The Southwest Parable

I saw the most fascinating commercial yesterday. It came from Southwest Airlines and urged viewers to go to Set Love Free and join the fight against the Wright Amendment. For those who don't know, the Wright Amendment is a piece of legislation that has limited the ability of Southwest to fly from its home airport of Dallas Love Field. As the other carriers left for DFW Airport, Southwest was left with Love all to itself, which caused a backlash from the major airlines that manifested itself in legislation banning interstate flights from Love. As enacted, the amendment allowed flights to and from the states surrounding Texas, and it has since been expanded to a few more states.

Just as the natural enemy of the hole is the pile, the natural enemy of the corporation is the government. Government intervention has always played a role in the fortunes of business, but how fatal can it be? The following story is for anyone who thinks that "things would be different if only we could get Uncle Sam off our backs":

Back when the earth was young, airlines operated much differently than they do today. There were a few carriers, and the government told them where they would fly and how much they would charge. It was nice--airlines made some good money and lived a very comfortable, color-by-numbers existence.

Enter Southwest Airlines. Southwest began operations in Dallas in 1971 after fighting (for 12 years) litigation intended to put it out of business. It aimed to become a low-cost carrier for the state of Texas, but its purpose was not fully realized until the Airline Deregulation Act turned the airline industry on its ear in 1978. The act subjected airlines to market forces, which prompted markedly different responses from Southwest and the rest of the airlines.

Most airlines sought to return to the stability they had seen under regulation. They organized themselves into hub-and-spoke patterns that gave each major airline a dominant territory and allowed it to (more or less) dictate prices within that region. Sometimes new carriers would enter and serve the same routes. Sometimes aggressive pricing and airport rules would drive them away; sometimes they would stay and cause a drop in prices. At any rate, the hub-and-spoke system allowed airlines to retain some of the comfort regulation had given them.

While government intervention was ending for other airlines, it was just beginning for Southwest. Regulation was a welcome current that lifted all planes, but the Wright Amendment was intended to keep only Southwest down. But rather than flee from Love Field (which is located in the heart of Dallas as opposed to DFW's suburban location), Southwest embraced it. It has incorporated the heart into its marketing communications, and it also chose the ticker symbol "LUV" when it joined the New York Stock Exchange.

Rather than trying to mirror the days of regulation, Southwest decided to compete in a new way. Southwest went from city to city rather than using hubs, and it stayed away from the behemoth airports that other airlines were flocking to. This, in addition to Southwest's using only 737 aircraft, led to quick turnaround times and high utilization. The airline also eschewed travel agents and frills and pursued an aggressive fuel hedging strategy in allowing itself to compete on cost and offer the lowest fares in the industry.

Air travel was naturally hit hard by the events of September 11, 2001. After flights were grounded for days after 9/11, the struggling airlines were bailed out by Congress through a $15 billion financial aid package.

So, all the airlines should have vivid memories about how the government has affected their operations. Hub-and-spoke carriers will have fond memories of how the government brought them guaranteed profits in the era of regulation and then gave them free money when their ability to serve customers was called into question. And Southwest will emit a distinctive scowl as it thinks about how the Wright Amendment has, to this day, hampered its business at its flagship airport.

The effect of government intervention on the airline industry is clear. And yet, it doesn't correlate with financial results. The "big" carriers have been devouring cash for years, and no amount of money from Congress is about to change their dire collective outlook. Southwest has been profitable for 32 straight years, despite government and competitors trying to keep it down. Southwest was delighted when deregulation came, and it did not need the 2001 bailout.


It’s not uncommon for businesses to view the interference of the government as a key factor in determining success or failure. Recently, the Sarbanes-Oxley Act, an overambitious attempt to correct the wrongs of Enron et al., has become the whipping boy of businesspeople, who say that it’s hurting the ability of smaller businesses to keep up (compliance costs resulting from the act are really high). While legislation certainly plays a role, the example shown by the airlines proves that it’s not deterministic. The bigger factor (and it's not even close) is the ability of a company to adapt and to reach customers, which arguably could be retarded by the government help that many firms would love to have.

The kind of thing that Southwest has that allows it to prosper goes by many names: a business model, core competencies, synergy, a mission, a vision. Let's just call it love. And to paraphrase one of history's greatest philosophers:
If I have planes and routes and cash,
And I have help from Uncle Sam,
And I have Uncle Sam holding down the other guy,
But have not love, then I have nothing.