Southwest Airlines is the biggest airline measured by quantity of passengers carried every year within the usa. It is additionally 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 easy strategy: “If you get your passengers to their destinations when they would like to get there, on time, at the cheapest possible fares, and make darn sure there is a good time carrying it out, men and women will fly your airline.” This strategy continues to be 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 when compared with other airlines in the market 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 might be studied within this paper.
After all, the airline industry overall is at shambles. But, so how exactly does https://www.headquarterscomplaints.com/southwest-airlines-co-headquarters-corporate stay profitable? Southwest Airlines has got the lowest costs and strongest balance sheet in the industry, in accordance with its chairman Kelleher. The two biggest operating costs for just about any airline are – labor costs (approx 40%) then fuel costs (approx 18%). Various other ways in which 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. Possibly the most important part 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 the employees are part of an union) and its salary rates are regarded as at or higher average when compared to the US airline industry. The reduced-fare carrier labor advantage is within a lot more flexible work rules that allow cross-consumption of practically all employees (except where disallowed by licensing and safety standards). Such cross-utilization and 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 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% greater 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 has the capacity to positively impact its bottom line revenues.
Fuel costs is definitely the second-largest expense for airlines after labor and accounts for about 18 percent in the carrier’s operating costs. Airlines who want to prevent huge swings in operating expenses and main point here profitability elect to hedge fuel prices. If airlines can control the expense 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 key to any airline’s survival and success. It became hard to pass higher fuel costs on to passengers by raising ticket prices as a result of highly competitive nature from the industry.
Southwest has become in a position 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. Inside 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 much lower fuel expense (.012 per ASM) when compared to the other airlines excluding JetBlue as illustrated in exhibit 1 below. In 2005, 85 percent 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 of the industry also suggests that airlines which can be 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 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 company to maximize its operational efficiency and stay inexpensive. Almost all of its flights are short hauls averaging about 590 miles. It uses the technique to keep its flights inside the air more regularly and therefore achieve better capacity utilization.