Analysis of Southwest Airlines Profitability

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Analysis of Southwest Airlines Profitability

1. Introduction

Due to the fluctuating demand and uncertainty in oil prices, the profitability of the airline industry was far outpaced by other industries such as banks and healthcare (Inkpen, 2013). Southwest Airlines Co., the largest low-cost carrier in the world, has developed a new business model with a low-cost strategy which helps the company to achieve 46 consecutive years of profitability in the tough industry environment (Southwest Airlines Co., 2019). Although the low-cost strategy plays an essential role in the success of Southwest Airlines, it is not enough to maintain the company’s competitive advantages for a long time. What is more important is that they insist on the work with people-oriented development, including “a sense of warmth, friendliness, individual pride and company spirit”. This mission greatly guarantees the company’s smooth implementation of the low-cost strategy. In this paper, it would like to analyze how low-cost strategy and people-oriented development work together to help the company to reach high capacity utilization.

2. Operation Cost Management

The purpose of Southwest Airlines is to provide reliable and low-cost air travel. To achieve the goal, the company implements the no-frills approach to make everything as simple as possible to lower operating costs in an effective way.

2.1 Adoption of A Single-Model Aircraft

Unlike most of airlines, especially those that provide premium services, Southwest Airlines has strict control on aircraft purchases wisely and efficiently and they only use the Boeing 737 aircraft. The benefit of the adoption of the only type of aircraft can reduce the training cost and time of crews and maintenance staff and reduce the supply cost of components of the aircraft. According to the latest one report of Southwest Airlines Co. (2019), there are 753 Boeing 737 aircraft in its fleet and all of them have installed split-scimitar winglets that can reduce air resistance to reduce fuel expenditure.

2.2 Short-haul, Point-to-point, and High-frequency Flights

Southwest Airlines aims to provide short-haul (less than 800 miles) and point-to-point flights instead of using the hub-and-spoke approach. Point-to-point services seem too costly during the insufficient demand time. To ensure operational efficiency, most airlines adopt the hub-and-spoke arrangement as a way of cost-saving. From the viewpoint of Southwest Airlines, the hub-and-spoke approach resulted in spending more time waiting for customers to board on the ground. The turnaround time of Southwest Airlines only needed 15 minutes which is half an hour faster than the industry average (Inkpen, 2013). Besides saving in turnaround time, Southwest Airlines’ point-to-point services are appreciated by customers as it maximizes convenience for passengers to fly between 2 destinations.

Moreover, the short-haul routes help the company to realize high-frequency flights. In 2018, the aircraft flew just over five flights or more than eleven hours and the trip length was 757 miles on average every day (Southwest Airlines Co., 2019). Frequent flight movements enhance the ability to attract more passengers on selected air routes (Huang& Huang, 2016). Therefore, Southwest Airlines is able to offer low-price tickets as one of its advantages.

3. The Power behind the low-cost strategy- “Employees come first”

Besides saving cost and time by the above policies, Southwest Airlines also has a no-frills approach for customer services that no reserved seating, meals and entertainment provided. Although there is a trade-off on services’ comfortability to realize low pricing, most of the customers think the flight was satisfactory because of the memorable experiences provided by the staff that Southwest Airlines is ranked first in marketing carrier in customer satisfaction in 2018 (U.S. Department of Transportation, 2018). The major reason for this remarkable achievement is Southwest Airlines values its employees even more than its customers.

3.1 High-Motivated Profit-Sharing System

Southwest Airlines believes that happier employees rarely complain about heavy workloads and overtime work and make for happy customers. Therefore, the company always does more than the regular paycheck to satisfy its employees. Other than the basic welfare that is offered in most companies, Southwest Airlines motivates the employees by sharing the company’s success with the profit-sharing scheme, which reward and match their contributions dollar-for-dollar (Southwest Airlines Co., 2019). High motivation can realize self-volunteering to achieve the organization’s goals. For example, to shorten the turnaround time and ensure on-time take-off, the crews sometimes help unload bags when the schedules are tight (Inkpen, 2013).

3.2 Culture Services Department

Southwest Airlines has created a Culture Services Department which is in charge of making sure every employee recognizes they are important and promoting an interesting and healthy working environment (Southwest Airlines Co., 2019). As employees are respected, they would recognize themselves as members of the Southwest family and establish their belongings to the company. It can explain why Southwest Airlines has only a 4% voluntary turnover when there are nearly 60000 employees (Robertson, 2018; Southwest Airlines, 2019). The low voluntary turnover means there is less demand for new recruitment which can further save the training cost and the quality of services and skills on tackling emergency problems of the current crews would be better due to experience.

4. Conclusion: The Lesson We Learnt

Southwest Airlines has tried to use a low pricing strategy to realize the high capacity utilization in this demand-fluctuation industry. In order to set the ticket price as low as possible, Southwest Airlines has developed a low-cost strategy to reduce operating costs as much as possible, that around 80% of operating costs generally seems to be fixed cost in the industry before (Inkpen, 2013). However, the low-cost strategy decreases the competitive advantage of the comfortability of airplanes than other premium airlines. To encounter this problem, Southwest Airlines sharpen its competitive edge on providing high-quality customer services with care and love. Southwest Airlines has tried to create a culture that emphasizes hard work and dedication, which helps the company to support the low-cost advantage. In the company, productivity is achieved through the employees’ initiative, because employees are aware that customers’ satisfaction is based on their own work (Burton, 2012). Thus, they are passionate and self-volunteering to achieve the organizational goal and maintain high efficiency.

Due to the success of Southwest Airlines, it enlightens the survival of low-cost carriers in the keen competition with premium airlines. Besides, the case of Southwest Airlines indicates that efficient cost control is indispensable in a successful business. As every policy has its own benefits and harms, only effective cost control would not be the only key for a business to success.

References

Burton, K. (2012). A study of motivation: How to get your employees moving. Management, 3(2), 232-234.
HUANG, H. P., & HUANG, H. M. (2016). Southwest Airlines Low-Cost Strategy of the United States and the Enlightenment to China. DEStech Transactions on Engineering and Technology Research, (imeia).
Inkpen, A. (2013). Southwest Airlines. United States: Thunderbird School of Global Management.
Robertson, K. (2018, May 29). Southwest Airlines Reveals 5 Culture Lessons. Retrieved from https://www.humansynergistics.com/blog/culture-university/details/culture-university/2018/05/29/southwest-airlines-reveals-5-culture-lessons
Southwest Airlines Co. (2019). 2018 Corporate Fact. Retrieved from https://www.swamedia.com/pages/corporate-fact-sheet#2018stats
Southwest Airlines Co. (2019). 2018 Southwest Airlines One Report. Retrieved from https://southwestonereport.com
U.S. Department of Transportation. (2018). Air Travel Consumer Reports. United States: Department of Transportation.