Southwest Airlines is definitely the largest airline measured by number of passengers carried every year within the United States. Additionally it is known as the ‘discount airline’ compared with its large rivals in the industry. Rollin King and Herb Kelleher founded Southwest Airlines on June 18, 1971. Its first flights were from Love Field in Dallas to Houston and San Antonio, short hops with no-frills service and a simple fare structure. The airline started with one simple strategy: “If you get your passengers to their destinations when they wish to get there, promptly, at the cheapest possible fares, and make darn sure there is a good time performing it, men and women will fly your airline.” This approach continues to be the real key to Southwest’s success. Currently, Southwest serves about 60 cities (in 31 states) with 71 million total passengers carried (in 2004) and with a total operating revenue of $6.5 billion. Southwest is traded publicly under the symbol “LUV” on NYSE.
Southwest clearly has a distinct advantage compared to other airlines in the industry by executing an effective and efficient operations strategy that forms an essential pillar of the overall corporate strategy. Given below are some competitive dimensions which will be studied in this particular paper.
In the end, the airline industry overall is in shambles. But, so how exactly does Southwest headquarters stay profitable? Southwest Airlines provides the lowest costs and strongest balance sheet in their industry, according to its chairman Kelleher. The two biggest operating costs for just about any airline are – labor costs (approx 40%) accompanied by fuel costs (approx 18%). Various other ways that Southwest has the capacity to keep their operational costs low is – flying point-to-point routes, choosing secondary (smaller) airports, carrying consistent aircraft, maintaining high aircraft utilization, encouraging e-ticketing etc.
The labor costs for Southwest typically accounts for about 37% of the operating costs. Perhaps the most important component of the successful low-fare airline business model is achieving significantly higher labor productivity. In accordance with a newly released HBS Case Study, southwest airlines will be the “most heavily unionized” US airline (about 81% of the employees belong to an union) as well as its salary rates are regarded as being at or above average when compared to US airline industry. The reduced-fare carrier labor advantage is within much more flexible work rules that permit cross-utilization of practically all employees (except where disallowed by licensing and safety standards). Such cross-utilization as well as a long-standing culture of cooperation among labor groups lead to lower unit labor costs. At Southwest in 4th quarter 2000, total labor expense per available seat mile (ASM) was more than 25% below that relating to United and American, and 58% less than US Airways.
Carriers like Southwest possess a tremendous cost advantage over network airlines mainly because their workforce generates more output per employee. In a study in 2001, the productivity of Southwest employees was over 45% greater than at American and United, inspite of the substantially longer flight lengths and larger average aircraft scale of these network carriers. Therefore by its relentless pursuit for lowest labor costs, Southwest is able to positively impact its financial well being revenues.
Fuel costs is definitely the second-largest expense for airlines after labor and makes up about about 18 percent in the carrier’s operating costs. Airlines that want to avoid huge swings in operating expenses and main point here profitability choose to hedge fuel prices. If airlines can control the price of fuel, they could more accurately estimate budgets and forecast earnings. With cvjryq competition and air travel transforming into a commodity business, being competitive on price was factor to any airline’s survival and success. It became hard to pass higher fuel costs on to passengers by raising ticket prices as a result of highly competitive nature in the industry.
Southwest has been able to successfully implement its fuel hedging strategy to reduce fuel expenses in a big way and has the largest hedging position among other carriers. In the second quarter of 2005, Southwest’s unit costs fell by 3.5% despite a 25% increase in jet fuel costs. During Fiscal year 2003, Southwest had far lower fuel expense (.012 per ASM) when compared to other airlines excluding JetBlue as illustrated in exhibit 1 below. In 2005, 85 per cent from the airline’s fuel needs continues to be hedged at $26 per barrel. World oil prices in August 2005 reached $68 per barrel. Within the second quarter of 2005 alone, Southwest achieved fuel savings of $196 million. The condition of the business also suggests that airlines that are hedged have a competitive edge on the non-hedging airlines. Southwest announced in 2003 which it would add performance-enhancing Blended Winglets to its current and future fleet of Boeing 737-700’s. The visually distinctive Winglets will improve performance by extending the airplane’s range, saving fuel, lowering engine maintenance costs, and reducing takeoff noise.
Southwest operates its flight point-to-point service to maximize its operational efficiency and remain cost-effective. The majority of its flights are short hauls averaging about 590 miles. It uses the tactic to keep its flights within the air more often and thus achieve better capacity utilization.