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Southwest Airlines is the biggest airline measured by quantity of passengers carried each year within the usa. It is also known as the ‘discount airline’ in comparison with its large rivals in the business. Rollin King and Herb Kelleher founded Southwest Airlines 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 started with one simple strategy: “If you get your passengers to their destinations when they would like to get there, on time, at the smallest possible fares, and make darn sure there is a good time doing it, individuals will fly your airline.” This approach has become the true secret to Southwest’s success. Currently, Southwest serves about 60 cities (in 31 states) with 71 million total passengers carried (in 2004) along with a total operating revenue of $6.5 billion. Southwest is traded publicly under the symbol “LUV” on NYSE.

Southwest clearly features a distinct advantage compared to other airlines in the industry by executing a highly effective and efficient operations strategy that forms an essential pillar of the overall corporate strategy. Given below are some competitive dimensions which will be studied within this paper.

All things considered, the airline industry overall is within shambles. But, how does stay profitable? Southwest Airlines has got the lowest costs and strongest balance sheet in their industry, according to its chairman Kelleher. The 2 biggest operating costs for just about any airline are – labor costs (approx 40%) accompanied by fuel costs (approx 18%). Various other ways that Southwest has the capacity 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 their operating costs. Probably the most important part of the successful low-fare airline business design is achieving significantly higher labor productivity. In accordance with a recently available HBS Case Study, southwest airlines is definitely the “most heavily unionized” US airline (about 81% of its employees belong to an union) as well as its salary rates are considered to be at or over average compared to the US airline industry. The reduced-fare carrier labor advantage is at far more flexible work rules that enable 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 translate into lower unit labor costs. At Southwest in 4th quarter 2000, total labor expense per available seat mile (ASM) was more than 25% below that relating to United and American, and 58% lower than US Airways.

Carriers like Southwest use a tremendous cost advantage over network airlines mainly because their workforce generates more output per employee. In a study in 2001, the productivity of Southwest employees was over 45% higher than at American and United, inspite of the substantially longer flight lengths and larger average aircraft scale 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 definitely the second-largest expense for airlines after labor and accounts for about 18 percent of the carrier’s operating costs. Airlines that want to stop huge swings in operating expenses and main point here profitability choose to hedge fuel prices. If airlines can control the cost of fuel, they can more accurately estimate budgets and forecast earnings. With cvjryq competition and air travel transforming into a commodity business, being competitive on price was answer to any airline’s survival and success. It became hard to pass higher fuel costs to passengers by raising ticket prices due to the highly competitive nature from the industry.

Southwest continues to be in a position to successfully implement its fuel hedging strategy to save on fuel expenses in a big way and contains the biggest hedging position among other carriers. In the second quarter of 2005, Southwest’s unit costs fell by 3.5% despite a 25% rise in jet fuel costs. During Fiscal year 2003, Southwest had lower fuel expense (.012 per ASM) when compared to other airlines with the exception of JetBlue as illustrated in exhibit 1 below. In 2005, 85 percent of the airline’s fuel needs has become hedged at $26 per barrel. World oil prices in August 2005 reached $68 per barrel. In the second quarter of 2005 alone, Southwest achieved fuel savings of $196 million. The condition of the market also suggests that airlines which are hedged possess a competitive advantage over the non-hedging airlines. Southwest announced in 2003 that it would add performance-enhancing Blended Winglets to the current and future fleet 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 service to maximize its operational efficiency and remain inexpensive. Almost all of its flights are short hauls averaging about 590 miles. It uses the tactic to keep its flights within the air more regularly and for that reason achieve better capacity utilization.

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