LUV What You Do

The airline industry is known to be a tough business. Capital costs are high, regulation is prolific, and competition is fierce. How then has Southwest Airlines (SWA) managed to differentiate itself as the only airline with 41 years of profitability?

 

Company Background and Business Model

In 1971, Southwest Airlines began flight operations out of Love Field (LUV), serving Dallas, Houston, and San Antonio with a mere three aircraft. Today, SWA executes 3,400 flights per day between 97 destinations in the United States and seven additional countries (Southwest One Report, 2014).

Southwest Airlines creates and captures value by transporting customers from point A to point B. They do so with a keen understanding of their target market: customers seeking low cost fares to select destinations. Most importantly, though, southwest_airlinesthey have successfully optimized their operations to match this business model.

 

Streamlined Fleet

Of the countless aircraft model types to choose from, Southwest has remain committed to one, the Boeing 737. In general, aircraft operations are accompanied by significant challenges. Some of these include:

– Maintenance (scheduled/unscheduled as well as replacement part storage)

– Aircrew training, staffing and scheduling (pilots and flight attendants)

– Aircraft terminal parking requirements (wingspan and servicing requirements)

By exclusively operating a streamlined fleet of 665 Boeing 737s, Southwest is able to achieve efficiencies in all of the above areas. Clearly Southwest identifies this decision as an operational competitive advantage as evidenced in the aftermath of their 2011 acquisition of AirTran. Although the acquisition brought along 66 airworthy Boeing 717s, SWA decided to divest them rather than strain its operations (Without a Heart, 2014).

 

Asset Utilization

While several of the operational advantages of a homogenous fleet are easily seen, the decision creates opportunities for very high asset utilization. The average SWA aircraft spends approximately 9 hours per day in the air versus the industry average of around 7 hours (Tully, 2015). Keep in mind that this is performed in conjunction with shorter average leg lengths as well, providing more revenue opportunities by volume.

Southwest uses several levers to help keep their utilization high, including an astonishing 25-minute turn time (ground time between flights) (Finney, 2006)! By instilling a team-oriented culture from Day 1 of new employee training, the company manages to work in an extremely efficient manner to accomplish required ground tasks. For example, it is not uncommon to see the pilots assisting with loading bags or cleaning cabins with the flight attendants (Mudali and Kaura, 2011). Each of these may seem like small acts, but the team first mentality is not incredibly common amongst the pilot community.

Another contributor to fast turn times is the way in which Southwest has “trained” its customers. By not offering reserved seats, SWA incents customers to arrive on time and file onto the plane in a quick manner. While it may seem small, every minute counts and leads to more time the aircraft can spend actually flying from point to point.

 

Point to Point and Destination Selection

In the early days of the company, there was no need for a hub. As the airline continued to grow, it stayed with this model in contrast to the hub and spoke model used by most airlines. By maintaining this operational structure, SWA is able to provide more customers with direct non-stop routing. In 2014, 73% of SWA customers flew non-stop with an average flight duration of 2.0 hours (Southwest Airlines Co., 2014).

By continuing point to point operations, SWA’s frequency at the busiest airports is fairly low, with only four of Southwest’s top 10 destinations overlapping with the top 10 busiest airports in the United States. Operationally, the lower amount of congestion at these destinations plays in to SWA’s expertise of minimizing ground times, feeding back into higher asset utilization (Southwest Airlines Co., 2014). From the customer’s point of view, SWA’s destination selectTOM Picion reduces the hassle of dealing with many large airports, providing a convenience factor to go alongside low fares.

 

 

 

 

Conclusion

Southwest Airlines is an exemplary company by almost any standard. For over 40 years, the company has developed strategies to increase value for its customer and maintain profitability. Simultaneously, they have remained true to their operational advantages: streamlined assets, high utilization, and superb market selection. The ability they have shown to integrate their business model with their operational model is something all of us in the business world should LUV.

FS2004-Southwest-Airlines-Boeing-737-400-fsx4

 

References:

Federal Aviation Administration. (2014). Air Traffic Activity System (ATADS). Retrieved December 6, 2015, from    http://aspm.faa.gov/opsnet/sys/Airport.asp

Finney, Paul. (2006, November 14). Loading an Airliner Is Rocket Science. The New York Times. Retrieved from    http://www.nytimes.com/2006/11/14/business/14boarding.html?_r=0

Muduli, A., & Kaura, V. (2011, July 1). Southwest Airlines Success: A Case Study Analysis. BVMR Management Edge, 115-118.

Southwest Airlines Co. (2014). Annual Report. Retrieved from http://southwest.investorroom.com/

Southwest One Report. (2014). Retrieved December 5, 2015, from http://southwest.investorroom.com/?clk=GFOOTER-ABOUT-INVESTOR

Tully, S. (2015, October 1). Southwest’s Radical New Flight Plan. Fortune, 128-136.

Without a Heart, it’s just a machine. (2014). Retrieved December 4, 2015, from http://www.southwestonereport.com/2014/#/read-the-one-report

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Student comments on LUV What You Do

  1. I wrote a post on Ryanair (https://digital.hbs.edu/platform-rctom/submission/ryanair-low-prices-without-unnecessarily-pissing-people-off/) and I think it’s really fascinating to see how low-cost airlines managed their operations. SouthWest and Ryanair have a lot in common, but SouthWest is known to focus on customer service where Ryanair is known to be the “meanest airline in the world”. Ryanair also has better profit numbers that SouthWest. However, Ryanair just announced that it was going to stop “unnecessarily pissing people off” and I wonder how its operations will support this new focus of its operating model. How do you think Southwest has managed to be loved by its customers while maintaining really low costs and how do you think Ryanair can learn from SouthWest and vice versa ? Is it possible to have a similar profit level to Ryanair, but still have good customer service?

    1. 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.

  2. The point to point model is indeed a rarity in today’s airline industry. Do you think this strategy has had any impact on South West’s load factors? Or has South West done anything to minimize this impact. On the all 737 fleet approach, do you think this poses a significant risk for South West as Boeing has been talking about discontinuing the 737 (the last update to this bird was in 1996). What do you think would be the impact, and the best response by South West, should Boeing indeed discontinue this line. Lastly, new planes that are much more fuel efficient than the 737 are available in the market, do you think the savings generated by having an all 737 fleet outweigh the potential fuel savings that South West could enjoy from the newer jets, given the size of South West’s fleet.

    1. 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.

  3. Hi Aaron, really great post that I think clearly highlights a well-thought of business / operational model relationship. Following on the above post, what do you think are the other key risks that SWA faces? Lower maintenance costs and efficiencies in turnaround times are key success factors but as you mention above, the 737 Maxes would likely require significant changes. In times of cheap fuel and more efficient competitors, how would SWA maintain its relative cost advantage and value proposition? I wonder if SWA is somewhat positioned between the ultra low cost players and the increasingly more efficient larger players and is thus likely to be squeezed and forced to make changes to its model.

    Thanks!

    1. 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).

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