Southwest Airlines is the largest airline measured by variety of passengers carried each year within the usa. Additionally it is known as the ‘discount airline’ in contrast to its large rivals in the business. Rollin King and Herb Kelleher started southwest airlines complaints 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 cheapest possible fares, and make darn sure they have a good time doing it, people 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 under the symbol “LUV” on NYSE.
All things considered, the airline industry overall is within shambles. But, how does Southwest Airlines stay profitable? Southwest Airlines has got the lowest costs and strongest balance sheet in the industry, in accordance with its chairman Kelleher. The 2 biggest operating costs for any airline are – labor costs (approx 40%) then fuel costs (approx 18%). Various other methods Southwest is 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 the operating costs. Probably the most critical component of the successful low-fare airline business structure 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 the employees fit in with an union) as well as its salary rates are regarded as being at or above average compared to the US airline industry. The reduced-fare carrier labor advantage is at much more flexible work rules that allow cross-consumption of practically all employees (except where disallowed by licensing and safety standards). Such cross-utilization along with 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 have a tremendous cost edge on southwest airlines customer service phone number 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, despite the substantially longer flight lengths and larger average aircraft dimensions 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 makes up about about 18 percent of 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 price of fuel, they can better estimate budgets and forecast earnings. With growing competition and air travel becoming a commodity business, being competitive on price was key to any airline’s survival and success. It became hard to move higher fuel costs onto 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 bring down fuel expenses in a big way and has the greatest hedging position among other carriers. In 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 much lower fuel expense (.012 per ASM) when compared to the other airlines with the exception of JetBlue as illustrated in exhibit 1 below. In 2005, 85 % 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 state from the industry also suggests that airlines which are hedged have 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 cost-effective. Almost all of its flights are short hauls averaging about 590 miles. It uses the technique to keep its flights within the air more frequently and thus achieve better capacity utilization.
Southwest flies to secondary/smaller airports in an attempt to reduce travel delays and therefore 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 training costs for pilots, ground crew and mechanics are lower, because there’s only a single aircraft to learn. Purchasing, provisioning, and other operations can also be vastly simplified, thereby lowering costs. Consistent aircraft also enables Southwest to use its pilot crew better.
The concept of ticketless travel was a major benefit to Southwest because it could lower its distribution costs. Southwest became electronic or ticketless back within the mid-1990s, and today these are about 90-95% ticketless. Customers who use bank cards are eligible for online transactions, and now Southwest.com bookings account for about 65% of total revenue. The CEO Gary Kelly thinks that wmprvh idea would grow further and this he wouldn’t be surprised if e-ticketing included 75% of Southwest’s revenues by end of 2005. Before, when there was a 10% travel agency commission paid, it employed to cost about $8 a booking. But currently, southwest airlines customer support is paying between 50 cents and $1 per booking for electronic transactions that translate to huge cost benefits.