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Southwest Airlines is definitely the biggest airline measured by quantity of passengers carried annually within the usa. It is also referred to as a ‘discount airline’ compared with its large rivals in the market. 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 wish to get there, promptly, at the cheapest possible fares, and make darn sure there is a good time performing it, individuals will fly your airline.” This approach continues to be the real key to Southwest’s success. Currently, Southwest serves about 60 cities (in 31 states) with 71 million total passengers carried (in 2004) with a total operating revenue of $6.5 billion. Southwest is traded publicly under the symbol “LUV” on NYSE.

Southwest clearly includes a distinct advantage in comparison to other airlines in the market by executing an effective and efficient operations strategy that forms an important pillar of its overall corporate strategy. Given listed here are some competitive dimensions which will be studied in this paper.

In the end, the airline industry overall is in shambles. But, how exactly does stay profitable? Southwest Airlines has the lowest costs and strongest balance sheet in their industry, based on its chairman Kelleher. The 2 biggest operating costs for just about any airline are – labor costs (approx 40%) then fuel costs (approx 18%). Some other ways in which Southwest will be able 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 makes up about about 37% of the operating costs. Probably the most important component of the successful low-fare airline business design is achieving significantly higher labor productivity. In accordance with a newly released HBS Case Study, southwest airlines is definitely the “most heavily unionized” US airline (about 81% of the employees are part of an union) along with its salary rates are considered to be at or over average when compared to the US airline industry. The low-fare carrier labor advantage is within a lot more flexible work rules that enable cross-consumption of practically all employees (except where disallowed by licensing and safety standards). Such cross-utilization and 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 those of United and American, and 58% under US Airways.

Carriers like Southwest possess a tremendous cost advantage over network airlines for the reason that their workforce generates more output per employee. In a study in 2001, the productivity of Southwest employees was over 45% greater than at American and United, inspite of the substantially longer flight lengths and larger average aircraft dimensions of these network carriers. Therefore by its relentless pursuit for lowest labor costs, Southwest is able to positively impact its main point here revenues.

Fuel costs is the second-largest expense for airlines after labor and makes up about about 18 percent of the carrier’s operating costs. Airlines that want to avoid huge swings in operating expenses and financial well being profitability elect to hedge fuel prices. If airlines can control the cost of fuel, they could better estimate budgets and forecast earnings. With cvjryq competition and air travel being a commodity business, being competitive on price was answer to any airline’s survival and success. It became hard to pass higher fuel costs on to passengers by raising ticket prices as a result of highly competitive nature in the industry.

Southwest has become able to successfully implement its fuel hedging strategy to bring down fuel expenses in a big way and contains the biggest hedging position among other carriers. Within 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 much 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 from the airline’s fuel needs has become hedged at $26 per barrel. World oil prices in August 2005 reached $68 per barrel. Inside the second quarter of 2005 alone, Southwest achieved fuel savings of $196 million. The state of the industry also shows that airlines that are hedged have 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 company to maximize its operational efficiency and remain inexpensive. Most of its flights are short hauls averaging about 590 miles. It uses the tactic to keep its flights inside the air more regularly and thus achieve better capacity utilization.