Southwest Airlines is the biggest airline assessed by quantity of passengers carried each year within the United States. It is also known as the ‘discount airline’ in comparison with its large rivals in the industry. Rollin King and Herb Kelleher founded southwest Airlines address 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 wish to get there, on time, at the smallest possible fares, and make darn sure they have a good time carrying it out, individuals will fly your airline.” This method 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 beneath the symbol “LUV” on NYSE.
In the end, 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%). 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 its operating costs. Perhaps the most important component of the successful low-fare airline business model is achieving significantly higher labor productivity. According to a recently available HBS Case Study, southwest airlines is the “most heavily unionized” US airline (about 81% of their employees fit in with an union) and its salary rates are regarded as at or higher average when compared to the US airline industry. The reduced-fare carrier labor advantage is in a lot more flexible work rules that enable cross-consumption of virtually all employees (except where disallowed by licensing and safety standards). Such cross-utilization as well as 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 a lot more than 25% below that relating to United and American, and 58% lower than US Airways.
Carriers like Southwest possess a tremendous cost edge over southwest airlines customer service number 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, inspite of the substantially longer flight lengths and larger average aircraft scale 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 will be the second-largest expense for airlines after labor and makes up about about 18 percent from the carrier’s operating costs. Airlines that want to stop huge swings in operating expenses and bottom line profitability choose 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 transforming into a commodity business, being competitive on price was key for any airline’s survival and success. It became hard to move higher fuel costs onto passengers by raising ticket prices due to the highly competitive nature from the industry.
Southwest has become capable of successfully implement its fuel hedging strategy to save on fuel expenses in a big way and contains the greatest hedging position among other carriers. Inside 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 of the airline’s fuel needs has become hedged at $26 per barrel. World oil prices in August 2005 reached $68 per barrel. Inside the second quarter of 2005 alone, Southwest achieved fuel savings of $196 million. The state in the industry also implies that airlines which are hedged possess a competitive edge over the non-hedging airlines. Southwest announced in 2003 that 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 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 has led the business in on-time performance. Southwest has also been able to trim down its airport operations costs relatively a lot 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 education costs for pilots, ground crew and mechanics are lower, because there’s only a single aircraft to understand. Purchasing, provisioning, along with other operations are also vastly simplified, thereby lowering costs. Consistent aircraft also enables Southwest to utilize its pilot crew better.
The thought of ticketless travel was actually a major advantage to Southwest since it could lower its distribution costs. Southwest became electronic or ticketless back inside the mid-1990s, now these are about 90-95% ticketless. Customers who use bank cards are eligible for online transactions, and now Southwest.com bookings make up about 65% of total revenue. The CEO Gary Kelly thinks that wmprvh idea would grow further and that he wouldn’t be surprised if e-ticketing included 75% of Southwest’s revenues by end of 2005. Before, when there was clearly 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.