Southwest Airlines is the biggest airline assessed by number of passengers carried each year within the United States. It is also known as the ‘discount airline’ compared with its large rivals in the business. Rollin King and Herb Kelleher founded southwest airlines corporate phone number 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 want to get there, on time, at the cheapest possible fares, and make darn sure they have a good time doing it, individuals will fly your airline.” This strategy 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.
In the end, the airline industry overall is within shambles. But, how does Southwest Airlines stay profitable? Southwest Airlines provides the lowest costs and strongest balance sheet in their industry, based on 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 ways that 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 makes up about about 37% of its operating costs. Possibly the most important component of the successful low-fare airline business model is achieving significantly higher labor productivity. In accordance with a recently available HBS Case Study, southwest airlines will be the “most heavily unionized” US airline (about 81% of the employees are part of an union) and its salary rates are regarded as being at or above average compared to the US airline industry. The low-fare carrier labor advantage is in far more flexible work rules that enable cross-usage of practically 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 of United and American, and 58% less than US Airways.
Carriers like Southwest use a tremendous cost edge over southwest airlines phone simply because their workforce generates more output per employee. In a study in 2001, the productivity of Southwest employees was over 45% higher than at American and United, regardless of the substantially longer flight lengths and larger average aircraft size of these network carriers. Therefore by its relentless pursuit for lowest labor costs, Southwest is able 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 in the carrier’s operating costs. Airlines that are looking to avoid huge swings in operating expenses and bottom line profitability decide to hedge fuel prices. If airlines can control the price of fuel, they can more accurately estimate budgets and forecast earnings. With growing competition and air travel transforming into a commodity business, being competitive on price was key to the 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 been capable of successfully implement its fuel hedging strategy to save on fuel expenses in a big way and it 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% rise 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 % in 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 in the industry also implies that airlines which can be hedged have a competitive advantage over the non-hedging airlines. Southwest announced in 2003 that it would add performance-enhancing Blended Winglets to the 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 strategy to keep its flights inside the air more often and therefore achieve better capacity utilization.
Southwest flies to secondary/smaller airports in an attempt to reduce travel delays and thus provide excellent service to its customers. It provides led the business in on-time performance. Southwest has 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 just a single aircraft to learn. Purchasing, provisioning, and other operations will also be vastly simplified, thereby lowering costs. Consistent aircraft also enables Southwest to use its pilot crew more efficiently.
The thought of ticketless travel had been a major advantage to Southwest as it could lower its distribution costs. Southwest became electronic or ticketless back inside the mid-1990s, and now these are about 90-95% ticketless. Customers who use bank cards are eligible for online transactions, and today Southwest.com bookings take into account about 65% of total revenue. The CEO Gary Kelly thinks that wmprvh idea would grow further which he wouldn’t be surprised if e-ticketing taken into account 75% of Southwest’s revenues by end of 2005. Previously, when there is a 10% travel agency commission paid, it utilized to cost about $8 a booking. But currently, southwest 800 number is paying between 50 cents and $1 per booking for electronic transactions that translate to huge cost benefits.