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Southwest Still Soaring as Other Airlines Stall

Rivals and analysts are watching closely to see in which markets the carrier will land next


DALLAS — Since last year's Sept. 11 terrorist attacks, the nation's airlines have had to deal with jittery passengers, increased security and mounting losses in the wake of a steep downturn in travel.

And then there's the carriers' ever-present domestic concern: the fun-loving, irreverent and always-profitable Southwest Airlines.

While other airlines are bleeding billions of dollars and shrinking fast, Dallas-based Southwest--the nation's sixth-largest carrier and the biggest in the California market--is poised to eat their lunch by taking more of their passengers and market share.

Donald Carty, chairman of American Airlines and its parent AMR Corp., said as much when he recently noted that American must adapt to "an environment where ... lower-cost competition represents a much bigger slice of the marketplace."

Moreover, if the competition thought that legendary Southwest co-founder Herb Kelleher would disappear after he retired as chief executive in mid-2001, they were wrong. Despite keeping a very low public profile, Kelleher, who remains chairman, is calling many of the shots at Southwest along with his successor, Chief Executive Jim Parker, and Southwest President Colleen Barrett.

One of those shots is where Southwest will expand next, or whether it will create more longer nonstop flights to supplement its core short-haul service. Industry experts foresee an expansion of service into the Chicago and Florida markets. "It's not a decision either one of us [Parker or Barrett] is going to make, because it's one of the things that Herb kept," Barrett said of Kelleher, who declined to be interviewed. "He kept strategic planning, he kept fleet planning.

"I'm sure he will discuss things with us," she said with her tongue partly in her cheek, "but they've always been his call in the end."

Kelleher, 71, is the charismatic, zany force who created the culture, the business model and the financial discipline that has set Southwest apart during its 31-year history. And he's the one who taught Southwest to take unrelenting aim at other airlines during their times of woe to garner more business for the carrier.

Southwest relishes moving into a city or route that's underused or has been abandoned, launching flights with its cheap ticket prices and then turning a profit thanks to its remarkably low operating costs. That, too, is one of its trademarks. It's the reason Southwest has not only doubled in size since 1995, but also has doubled its share of total U.S. passenger traffic to 8% from 4% in that period.

In 1991, for instance, US Airways pulled out of several California cities. "We said, 'We'd love to be in Sacramento,' " recalled Gary Kelly, Southwest's chief financial officer. "So boom, we went in." That helped launch Southwest's dominance of the intra-California market.

In the last year, the airline grabbed even more passengers in the West, after UAL Corp.'s United Airlines abandoned its West Coast shuttle program, and in Baltimore and other Eastern cities after US Airways grounded its Metrojet division.

Southwest's low fares have never been more popular than during the current travel slump and are another significant reason the bigger carriers--with their higher costs and typically higher fares--are on the ropes. With the growing help of the Internet, both business and leisure travelers increasingly are searching for the cheapest fares, playing right into Southwest's hands.

"They are sitting on a kind of treasure trove," said Ron Kuhlmann, vice president of aviation consulting firm Unisys R2A in Hayward, Calif.

Southwest's senior managers avoid talking publicly about exploiting their competitors' troubles, in good part because Southwest--with 2,800 daily flights to 58 cities--has its share of problems. Its passenger revenue is down 9% for the first half of the year, and its profit is less than half what it was a year ago. Southwest's famous on-time performance has slipped noticeably in recent months, which the carrier blames mostly on increased security measures and bad weather.

The company's stock also has plummeted 43% since it peaked at $22 a share in late February--it closed Friday at $12.48 a share--as investors fret that the factors whipping the big carriers will impede Southwest's growth. Even so, Southwest's total stock market value of $9.7 billion remains twice that of all other major airlines combined.

Southwest's executives acknowledge that the industry shakeout gives their airline another opportunity to build up while the others are tearing down. Southwest still has the money, the planes, the people and--most of all--the will to swoop in wherever other carriers pull out.

"Adding new cities is something we have historically done, and we will do it in the future," Parker said. "But we've never taken on more than we could sustain."

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