Southwest Airlines is the largest airline measured by variety of passengers carried annually within america. Additionally it is referred to as a ‘discount airline’ compared with its large rivals in the market. 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 would like to get there, on time, at the smallest 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) and with a total operating revenue of $6.5 billion. Southwest is traded publicly under the symbol “LUV” on NYSE.
After all, the airline industry overall is at shambles. But, how exactly does Southwest Airlines stay profitable? Southwest Airlines has got the lowest costs and strongest balance sheet in their industry, based on its chairman Kelleher. The 2 biggest operating costs for just about any airline are – labor costs (approx 40%) followed by fuel costs (approx 18%). Some other ways that 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 the operating costs. Probably the most critical part 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 the employees fit in with 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 much more flexible work rules that permit 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 translate into 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% lower than US Airways.
Carriers like Southwest possess a tremendous cost advantage over southwest airlines customer service for the reason that 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 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 accounts for about 18 percent from the carrier’s operating costs. Airlines that are looking to prevent huge swings in operating expenses and bottom line profitability elect to hedge fuel prices. If airlines can control the price of fuel, they can better 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 on to passengers by raising ticket prices because of the highly competitive nature of the industry.
Southwest continues to be 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 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 that are hedged have a competitive edge over the non-hedging airlines. Southwest announced in 2003 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 company to maximize its operational efficiency and stay inexpensive. The majority of its flights are short hauls averaging about 590 miles. It uses the tactic to keep its flights inside the air more regularly and therefore achieve better capacity utilization.
Southwest flies to secondary/smaller airports in order to reduce travel delays and thus provide excellent company to its customers. It has led the business in on-time performance. Southwest has been capable of trim down its airport operations costs relatively 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 just a single aircraft to find out. Purchasing, provisioning, and other operations are also vastly simplified, thereby lowering costs. Consistent aircraft also enables Southwest to use its pilot crew more effectively.
The concept of ticketless travel was a major benefit to Southwest as it could lower its distribution costs. Southwest became electronic or ticketless back inside the mid-1990s, and today these are about 90-95% ticketless. Customers who use credit cards qualify for online transactions, now Southwest.com bookings take into account about 65% of total revenue. The CEO Gary Kelly thinks that wmprvh idea would grow further and this he wouldn’t be amazed if e-ticketing taken into account 75% of Southwest’s revenues by end of 2005. Before, when there is a 10% travel agency commission paid, it utilized to cost about $8 a booking. But currently, southwest airlines customer service phone number is paying between 50 cents and $1 per booking for electronic transactions that translate to huge financial savings.