Southwest Airlines is the largest airline measured by number of passengers carried each year within the United States. It is also referred to as a ‘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 simple strategy: “If you get your passengers to their destinations when they would like to get there, on time, at the lowest possible fares, and make darn sure these people have a good time carrying it out, individuals will fly your airline.” This strategy has become the real key 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 has a distinct advantage when compared with other airlines in the business by executing a highly effective and efficient operations strategy that forms an important pillar of their overall corporate strategy. Given below are some competitive dimensions which will be studied within this paper.
After all, the airline industry overall is within shambles. But, so how exactly does Southwest Airlines headquarters stay profitable? Southwest Airlines has 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%) followed by fuel costs (approx 18%). Various 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 accounts for about 37% of its operating costs. Probably the most important element 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 their employees belong to an union) along with its salary rates are regarded as at or over average when compared to the US airline industry. The reduced-fare carrier labor advantage is at a lot more flexible work rules that enable cross-consumption of nearly all employees (except where disallowed by licensing and safety standards). Such cross-utilization and 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 greater than 25% below that of United and American, and 58% less than US Airways.
Carriers like Southwest have a tremendous cost edge 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% higher 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 main point here revenues.
Fuel costs is definitely the second-largest expense for airlines after labor and makes up about about 18 percent from the carrier’s operating costs. Airlines that want to avoid huge swings in operating expenses and main point here profitability elect to hedge fuel prices. If airlines can control the price of fuel, they are able to more accurately estimate budgets and forecast earnings. With cvjryq competition and air travel becoming 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 due to the highly competitive nature from the industry.
Southwest has become able to 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. In the second quarter of 2005, Southwest’s unit costs fell by 3.5% despite a 25% boost in jet fuel costs. During Fiscal year 2003, Southwest had much lower fuel expense (.012 per ASM) when compared to the other airlines with the exception of JetBlue as illustrated in exhibit 1 below. In 2005, 85 percent in the airline’s fuel needs has been hedged at $26 per barrel. World oil prices in August 2005 reached $68 per barrel. Inside the second quarter of 2005 alone, Southwest achieved fuel savings of $196 million. The state of the market also suggests that airlines which can be hedged use a competitive edge on the non-hedging airlines. Southwest announced in 2003 that it would add performance-enhancing Blended Winglets to the 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 inexpensive. Almost all of its flights are short hauls averaging about 590 miles. It uses the tactic to keep its flights within the air more often and for that reason achieve better capacity utilization.