Southwest Airlines is definitely the major airline measured by number of passengers carried every year within the United States. Additionally it is known as a ‘discount airline’ compared with its large rivals in the industry. Rollin King and Herb Kelleher founded 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 started with one simple strategy: “If you get your passengers to their destinations when they wish to get there, on time, at the smallest possible fares, and make darn sure these people have a good time doing it, men and women will fly your airline.” This strategy has become the real 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.
Southwest clearly features a distinct advantage when compared with other airlines in the market by executing a powerful and efficient operations strategy that forms a significant pillar of its overall corporate strategy. Given here are some competitive dimensions which will be studied in this particular paper.
After all, the airline industry overall is in shambles. But, how exactly does https://www.headquarterscomplaints.com/southwest-airlines-co-headquarters-corporate stay profitable? Southwest Airlines has the lowest costs and strongest balance sheet in the industry, in accordance with its chairman Kelleher. The 2 biggest operating costs for just about any airline are – labor costs (approx 40%) followed by fuel costs (approx 18%). A few 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 their operating costs. Perhaps the most critical part of the successful low-fare airline business model is achieving significantly higher labor productivity. According to a newly released HBS Case Study, southwest airlines will be the “most heavily unionized” US airline (about 81% of its employees belong to an union) along with its salary rates are regarded as being at or higher average compared to the US airline industry. The reduced-fare carrier labor advantage is within far 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 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% lower than US Airways.
Carriers like Southwest use a tremendous cost edge over network airlines 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, inspite 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 definitely the second-largest expense for airlines after labor and accounts for about 18 percent from the carrier’s operating costs. Airlines who want to prevent huge swings in operating expenses and bottom line profitability choose to hedge fuel prices. If airlines can control the cost of fuel, they could better estimate budgets and forecast earnings. With cvjryq competition and air travel becoming a commodity business, being competitive on price was factor to any airline’s survival and success. It became tough to pass higher fuel costs to passengers by raising ticket prices because of the highly competitive nature from the industry.
Southwest has been in a position to successfully implement its fuel hedging strategy to save on fuel expenses in a big way and it has the greatest 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 lower fuel expense (.012 per ASM) when compared to the other airlines except for JetBlue as illustrated in exhibit 1 below. In 2005, 85 % in the airline’s fuel needs continues to be 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 of the industry also implies that airlines which are hedged use a competitive edge on the non-hedging airlines. Southwest announced in 2003 it would add performance-enhancing Blended Winglets to its 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. Almost all of its flights are short hauls averaging about 590 miles. It uses the technique to keep its flights inside the air more frequently and therefore achieve better capacity utilization.