No one has made it through the economic maelstrom of recent years unscathed. But the airline industry has been particularly battered, as business travel has plummeted and consumers continue to demand steep discounts, while oil prices continue to zig and zag wildly.
Yet that hasn't stopped Southwest Airlines CFO Laura Wright from overseeing a run of unprecedented success. The Dallas company's $459 million 2010 net profit more than quadrupled a $99 million profit in 2009, marking the airline's 38th consecutive year in the black. It took perhaps its boldest step yet earlier this year when it purchased rival AirTran Airways for $1.4 billion, combining the world's largest low cost airline (Southwest) with North America's third largest low cost carrier (AirTran). The most recent quarter ended Sept. 30 saw the airline post impressive 11.7 percent year-over-year revenue growth on a pro forma basis (counting the combined Southwest/AirTran revenue in the 2010 third quarter), even as the U.S. economy sputtered.
Southwest has emerged as among the most resilient airlines, overcoming previous downturns in large part thanks to its low cost structure and strategic long-term planning. Wright is now overseeing the complicated merging of AirTran under the Southwest umbrella, a move the airline believes will reignite company growth. It represents Southwest's third merger and is "our most ambitious," the company has maintained. In the late 1980s it acquired Dallas-based rival Muse Air, and it purchased Salt Lake City-based Morris Air in the 1990s.
For Wright, the challenge is to maneuver through the wild swings of this economic climate without compromising the company's strength. Business Finance recently sat down with the Southwest CFO to hear how she has navigated the wild swings in oil prices, created new streams of revenue and why the last four years has changed her philosophy of the role of CFO.
Business Finance: Toward the end of 2010, you were predicting crude prices at $79 or $80 for 2011, but also bracing for the potential of volatility. Tell me about those first months of this year and how you and your finance team mobilized to counteract those price spikes.
Laura Wright: When we do our plans for the next year, we don't know what is going to happen with energy prices. Price is determined by the world commodity market. But we went into 2011 with a plan for a forward curve which implied energy prices this year would be in the mid 80s.
We've seen some significant increases in our fuel prices this year. Our energy prices were going up every day. We had to adjust to it with a series of fair increases. The revenue management side of the business also jumped into action and instituted some revenue management techniques just to cover the increased costs.
The other early adjustment we made to the businesses, as it became clear prices were higher and that we weren't able to raise price fares to keep up with them, was we also made the decision to keep our capacity flat in 2012 versus what was originally going to be in the 3 to 4 percent range.
BF: How is fuel affecting SWA's 2011 financial performance? Have high fuel prices largely canceled out the revenue gains achieved over the last year or so?
LW: We had a very strong revenue year in 2011 and that followed a really strong revenue performance in 2010. There were records on about every front. But the revenue gains have not kept pace with the fuel cost increases. As a result, if you look at our earnings for the first nine months of the year, we're down about 40 percent from the first nine months of 2010. That's entirely attributable to higher energy prices.
BF: Some new sources of revenue for Southwest Airlines over the last year have been programs such as Business Select and the EarlyBird Check-In option. In an industry in which creating new profit is ever more difficult, what new revenue streams are you exploring?
LW: Our BusinessSelect and EarlyBird have both been very successful product launches for Southwest. Business Select brought in around $24 or $25 million in the third quarter. The EarlyBird was in excess of $30 million, which is ahead of our expectations.
We've got a lot under way as far as bringing in new revenue streams. Our strategy is to provide value for our customers, but where they also have a choice, so it's not nickel and diming and charging bag fees and change fees. We've got several really large initiatives underway right now that are revenue drivers.
We launched a redesigned Rapid Rewards loyalty program recently, which we are expecting will generate hundreds of millions of additional dollars in revenue. Next year, we're going to be introducing a 737/800. It's the same airplane we fly today, but a larger scale. In our configuration, it will have 175 seats versus 137. That's a revenue optimization.
The last big initiative, which is one we have not started yet, will be a rebuild of our reservations system capabilities. It will allow us, from a market perspective, to do things that we can't today, such as surf certain markets, create flexibility in how we connect with other carriers, and so on.
BF: How is the ongoing integration of Southwest and AirTran affecting SWA financially from a cost perspective and operationally?
LW: Overall, integration is going extremely well. But integration at this scale impacts every piece of our organization. From an operations side, we actually can't begin integrating or operating as one until we get a Single Operating Certificate from the FAA. It is currently on-schedule for early March. With that being said, there is a tremendous amount of work and planning for the operations to integrate, such as technology, but we won't really see that piece until next year.
On the back office side, we are further along than we had envisioned. I think the challenges are always technology: the different platforms that we use, how we get them to talk to one another, and different processes.
BF: The two carriers generated $14.7 billion in combined revenue in 2010. What sort of revenue performance on an annual basis is potentially achievable over the next five to 10 years?
LW: We don't provide revenue forecasts, but I can give you some color. We estimated $400 million in net synergies for the 2013 time frame. The way to think of that is largely top line revenue gross. There are cost synergies, but there are also costs to synergies that kind of wipe each other out. If you look at our results in 2011, Southwest and AirTran, our revenues are up over the 2010 numbers.
We are not going to grow in 2012. We're going to focus on integrating AirTran and working to reap those revenue gains. We would hope by the 2015 to 2020 timeframe we can begin to grow the combined airline again with a new combined network.
BF: When looking at SWA's systems and operational standards compared to AirTran's, are there any elements such as computer systems, accounting methods or ways of operating that will incorporated from AirTran?
LW: Our approach with integration has been to be very open-minded. We have made some changes. On the maintenance side, we actually liked their IT system better and we're making changes in some of our maintenance technology. We were able to take some of the things in their maintenance program that we liked that are better than ours, quite frankly.
BF: How about AirTran's 717s? SWA has always touted the efficiencies gained from just operating 737s. How will incorporating a new aircraft type affect this?
LW: We have a long history of operating the Boeing 737. AirTran fortunately has 52 737/700s which made them attractive to us. The 717 is a different airplane type. AirTran has 88 717s, which is more 717s than most airlines have in their entire fleet. Its large enough we can still productively schedule, maintain and train it. Long term, these airplanes won't be strategic to the fleet and they'll inevitably be replaced.
BF: How has your philosophy of the role of the CFO evolved given the turbulence we've seen the last four years?
LW: To say it's changed would be an understatement. From a financial perspective, it has been extremely volatile for years, not only with the price of fuel, but also with the economic environment.
We're a cyclical company. We saw a fall-off in passenger demand in the 2008 and 2009 during the credit crisis that most of us had never seen. I'd say that the biggest learning experience I've had is it's sort of like that black swan theory: there is no such thing as the unthinkable. Even if we build a plan and imagine a host of scenarios, the potential of what could happen are much wider than we would have ever imagined years ago.
In 2008, we wouldn't have built a plan that showed what might happen if fuel hit $147 or if it drops to $35. It didn't seem possible that you could hit both of those prices in the same year. We have widened our scenarios. As the CFO, you still take risks, but we're a business and you have to understand what the extremes of those outcomes can be and just make sure you have contingencies in place.