Southwest Airlines is the largest airline measured by number of passengers carried every year within the United States. It is additionally known as a ‘discount airline’ in comparison with its large rivals in the business. 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 there is a good time carrying it out, people will fly your airline.” This method 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) 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 in comparison to other airlines in the market by executing a highly effective and efficient operations strategy that forms a significant pillar of the overall corporate strategy. Given here are some competitive dimensions which will be studied in this paper.
After all, the airline industry overall is within shambles. But, how does https://www.headquarterscomplaints.com/southwest-airlines-co-headquarters-corporate/ stay profitable? Southwest Airlines has got the lowest costs and strongest balance sheet in its industry, based on its chairman Kelleher. The 2 biggest operating costs for any airline are – labor costs (approx 40%) then fuel costs (approx 18%). Some 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 accounts for about 37% of its operating costs. Probably the most important part of the successful low-fare airline business design is achieving significantly higher labor productivity. According to a newly released HBS Case Study, southwest airlines is definitely the “most heavily unionized” US airline (about 81% of the employees belong to an union) along with its salary rates are regarded as at or over average compared to the US airline industry. The reduced-fare carrier labor advantage is in a lot more flexible work rules that enable cross-usage 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 translate into 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% under US Airways.
Carriers like Southwest possess a tremendous cost edge on 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% 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 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 of the carrier’s operating costs. Airlines that are looking to prevent huge swings in operating expenses and financial well being profitability decide to hedge fuel prices. If airlines can control the cost of fuel, they can more accurately estimate budgets and forecast earnings. With cvjryq competition and air travel transforming into a commodity business, being competitive on price was key to any airline’s survival and success. It became difficult to pass higher fuel costs to passengers by raising ticket prices as a result of highly competitive nature of the industry.
Southwest continues to be capable of successfully implement its fuel hedging strategy to save on fuel expenses in a big way and it has the largest hedging position among other carriers. In 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 lower fuel expense (.012 per ASM) compared to the other airlines except for JetBlue as illustrated in exhibit 1 below. In 2005, 85 % of 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 of the business also shows that airlines which are hedged have a competitive edge on the non-hedging airlines. Southwest announced in 2003 that 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 service to maximize its operational efficiency and remain inexpensive. Most of its flights are short hauls averaging about 590 miles. It uses the technique to keep its flights within the air more often and for that reason achieve better capacity utilization.