Case Analysis: Southwest Airlines

At the onset of the airline industry in the United States, major network airlines were the sole providers of air travel. This multifaceted industry was a difficult industry to break into as a consequence of “sophisticated customer segmentation, hub-and spoke models and costly information systems for reservations, fare wars and intense competition” (Thompson 2008). Shrinkage in airline ticket prices augmented the demand for airline travel. Many markets were simply deserted or over-looked by major network airlines; this is a region a fresh “second tier of service providers” could enter into.

This endeavor proved to provide a consumer savings of billions per year. Thus in June of 1971, after a tumultuous battle with other Texas-based airlines, Southwest Airlines inaugurated its initial flight (Inkpen 2008). As one of the United States’ new low-cost carriers, Southwest Airlines predominantly distributed “short haul, high frequency, point-to-point, low-fare service” (Keller 2008) serving “64 cities in 32 states” on the wings of Boeing 737 aircraft (Thompson 2008). In each successive year since 1973 Southwest has turned a profit (Keller 2008).

Southwest Airlines “revenues of $9. 8 billion, operating profit of $791 million and net profit of $645 million in 2007, confirm its profitability” (Thompson 2008). Southwest Airlines had a different take on the accepted hub-and-spoke organization for airline travel where “the spokes fed passengers from outlying points into a central airport—the hub—where passengers could travel to additional hubs or their final destination. ” In the view of Southwest Airlines, these models caused congestion and unprofitable time spent awaiting customer arrivals from other airports (Inkpen 2008).

According to Andrew C. Inkpen via Southwest Airlines’ 2001 Annual report, insight into functioning viewpoint of this airline can be unearthed through this statement: “Southwest was well poised, financially, to withstand the potentially devastating hammer blow of September 11. Why? Because for several decades our leadership philosophy had been: We manage in good times so that our Company and our People can be job secure and prosper through bad times…” Southwest remained steady standing in 2008 and employed 33,000 people compared to 6000 in 1987.

The company outperformed every other US Airline in the amount of domestic passengers flown. Southwest airline relished in a first quarter revenue and passenger load factor that exceeded any preceding record. Load factor can be determined through a simple equation using the revenue passenger miles, or “the number of passengers carried multiplied by the distance flown”, divided by the available seat miles, or the number of seats available for sale multiplied by the distance flown”. Southwest continued only in the domestic United States markets as of 2008 (Inkpen 2008).

In the opinion of Dr. Grace S. Thomson, “a heterogeneous mix of long and short-haul in very thing segments, passenger, density, and per capita income at end points gives [Southwest Airlines] competitive advantage. The way to establish a company in such a market as the airline industry would be to strategically expand in to airports with less competition. Southwest Airline capitalized on this fact to become a national airline (Keller 2008). Southwest Airlines satisfies what were once negligible markets.

Southwest serves “64 cities in 411 non-stop city pairs” (Thompson 2008). Saturating these markets has allowed Southwest Airlines to expand without putting a strain on its pocket book (Keller 2008). “At the current rate of expansion, 7/8% of long-haul competitors will see their revenues exposed to [Southwest Airlines], and 14. 4% by 2014” (Thompson 2008). Southwest Airlines has a predisposition to to be ahead of the curve. This company turned a blind of to the industry trend of profit loss. Southwest has netted a profit for 36 consecutive years.

Southwest Airlines has an investment grade credit rating; a feet only accomplished by a few other airlines in the world (Inkpen 2008). This company has established strategies and efficient management (Keller 2008). At Southwest Airlines top executives “generated ten times more revenue per dollar of compensation than did C-suite types at some of the network carriers”. In 2008, hardline fuel-hedging left Southwest Airlines “70 percent hedged at $51 a barrel through the end of the year and 55 percent hedged at the same price” in 2009.

This approach accumulated a savings for Southwest Airlines at a projected $3. 5 billion dollars (Brancatelli 2008). Southwest Airlines makes use of an abridged price structure based on “low unrestricted, unlimited, everyday coach fares” (Thompson 2008). The company conserves money using this simple system in relationship to a complex fare structure that is costly to manage (Brancatelli 2008). The average short-haul ticket fare for Southwest Airlines reached $106. 60 in 2007.

Long haul fares only reached $399 (Thompson 2008). The accepted average plane turn-around time for major networked carriers is ninety minutes. Through the company’s basic approach, Southwest is able to reduce this time to twenty minutes for unloading and cleaning the previous flight and boarding another flight. Also, an average Southwest Airlines aircraft could be “in the air for more than an hour longer each day than similarly sized jets flown by a national carrier” (Brancantelli 2008).

The Boeing 737 series is the solitary style of plane Southwest Airlines flies which accumulates millions in savings for basic maintenance costs which include “spare-parts inventories, mechanic training, and other nuts-and-bolts airline issues”. Expensive disruptions and reconfigurations are avoided as the 527 aircraft travel freely throughout any of Southwest Airlines established routes (Brancantelli 2008). Additional flights accrue into additional income. Positively Outrageous Service is the code name for the beyond the norm customer service that is proved by Southwest Airlines (Inkpen 2008).

This outstanding customer service is yet another facet that sets Southwest Airlines apart from the rest. Southwest Airlines employs all the fundamentals of a customer-centric organization. Relationship economic drivers are exercised to “increase the willingness for customers to fly”. Resource drivers are utilized to stimulate customers to prefer Southwest Airlines (Thompson 2008). Long establishment in the market has allowed Southwest Airlines to benefit from the consumers mindfulness of the brand (Keller 2008).

Social drivers are likewise sourced to “provide customers with recognition and prestige” (Thompson 2008). The airline industry underwent Deregulation by President Jimmy Carter in 1978. The result of this turn of events supplied a domino effect beginning with the steady sinking of airline fares which, in turn, “allowed new firms to enter the market” Adding salt to the wound of the airline industry was the 1979 fuel crisis and the 1981 air traffic controllers’ strike.

The United States incurred a severe recession in the 1980s that only promoted to the turbulence (Inkpen 2008). Today’s threats are incurred in a post-September 11th environment. In the time subsequent to September 11, 2001 thirty billion dollars was lost by domestic airlines (Inkpen 2008). Southwest Airlines now was plagued with an increased “war risk insurance and passenger security laws and directives” which placed an increase on security costs. Southwest Airlines must absorb these costs since the company depends on a low-fare business model” and would be less likely to circulate those costs on to passengers (Keller 2008). Firmer government guidelines for aged aircraft also placed encumbrances on Southwest Airlines (Inkpen 2008). These aged aircraft will eventually prove to a need for replacement and amplified upkeep expenses. The private automobile is one form of surface transportation that allowed for a degree of competition to Southwest’s short-haul markets (Keller 2008). Jet fuel costs rose rapidly in 2008 which depleted profitability in the airline industry (Inkpen 2008).

Forty percent of airline costs can be attributed to intensifying fuel prices (Brancatelli 2008). The “threat of volatile and unprecedented jet fuel prices” is a key concern that imperiled impending development of the airline industry (Inkpen 2008). The major operating costs of the airline industry include an increase in labor costs, which gave rise to a “damaging round of negotiations with the flight attendants union”, and escalated cost of jet fuel which will not be prevented long term through hedging (Keller 2008).