Southwest Airlines is the major airline measured by quantity of passengers carried annually within the usa. It is additionally known 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 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 they have a good time carrying it out, men and women will fly your airline.” This strategy 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) along 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 compared to other airlines in the industry by executing a powerful and efficient operations strategy that forms a significant pillar of its overall corporate strategy. Given below are some competitive dimensions that will be studied in this particular paper.
In the end, the airline industry overall is within shambles. But, how exactly does https://www.headquarterscomplaints.com/southwest-airlines-co-headquarters-corporate/ stay profitable? Southwest Airlines has the lowest costs and strongest balance sheet in the 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%). A few other methods 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 makes up about about 37% of the operating costs. Probably the most important part of the successful low-fare airline business model is achieving significantly higher labor productivity. Based on a newly released HBS Case Study, southwest airlines will be the “most heavily unionized” US airline (about 81% of the employees belong to an union) as well as its salary rates are considered to be at or above average when compared to the US airline industry. The low-fare carrier labor advantage is within much more flexible work rules that allow cross-consumption of nearly 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 a lot more than 25% below that relating to United and American, and 58% less than US Airways.
Carriers like Southwest use a tremendous cost advantage 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% greater than at American and United, regardless of 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 financial well being 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 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 price of fuel, they are able to better estimate budgets and forecast earnings. With cvjryq competition and air travel transforming into a commodity business, being competitive on price was answer to any airline’s survival and success. It became tough to pass higher fuel costs on to passengers by raising ticket prices as a result of highly competitive nature of 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. 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 the other airlines with the exception of JetBlue as illustrated in exhibit 1 below. In 2005, 85 per cent from the airline’s fuel needs continues to be 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 of the market also suggests that airlines that 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 inexpensive. Most of its flights are short hauls averaging about 590 miles. It uses the tactic to keep its flights inside the air more regularly and therefore achieve better capacity utilization.