, it is still the right thing to do. A self-interested perspective should still be a motivation as rewards created will fulfill personal benefits.

As we all know, Capitalism does not have a conscience, but it is the best of any alternative economic system. Conducted with a strong personal moral compass and ethical behavior, I have seen a company that was able to maintain success and credibility with customers and employees. Efforts were not always successful, but the intention was always right. When mistakes were discovered, they were remedied.