Low cost Airlines (Southwest Airlines) - Essay Example

? Low cost Airlines Case Study Introduction This report will investigate the factors that have led to the survival and continuing success of Southwest Airlines, including the company’s financial planning, financial control, costing and the company’s efficient decision making process. The company has a unique business model of careful financial planning, control, efficient costing and a quick decision making process. Such unique business models have been known to ensure continued success in business organisations (Schein, E. H. 1980). Financial planning Southwest airlines is the only airline in the United States that has been consistently profitable for the past 3 decades, and this is mostly due to proper financial planning by the airline. The company’s financial planning model is a major reason why Southwest Airlines has remained profitable every year since its inception in the 1960s. In order to effectively carry out flight operations, an airline needs pilots, cabin crews planes that can take-off and land on the landing slots, and sales-point coordination. It is quite difficult to make these resources sustainable sources of competitiveness, as they are now much more accessible due to the development of the international markets. (Butler, G.F., and Keller, M.R. 2000). Southwest created an advantage by planning to price their fares at 60 percent below the prevailing air fares in the market. “When Southwest launched its Florida intra-state services in 1996, it offered some advanced purchase fares for as low as $29. Also, when the airline opened a Chicago-to-Cleveland route, its lowest unrestricted one-way fare was as low as $59, while those of other airlines were around $310.” (Doganis R. 2001). With this plan, the airline has been able to divert a substantial number of passengers from the road thus ensuring that the yields achieved are relatively high when measured in terms of revenue per passenger-kilometre because the fares are all point-to-point The airline’s financial success comes from the company’s ability to operate at costs that are lower than the revenue generated by the airline’s operations. Although southwest’s unit revenues are not much lower than those of other competing airlines, operating on the same routes, southwest has enjoyed an advantage in the unit cost, by operating at cost levels that are as much as 40 percent below those of its major competitors. (Doganis R. 2001) Financial control Despite the economic downturn that has been experienced in the United States, Southwest Airlines has remained financially stable and ahead of its competitors in the industry. This is due to an adequate control of the company’s finances, as Southwest Airlines has been able to overcome the economic issues that have affected the airline industry. Southwest is one of the most successful airlines in the United States due to its ability to attract customers based on the exceptional services, low-fares, and the company’s ability to evolve and effect needed changes. “In recent years, the global price of oil has caused many airlines to collapse as airlines were forced to raise ticket prices and lose customers. Airlines were also hurt by low ridership rates.” (Bennett and Craun 1993) Southwest Airlines has been able to maintain financial control by increasing or decreasing the number of flights served per day, as against increasing the coat of travelling for their customers. As a result of this control, the customers reach their destinations on time, and without having to pay higher fares. Since low fares have become the airline’s selling point, decreasing the cost becomes a very important aspect of the company’s financial control. Southwest Airlines also tries to maintain financial control by simplifying its operating process and utilizing strategies like the maintenance of one type of aircraft, not serving meals on flights, using cash-register receipts as tickets, and not using a computer reservation system. Southwest airlines has been known to cuts flights with poor sales and unpopular flights in order to free up their aircraft for the more popular routes. Not every route is a success, and removing the areas of poor sales ensures that there is a better chance of finding better and more profitable routes. The reasons behind such poor sales may include fuel costs, the state of the economy, and practical reasons such as cold weather, that may lead to engine problems. Costing Another key to the survival and continued success of Southwest Airlines is that the airline clearly defines its existing purposes, which is the provision of low fares for leisure travellers and business travellers travelling between states. The main purpose of these low fares is to enable almost anybody the opportunity to travel from place to place by airplanes. Although there is the issue of rising oil costs, and other factors like low air ticket sales due to the weak economy which has affected many airlines, especially the low-cost airlines because they run on a lower operating income, Southwest Airlines has effectively escaped any major problems at a time when many different airlines have gone bankrupt or have been absorbed by other airlines. This success is a result of the effective costing techniques that the airline has utilised within this period. Southwest airlines has employed a unique set of product and service features that have enabled the company to operate below average costs while generating relatively high average yields. Since the airline’s key product feature is low, unrestricted fares, it is able to compete favourably with other airlines, as well as being in competition with ground transportation services. This is evident in the fact that southwest has stated that it intends to divert traffic from ground transport. Table 1. Comparison of Boeing 737-300 operating costs, United States airlines, 1998. (Doganis, R. 2001) Southwest airlines has been able to combine high frequencies with excellent punctuality provided for their customers. (Doganis, R. 2001). This attitude of excellent service, delivered on time can be seen in the airline’s ability to turn its planes around in a little as 10 minutes. Another instance in which Southwest proved to be exceptional adept at providing quick turnover speed is when a student informed the airline management that they were arriving about 15 minutes late for their class, and the airline was able to changed its flight schedule to accommodate those students so they could arrive on time for their classes. Decision making process Southwest’s efficient decision making process is another reason why the company is successful. The Airlines employees are selected for the passion they display for the job, and this is evident in their readiness and willingness to perform services for the customers. The Airline’s employees are empowered to make all minor decisions and some major decisions on their own, and this authorises them to speak out, and be able to deal with any unforeseen or special circumstances that might occur during flights. “As a result, most of the company’s employees can give prompt service when needed, without having to wait for their boss to report back before they are allowed to handle the situation.” (Doganis, R. 2006) In 1995, Southwest Airlines started a non-ticket policy, which removed the possibility of customers losing their tickets before they board the airplane. (Doganis, R. 2006) Through strategies and decisions like these, Southwest Airlines has pioneered a rapid turnaround service and keeps its planes on the ground for shorter periods of time than other airlines. There is also the issue of having everyone working at the same time to get the aircrafts ready for the next flight. The Airline even went as far as putting efforts into changing the internal design of their aircraft in a bid to speed up the time to the next flight duty. “Employees of Southwest Airlines are consistently updated with the firm’s business operations and have sufficient knowledge to answer questions that might be aroused by customers. One of the reasons behind this is that although there is an intuitive belief that people are important, this intuition cannot be demonstrated with numbers. The majority of criteria used when taking decisions relating to sales, finance or production can be quantified in financial terms.” (Chris Lin, J. 2008) The airline’s decisions are based on an analysis of ticket sales, profitability and cost reduction, as “most decisions that have to do with investment in people are based on criteria that cannot be quantified in financial terms. It is difficult to justify the value of these investments and to demonstrate their usefulness in achieving an organization’s strategic objectives.” (Peters, T. and Robert Waterman 1982) Recent research indicates that that how a company manages its people has a strong impact on the bottom line. (Schein, Edgar H. 1992) Thus, people are the company?s best asset, as the viability and future success of any airline company depends on the decisions made by the staff. Southwest’s employees see themselves as one big family, and everyone on the crew shares the responsibility of tasks like cleaning up the aircraft, and enabling the planes for take-off, and this ensures that only a short period of time is spent on the ground before taking off again for flight duties. Conclusion Southwest Airlines has enjoyed financial success that comes from the company’s ability to operate at costs that are lower than the revenue generated by the airline’s operations. Although southwest’s unit revenues are not much lower than those of other competing airlines, operating on the same routes, southwest has enjoyed an advantage in the unit cost. With its plan of providing low-cost airline services, Southwest has been able to divert a substantial number of passengers from the road thus ensuring that the yields achieved are relatively high when measured in terms of revenue per passenger-kilometre because the fares are all point-to-point. Southwest airlines has employed a unique set of product and service features that have enabled the company to operate below average costs while generating relatively high average yields. Since the airline’s key product feature is low, unrestricted fares, it is able to compete favourably with other airlines, as well as being in competition with ground transportation services. This is evident in the fact that southwest has stated that it intends to divert traffic from ground transport. Thus, the company has implemented a unique business model of careful financial planning, control, efficient costing and a quick decision making process that has ensured its continued success in the airline industry. Works cited Bennett, Randall D. and James M. Craun (1993) The Southwest Effect; The airline deregulation evolution continues. (Retrieved from http://ostpxweb.dot.gov/aviation/X-50%20Role_files/Southwest%20Effect.DOC.) Butler, G.F., and Keller, M.R. (2000) Handbook of Airline Operations. Aviation Week; McGraw-Hill Companies. Chris, Lin, J. (2008) Southwest Airlines Term Project (Retrived from http://www.tehw00t.net/azn8oi/southwestfinal.doc) Doganis R. (2001) The Airline Business in the Twenty-First Century. London: Routledge. Doganis, R (2006) The Airline Business. London: Routledge Peters, Tom, and Robert Waterman. (1982). In Search of Excellence: Lessons from America’s Best Run Companies. New York: Harper and Row. Schein, E. H. (1980). Organizational Psychology. Englewood Cliffs. NJ: Prentice Hall. Schein, Edgar H. (1992). Organizational Culture and Leadership. San Francisco: Jossey-Bass Publishers. Read More