Southwest Airlines is the largest airline measured by variety of passengers carried annually within the United States. It is additionally known as a ‘discount airline’ in comparison with its large rivals in the market. Rollin King and Herb Kelleher launched 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 want to get there, on time, at the lowest possible fares, and make darn sure they have a good time carrying it out, individuals will fly your airline.” This approach 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 beneath the symbol “LUV” on NYSE.
In the end, the airline industry overall is at shambles. But, so how exactly does Southwest Airlines stay profitable? Southwest Airlines has got the lowest costs and strongest balance sheet in the industry, according to its chairman Kelleher. The 2 biggest operating costs for virtually any airline are – labor costs (approx 40%) accompanied by fuel costs (approx 18%). Various other ways that 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 makes up about about 37% of its operating costs. Possibly the most critical element of the successful low-fare airline business design is achieving significantly higher labor productivity. Based on a recent HBS Case Study, southwest airlines will be the “most heavily unionized” US airline (about 81% of the employees are part of an union) as well as its salary rates are considered to be at or over average when compared to the US airline industry. The reduced-fare carrier labor advantage is at much more flexible work rules that permit 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 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 relating to United and American, and 58% less than US Airways.
Carriers like Southwest have a tremendous cost edge over southwest airlines customer service phone number for the reason that 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, despite 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 in the carrier’s operating costs. Airlines who want to stop huge swings in operating expenses and bottom line profitability elect to hedge fuel prices. If airlines can control the expense of fuel, they can better 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 move higher fuel costs to passengers by raising ticket prices because of the highly competitive nature from the industry.
Southwest continues to be in a position to successfully implement its fuel hedging strategy to save on fuel expenses in a big way and contains the largest hedging position among other carriers. Inside 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 other airlines excluding JetBlue as illustrated in exhibit 1 below. In 2005, 85 % from the airline’s fuel needs has been 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 in the industry also shows that airlines that are hedged have a competitive edge on the non-hedging airlines. Southwest announced in 2003 it would add performance-enhancing Blended Winglets to the 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 remain inexpensive. The majority of its flights are short hauls averaging about 590 miles. It uses the tactic to keep its flights in the air more often and for that reason achieve better capacity utilization.
Southwest flies to secondary/smaller airports in order to reduce travel delays and thus provide excellent service to its customers. It provides led the industry in on-time performance. Southwest has also been able to 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 only a single aircraft to understand. 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 more efficiently.
The idea of ticketless travel was a major advantage 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 bank cards qualify for online transactions, now Southwest.com bookings make up 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 accounted for 75% of Southwest’s revenues by end of 2005. In the past, when there was a 10% travel agency commission paid, it used to cost about $8 a booking. But currently, southwest airlines phone is paying between 50 cents and $1 per booking for electronic transactions that translate to huge financial savings.