Southwest Airlines is definitely the largest airline measured by quantity of passengers carried every year within the United States. It is also referred to as a ‘discount airline’ in contrast to 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 began with one particular strategy: “If you get your passengers to their destinations when they would like to get there, promptly, at the smallest possible fares, and make darn sure these people have a good time performing it, individuals will fly your airline.” This approach continues to be 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.
Southwest clearly features a distinct advantage when compared with other airlines in the industry by executing an effective and efficient operations strategy that forms a significant pillar of its overall corporate strategy. Given here are some competitive dimensions that will be studied in this particular paper.
In the end, the airline industry overall is in shambles. But, so how exactly does www.headquarterscomplaints.com/southwest-airlines-co-headquarters-corporate stay profitable? Southwest Airlines has got the lowest costs and strongest balance sheet in their industry, according to its chairman Kelleher. Both biggest operating costs for just about any airline are – labor costs (approx 40%) followed by fuel costs (approx 18%). Various other methods 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 their operating costs. Possibly the most important part of the successful low-fare airline business model is achieving significantly higher labor productivity. According to a recent HBS Case Study, southwest airlines is definitely the “most heavily unionized” US airline (about 81% of their employees fit in with an union) as well as its salary rates are regarded as at or above average when compared to the US airline industry. The reduced-fare carrier labor advantage is within much more flexible work rules that enable cross-utilization of virtually all employees (except where disallowed by licensing and safety standards). Such cross-utilization and 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 greater than 25% below those of United and American, and 58% under US Airways.
Carriers like Southwest have 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% more than at American and United, despite the substantially longer flight lengths and larger average aircraft scale of these network carriers. Therefore by its relentless pursuit for lowest labor costs, Southwest is able to positively impact its financial well being revenues.
Fuel costs will be the second-largest expense for airlines after labor and accounts for about 18 percent of the carrier’s operating costs. Airlines who want to prevent huge swings in operating expenses and main point here 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 answer to any airline’s survival and success. It became difficult to pass higher fuel costs to passengers by raising ticket prices because of the highly competitive nature in the industry.
Southwest has become capable of successfully implement its fuel hedging strategy to save on fuel expenses in a big way and it 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% boost in jet fuel costs. During Fiscal year 2003, Southwest had far lower fuel expense (.012 per ASM) when compared to the other airlines excluding JetBlue as illustrated in exhibit 1 below. In 2005, 85 % in 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 the market also implies that airlines that are hedged possess a competitive advantage over the non-hedging airlines. Southwest announced in 2003 which 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 service to maximize its operational efficiency and stay cost-effective. Almost all 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.