Southwest Airlines is the biggest airline measured by number of passengers carried each year within the usa. Additionally it is referred to as a ‘discount airline’ in comparison with its large rivals in the industry. Rollin King and Herb Kelleher started southwest airlines corporate office 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 they have a good time doing it, people will fly your airline.” This strategy 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 underneath the symbol “LUV” on NYSE.
After all, the airline industry overall is in shambles. But, how exactly does Southwest Airlines stay profitable? Southwest Airlines provides the lowest costs and strongest balance sheet in its 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%). Various 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. Probably the most critical element of the successful low-fare airline business structure is achieving significantly higher labor productivity. Based on a newly released HBS Case Study, southwest airlines is the “most heavily unionized” US airline (about 81% of the 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 within far more flexible work rules that allow cross-consumption of virtually all employees (except where disallowed by licensing and safety standards). Such cross-utilization along with a long-standing culture of cooperation among labor groups result in 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% under US Airways.
Carriers like Southwest possess a tremendous cost advantage over southwest airlines customer service number 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, inspite of the substantially longer flight lengths and larger average aircraft dimensions of these network carriers. Therefore by its relentless pursuit for lowest labor costs, Southwest will be able to positively impact its bottom line revenues.
Fuel costs is definitely the second-largest expense for airlines after labor and makes up about about 18 percent of the carrier’s operating costs. Airlines that want to prevent huge swings in operating expenses and bottom line profitability elect to hedge fuel prices. If airlines can control the cost of fuel, they can more accurately estimate budgets and forecast earnings. With growing competition and air travel becoming a commodity business, being competitive on price was key to any airline’s survival and success. It became hard to move higher fuel costs to passengers by raising ticket prices due to the highly competitive nature from the industry.
Southwest has been able to successfully implement its fuel hedging strategy to reduce fuel expenses in a big way and contains the largest hedging position among other carriers. In 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 except for JetBlue as illustrated in exhibit 1 below. In 2005, 85 per cent in the airline’s fuel needs continues to be 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 state from the industry also suggests that airlines which are hedged have a competitive edge on the non-hedging airlines. Southwest announced in 2003 it would add performance-enhancing Blended Winglets to its current and future number 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. Most of its flights are short hauls averaging about 590 miles. It uses the strategy to keep its flights in the air more regularly and thus 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 offers led the business in on-time performance. Southwest has also been capable of trim down its airport operations costs relatively better than its rival airlines.
In the middle 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 courses costs for pilots, ground crew and mechanics are lower, because there’s just a single aircraft to find out. Purchasing, provisioning, along with other operations will also be vastly simplified, thereby lowering costs. Consistent aircraft also enables Southwest to utilize its pilot crew more efficiently.
The idea of ticketless travel was actually a major advantage to Southwest as it could lower its distribution costs. Southwest became electronic or ticketless back in the mid-1990s, now they may be about 90-95% ticketless. Customers who use credit cards are eligible for online transactions, now Southwest.com bookings account for about 65% of total revenue. The CEO Gary Kelly thinks that wmprvh idea would grow further and this he wouldn’t be blown away if e-ticketing accounted for 75% of Southwest’s revenues by end of 2005. Before, when there was a 10% travel agency commission paid, it employed to cost about $8 a booking. But currently, call southwest airlines is paying between 50 cents and $1 per booking for electronic transactions that translate to huge cost benefits.