Southwest Airlines

Brief Introduction

Airline industry can be divided into two sub-sectors. The first is traditional airlines such as American Airlines, United Airlines and Delta Airlines. These carriers have global air networks and serve both long-distance and medium-distance routes. The second is low-cost airlines such as Southwest Airlines and JetBlue, which mainly operate medium or short distance routes and only serve domestic clients. In todayЎЇs competitive environment with high oil prices, most traditional airlines suffer huge losses while lost-cost carriers still record sizable profits due to their unique strategy and flexible operations. Southwest Airlines epitomizes the business model of low-cost airlines.

Low Cost and High Efficiency

The most important asset of Southwest Airlines is its low operating cost, which is currently the lowest in the industry. Over the past thirty years air fare price has been keeping going down and therefore a low cost structure places Southwest Airlines in a competitive advantage over its peers. It can price its fares at or even below industry level but still makes money. Chart 1 compares its unit cost with other major carriers. Southwest AirlinesЎЇ unit cost is only 8 cents per ASM, about 58% lower than Delta Airlines and 29% lower than JetBlue. Given Southwest AirlinesЎЇ low stage length, this cost saving is even more encouraging, signifying the companyЎЇs sound cost control.

If we dig more deeply, we can compare Southwest AirlinesЎЇ cost structure to that of JetBlue (Chart 2). Staff costs and fuel costs are the two largest expenditures. Due to successful oil hedging, fuel costs only account for 19% of Southwest AirlinesЎЇ total expenditure while 29% of JetblueЎЇs. In the high oil price environment, this cost savings translates into significant earning improvements. In the meanwhile, Southwest Airlines allocate more to staff costs, 40% of the total compared to only 26% of JetBlue. Higher employee compensations are powerful incentives for staff to work more efficiently, leading to increasing ASMs per employee and decreasing employees per aircraft, two significant yardsticks in aviation industry to evaluate efficiency (Chart 3). Southwest AirlinesЎЇ ASMs per employee jump from 0.51 at 1Q02 to 0.70 1Q06, representing a 37% improvement. In the meantime, its employee per aircraft has dropped by 22%, from 89.8 to 69.6 during the same period.

Low Price Strategy

Another important strategy Southwest Airlines has been following since its establishment is low price strategy. At the first glance, low price will exert pressure on both top line and bottom line, but actually it contributes to attract more leisure customers, improving Southwest AirlineЎЇs

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