Controlling Your Distribution Destiny: Southwest Airlines

Dave Yuan
Dave Yuan
May 18, 2016 · 6 min read

By David Yuan, General Partner at Technology Crossover Ventures and Kevin Krone, former CMO of Southwest.com

The travel distribution landscape is incredibly noisy right now. Google and Tripadvisor are making big bets on direct bookings. As are large hotel brands Marriott and Hyatt. On the other side, the OTAs remain formidable and are using their power to shape the value chain. It remains to be seen who will ultimately be successful. In this debate, the Southwest.com story shines as an inspiration to the direct distribution faction. Southwest has been a key travel innovator and pioneer, and religious “direct-only.”

I recently had an opportunity to sit down with the former CMO of Southwest Airlines, Kevin Krone. Kevin has been a key leader in development Southwest.com’s distribution strategy in various executive roles since 1992. My partner Woody Marshall was fortunate to work with Kevin on the board ofHomeaway, and Kevin has been an informal advisor to our firm on our efforts in travel.

[Dave]: Kevin, let’s start with the Southwest story. How has Southwest engaged with distribution?

[Kevin]: Distribution Strategy has always been a part of the Southwest business model. Southwest learned a hard lesson in the mid-1990s about what happens when you lose control of your distribution. Subsequently, we’ve been “direct-only.” The good news is Southwest learned, and, like always, innovated its way out of the problem.

[Dave]: What happened in the mid 1990’s?

[Kevin]: In the mid-1990s Southwest was being distributed by both travel agencies and through Southwest owned call centers. (Of course this was before the advent of the Internet.) The travel agencies used third-party tools called computer reservation systems or CRS systems to connect to Airline inventory. While this was an efficient technology for both the Airlines and the travel agent, it was expensive.

As a result, Southwest only participated with one CRS provider, Sabre. There were three other CRS systems, and they carried Southwest Airlines’ schedules and fares to stay competitive with Sabre. Of course all four systems, at that time, were owned by another airline which were competitors to Southwest Airlines.

As Southwest Airlines was turning about 20 years old in the nineties, it was having a profound impact on the other airlines. In March of 1994, the other three CRS systems owned by Southwest Airlines competitors said they would no longer carry Southwest schedules and fares in the systems unless Southwest paid their asking rate. If we had acquiesced, it would have wiped out all of Southwest Airlines’ 1993 net income. So the threat to the company was very large and very real.

In a classic Southwest Airlines maneuver, our CEO refused to be held hostage and pay these fees to the third-party distribution channels. Instead he directed the company to start innovating solutions to this revenue/distribution threat: This is the period in which website distribution, and ticketless travel was born.

Later, there was a lot of debate around if we should join the emerging third-party distribution channels, the OTAs. I felt strongly that that would not be necessary in the new digital world. Through much debate and discussion we agreed to continue direct distribution in this emerging digital world.

During this period of crisis, we developed a much more focused distribution strategy. The primary tool was southwest.com (which today sells more air than any other web site in the world…. including the aggregators). To ensure the success of this new tool AND the Southwest Airlines business, I adhered to an unwavering “direct only” distribution strategy. Fast forward 20 years and that policy is paying off for Southwest in terms of lower cost, more control (often these two are linked), better customer interaction and data, and the ability to drive more ancillary revenue.

[Dave]: The story ends well, but in the early days it must have looked equal parts admirable and insane. You have an airline business model which has enormous fixed costs — big, expensive planes that you need to fill; Isn’t this all about getting distribution as broadly and as quickly as possible?

[Kevin]: You’re right… it is completely counter to the traditional approach. I am glad that my professors were not around to hear me explain my approach! Conventional wisdom would say use as many distribution channels as you can to maximize the amount of demand. I sensed a trap in this approach. Further, if you think about the advantage of the Internet vs. the “brick and mortar” world you realize that everything is immediately proximate. Most people did not connect these dots, I believe. They simply “copied and pasted” the traditional world into the Internet world. The result… ask most travel suppliers if they wish they had more direct distribution and I bet you cannot find one that says they are happy with their current channel mix. I argued, and prevailed, inside Southwest that we could control our own destiny by managing our distribution directly.

[Dave] What were the toughest moments?

[Kevin]: There were tough moments and lots of heated discussions. I was absolutely convinced we had the brand, the smarts, and the guts to make it work. It did require us to walk past the proverbial “bird in the hand” that 3rd parties seemed to offer for the promise that we could build it better. It also required us to make sure everyone knew that southwest.com was THE only place to go for Southwest’s great fares. To get this done we did a few things: 1. Obviously, we did not let anyone show our information; 2. We advertised the message that our fares were only available at southwest.com in dedicated advertising messages; 3. We practically changed the name of the company to “southwest.com” … the logo became southwest.com, we put it on our airplanes, in sport sponsorships, etc. I believed it was CRITICAL that if you saw a travel moment you saw not Southwest Airlines, but southwest.com connected to it.

We argued about the pros and cons. I was outnumbered by very senior leaders in the company. To their credit, they listened and debated. At the end of the debate, I was able to convince them to try it and trust in the power of the plan. And now… the rest is history and Southwest is the envy of the travel industry in the amount of distribution control and success they have.

[Dave]: Fast forward today. How do you feel about the OTAs, the metas?

[Kevin]: Any 3rd party is in the business of maximizing THEIR interests regardless of any impact on your business. Never forget this tenant. To this point, OTAs, metas, etc. are in business to drive their results and this will often come out of your wallet one way or the other. Either directly paying them, being the victim of them steering business away from you, poorer guest relations, or lost up-sell revenue opportunities. As I mentioned before, when you lose control of distribution, you also increase your costs. This is exactly why I felt so strongly about pursuing our direct distribution model.

[Dave]: Google and Trip are new metas that offer quasi-direct channels. What’s your take on these new channels?

[Kevin]: These new “quasi-direct” channels are sheep in wolf’s clothing. Do not fall for it. You are trading one 3rd party interested in their results for another… perhaps even more powerful. The safest plan is to find a path to independence. While it may not be as “easy” as what Southwest did, I believe it is the smartest path for any sized company. This is one of the areas I spend my time these days… helping companies navigate the path to independence. With a focus and determined mind, it can be done.

About TCV

Technology Crossover Ventures (TCV) has been an investor in online travel for over a decade. We’ve been fortunate to have partnered with key franchises such as Expedia, HomeAway, Travelport/ Orbitz, and most recently, Siteminder. Founded in 1995, TCV is a leading provider of capital to growth-stage private and public companies in the technology industry. With over $10 billion in capital raised, TCV has invested in more than 200 technology companies over the last 20+ years. For a complete list of TCV investments, please visit www.tcv.com/portfolio-list.