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SOUTHWEST AIRLINES. Southwest Airlines, headquartered in Dallas, is a publicly held airline. Before 1967, when it was incorporated, the company was known as Air Southwest. In 1994 it served forty-one cities in nineteen states, including eleven airports in ten Texas cities, and had plans for major expansion. Rollin King, entrepreneur and cofounder of Southwest, served as the airline's first chairman, president, and chief executive officer, and he was for many years the company's largest shareholder. A licensed pilot who obtained an M.B.A. from Harvard University in 1962, King had moved to San Antonio to become a partner in the newly formed investment-counsel firm King, Pitman and Company. In 1964 he acquired and reincorporated as Southwest Airlines, Incorporated, a small air-taxi service called Wild Goose Flying Service, which did business as Southwest Airlines between San Antonio and such small South Texas cities as Del Rio and Laredo. Though Wild Goose was never profitable, it was the seed for the present airline. In 1967, King met with Herb Kelleher to discuss a new business venture. Kelleher was a young attorney, a transplanted Yankee who sank his roots into his wife's hometown, San Antonio, and King was his client. The venture King proposed sounded a lot like his old business but with a slight twist. Instead of flying to small towns, King suggested serving the three largest cities in Texas, offering low fares, convenient schedules, and a "no-frills" approach that was completely contrary to the standards of the established airlines. King used a napkin to demonstrate his idea, drawing a triangle and labeling the three corners "Dallas," "San Antonio," and "Houston." Service between these cities had been provided by Braniff Airways and Trans-Texas Airways (later Texas International Airlines), but usually as a leg of longer, interstate flights. Kelleher thought King was crazy, but after doing some homework, decided that he was just crazy enough to go along with the plan. King convinced his banker, John Parker, of the Alamo National Bank in San Antonio, to conduct a feasibility study for an airline that would serve the market at a time when the three cities involved were among the fastest growing in the nation. An independent marketing consulting group, hired with $150,000 donated by seven of their San Antonio friends, helped to convince King and Kelleher of the project's viability.
In 1967, a new airline, Air California, had made an initial public offering before the company had actually started flying. This provided the model for King and Kelleher, who used Air California's investment bankers and two of its founders to raise money for Air Southwest. Kelleher, who had been John B. Connally's Bexar County campaign manager in his 1962 race for governor, found other investors in Texas. A second group of shareholders, who bought $3 shares up to a limit of $25,000, included some of the best-known men in Texas, including John Murchison, brother of Clinton Murchison, Jr., of the Dallas Cowboys; Democratic party leader and future Russian ambassador Robert S. Strauss; future governor Dolph Briscoe; University of Texas Board of Regents chairman John Peace; Houston oilman Pat Rutherford; and Dresser Industries executive Charles Kuhn. The company was incorporated as Air Southwest on March 15, 1967, with King, Kelleher, Peace, Murchison, Kuhn, and Strauss as its first board of directors. The group received an additional pledge of $2 million in common stock and a $3 million commitment from Sears and Roebuck's venture-capital fund after Wilber Morrison of Pan American Airlines persuaded the Sears investment committee to support the project. Although the deal with Sears never quite worked out, Morrison was so convinced of Southwest's potential that he later joined the airline's board of directors. In November 1967, Kelleher filed an application with the Texas Aeronautics Commission to serve Dallas, Houston, and San Antonio. The application was a state, not a federal, matter because Southwest wasn't proposing to fly out of state; therefore, it didn't fall under the regulatory tentacles of the Civil Aeronautics Board. On February 20, 1968, the TAC voted unanimously to grant Air Southwest a Certificate of Public Convenience and Necessity that would allow it to begin service. The following day, however, Braniff, Trans-Texas, and Continental Airlines obtained a restraining order from the Travis County District Court that temporarily prohibited the agency from issuing the certificate. Thus began a three-year legal battle with competitors that wanted to keep Southwest on the ground. Kelleher led Southwest's legal fight, but lost the first round in Austin State District Court, which found that the three cities Air Southwest proposed to serve already had sufficient air service. Kelleher appealed to the Third Court of Civil Appeals, which, seven months later, upheld the lower court's decision. The investors were ready to admit defeat, but King and Kelleher were not. Offering to hold off on charging legal fees until such time as the company had some money, and agreeing to pay all court costs and expenses out of his own pocket, Kelleher filed an appeal with the Texas Supreme Court; to everyone's surprise, by unanimous vote the Supreme Court overturned the lower court's ruling. The battles raged on for Air Southwest, however. Two went as high as the United States Supreme Court, which ultimately upheld Southwest's right to fly in Texas. December 7, 1970, the date of the Supreme Court decision, is considered by many to be the beginning of deregulation in the airline industry.
In 1971, Air Southwest became Southwest Airlines. In January, King and Kelleher hired Marion Lamar Muse, the former president of Detroit-based Universal Airlines, to run Southwest, which had $148 in the bank and past-due bills for more than $133,000. Faced with starting an airline virtually from scratch after much of its original investment had already been used to pay expenses, Muse called on his industry resources to raise capital. Kelleher also took a stake in the company. In just 120 days the company hired and trained pilots, flight attendants, mechanics, and other personnel; completed negotiations for space at three airports; hired Bloom Advertising to design an initial campaign; and completed the purchase of three Boeing 737–200 aircraft. King, Kelleher, and Muse were able to purchase the planes at 90 percent financing, a move previously unheard of in the industry. But plans to raise additional money through an initial public offering just before service began were interrupted by yet another battle. Braniff and Texas International complained to the Civil Aeronautics Board that Southwest's operation might violate its intrastate exclusivity. Kelleher moved swiftly to argue the Southwest case. He flew without a change of clothes from San Antonio to Washington, where he pleaded before the CAB for several days in his rumpled business suit. Back in Dallas, and only two days before Southwest's scheduled inaugural flight, word was received that the CAB had thrown out the objections of Braniff and Texas International. But almost in the same instant, it was learned that the two carriers had won a restraining order barring Southwest from beginning service. The order was issued by the same Austin judge who issued the original injunction against the TAC decision. Kelleher immediately flew to Austin, where the Texas Supreme Court held an emergency session to hear the case, voided the injunction, and forbade the judge from involving himself with Southwest again. On June 18, 1971, a Southwest Airlines plane flown by Capt. Emilio Salazar began service out of Love Field.
Southwest was only five months old when Muse came out with an unbelievable fare offer-$10 on the last flight of the week from Houston to Dallas. The plane was needed back in Dallas anyway for weekend servicing and the crew had been ferrying it back empty every week for five months. Within two weeks, the flight was carrying a full load-and Southwest never advertised. Muse then slashed fares on the last flight of each day in each direction to $10. That meant anyone flying Southwest after 7:00 P.M. on any day of the week needed only a $10 bill to board. By the next fall, Muse had raised regular fares from $20 to $26 and the weekend and night fare to $13. The two-tier fare system, one of the most important innovations in airline marketing history, had been born. The larger airlines, however, were not finished with their fight against Southwest. Braniff lowered its Dallas-Houston fare to just $13. In an action that became characteristic of the airline, Muse responded with newspaper advertisements claiming, "Nobody's going to shoot Southwest Airlines out of the sky for a lousy $13," offering customers their choice of either a $13 fare or a full-fare ticket plus a fifth of premium liquor. The bottles of liquor did not cost $13, but a businessman could put the $26 fare on his expense report and take the liquor home free. Once again, a Braniff tactic backfired. With 80 percent of its customer base choosing to pay full fare, Southwest won this 1972 fare war and became the largest distributor in Texas of Chivas, Crown Royal, and Smirnoff. Braniff and Texas International were later indicted and pled nolo contendere to antitrust charges in connection with their activities involving Southwest.
To enhance the company's image further, Muse began a marketing campaign that clad stewardesses in hot pants and advertised the company as the "LUV" airline, a pun on its home base at Love Field. In 1977, Southwest listed its stock on the New York Stock Exchange under the trading symbol LUV. Southwest turned a profit in 1973 and has remained profitable for every year since. Nevertheless, one of the line's longest court battles began in 1972, when the new Dallas-Fort Worth Regional Airport (now Dallas-Fort Worth International Airportqv) and the cities of Dallas and Fort Worth sued Southwest in an attempt to force the carrier to move with other airlines to the new airport. The other airlines were bound to the move by contracts, signed in accord with the 1968 Regional Airport Concurrent Bond Ordinance. Southwest wasn't operating when the deal for the new airport was signed, however, and intended to remain at Love Field, which is considerably closer to downtown Dallas than DFW. Two years later, Southwest won the privilege to remain at Love Field as long as the field was a commercial airport. Despite this ruling, the controversy continued. In April 1974 the Dallas City Council attempted to close Love Field to commercial traffic, but once again court rulings enabled the airport to survive. Still, the bigger airlines were not through with Southwest. In 1978, in an attempt to curb Southwest's growth, the major airlines at DFW sought support from Congress to bar flights from Love Field to anywhere outside of Texas. Finally, in 1979 a compromise known as the Wright Amendment (named after majority leader Jim Wright, D-Fort Worth) was ratified. This measure limits service from Love Field to Texas and the four surrounding states, Arkansas, Louisiana, Oklahoma, and New Mexico. The Wright Amendment hampered Southwest's growth from Dallas Love Field, but it did not prevent the carrier from succeeding. Southwest simply grew in other directions. The Wright Amendment continued to be a controversial issue. Congressional representatives from districts not served by Southwest introduced legislation to repeal the act in hopes of bringing nonstop Southwest service and low fares to states that do not border Texas. Other major airlines oppose repeal of the Wright Amendment. American Airlines (see AMR CORPORATION) president Robert Crandall openly lobbied Dallas mayor Steve Bartlett against repeal, and Fort Worth threatened to sue Dallas if the latter even discussed repeal. Meanwhile, Southwest's low fares continued to attract customers and force other airlines to discount their fares.
King resigned as an officer of the company in 1976, but remained on the board of directors and flew the line for two years as a captain. When Muse left the company in March 1978, Kelleher was asked to run the airline on an interim basis until a new president and CEO could be hired. Kelleher was appointed chairman of the company at that time and retained that title in 1994. In August 1978, Howard Putnam, a United Airlines executive, was hired as president and CEO. Putnam subsequently left in September 1981 to take over the ailing Braniff Airways. At that time, Kelleher left his San Antonio law firm for good and began running Southwest full-time. He was named permanent chairman, president, and chief executive officer on February 23, 1982. With the Airline Deregulation Act of 1978, which permitted competition on routes across the country that were previously virtual monopolies, Southwest again expanded. By the end of 1981 it had added service to Amarillo, New Orleans, Albuquerque, Oklahoma City, Tulsa, and thirteen other cities. In early 1982, it added service to San Diego, Kansas City, Las Vegas, and Phoenix-its first service to cities outside of Texas and the surrounding states. Of course, in compliance with the terms of the Wright Amendment, direct service to these cities was not available from Dallas Love Field. Since 1982 the airline has grown substantially, generally by taking advantage of opportunities in markets that are overpriced and underserved. By the late 1980s, Southwest had become the number-one airline in California, and in 1989 it officially became a "major" airline, with annual revenues exceeding $1 billion. With the inauguration of service to Baltimore Washington International in 1993, Southwest served both coasts for the first time. The acquisition of Salt Lake City-based Morris Air at the end of 1993 facilitated Southwest's expansion into new cities in the West and Northwest.
In the late 1980s and early 1990s, Southwest lobbied against a proposed high-speed train between Dallas, Houston, and San Antonio, since studies showed that the train would require government subsidies of close to $100 per passenger. Since all of Southwest's fares between those cities were well below $100, the company claimed that with the same subsidy, it could fly everyone in those markets for nothing. Although a contract to build the train was awarded to Texas TGV, the company was unable to raise even a fraction of the start-up funds it required, and it ultimately defaulted on its contract. The project remains "on hold" indefinitely.
Southwest has maintained a high level of public recognition through innovative advertising and public relations. Kelleher has painted Southwest planes to resemble the Texas and Arizona state flags and Shamu, the killer whale, to promote the airline's association with those states and with Sea World in San Antonio. The company also staged a famous arm-wrestling contest between Kelleher and the president of Stevens Aviation, Incorporated, of Greenville, South Carolina, to settle a dispute over rights to the advertising slogan "Just Plane Smart." While avoiding a high-cost court battle, the two companies agreed to a much-publicized match in Dallas to settle the dispute. Kelleher lost, but Stevens allowed Southwest to share the slogan anyway. By the early 1990s, Southwest had grown to be the nation's seventh-largest airline, with over 35 million customers a year, annual revenues exceeding $2 billion, and more than 15,000 employees in a largely unionized workforce. Although it owned under 3 percent of the nation's airline market, more than two-thirds of passengers flying in Texas did so on Southwest. With a highly developed corporate culture, which emphasizes that work can be fun, with employee stock options totaling about 10 percent of shares outstanding, and with a no-layoff policy unheard of elsewhere in the airline industry, Southwest was named one of the top ten companies to work for in America. Southwest was the only major airline in 1990 and 1991 to make a net operating profit, and in 1992 and 1993 it received the industry's "Triple Crown" for best on-time performance, least lost baggage, and fewest customer complaints-thus accomplishing for two years straight something no other airline has ever done, even for a single month.
Southwest is a major supporter of the Ronald McDonald Houses, which provide a home-away-from-home for families of critically ill children who are undergoing treatment at nearby medical facilities. The Southwest annual "Home for the Holidays" program, which received the President's Award for Private Sector Initiatives for 1986 and 1987, has enabled thousands of poor senior citizens to visit friends and relatives during the Christmas season at no charge. Southwest also assists victims of floods and other disasters.
BIBLIOGRAPHY:Steven Kyle Johnson, Southwest Airlines: A Case Study in Strategic Planning (M.B.A. report, University of Texas at Austin, 1987). Roger C. Kuile, Airline Deregulation Act (M.B.A. report, University of Texas at Austin, 1985). Howard D. Putnam, Winds of Turbulence (New York: Harper Business, 1991). Linda Shapiro, Southwest Airlines: A Case Study in Airline Deregulation (M.B.A. report, University of Texas at Austin, 1985).
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