Southwest Airlines 2006 Annual Report Download - page 23

roundtrips. Southwest complements these high-fre-
quency shorthaul routes with longhaul nonstop service
between markets such as Baltimore and Los Angeles,
Phoenix and Tampa Bay, Las Vegas and Orlando, and
Houston and Oakland.
Most major U.S. airlines have adopted the
“hub-and-spoke” system, which concentrates most of
an airline’s operations at a limited number of hub cities
and serves most other destinations in the system by
providing one-stop or connecting service through the
hub. Southwest focuses on nonstop, not connecting,
traffic over its point-to-point route system. The
point-to-point route system, as compared to
hub-and-spoke, allows for more direct nonstop routings
for our Customers and, therefore, minimizes connections,
delays, and total trip time. As a result, approximately
79 percent of the Company’s Customers fly nonstop.
Southwest serves many conveniently located second-
ary or downtown airports such as Dallas Love Field,
Houston Hobby, Chicago Midway, Baltimore-Washing-
ton International, Burbank, Manchester, Oakland,
San Jose, Providence, Ft. Lauderdale/Hollywood, and
Long Island Islip airports, which are typically less con-
gested than other airlines’ hub airports. This operating
strategy enables the Company to achieve high asset uti-
lization because aircraft can be scheduled to minimize the
amount of time they are at the gate (currently approx-
imately 25 minutes). This in turn reduces the number of
aircraft and gate facilities that would otherwise be
required. The Company is also able to simplify schedul-
ing, maintenance, flight operations, and training activi-
ties by operating only one aircraft type, the Boeing 737.
All of these strategies enhance the Company’s ability to
sustain high Employee productivity and reliable ontime
performance.
Introduction of Codesharing. In first quarter 2005,
Southwest began its first codeshare arrangement, with
ATA Airlines. Under its codeshare arrangement with
ATA, Southwest may market and sell tickets for certain
flights on ATA that are identified by Southwest’s des-
ignator code (for example, “WN Flight 123”). Con-
versely, ATA may market and sell tickets under its code
designator (TZ) for certain flights on Southwest Air-
lines. Any flight bearing a Southwest code designator that
is operated by ATA is disclosed in Southwest’s reserva-
tions systems and on the Customer’s flight itinerary,
boarding pass, and ticket, if a paper ticket is issued.
As a result of the ATA codeshare, Southwest’s Customers
are able to purchase single ticket service on Southwest
connecting to ATA’s service to Hawaii, New York’s
LaGuardia Airport, and Washington Reagan National
Airport. Also, members of Southwest’s and ATA’s
respective frequent flier programs are able to earn and
redeem awards in the other carrier’s program. Finally,
beginning in 2006, Southwest began selling ATA-only
service at www.southwest.com. Other than the ATA
arrangement, Southwest does not interline or offer joint
fares with other airlines, nor does Southwest have any
marketing or commuter feeder relationships with other
carriers.
Simplified Fare Structure. Southwest employs a
relatively simple fare structure, featuring low, unre-
stricted, unlimited, everyday coach fares, as well as even
lower fares available on a restricted basis. As of Novem-
ber 1, 2006, the Company’s highest non-codeshare,
oneway unrestricted walkup fare offered was $319 for
any flight. Even lower walkup fares are available on
Southwest’s short and medium haul flights.
Ticketless Travel. Southwest was the first major
airline to introduce a Ticketless travel option, eliminating
the need to print and then process a paper ticket alto-
gether, and the first to offer Ticketless travel through the
Company’s home page on the Internet, at
www.southwest.com. For the year ended December 31,
2006, more than 94 percent of Southwest’s Customers
chose the Ticketless travel option and over 70 percent of
Southwest’s passenger revenues came through its Internet
site, which has become a vital part of the Company’s
distribution strategy. The Company has not paid com-
missions to travel agents for sales since December 15,
2003.
Competition
The airline industry is highly competitive. We
believe the principal competitive factors in the industry
are:
• Fares
• Customer Service
• Costs
• Frequency and convenience of scheduling
• Frequent flyer benefits
• Efficiency and productivity, including effective
selection and use of aircraft
We currently compete with other airlines on all of
our routes, some of which airlines have larger fleets and
some of which airlines may have wider name recognition
in some markets. Certain major U.S. airlines have estab-
lished marketing or codesharing alliances with each
other, including Northwest Airlines/Continental Air-
lines/Delta Air Lines; American Airlines/Alaska
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