Southwest Airlines Challenge to Stay Ahead Abstract This paper will discuss the challenges currently facing Southwest Airlines in their attempt to remain the most profitable airline in the United States. Southwest has posted consecutive quarterly profits dating back to 1991. Southwest’s success is built upon a business model to keep costs low while providing great customer service and maintaining employee satisfaction. Led by Gary Kelly, the CEO of Southwest Airlines, the company strives to find ways to improve bottom line in terms of reliability, low fares, and customer service.
The most notable action the company took to stay ahead of the competition was investing heavily in fuel hedging as a way to combat against rise in jet fuel costs. The strategy paid off for Southwest as it paid much less in fuel costs than its competitors. With the fuel hedging contracts set to expire, Southwest faces the challenge to maintaining its competitive advantage. SYNOPSIS Southwest Airlines is a profitable domestic airline company operating 3,200 flights per day in the United States.
Southwest was founded on the premises of being a low fare carrier with a lean operational business model and high aircraft use (Southwest Airlines, 2010). Southwest started out with three 737 Boeing aircraft operating in Texas. The company today operates a fleet of 537 Boeing 737 jets serving 68 cities in 35 states with nearly 35,000 employees (Southwest Airlines Fact Sheet, 2010). Southwest has been profitable for 37 consecutive years and is the largest U. S. carrier based on domestic passengers carried as of September 30, 2009 (Southwest Airlines Fact Sheet, 2010).
The company philosophy is to offer low fares on airline travel while treating customers like royalty and their employees even better. The company flies only Boeing 737s, to simplify maintenance and training, and employee productivity is high. Planes are turned around for their next flight within 25 minutes, one-third the industry average (A Day in the Life of a 25-minute Turn, 2010). The company operations are dialed down to a science making it highly efficient. Leading the charge at Southwest Airlines is CEO Gary Kelly, who was named one of the best CEOs in America for 2008 and 2009 by Institutional Investor magazine (Gary C.
Kelly, 2010). He leads by example and is very much involved in daily operations. Gary knows the names of many of the nearly 35,000 employees. He travels in the nosiest seats in the back of the plane leaving the good seats for paying customers. He interacts with customers and employees in a manner making titles irrelevant. I believe Gary is an effective leader because people understand and believe in his vision. He is committed to upholding the foundation upon which Southwest Airlines was founded. He does not retort to the lavish perks that other CEOs may enjoy.
Instead, Gary carries himself as one of the common employees. I consider this leading by example because of Southwest Airlines’ commitment to operating a lean operations model. Southwest Airlines has held a competitive advantage over its competitors by securing low fuel costs by investing in a financial tool known as fuel hedging. The concept behind fuel hedging is an agreement to buy fuel that’s tied to specific dates or prices (Can fuel hedges keep Southwest in the money? , 2008). Southwest Airlines is one of the few profitable airline companies in the United States.
The company has a great corporate culture which attracts talented employees. In fact, Southwest received 90,043 resumes and hired 831 new Employees in 2009 (Southwest Airlines Fact Sheet, 2010). KEY ISSUES Key issues that Southwest includes their fuel hedging contracts set to expire soon and pilots demanding increase in salary. Since 1998, Southwest has saved $3. 5 billion over what it would have spent if it had paid the industry average price for jet fuel. These huge savings made Southwest profitable while other airlines took significant losses (Can fuel hedges keep Southwest in the money? 2008). While Southwest pilots are among the highest paid in the industry, they rejected a contract from Southwest for a two percent retroactive pay increase for 2007 thru 2009 with 2010 and 2011 pay increases tied to financial performance (Southwest Pilots Reject Contract, 2009). DEFINE THE PROBLEM AND OPPORTUNITY Fuel hedging saved Southwest Airlines significant amount of money over the last decade. However, Southwest hasn’t done a significant number of new hedging contracts since the first quarter of 2007 The problem is there asn’t been a good opportunity to enter into favorable contracts due to volatility in the crude oil market. (Can fuel hedges keep Southwest in the money? , 2008). It would make sense to enter into new contracts if Southwest anticipated the price of fuel will be much higher in the future. This is hard to predict with cost being as high as it is. With the expiration of existing contracts, the fuel savings advantage Southwest held may soon dissipate. I think this may be time for Southwest Airlines to explore and take advantage of new opportunities to stay ahead of competitors and remain profitable.
One such opportunity is to begin syndicating Southwest Airlines booking and prices on consumer rate comparison websites to capture a larger market share. Currently, Southwest only offers online pricing and booking on southwest. com. ALTERNATIVE SOLUTIONS Southwest may consider expanding operations to cover North America. With the addition of Mexico and Canada, Southwest Airlines may be able to make up for lost revenue due to high fuel costs. The challenge here would be to enter new markets in which the barriers to entry especially regulatory constraints may prove to be too costly.
The other big challenge would be to gain access to airports where competition already has established strong roots. Southwest may also consider offering amenities such as meals and upgraded seats to attract a new segment of customers. The problem is that this approach changes the entire company dynamic. The company was founded on offering no-frills service. To make changes to attract luxury seeking customers may prove to be a costly venture that bears no fruit. SELECTED SOLUTION I think the best solution to remain atop the industry leaders is to begin syndicating booking and pricing services to pricing comparison websites such as expedia. om. I think this will open up other marketing verticals to capture a larger market share of customers. IMPLEMENTATION/RECOMMENDATIONS I think Gary Kelly should negotiate with major price comparison websites to promote Southwest fares and booking services on their websites. The solution is fairly simple to implement and may only require a small investment in IT costs. References: Wikipedia. org (2010). Southwest Airlines. Retrieved May 15, 2010, from: http://en. wikipedia. org/wiki/Southwest_Airlines Southwest. com (2010). Southwest Airlines Fact Sheet, 2010.
Retrieved May 15, 2010, from: http://www. southwest. com/about_swa/press/factsheet. htm Southwest. com (2010). A Day in the Life of a 25-minute Turn, 2010. Retrieved May 16, 2010, from: http://www. southwest. com/about_swa/southwest_difference. html? int=GNAVSWADIFFERENCE Wikipedia. org (2010). Gary C. Kelly. Retrieved May 16, 2010, from: http://en. wikipedia. org/wiki/Gary_C. _Kelly Reed, D. (2008, July 24). Can fuel hedges keep Southwest in the money? Retrieved May 15, 2010, from: http://www. usatoday. com/money/industries/travel/2008-07-23-southwest-jet-fuel_N. htm