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Running head: SOUTHWEST AIRLINE 1 

Southwest Airline 

In the day to day life, individuals are tasked with the duty of making an informed decision on numerous matters. In the business world, the case is not different as firms are influenced by their individual customer's needs which in turn shape the process of decision making in a firm which illustrates the application of microeconomic in the daily operations of businesses. One of the businesses that have significantly endorsed microeconomics in its operations is the Southwest Airlines company. The South-west airline company is an air transport firm that offers passage air transport on a scheduled basis in the US and the neighboring internal markets. 

History 

One evening MR. Rollin King was sharing dinner with his friend Herb Kelleher when he shared his idea of an airline and drew a draft of what he believed was his dream airline. Mr. King and Keller implemented the dream which leads to the establishment of the Southwest airline which started its air services in June 1971 ( Voigt et al, 2015) .The main goal, to start the airline was to offer the American people and opportunity to travel and have fun at a relatively low cost which has seen the company lead as the largest low-cost passenger carrier globally. Despite the great vision to help the American people, the southwest airline was faced with challenges from 1967 to 1970 which involved a legal battle between the company and its competitors. In the end, the Supreme Court ruled for the Southwest airline in December 1970 which provided the company with the right to fly in Texas, hence, starting its services in 1971 ( Vowles & Lück 2016). During its start, the company started with three Boeing jets which served three states in Texas city in the US which are Dallas, Houston, and San Antonio and each of the Jets had the capacity to carry two hundred and five passengers. During in the 1970s, air services were quite expensive making it unaffordable for most people, but the Southwest airline filled the gap as it provided its customers with air tickets that were and are still relatively cost effective while compared with the cost of traveling with other airlines in the US. As a result of its strategic business plans, Southwest airline company have experienced significant growth which in turn have enabled it to compete in the US competitive airline market to overcome its competitors such as Transtrat and Morris airlines. Today the company is the largest low-cost passenger carrier in the whole world operating in more than three thousand nine hundred destinations in a day during the peak seasons ( Vowles & Lück 2016) . 

Demand Condition 

For the past forty-five years since the initial operations of the Southwest airline, the company has significantly grown with time. Initially, the company started its operation in three states within Texas and had three jets, as, at 2015, the company was already operating in more than 97 destinations in 40 states of the US (( Zhou et al., 2016) . The figures are clear indications of the ever increasing demand for the Southwest airline services, whereby, the customers prefer the company over its competitors due to quality services that are effective as well as the fact that the customers acquire the services at a reasonable price. Additionally, by the same year, the company had a total of seven hundred and four Boeing jets and approximately seven hundred and thirty-seven aircraft. From the data, it is evidence that the company has significantly grown from operating in three states to forty states and ninety seven destinations as well as increasing their aircraft and Boeing. Additionally, in 2014, the company launched the international trips and in a span of one year the company had eleven international destinations. 

As a result of the continued growth and development within the company, the southwest airline has also experienced growth in its total revenue throughout the years. For example, the net income for the company in 2015 was approximately$2.2 billion and earnings from special items accumulate to $ 2.4 billion which was an increase from 2014 earnings with a difference of 75.1 % increment ( Voigt et al, 2015) . As a result of the increased demand for travel and the ever increasing cost of flight, the Southwest Company have taken advantage of the large market of travels and offering their services at a lower price. Which in turn enables the company to attract new customers as well as maintain its customers; hence, achieving high profits rates reflected the company's total revenues. Below is a chart indicating the revenue progress of the company for the past five years. 

It is evidence from the above data that the company’s revenue have progressively increased for the last five years, while the company works hard to reduce the cost revenue in an attempt to increase its profit. 

Price Elasticity of Demand 

In a natural market of a commodity, a decrease in the price of a product leads to increase it is demand while and increase in the price of the product forces the customers to use substitute products or similar products offered by competing for companies at a lower price., In this case, the southwest airline started its operations in 1971, with low prices when compared with its competitors which in turn helped the company to attract a new customer, which increased the demand for the airline services. For example, the Southwest airline introduces new prices which were low when compared with its competitors operating between Baltimore and Cleveland. The new and low prices which shifted from $ $193 to $56for one way tickets lead to increased numbers of passengers booking with the company leading to an increase in the traffic from 89 passengers per day to approximately 781 passengers in a day traveling in one direction without considering the to and from trips ( Vowles & Lück 2016) . 

Over the years, the Southwest Company has recorded a high profile in the provision of quality services at a relatively low cost, and it is therefore for such a reason that the company has acquired loyal customers who’s responsive to changes in prices of other flying company does not significantly shift their interest to the competing company. Additionally, the company has recorded low rates of accidents when compared with its competitors such as the people express who in turn help the southwest company to maintain their customers as well as attracting customers from such competing companies with high rates of accidents ( Vowles & Lück 2016) . Also, the company has employed adequate employees who are qualified, who in turn provide quality services, hence attracting customers due to the nature of services offered by the company. Additionally, the southwest company offers flexible flights which in turn help the customers to use the airline during emergencies and at their own convenient time. Also, the company processes as easily such as ticket booking and enabling the customers to claim their baggage which in turn help to win the customer's trust hence the customers end up preferring the company's services as opposed to its competitors irrespective of the prices offered by the competing companies ( Vowles & Lück 2016) . Lastly, despite the fact that the company has been faced with terrorism which can significantly affect its image and services to its customers, the company has not suffered any significant attack, hence, proving to be safe for its customers who in turn help to win the customer's loyalty as well as their response to changes in the price of services offered by Southwest competitors. 

In a normal demand curve, a reducing in the price of a commodity or services lead to an increase in the demand. In this case, the Southwest Company have significantly shaped its market price and set it quite low when compared with its competitors which in turn increases customers preference to the company's service which directly leads to an increase in the demand for the southwest airline services(( Zhou et al., 2016) . Additionally, the firm also applies strategic approaches which in turn enable the company to reduce its product cost, hence managing to sell its services at a low price while increasing the demand and total revenue simultaneously. 

Cost of Production 

For the last forty years, the southwest airline has significantly grown which implies that the cost of its daily operations has also increased. The company cost of production is shaped by the company's rate of wages and benefits to its employees, fuel, and oils, equipment necessary for maintenance and repairs, aircraft rentals, landing cost, depreciation, and amortization as well as the cost of acquiring and incorporating new strategies or materials in the company. As at last year, the company had a capacity of approximately 53,072 which is an increase from the company's initial employees which in turn implies an additional cost of operation. For example, the total expense of the company of employees' wages and benefit in 2014 had increased by $399 million which is equivalent to a 7. 9% increase from 2013 expenses on this item ( Voigt et al, 2015) . Additionally, the southwest company has also increased its total aircraft and Boeing which in turn implies that the company has increased its spending on fuel and oils as well as other related costs such as aircraft maintenance, and landing fees. Despite the increases in the cost of operation, an increase in a total number of employees implies adequate employees to serve the company's clients which in turn lead to efficiency and high-quality services which in turn attract customers leading to more sales which translate to the company profitability ( Vowles & Lück 2016) . Additionally, the company acquires oil and fuel in large quantities, hence, being on the safe side when the oil prices increase for a short period, this, in turn, does not influence the company in any way and therefore the company can maintain its cost of operation while providing services at a low price. 

The Southwest Company’s output in primarily shaped by the cost of its production. For example, increased number of employees implies that the corporation can serve many customers hence increasing its end results ( Zhou et al., 2016) . Additionally, the increased number of aircraft and Boeing, as well as the increased geographical destination and number of the trip, implies that the company output is dependent on the input such as the number of aircraft. Also as a result of increased input regarding labor and equipment the company can serve a large population and also different geographical areas. 

Market Shares 

Despite the low prices of services offered by the Southwest airline, the company has also managed to increase its shares over time when compared with other companies offering the same services. For example, when evaluating shares from revenue per passage mile (RPM), in 2014, the southwest airline experience 108 billion which is equivalent to 18% which was a 2% increase from 2010 ( Vowles & Lück 2016) . When the data is compared with other airlines such as Us airways, Delta, American Airline, as well as United airline the company has increased its shares because in 2014 onlyAmerican Airline and Delta Airlines were the only airlines with higher RPM than Southwest airline as they had 30% and 40% respectively. Additionally, in 2015, the southwest airline had 18.8% of the available seat miles (ASM) market shares when compared with Delta which is one of the largest airlines which stood at 19.2% reflecting a difference of 04% only ( Zhou et al., 2016) . Over the years, the southwest airline has been progressively increasing its market shares when compared with its compares as indicated below. 

Domestic Market Shares in percentage 

Numerous barriers exist in the airline industry which hinders and challenges new investors to invest in the industry. Firstly, the industry is competitive, which in turn hinders new airlines from entering the market. Additionally, the airline prices are controlled by the dominating form such as Delta which might engage in price wars making it difficult for a new entry into the industry (( Zhou et al., 2016) . Thirdly, the capital to start an airline is quite high, placing a financial challenge to investors in the airline industry. 

The southwest company has a significant impact on the airline industry due to its price structures. The company reduces it operation cost which in turn enables the company to provide quality services at an affordable rate. In an attempt to take advantage of the large market other airline companies are forced to reduce their prices so as to meet their operation as well as earn income from the business. 

Recommendations 

The company should develop strategies to ensure that fuel and oil prices to not hinder it from providing low-cost services. In this case, the company should develop plans to reduce its operational expenses. 

The Southwest airline company is influential in the airline industry, and therefore it can apply price wars in cases when oil prices increase to ensure that the other company's prices are also influenced hence maintaining its customers. 

Lastly, the company is already experiencing success, but it is important to develop a good management plan that allows employees development which will, in turn, help them to be efficient, hence, meeting the customers ever changing needs, taste, and preference. 

References 

Voigt, K. I., Buliga, O., & Michl, K. (2015). Pioneer in the Skies: The Case of Southwest Airlines. In   Business Model Pioneers   (pp. 171-184). Springer International Publishing. 

Vowles, T. M., & Lück, M. (2016). Low Cost Carriers in the USA and Canada.   The Low Cost Carrier Worldwide , 61. 

Zhou, C., Albuquerque, P., & Grewal, R. (2016). Competition and Firm Service Reliability Decisions: A Study of the Airline Industry.