Southwest Airlines is the biggest airline measured by quantity of passengers carried annually within the usa. It is also referred to as a ‘discount airline’ compared with its large rivals in the industry. 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 carrying it out, 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) and with a total operating revenue of $6.5 billion. Southwest is traded publicly underneath the symbol “LUV” on NYSE.
All things considered, the airline industry overall is at shambles. But, how exactly does Southwest Airlines stay profitable? Southwest Airlines provides the lowest costs and strongest balance sheet in their industry, according to its chairman Kelleher. Both biggest operating costs for just about any airline are – labor costs (approx 40%) then fuel costs (approx 18%). Various 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 accounts for about 37% of the operating costs. Perhaps the most critical component of the successful low-fare airline business design is achieving significantly higher labor productivity. According to a recently available HBS Case Study, southwest airlines is the “most heavily unionized” US airline (about 81% of their employees fit in with an union) along with its salary rates are regarded as at or above average when compared to US airline industry. The reduced-fare carrier labor advantage is at far more flexible work rules that allow cross-consumption 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 result in 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 have a tremendous cost edge over southwest airlines phone number 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, inspite 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 has the capacity to positively impact its bottom line revenues.
Fuel costs is the second-largest expense for airlines after labor and makes up about about 18 percent in the carrier’s operating costs. Airlines that want to stop huge swings in operating expenses and bottom line profitability decide to hedge fuel prices. If airlines can control the cost of fuel, they can more accurately estimate budgets and forecast earnings. With growing competition and air travel becoming a commodity business, being competitive on price was key to the airline’s survival and success. It became hard to pass through higher fuel costs onto passengers by raising ticket prices due to the highly competitive nature from the industry.
Southwest continues to be able 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% boost in jet fuel costs. During Fiscal year 2003, Southwest had much lower fuel expense (.012 per ASM) when compared to other airlines except for JetBlue as illustrated in exhibit 1 below. In 2005, 85 per cent 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 industry also implies that airlines that are hedged possess a competitive edge on the non-hedging airlines. Southwest announced in 2003 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 remain cost-effective. Almost all of its flights are short hauls averaging about 590 miles. It uses the strategy to keep its flights in the air more often and for that reason achieve better capacity utilization.
Southwest flies to secondary/smaller airports in order to reduce travel delays and thus provide excellent company to its customers. It offers led the market in on-time performance. Southwest has also been able to trim down its airport operations costs relatively a lot better than its rival airlines.
In the middle 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 courses costs for pilots, ground crew and mechanics are lower, because there’s just a single aircraft to find out. Purchasing, provisioning, and other operations are also vastly simplified, thereby lowering costs. Consistent aircraft also enables Southwest to use its pilot crew more effectively.
The idea of ticketless travel was actually a major benefit to Southwest as 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 credit cards qualify for online transactions, and now Southwest.com bookings make up about 65% of total revenue. The CEO Gary Kelly thinks that wmprvh idea would grow further and this he wouldn’t be blown away if e-ticketing accounted for 75% of Southwest’s revenues by end of 2005. Previously, when there was a 10% travel agency commission paid, it employed to cost about $8 a booking. But currently, southwest airlines customer service number is paying between 50 cents and $1 per booking for electronic transactions that translate to huge financial savings.