Southwest Airlines is definitely the major airline measured by number of passengers carried annually within america. Additionally it is known as a ‘discount airline’ in comparison with 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 started with one easy strategy: “If you get your passengers to their destinations when they wish to get there, promptly, at the cheapest possible fares, and make darn sure they have a good time carrying it out, individuals will fly your airline.” This approach 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 includes a distinct advantage compared to other airlines in the industry by executing an effective and efficient operations strategy that forms an essential pillar of the overall corporate strategy. Given below are some competitive dimensions that might be studied in this paper.
All things considered, the airline industry overall is at shambles. But, how does www.headquarterscomplaints.com/southwest-airlines-co-headquarters-corporate stay profitable? Southwest Airlines has the lowest costs and strongest balance sheet in the industry, in accordance with its chairman Kelleher. The 2 biggest operating costs for virtually any airline are – labor costs (approx 40%) followed by fuel costs (approx 18%). Various 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 accounts for about 37% of its operating costs. Perhaps the most critical element of the successful low-fare airline business design is achieving significantly higher labor productivity. Based on a recent HBS Case Study, southwest airlines is definitely the “most heavily unionized” US airline (about 81% of its employees fit in with an union) as well as its salary rates are regarded as at or above average compared to the US airline industry. The low-fare carrier labor advantage is in much more flexible work rules that enable cross-utilization of nearly 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 those of United and American, and 58% lower than US Airways.
Carriers like Southwest possess 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% more 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 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 from the carrier’s operating costs. Airlines that are looking to avoid huge swings in operating expenses and financial well being profitability decide to hedge fuel prices. If airlines can control the price of fuel, they could better estimate budgets and forecast earnings. With cvjryq competition and air travel transforming into a commodity business, being competitive on price was factor to any airline’s survival and success. It became difficult to pass higher fuel costs on to passengers by raising ticket prices due to the highly competitive nature of the industry.
Southwest has been able to successfully implement its fuel hedging strategy to bring down fuel expenses in a big way and 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) compared to the other airlines with the exception of JetBlue as illustrated in exhibit 1 below. In 2005, 85 percent from 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 of the business also suggests that airlines which can be hedged have a competitive edge on the non-hedging airlines. Southwest announced in 2003 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 remain inexpensive. Most of its flights are short hauls averaging about 590 miles. It uses the strategy to keep its flights in the air more often and therefore achieve better capacity utilization.