The Archetypical Low-Cost Air Carrier: Southwest Airlines

The Archetypical Low-Cost Air Carrier: Southwest Airlines

Former Student

ECON 211 Macroeconomics

Embry-Riddle Aeronautical University

Abstract

The seventh largest major domestic airline in the United States (US), Southwest Airlines, is commonly known or referred to as a low-cost carrier. Southwest Airlines is the only major airline that provides short-haul, point-to-point service in the United States. In fact it was the first airline of its type ever started; it has become the archetypical low-cost airline. The idea has proven itself so well, that other start-up airlines have based their company strategies upon the basics of Southwest. Today, there are two other low-cost air carriers (the other two airlines are considered national airlines and not major airlines) that are actively and aggressively competing with Southwest Airlines for business and profit turning. The three American low-cost air carriers are currently posting profits even in light of the US economy's current state of affairs, with Southwest Airlines first, JetBlue second, and Air Tran third, in profits. How is this possible when the major six airlines are reporting losses of millions and millions of dollars each quarter? The answer to this question begins about 30 years ago.

The Archetypical Low-Cost Air Carrier: Southwest Airlines

The product one airline can offer is the same exact product the next airline can offer, a single available seat mile (ASM) for sale. The difference between the airlines lies in the marketing, routing, pricing, executive decision-making, and the operating strategies that each airline chooses to espouse regarding that one product. It is through these strategies that an airline must find productivity in total revenue passenger miles (RPM) flown to be profitable. When the ASM is filled with a fare-paying passenger, sales or income is recognized, and it converts to an RPM. The relationship between the ASM and RPM are directly related and is expressed in percentages known as Load Factors (LF). This LF is a management tool used to determine the efficiency and health of the airline. It is necessary to keep these two variables in balance of each other. Southwest Airlines load factors are represented in Figure 1 and 2.

RPM

LF = ASM

Many airlines choose to use the hub network, which induces costly effects in all areas of the airline. It is the point-to-point; short haul airline that is capable of keeping costs low and turn profits, Southwest Airlines has proven just that.

Southwest Airlines survived the initial years of deregulation, years of cyclical business cycles that may have led to recessionary and or inflationary periods, and its 25-year

post-deregulation financial condition remains strong regardless of current economic trends. The airline management has made sound decisions in a governed airline market as well as an ungoverned airline market. It chooses to maintain a conservative financial philosophy and growth is only realized when the company can afford it. Many airlines have been faced with losses on a continuing basis, whereas Southwest has performed consistently and remain unsurpassed through 30 years of service.

Figure 1

1971 1975 1980 1985 1990 1995 2000 2001 2002

RPM 24771 298458 2024097 5971400 9958940 23327804 42215162 44493916 4539903

ASM 154565 477166 2969448 9884526 16411115 36180001 59909965 65295290 68886546

Figure 2

"Keeping airfares low is dependent upon the airline keeping costs low which can be conducted through many things; being less unionized which allows for lower wage rates and less restrictive work rules, flying aircraft more hours per day, allowing more managerial discretion in making labor assignments, using less expensive satellite airports or terminals, eliminating "unnecessary" service frills, encouraging travelers to carry their own luggage, not interlining reservations or luggage, eliminating meal services, and possibly using an all coach-class seating configuration" (Meyer and Oster, p. 50). It has been through these ideas that Southwest have been able to guide and conduct its airline operation strategy.

Through the brainstorming of two individuals, Rollin King and Herb Kelleher, a new company was formed and an airline was at the brink of birth. The company decided that the infrastructure and operations of this airline would be quite different from the others and be the first airline of its kind. The company's operating strategy would be based upon maintaining short-haul frequent flights from airports that were not primary busy airports that did not experience congestion and air traffic delays. Instead, it would service secondary airports that minimize the time aircraft are on the ground and where the local populace could provide enough generated revenue to keep the aircraft flying.

To fully implement and realize their brainstorming to create a new airline, they needed to be able to answer, "What do passengers want?" It is upon those responses of; destination, on time arrival, and the lowest fare possible, that the structure of a new airline was conceived.

The two gentlemen, Rollin and Herb, armed with the knowledge of what they believed a passenger wanted went about how to address each issue. The company decided the best way to address the destination issue was to provide point-to-point service "Ð'...for more direct nonstop routingsÐ'...therefore, minimizing connections, delays, and total trip timeÐ'..." for all flights offered (Annual Form 10-K Report, p.3 & 22). This meant that passengers would not need to be routed through the company's primary hub in Dallas, Texas for connecting flights. With the point-to-point service, this would diminish the total time required by passengers for traveling to their intended destination. Additionally, by-passing the hub connection, this allowed for a higher percentage of on time arrivals for passengers, thus providing the company an opportunity to excel in committed service. Today, the company's "average aircraft trip stage lengthÐ'...was 548 miles with an average duration of approximately 1.5 hours" (Annual