Southwest Airlines is the largest airline measured by number of passengers carried annually within america. It is also 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 began with one easy strategy: “If you get your passengers to their destinations when they wish to get there, on time, at the smallest possible fares, and make darn sure these people have a good time performing it, individuals will fly your airline.” This strategy has become the true secret to Southwest’s success. Currently, Southwest serves about 60 cities (in 31 states) with 71 million total passengers carried (in 2004) with a total operating revenue of $6.5 billion. Southwest is traded publicly under the symbol “LUV” on NYSE.
Southwest clearly includes a distinct advantage compared to other airlines in the market by executing an effective and efficient operations strategy that forms an important 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 at shambles. But, how does headquarterscomplaints.com stay profitable? Southwest Airlines provides the lowest costs and strongest balance sheet in the industry, based on its chairman Kelleher. Both biggest operating costs for just about any airline are – labor costs (approx 40%) then fuel costs (approx 18%). Some other ways in which 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 makes up about about 37% of the operating costs. Perhaps the most important component of the successful low-fare airline business structure is achieving significantly higher labor productivity. In accordance with a recent HBS Case Study, southwest airlines is the “most heavily unionized” US airline (about 81% of their employees fit in with an union) and its salary rates are considered to be at or higher average compared to the US airline industry. The low-fare carrier labor advantage is in far more flexible work rules that allow cross-usage of practically all employees (except where disallowed by licensing and safety standards). Such cross-utilization and a long-standing culture of cooperation among labor groups translate into 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 use a tremendous cost edge on network airlines simply 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, despite the substantially longer flight lengths and larger average aircraft size of these network carriers. Therefore by its relentless pursuit for lowest labor costs, Southwest has the capacity to positively impact its bottom line revenues.
Fuel costs is 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 prevent huge swings in operating expenses and financial well being profitability elect to hedge fuel prices. If airlines can control the expense of fuel, they can better estimate budgets and forecast earnings. With cvjryq competition and air travel transforming into a commodity business, being competitive on price was answer to any airline’s survival and success. It became hard to pass higher fuel costs to passengers by raising ticket prices due to the highly competitive nature from the industry.
Southwest continues to be capable of successfully implement its fuel hedging strategy to bring down fuel expenses in a big way and it has the largest hedging position among other carriers. Within the second quarter of 2005, Southwest’s unit costs fell by 3.5% despite a 25% rise in jet fuel costs. During Fiscal year 2003, Southwest had much lower fuel expense (.012 per ASM) compared to the other airlines excluding JetBlue as illustrated in exhibit 1 below. In 2005, 85 % of the airline’s fuel needs has been hedged at $26 per barrel. World oil prices in August 2005 reached $68 per barrel. In the second quarter of 2005 alone, Southwest achieved fuel savings of $196 million. The condition of the market also suggests that airlines that are hedged possess a competitive advantage over the non-hedging airlines. Southwest announced in 2003 that 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 company to maximize its operational efficiency and stay inexpensive. Almost all of its flights are short hauls averaging about 590 miles. It uses the technique to keep its flights inside the air more often and thus achieve better capacity utilization.