Southwest Airlines is the largest airline measured by variety of passengers carried annually within america. It is also known as a ‘discount airline’ compared with its large rivals in the industry. Rollin King and Herb Kelleher started southwest headquarters 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 want to get there, on time, at the smallest possible fares, and make darn sure they have a good time carrying it out, men and women 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.
All things considered, 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 the industry, according to its chairman Kelleher. The two biggest operating costs for any airline are – labor costs (approx 40%) accompanied by 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. Probably the most critical component of the successful low-fare airline business structure is achieving significantly higher labor productivity. Based on 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) and its salary rates are regarded as being at or higher average when compared to the US airline industry. The reduced-fare carrier labor advantage is at a lot more flexible work rules that allow cross-usage of nearly all employees (except where disallowed by licensing and safety standards). Such cross-utilization along with 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 a lot more than 25% below those of United and American, and 58% less than US Airways.
Carriers like Southwest use a tremendous cost edge on www.corporateofficeheadquarter.com 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, regardless 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 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 of the carrier’s operating costs. Airlines that are looking to avoid 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 for 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 in the industry.
Southwest has become in a position to successfully implement its fuel hedging strategy to bring down fuel expenses in a big way and has the biggest 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) when compared to the other airlines with the exception of JetBlue as illustrated in exhibit 1 below. In 2005, 85 % in the airline’s fuel needs has become 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 state from the industry also shows that airlines which can be hedged use a competitive edge 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 cost-effective. The majority of its flights are short hauls averaging about 590 miles. It uses the tactic to keep its flights inside the air more frequently and thus achieve better capacity utilization.
Southwest flies to secondary/smaller airports in an attempt to reduce travel delays and therefore provide excellent company to its customers. It offers led the industry in on-time performance. Southwest has 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 courses costs for pilots, ground crew and mechanics are lower, because there’s just a single aircraft to find out. Purchasing, provisioning, as well as other operations can also be vastly simplified, thereby lowering costs. Consistent aircraft also enables Southwest to utilize its pilot crew better.
The thought of ticketless travel was a major benefit to Southwest since it could lower its distribution costs. Southwest became electronic or ticketless back inside the mid-1990s, now they may be about 90-95% ticketless. Customers who use credit cards are eligible for online transactions, and now Southwest.com bookings take into account about 65% of total revenue. The CEO Gary Kelly thinks that wmprvh idea would grow further and that he wouldn’t be blown away if e-ticketing accounted for 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 number is paying between 50 cents and $1 per booking for electronic transactions that translate to huge financial savings.