Southwest Airlines is the biggest airline measured by number of passengers carried every year within america. It is also referred to as a ‘discount airline’ compared with its large rivals in the business. Rollin King and Herb Kelleher launched www.corporateofficeheadquarter.com 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 wish to get there, on time, at the cheapest possible fares, and make darn sure they have a good time carrying it out, individuals will fly your airline.” This method has been the key to Southwest’s success. Currently, Southwest serves about 60 cities (in 31 states) with 71 million total passengers carried (in 2004) along with a total operating revenue of $6.5 billion. Southwest is traded publicly beneath the symbol “LUV” on NYSE.
After all, the airline industry overall is within shambles. But, how does Southwest Airlines stay profitable? Southwest Airlines provides the lowest costs and strongest balance sheet in their industry, based on its chairman Kelleher. The 2 biggest operating costs for virtually any airline are – labor costs (approx 40%) then fuel costs (approx 18%). Some other ways in which Southwest will be able 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. Possibly the most important component of the successful low-fare airline business model is achieving significantly higher labor productivity. According to a recently available HBS Case Study, southwest airlines will be the “most heavily unionized” US airline (about 81% of their employees belong to an union) as well as its salary rates are regarded as at or over average compared to the US airline industry. The reduced-fare carrier labor advantage is in far more flexible work rules that enable 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 of United and American, and 58% less than US Airways.
Carriers like Southwest have a tremendous cost advantage over southwest airlines customer support 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 bottom line revenues.
Fuel costs is definitely the second-largest expense for airlines after labor and accounts for about 18 percent in the carrier’s operating costs. Airlines who want to avoid huge swings in operating expenses and bottom line profitability choose to hedge fuel prices. If airlines can control the expense of fuel, they can more accurately estimate budgets and forecast earnings. With growing competition and air travel being a commodity business, being competitive on price was key for any airline’s survival and success. It became hard to pass through higher fuel costs to passengers by raising ticket prices as a result of highly competitive nature from the industry.
Southwest has become in a position to successfully implement its fuel hedging strategy to save on 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 much lower fuel expense (.012 per ASM) when compared to other airlines except for 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. Inside the second quarter of 2005 alone, Southwest achieved fuel savings of $196 million. The state from the industry also shows that airlines which are hedged use a competitive advantage over the non-hedging airlines. Southwest announced in 2003 which 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. The majority of its flights are short hauls averaging about 590 miles. It uses the strategy to keep its flights in the air more often and therefore achieve better capacity utilization.
Southwest flies to secondary/smaller airports in an effort to reduce travel delays and for that reason provide excellent service to its customers. It provides led the market in on-time performance. Southwest has also been capable of trim down its airport operations costs relatively much better than its rival airlines.
At the heart of Southwest’s success is its single aircraft strategy: Its fleet consists exclusively of Boeing 737 jets. Having common fleet significantly simplifies scheduling, operations and flight maintenance. The training costs for pilots, ground crew and mechanics are lower, because there’s merely a single aircraft to understand. Purchasing, provisioning, along with other operations can also be vastly simplified, thereby lowering costs. Consistent aircraft also enables Southwest to make use of its pilot crew more effectively.
The idea of ticketless travel was actually a major advantage to Southwest because it could lower its distribution costs. Southwest became electronic or ticketless back inside the mid-1990s, and now they are about 90-95% ticketless. Customers who use credit cards qualify for online transactions, and today Southwest.com bookings make up about 65% of total revenue. The CEO Gary Kelly thinks that wmprvh idea would grow further and that he wouldn’t be surprised if e-ticketing included 75% of Southwest’s revenues by end of 2005. In the past, when there was clearly a 10% travel agency commission paid, it used to cost about $8 a booking. But currently, southwest airlines customer service is paying between 50 cents and $1 per booking for electronic transactions that translate to huge cost savings.