Budgeting seems to be the most important operation that any organization undertakes. In essence, the process of planning involved in budgeting spans the entire organization. Further, efficient monetary planning oversees the logistical operations of other activities. For this reason, this discussion touches on the elements of budgeting and financial objectives approaches and measures in the South West Airlines company. The two concepts intertwine from budgeting as the initial stage and sound financial decisions as the final stage to show performance. The following paper explores the different budgeting elements that have been utilized by the airline to maintain their success for more than 30 years (Southwest Airlines, 2016).
In order for any company to operate efficiently, the circulating resources it requires, or simply put, operational costs need to be determined. The four elements of budgeting involve allocating resources over various different time periods. In essence, the first element of budgeting is flexible resources that require variable costs. Flexible resources include those items that can be acquired by a company and disposed of in the short term, they can be called operating resources (Robinson, 2009). Flexible resources affect revenue in a way that allows allocations to be made in a way the resources promote the operation of the company. The second element of budgeting is intermediate capacity resources that create fixed costs. The resources represent an allocation that will reduce expense over time. In essence, Southwest Airlines has managed to stay on top because of effective control on their budget and with very low operations costs on the balance sheet. According to Srinivasan, the highest cost to the company include: labor—which accounts for about 40% of the operating cost which are all budgeted in the second element. These resources are valued over an estimated annual period (2006).
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The third element of budgeting is resources that enhance an organization’s strategy over the intermediate or long term. These resources are like research and development and employee training (Tatiana et. al., 2016). The allocation is expected to enhance the overall quality of the organization in the long run. In this way, the organization improves intrinsically through the allocation of such resources. Labor represents the budgeting element of and fuel costs accounting for about 18% in Southwest Airlines (Southwest Airlines, 2016). The budget on labor can be said to represent the third element of budgeting.
The fourth and final element of budgeting is the major resources that promote fixed cost over time and are usable over a period of about 10 years. South West Airlines is able to maintain low operating costs because of the following reasons: maintaining the same type of planes, flying point to point and to secondary airports. Important strategies like flying point-to-point help the company to save on costs and available financial resources. Essentially, point to point incorporates short haul flights of less than 600 miles (Thompson & Gamble, 2017). In the same way, efficiency is enhanced by: using only one type of plane—this means less training time and better versed pilots and crews. The above shows how the Southwest Company utilizes the fourth element of budgeting where the company strategizes on shorter flights and buy the same type of planes. The above elements show the simplicity of budgeting towards helping a company like Southwest Airlines achieve effective use of revenue. Available revenue can be divided in the four elements to cover the company’s needs and logistical requirements in the long term. The financial objective approaches show how the measures can be put simply to determine how allocated revenue is utilized in the airlines industry.
The first objective in a business should be to increase shareholder value. The measures of this increase are the return to capital employed which the most important one and show that shareholder principal is sound. Southwest Airlines has experienced consistent profits for the last 45 years of operation (Southwest Airlines, 2016). The profits can be owed to various operational changes and enhancements. The profits can be owed to following effective financial objectives that are measurable throughout the financial period. The other measures for increased shareholder value are economic value and market-to-book ratio. Improvement of cost structure is the other important objective—it utilizes the general selling and administrative expenses. The company is observed to operate on more than 92% passenger transport revenues (Thompson & Gamble, 2017). The acquisition AirTran is also observed to boost financials for Southwest Airlines and an effective financial boost objective. In this way, Southwest Airlines is able to identify the ways to enhance customer experience through in flight treatment.
The second objective for finance is increase in asset utilization which is measured by sales to asset ratio and percentage capacity utilization. It is evident that Southwest Airline shares are receiving significant traction. Southwest Airlines has prices per share that almost double other rivals. The credit rating given also shows significant competence in operations. A comparison to the AMEX Airline index shows very similar performance with Southwest Airlines. This shows that the company has been significantly adaptable in the volatile airline business. A concise comparison to, say, UAL, shows that Southwest Airlines outperforms it in a margin of about 3 times (Griffin Consulting Group, 2012). Consequently, Southwest financials are 3 times better than UAL’s. In this way the second financial objective is realized by a comparison with Southwest rivals where the company’s assets seem to have a 3.39% return on assets.
A third and final financial objective utilized by Southwest Airlines is enhancing existing customer value which is measured by finding out the percentage revenue growth (Delkhosh, 2016). The final objective involves the growth of the company itself. It can be measured by the number of new customers or by finding out the revenue collected from new products. The intense competition within the industry in addition to sellers offering a product major similarities and virtually no differentiation has been the cause of low profit margins across the industry as airlines use competition based on price as their primary mode of rivalry. Differentiation might be possible as airlines begin to single out particular sectors of the market to focus their efforts. Southwest has incorporated the strategy by focusing primarily on low budget, no hassle travelers. However, apart from the minor shifts in focus there are hardly any essential differences between the products airlines are putting out. In addition, their methods of incentives through frequent flyer programs are employed across the industry and afford little actual customer loyalty. The phenomenon explains Southwest Airlines use of impeccable service to retain customers.
One of these services is that the company looks for ways to tell its story as concisely as possible through marketing and advertising efforts. Many of the company’s ad campaigns have been intentionally unconventional. Essentially most of the marketing done by Southwest Airlines seems to enhance the fun-loving and combative spirit created by the company over the years. One of the most significant marketing launches was introducing the TransFAREcy in 2015 (Thompson & Gamble, 2017). The feature composed of an easy to understand flight and ticketing procedure with no hidden fees for baggage and preferred seating. Most of the company’s advertisements have centered on providing the lowest fares in the industry. The TransFAREcy campaign seeks to set the company apart from other airlines by giving full transparency on flight travel. The effort emphasizes the fourth financial objective of enhancing existing customer value by offering out-of-the-box kind of service in order to grow the company.
The above financial objectives and their measures are important in effectively selecting future strategic allocations for available revenue. The financial objectives and their measures aid in the strategic allocation of resources and adjusting important budget elements. A company like Southwest Airlines has improved its success through effective use of the budgeting elements to run both the airplanes and staff. In the same way, they have strategized on financial objectives with which they measure financial implications and find ways to mitigate them.
References
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Griffin Consulting Group. (2012). Southwest Airline Co. GCG.
Robinson. M. (2009). Accrual Budgeting and fiscal policy. OECD Journal on Budgeting , Vol 2009(1) 258-266.
Southwest Airlines. (2016). Southwest airlines annual report 2015. Retrieved from: www.southwest.com
Srinivasan. M. (2006). Southwest Airlines Operations - A Strategic Perspective. Ezine articles . P1-10.
Thompson. A.A & Gamble. J.E. (2017). Southwest Airlines in 2016: Culture, Values, and Operating Practices. Connect :c311-c345.
Tatiana. M., Oleg. A.K., Alla. G., Veronica. V., Gavrilov. D.E. (2016). The budgeting mechanism in development companies. International Journal of Environmental and Science Education , Vol 11(15) 7726-7744.
