Prince Of Midair

By RICHARD WOODBURY DALLAS

Imagine a major airline that seems to go out of its way to put its passengers in a blind rage: it routinely denies them assigned seats, refuses to transfer their baggage or arrange connections, and crams them three abreast into planes with only crackers and cookies to nibble. It sells no tickets through the industry's computerized reservations system and avoids flying to many large- city airports. As though to compensate for all this, its chief executive dresses in clown suits and Elvis costumes and paints his planes to resemble whales.

Yet Southwest Airlines has used just such perverse tactics to accomplish what no other big carrier has during the current aviation downturn, the industry's worst: make consistent operating profits. As others struggle in bankruptcy, lay off flight crews and mechanics, and cut routes, the seventh largest airline has been merrily expanding to new cities, buying more airplanes and hiring personnel. As a gauge of customer satisfaction, the airline says it receives 3,500 favorable letters a month.

Southwest's formula is starkly simple: keep costs at rock-bottom. Using only fuel-thrifty 737s, it concentrates on flying large numbers of passengers on high-frequency, one-hour hops directly from city to city, rather than funneling them through the elaborate hub-and-spoke systems of its larger rivals. The lack of amenities enables it to offer bargain fares (average: $58) that undercut others and allow Southwest to quickly dominate most new routes it enters. Boasts CEO and co-founder Herb Kelleher: "We've created a solid niche -- our main competition is the automobile. We're taking people away from Toyota and Ford."

When it was a Texas puddle jumper, Southwest and its fun-loving chairman were dismissed as an oddity. But now that the Dallas-based airline has made money for 20 straight years and spread to 34 cities in 15 states, the industry is paying it sober respect. Concedes Gerard Arpey, senior vice president of American Airlines: "Unless we can find a way to lower our own costs, they're going to drive us out of many markets." Southwest has been wreaking turmoil in California, where intrastate fares averaged $200 before it shook up the market in 1991 with $59 tickets. Since then, American, Delta and USAir have scaled back operations in the state, leaving Southwest the No. 1 carrier, with 31% of the business. After Southwest began St. Louis, Missouri-Kansas City, Missouri, service in 1991 and Cleveland, Ohio-Chicago last year, average fares for those routes nose-dived from about $300 to $59.

None of this would have happened without Kelleher, 61, a folksy ex-San Antonio, Texas, lawyer who runs the company like a carnival sideshow. He schmoozes with employees, who know him as "Uncle Herb"; stages weekly parties at corporate headquarters; and encourages such zany antics by his flight attendants as organizing trivia contests, delivering instructions in rap and awarding prizes for the passengers with the largest holes in their socks. The wackiness has a calculated purpose -- to generate a gung-ho spirit that will boost productivity, the key to Southwest's goal of carefully scripted growth.

Such productivity, combined with a reluctance to take on debt and a remorseless eye on the bottom line, has enabled Southwest to operate at costs about 20% below those of its rivals. Its brisk efficiency has 11 times won the Department of Transportation's "triple crown": monthly citations for the best on-time performance, fewest lost bags and fewest overall complaints. "Our people are so energetic they couldn't be replicated," says Kelleher. "They realize they've got something special here that has protected them from the industry's economic holocaust."

Critical to employee output are Southwest's labor-union contracts, which permit an easy, largely voluntary cross-utilization of workers. Thus pilots and flight attendants occasionally help clean up planes, ramp workers sell tickets, and counter agents unload bags. Flight crews are paid by the trip rather than the hour. "Herb's fun is infectious," says Kay Wallace, president of the Flight Attendants Union Local 556. "Everyone enjoys what they're doing and realizes they've got to make an extra effort."

The extra oomph is vital for Southwest to meet its high-frequency schedules, which call for most of its 141 planes to make 11 trips a day. This requires that they be serviced and airborne 15 minutes after reaching a gate, an Indy- like feat that Southwest achieves 85% of the time with ground crews barely half the standard size.

In spite of Southwest's impressive growth, Kelleher insists that size by itself doesn't equate with success. "You have to be fast and tactical," he says. "And if costs ever get out of hand, we'll be vulnerable." As long as the chairman keeps his customers on a diet of crackers and peanuts, there seems little chance of that happening.