It flies passengers city to city nonstop instead of routing them through a hub where they would have to change planes. Its routes are short, up to 500 miles in length, with flying times of 60 to 90 minutes. Only pairs of cities with sufficient passengers to support frequent service, typically six to eight flights a day, are candidates for Southwest's expansion. Southwest services its planes and gets them airborne in just 15 or 20 minutes, compared with the hour that its competitors need at crowded hubs, where planes must await connecting passengers. As a result, Southwest's planes are in the air, producing revenues, more hours each day. In 80 of its 100 biggest markets, Southwest has grabbed a 50% or greater share of the passengers.
By the early '90s it became possible once again to start an airline around the principle of low operating costs. "It was a recession," says Lorenzo. "The other carriers were all in the tank. Equipment was available; people were available." Market rates for labor were half or less than half of the union wages paid by the major carriers. More than 700 jets were in mothballs, sending leasing costs down by a third or more from where they'd been a few years earlier.
Throughout the country entrepreneurs heard the call. Among the most notable, a former pilot for now-defunct Eastern started working in Newark on a low-fare airline called Kiwi International, after the flightless New Zealand bird. Two wealthy business owners in Houston began putting together a luxury-service airline called UltrAir.
And from his ranch in Colorado, Joseph Lorenzo saw it was time to make his move. He knew he faced a series of tricky decisions -- where to locate the airline and what type of service to offer, for example -- that would determine the success or failure of the venture.
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Decision #1: Figure out the best location.
Choosing a home base is one of the most fundamental of all strategic decisions for an airline -- much more so than for most other businesses. And it was with this choice that Lorenzo parted company most dramatically with some of the other start-ups of the early '90s.
He had two major objectives. First, he wanted to find a location that would shelter his new airline from the industry monsters. Low fares and low costs, he feared, would not be big enough advantages if he were to challenge a large carrier directly. A bigger competitor might match his lower fares even if it meant losing money on the routes. And the bigger carrier might throw enough advertising dollars and frequent-flier miles at the market to deny Lorenzo's airline the passengers it needed to survive.
His second objective was to anchor the new carrier in a midsize city that had little air service relative to its potential needs. And the fares for travel to and from that city had to be high enough so that he could slash existing prices and stimulate demand in the marketplace.
Tucson was the city that initially attracted him. "We saw it as a very underserved, overpriced market," Lorenzo says. But he could not attract the money he needed to get started there.
Lorenzo had raised $350,000 in seed money from a small group of investors that included Anthony Silverman, president of Paradise Valley Securities Inc., a small investment-banking company in Phoenix. "While we were waiting to get the funding for Tucson," Lorenzo recalls, "I happened to look at Reno, and I came to Silverman and said, 'If you liked Tucson, you're going to love Reno.' The void was even greater, and I thought the risk was lower and the potential higher."
The Reno area is a year-round tourist attraction, and it is one of the country's leading gaming centers. Less than an hour away is Lake Tahoe, a beautiful mountain lake and a major ski area.
Lorenzo liked the city of Reno even more once he had done his homework. Despite its considerable assets, Reno had suffered deteriorating air service for 10 years. During the '80s the major airlines increased their service to Las Vegas while they cut flights and raised fares to Reno. As a result, Reno's air-passenger traffic had declined from 1979 to 1990, while Las Vegas's had doubled.
When Lorenzo analyzed the number of hotel rooms in the two cities and what had happened to passenger traffic, he concluded that Reno had tremendous latent demand for air service.
"I concluded that Reno was underserved and that traffic was about half of what it should have been based on the number of hotel rooms in the city. What had happened in the interim was that Reno had had to rely on drive traffic, people coming in on buses and by car, because the air service was so poor." With low fares between Reno and the largest cities on the West Coast, Lorenzo figured he could take those people from their cars and buses and put them on his planes.
His strategy was essentially to stay off the radar screens of the big carriers, to get a foothold where competition was thin. In retrospect, that may prove to be a wise decision compared with the strategy followed by another prominent start-up, Kiwi. Robert Iverson, cofounder and CEO of Kiwi, chose Newark as his home market. Newark is also a major hub of Continental Airlines, which dominates that market with 52% of the passenger traffic. United, American, and USAir control another 32%.
Iverson figured Kiwi could do well in Newark by attracting a relatively small market share. But competing at a major airport against the big, entrenched carriers is tough. On such a crowded airfield Iverson has had trouble even getting noticed.
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Decision #2: Put together a top management team.
Although he had been the marketing chief at Continental, Lorenzo had never run an airline. So he hired Jeffrey Erickson in January 1991 and at the end of the year turned over to him the reins as CEO. Erickson had been president and chief operating officer at Midway Airlines. Although Midway was in its final death throes -- it filed for bankruptcy in late March, a few months after Erickson came aboard Reno Air -- Lorenzo felt that Erickson was untarnished by the carrier's problems. Lorenzo remained as chief strategist, a director, and the largest stockholder.
