Southwest Airlines is definitely the biggest airline measured by quantity of passengers carried each year within america. It is also known as a ‘discount airline’ in contrast to 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 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 these people have a good time performing it, men and women will fly your airline.” This method continues to be the true secret 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 under the symbol “LUV” on NYSE.
Southwest clearly includes a distinct advantage compared to other airlines in the business by executing an effective and efficient operations strategy that forms an essential pillar of their overall corporate strategy. Given listed here are some competitive dimensions that will be studied in this paper.
All things considered, the airline industry overall is in shambles. But, how exactly does headquarterscomplaints.com stay profitable? Southwest Airlines has got the lowest costs and strongest balance sheet in its industry, in accordance with its chairman Kelleher. The 2 biggest operating costs for just about any airline are – labor costs (approx 40%) then fuel costs (approx 18%). Various other ways in which 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 component of the successful low-fare airline business structure is achieving significantly higher labor productivity. In accordance with a recent HBS Case Study, southwest airlines is the “most heavily unionized” US airline (about 81% of its employees fit in with an union) and its salary rates are regarded as being at or above average when compared to the US airline industry. The low-fare carrier labor advantage is in much 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 translate into 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% under US Airways.
Carriers like Southwest use a tremendous cost edge on network airlines simply 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 has the capacity to positively impact its main point here revenues.
Fuel costs is the second-largest expense for airlines after labor and accounts for about 18 percent of the carrier’s operating costs. Airlines who want to avoid huge swings in operating expenses and bottom line profitability choose to hedge fuel prices. If airlines can control the cost of fuel, they could more accurately estimate budgets and forecast earnings. With cvjryq competition and air travel being a commodity business, being competitive on price was answer to any airline’s survival and success. It became difficult to pass higher fuel costs onto passengers by raising ticket prices because of the highly competitive nature in the industry.
Southwest continues to be in a position to successfully implement its fuel hedging strategy to bring down 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% increase in jet fuel costs. During Fiscal year 2003, Southwest had far 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 been 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 condition of the market also suggests that airlines which can be hedged have a competitive edge over the non-hedging airlines. Southwest announced in 2003 which 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 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 inside the air more frequently and for that reason achieve better capacity utilization.