I actually don’t think the 737 Max transition would hurt them too much. They could still have great turnaround times and be pretty efficient overall. I think about the comparison to other airlines. They have many more models. Having 2 slightly different jets probably wouldn’t create too much difficulty, actually. If the crews could be dual qualified, then it would be pretty seamless on that end and you would have to worry about maintenance differences. I think cheap fuel would not change the game too much due to the differences in how they operate their aircraft.
I think their biggest risk is that they lose their way as they expand internationally. International flights could bring some challenges in my opinion, and they will have to continue down that path to maintain growth.
One parting tidbit of knowledge….next time you’re at the airport, compare the taxi speeds between SWA and the other airlines. You’ll notice a difference as they race the smaller 737 around quickly to save fuel on the ground and decrease overall turn times. (Downside is the safety compromise with increased speeds).
Very interesting post, Ko. I knew that they were prevalent in the sport, but didn’t realize they were that dominant! A couple of follow up questions/thoughts:
– Do they use the high dollar items to help offset their R&D costs?
– With their core target being the high end market, do you think it decreases the perceived value (of the product and the brand) when they discount the product for the masses?
– For their new products, do they provide these to racers for free or do the racers expect them for free as a “sponsor”?
– I really like how they master the design and recoup significant costs before outsourcing and degrading for the mass market. It seems like a great way to pay for the innovation and still make it easily accessible by the common cyclist.
Thomas, very well done analysis.
As I was reading, I was thinking about how they are basically moving their inventory holding from raw materials to a finished good inventory. While I agree that they have less opportunity for spoilage on the raw materials side, there must be some amount of spoilage of the pizzas that have already been cooked (finished goods). I’m assuming they have some sort of model for helping plan anticipated demand to keep this at a minimum. Did you find any evidence of this?
Also, with respect to your comment on their waiting area, it indeed has to be almost minimal due to their ability to move customers in and out relatively quickly. In response to Vitali’s comment, I think they probably occupy lower rent locations to help keep this cost down. The way I see it, they are comparable to a pizza by the slice restaurant that you see in NYC or other large cities. The value proposition they have that those don’t is the affordability of the entire pizza which makes them a more viable to families when times are busy and planning is limited.
On the supply chain side, did you find evidence that they have extensive supply from a company-wide distributor? It seems like having these relatively simple perishable ingredients, they could be purchased in bulk somewhat locally. That would leave them with a lower requirement for supplying ingredients from the company (like dough ingredients, canned sauces, and the branded paper products for serving). Not real sure if this is viable in their industry, but could see a scenario where they could minimize costs to allow for the margin Vitali was inquiring about.
Great post to illuminate how one player can capitalize on operational opportunities to develop a strategy to help the local population while still capturing value. Does Dangote Cement have the ability to extract from limestone deposits in nearby countries as it expands across the continent? Do the areas of potential expansion have significant deposits to satisfy local demands? Will Dangote Cement be able to achieve the same positive image with respect to local populations and governments.
I definitely find it interesting that they have been able to lower costs by forging alliances with Chinese providers and creative energy sourcing. Will those opportunities exist going into other countries? Have their been any competitors in nearby countries who could replicate their model but use their personal relationships within their countries to beat Dangote at their own strategy?
SWA actually has very high load factors. By doing point to point, they are able to maintain extensive flexibility with regard to changing routes or cancelling underutilized ones altogether. Great point about the 737 change. Boeing actually just rolled out a new 737, but my understanding is that it’s significantly different from the old models. I would, however, expect SWA to maintain its commitment to the 737. According to the Boeing website, the new 737 will provide an 8% increase in operating efficiency. This could help to offset some of the cost/challenges with a future transition.
With respect to fuel savings, Southwest is operating some legacy 737s as well as some 737 Next Generation models, which also have some increased technology and associated efficiencies. Another important thing to remember is the influence of flight duration on fuel efficiency. Greatest efficiencies are realized at high altitude where the engines operate more efficiently. Most of SWA’s flights are short duration, which I believe negate some of the cost savings they could see from other fuel efficient aircraft.
If you want to talk more about the 737, we can do so in person…I have an Airline Transport Pilot certification with a 737 certification.
I think Southwest is able to offer few frills and have it accepted due to the culture of the company that flows all the way down to the front lines. They are able to make people smile, laugh, and have fun, even while offering little perks compared with the other major airlines. Not that it will be impossible for Ryanair to replicate, but SWA has maintained this culture through the way they have hired for years. This is probably the aspect that is most difficult to change. At the end of the day, the customer experience is incredibly dependent on those front line workers who are far removed from the corporate office and its pricing strategy.