From relative obscurity not too long ago, Southwest Airlines has today become the second largest airline in the world in terms of passengers flown, just barely behind Delta. It has become so by bucking many of the traditional rules. For example, you won’t see Southwest tickets listed on websites such as Expedia and Kayak. They also don’t give people seats ahead of time, but instead line you up and let you choose your own seat. And bags travel free.
To say Southwest Airlines has been successful with this approach is an understatement. In 2015, it topped $1 billion in annual profits for the first time and has been growing in a remarkably consistent way for 40 years. Furthermore, as The Washington Post notes, “[Southwest was] the only major U.S. airline to remain profitable since the Sept. 11, 2001 terrorist attacks.”
Indeed, I have one friend who won’t travel with any airline other than Southwest. And this is the case even though Southwest doesn’t fly out of his hometown of Eugene, Oregon. Every time he wants to fly, he has to travel two hours North to Portland. But he does so anyway because he’s so loyal to them.
What other airline could produce such loyalty? Indeed, what other airline could produce any loyalty?
On the operations side, everything Southwest does is based on reducing turnaround times so they can get more flights out of the same number of planes. It is thus somewhat ironic that Southwest is not in a hurry to expand to new markets.
Yes, Southwest is intent on growing. But it is intent on growing at a sustained and consistent pace. Here’s how Jim Collins describes Southwest’s success and growth strategy in his book Great by Choice:
“Southwest Airlines […] demanded of itself a profit every year, even when the entire industry lost money. From 1990 through 2003, the U.S. airline industry as a whole turned a profit in just 6 of 14 years. In the early 1990s, the airline industry lost $13 billion and furloughed more than a hundred thousand employees; Southwest remained profitable and furloughed not a single person. Despite an almost chronic epidemic of airline troubles, including high-profile bankruptcies of some major carriers, Southwest generated a profit every year for 30 consecutive years.
“Equally important, Southwest had the discipline to hold back in good times so as not to extend beyond its ability to preserve profitability and the Southwest culture. It didn’t expand outside Texas until nearly eight years after starting service, making a small jump to New Orleans. Southwest moved outward from Texas in deliberate steps — Oklahoma City, Tulsa, Albuquerque, Phoenix, Los Angeles — and didn’t reach the eastern seaboard until almost a quarter of a century after its founding. In 1996, more than a hundred cities clamored for Southwest service. And how many cities did Southwest open that year? Four.”
Remember folks, the tortoise beat the hare.
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What Real Estate Investors Can Learn from Southwest Airlines
Jim Collins calls the approach Southwest Airlines took “20 mile marching” based off the philosophy of Ronald Amundsen. It must certainly have been tempting for Southwest to open in as many cities as possible each year, but Southwest opened in what might seem to be only a meager four. But that was the rate they felt they could grow into securely.
Basically, Southwest’s approach is to grow at a consistent rate and not to accelerate recklessly in good times or hunker down in bad times.
In an article sometime back, I related it to real estate this way:
“So instead of going from buying five houses a year to 50 or looking for a home run out of the gates or whatever shiny new object comes along, play the long game. Go from five houses to maybe seven or eight. And when a recession comes, don’t simply give up or hunker down because it’s gotten harder. Try to grow in a controlled, consistent manner, always leaning out just a little past your comfort zone. It may not be sexy, but it’s effective.”
Avoiding Reckless Growth
An agent of mine once told me about a hedge fund he used to work for that bought cheap houses, fixed them up and then sold them with seller financing. The model seemed to be working, but then they grew to something like 10 different markets in a matter of two years. Eventually, they got so overburdened that they made more and more mistakes and ended up collapsing under the weight of their own reckless growth.
At the same time, I can relate times when we let good deals slip by because we were suffering from some mistake or the market wasn’t cooperating. Indeed, the best time to buy real estate was right after the crash. But how many people were so burned by what had just happened that they decided not to jump in?
Please don’t misunderstand me. My point is not that you shouldn’t grow or even that you shouldn’t increase your rate of growth. You absolutely should grow and increase the rate of growth if at all possible. But you shouldn’t go from A to Z just like that. The speed of your growth should gradually increase as you gradually increase your ability to handle such growth.
The key that Southwest discovered was that a great business doesn’t try to get there all at once nor does it hunker down and stop when things aren’t going well. And real estate investors are in business just like Southwest. So continue to grow, but do so at a consistent Southwest-like rate.
Investors: What do YOU take away from Southwest’s amazing success?
Leave your comments below!