Southwest Airline made its maiden flight on 18th June 1971 after surmounting resistance to its operations by Texas-based airlines (Inkpen, 2017). The airline’s idea was spearhead by the company’s founding chairman and chief executive officer, Herb Kelleher and one of his clients, Rollin King in 1966(Inkpen, 2017). The airline would fly within Texas in the cities of Dallas, Houston, and San Antonio. This enabled the company to avoid the existent regulatory policies on airlines by the federal government. The federal regulation on airlines designated the routes that airlines could fly. Airlines did not compete on pricing as flying was considered a preserve of those who could afford to.
Kelleher and King raised the start-up capital and obtained regulatory approval from the Texas Aeronautics Commission (Inkpen, 2017). Southwest began its operations with three aircraft all Boeing 737s. Initially, the firm had 25 employees. Southwest’s management realized the differences between travellers; some were business travellers, time-oriented and sought while others were leisure travellers who were quite sensitive on pricing. This led to Southwest' s adaptation to their needs by offering pricing models that favoured them. To achieve this, Southwest had to undercut its competitors such as Braniff Airlines by providing lower airfares. However, Southwest faced the challenge of convincing their clients that their fares were not just introductory but regular. Southwest maintained its reputation for low airfares and established its brand as a low-cost carrier (Inkpen, 2017). To date, it remains to be a leader in pricing within the airline industry.
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Post deregulation period in 1978, Southwest maintained most of its distinguishable characteristics such as (Inkpen, 2017):
Short-haul distances less than 500 miles
Point to point flights
Its aircraft fleet of Boeing 737s
High-frequency flights
No baggage fees
Low airfares
The company, however, made adjustments to its flight routes and explored destinations such as Mexico and the Caribbean, making it an international company. In 2007 the airline commissioned new boarding processes to include early boarding for an extra fee (Inkpen, 2017).
Southwest operations did not include the significant hubs though some cities were part of the transit routes such as Chicago, Dallas, Denver, Las Vegas, Baltimore, and Phoenix. Southwest established itself as an airline has one of the fastest turnaround times. The airline used a 50 per cent smaller gate crew than other airlines to achieve the time savings. The airline offered no reserved seating or meals for its customers and seats were occupied on a first-come-first-served basis. This was due to the low number of passengers and thus no need for the reservations. The fast turnaround times enabled the aircraft to fly more routes in a single day which generated more revenues for the firm and allowed it to continue offering lower airfares for their customers.
The airline seldom offered its delayed customers hotel residency or telephone calls. The firm’s use of computerized reservation systems was low, and their tickets were not sold on travel websites such as Expedia and Orbitz. However, Southwest was the first national carrier to adopt internet ticketing. The airline provided ticketless travel to its customers in 1995, becoming among the first airlines to adopt the system (Inkpen, 2017).
Southwest defied most challenges in the airline industry to post profits for a record 44 consecutive years. The company has also been severally ranked first as one of the airlines with the lowest customer complaints since 1987 (Inkpen, 2017). The company set competitive standards for other companies to follow. It had the lowest number of employees per aircraft, yet it flew more passengers per employee. The airline also had a trend of not halting services because of union strikes, and its security measures had ensured no passenger had ever died due to a safety incident.
Route Structure and Product Alternatives used by Southwest Airlines
As of 2018, Southwest Airlines was flying to 100 destinations in different parts of America. The carrier had more than 720 aircraft, all Boeing 737. The company registered more than 4000 flights daily (Louis, 2018). The airline transports an average of about 130 million passengers every year (Louis, 2018). The company has broadly maintained its strategy of carrying a large number of passengers on short trips. The company aims to achieve high frequency for its flights to continue providing its customers with low fares. The company’s flight structure departed from the hub and spoke system mostly used by the traditional carriers. The company focuses on frequent point-to-point flights. The use of short flights taking an hour or lesser, use of each aircraft for an average 11 hours per day which is higher than the industry average by three hours, allows Southwest to distribute its fixed costs over a more significant number of seats (Desai et al., n.d).
The airline’s choice of landing at smaller airports enables aircraft to avoid congestion mainly associated with rival's larger hubs. This reduces their turnaround times thus can make more flights in a day. Their concentration on point-to-point systems creates more direct routes, decreasing the need for connections, delays and the overall trip time. Consequently, only a 55 per cent load factor is required for the carrier to break even (Desai et al., n.d). This has enabled the company to realize profits for 45 consecutive years. Load factor is obtained by dividing the revenue passenger miles (RPM) by available seat miles (ASM) (Inkman, 2012). The RPM is the product of the number of passengers flown and the distance covered. ARM is the product of the number of seats up for sale and the distance flown.
Southwest has also achieved product differentiation by offering its customers low-priced air transportation option, unlike traditional carriers. This has been achieved through the reduction of operating costs and increasing the number of flights in a day. The cost-reducing measures include the absence of full meals during flights, seating arrangements, and a singular aircraft model ensuring fuel efficiency, and savings in operation and maintenance costs (Desai et al., n.d).
Southwest Airline’s Departments and role of each in Planning, Development, and Execution of Flight Operations
Southwest has a functional organizational structure with a centralized command that allows timely response to industry changes, efficient control of costs, eliminates departmental redundancy and allows operations to be run by experts (Weedmark, 2019). The company's CEO is also the board chairman and reports to the board of directors. The different vice presidents are in charge of various operations. They include executive VPs in charge of Corporate Services, Finances, Legal and Regulation Affairs, Commercial Operations, and Daily Operations. Senior VP's in charge of Air Operations, Operations and Hospitality, Marketing, Finance, Technical Operations, Communications, Governmental affairs and information and Technology. Other VP's oversee Customer Support and Services, Air and Technical Operations, Network Planning, Strategy and Planning, Ground Operations and Provisioning, Network Operations Control, Safety and Security, Business, Commercial and Customer Operations, Technical Operations Planning and Performance, Flight Operations, Maintenance Operations, Inflight Operations, Labor Relations, Supply Chain Management, Revenue Management and Pricing (Southwest Airlines, 2019). Managing directors are involved in the day to day running of the different operations of the various departments to ensure that the airline remains operational.
To ensure the everyday flight operations of the company, airline operational control centre is in place, and the different functions are overseen by the various heads (Weedmark, 2019). Its roles include
Flight dispatch. Prepares flight plans and requests flight slots from air traffic control entities.
Aircraft Control manages the aircraft in terms of operational controls.
Maintenance services, including scheduled and unplanned maintenance.
Passenger services to ensure that changes and decisions have minimal impact on passengers.
Southwest’s Airline Cost Structure
Southwest has established itself as an airline that strives to keep its operational costs low. Despite its operational expenses increasing over the years, the percentage increase has been gradual and smaller than other traditional carriers. According to Macrotrends (2019), the operational costs for Southwest from 2005 to2018 are summarized in the table below:
| Southwest Airlines Yearly Operating Costs (Millions of US $) | |
| 2018 | 18759 |
| 2017 | 17739 |
| 2016 | 16767 |
| 2015 | 15704 |
| 2014 | 16380 |
| 2013 | 16421 |
| 2012 | 16465 |
| 2011 | 14965 |
| 2010 | 11116 |
| 2009 | 10088 |
| 2008 | 10574 |
| 2007 | 9070 |
| 2006 | 8152 |
| 2005 | 6859 |
Operational costs are dependent on flight length, aircraft size, and fuel prices. The flight capacity is related to the operational costs due to the crew costs. Employees account for the biggest cost component at around 40 per cent of the flight operating expenses (Trefis Team, 2018). An estimated 80 per cent of the airline's operating costs are fixed or semi-variable costs (Inkman, 2012). Variable costs include ticketing fees and food costs. Their concentration on point-to-point systems increases direct routes, decreases connections, delays and time for making a trip. Consequently, only a 55% load factor is required for the airline to break even (Desai et.al, n.d).
Methods Used to Obtain Sustainable Cost Advantages over other Carriers
Southwest has the biggest market capitalization amongst all the airlines. The company’s success has been contributed by its provision of customer-oriented services, low-cost air travel under safe conditions. The economic depression of the 1990s changed customers' behaviour, and they became more price-sensitive (Maxim, 2012). The new consumers' behaviour in the US was in line with Southwest's aim of providing low-price air travel, thus enabling its success. To obtain sustainable cost advantages over other carriers, the airline uses different measures such as (Maxim, 2012): cutting their operating costs; providing higher quality services than other low-cost carriers; establishing an excellent price-quality ratio; and putting in place efficient management.
The company’s use of a single model of aircraft, Boeing 737 has enabled it to obtain substantial cost reductions in terms of maintenance, repair, and employee training. The use of a singular aircraft model also ensures that the employees are quite familiar with it, thus keeping accidents rates to a minimum and thus enable achievement of operational safety (Maxim, 2012).
The use of point to point flights in small airports enables an aircraft to make several trips each day, about 8 (Maxim, 2012). The costs associated with these flights are lower than operating costs for connection flights through large international airports. Small airports provide scale economics. The aircraft fleet can make more takeoffs and landings, thus maximizing the company’s revenues while keeping the fares low to enable the customers to fly.
Absence of catering services for short-duration flights also helps keep the operation costs low. Provision of minimal catering services for free to passengers flying for more than three hours help to make the airline attractive to passengers, unlike other low-cost carriers. The use of an open seating arrangement does away with the need for expensive software to hold the seating arrangement (Maxim, 2012). It also creates efficiency by saving time and money to print and verify boarding passes. The use of Blended Winglets system ensures efficiency through savings in fuel costs and engine maintenance. The use of yield management strategies has also enabled the airline to maximize profits by charging higher tariffs during times of the day when demand is high, while still ensuring that the prices are lower than traditional operators (Maxim, 2012).
The company’s ten organizational practices have also ensured its success. The organizational practices have ensured coordination of the different organizational departments. The organizational practices are (Gittell, 2003): Credible business leadership; Investment in front-line leaders; Hiring and training for relationship excellence; use of conflicts to create relationships; bridging the work-family divide; creation of positions that span boundaries; broad performance metrics usage; flexible job descriptions; partnerships with unions; and creating relationships with suppliers
Methods of Revenue Management used and the Relation to other Industries.
Revenue management is the tactics and methods used in scientific management of demand for products and services by companies and organizations ( Klophaus, 2016 ). Southwest has positioned itself as a leader by offering low-cost airfares to their clients. The market conditions in 2018 forced airlines to raise their fares (Jonas, 2018). Some of the contributing factors to this hike was the increased fuel prices. Most airlines adjust to fuel price hikes by slowing down their capacity growth (Brooks, 2012). However, Southwest Airlines adjusted by changing its prior booking system to a newer Amadeus system that enabled better control for scheduling, determining airfares and gaining ancillaries revenue (Jonas, 2018).
In the older reservation system, southwest Airline was forced to adjust its airfares to its rivals such as Spirit Airlines throughout the day, despite in some instances their rivals having a single departure in a day. The result was standard air pricing to match Southwest's by other competitors throughout the day. The new revenue management system enables Southwest to use top-notch pricing strategies. The airline uses time restrictions to try to ward off ultra-low-cost carriers such as Spirit and Frontier Airlines. This is in Southwest's response to the competitors gain of their market share by 11 per cent for the last three years (Jonas, 2018). The new management system has advantages such as: Allowing fare flexibility enabling the airline to provide their clients with the appropriate low fares t the appropriate times; Enables the airline to vary its airfares throughout the day; Helping in better management of revenues amidst a highly competitive industry.
The airline also abandoned most three-day advance purchase fares in favour of seven-day advance reservations. Non-stop itineraries are also excluded from the lowest fares. The new management system seeks to maximize revenues at route level rather than flight level. Although such a move constitutes hiking airfares for the customers, it is well hidden and choreographed to enable the airline to remain competitive and a price leader in the airline industry.
References
Brooks, R. (2012). A life cycle view of enterprise risk management: The case of Southwest Airlines jet fuel hedging. Journal of Financial Education , 33-45.
Desai, K., Patel, V., & Quach, D. Southwest Airlines [Ebook].
Gittell, J. (2003). THE SOUTHWEST AIRLINES WAY Using the Power of Relationships to Achieve High Performance [Ebook].
Inkpen, A. C., & DEGROOT, V. (2013). Southwest airlines. Caso pedagógico .
Jonas, D. (2018). New Southwest Revenue Management Tactics Put Upward Pressure on Fares. Retrieved from https://www.thecompanydime.com/southwest-revenue-management/
Klophaus, R. (2016). Airline revenue management in a changing business environment. Transport and Telecomunication, 7 (1): 183-188.
Louis, M. (2018). Transformation of the Revenue Manager [Ebook].
Macrotrends. (2019). Southwest Airlines Operating Expenses 2006-2019 | LUV. Retrieved 21 December 2019, from https://www.macrotrends.net/stocks/charts/LUV/southwest-airlines/operating-expenses
Maxim, L. D. (2012). The development of the low-cost carriers’ business models. Southwest Airlines case study. Annals of the Alexandru Ioan Cuza University-Economics , 59 (1), 231-238.
Southwest Airlines. (2019). Senior Management Committee. Retrieved 21 December 2019, from https://www.swamedia.com/executives
Trefis Team. (2018). Breaking Down Southwest Airlines' Flight Operating Costs. Retrieved 21 December 2019, from https://www.forbes.com/sites/greatspeculations/2018/02/23/breaking-down-southwest-airlines-flight-operating-costs/#2b62290c1432
Trefis Team. (2018). Breaking Down Southwest Airlines' Flight Operating Costs. Retrieved 21 December 2019, from https://www.forbes.com/sites/greatspeculations/2018/02/23/breaking-down-southwest-airlines-flight-operating-costs/#2b62290c1432
