2. Running head: SOUTHWEST AIRLINES PORTFOLIO 2
Abstract
Southwest Airlines has been a successful low-cost carrier for the last 39 years. The
direction of this company is a result of innovative leadership and proper management of its
assets. The cost-driven nature of Southwest Airlines sets the stage for simplified operations, and
illuminates the path to efficiency. Optimal utilization of assets is paramount to success, and with
the assets of the recent AirTran acquisition, Southwest Airlines must not deviate from the
strategic management decisions that ensured its success. This company is a prime example of
using persistence, innovation, and appropriate risk taking for entrepreneurs world-wide. This
portfolio contains detailed information on the history, structure, finances, and future expansion
that provides a successful foundation for potential investors.
3. Running head: SOUTHWEST AIRLINES PORTFOLIO 3
Introduction
The events of September 11, 2001 had devastating effects on the airline industry, causing the
majority of U.S. carriers to experience several years of lost revenue. With the economic crisis of 2008, the
airline industry also experienced massive setbacks in growth. In contrast, Southwest Airlines has operated
in profitability for 39 consecutive years, holding a solid position in the face of various economic
inconsistency and industry disaster. This company has taken an uncommon path to stability and financial
success. Their high standard of excellence paired with the unique combination of personnel and
leadership have shaped a solid foundation not easily replicated.
This portfolio is a comprehensive look at Southwest Airlines, including: history, finances,
personnel, asset utilization, scheduling, cargo management, international operations, and marketing
strategy. Each section reveals the efficiency created by continually striving for excellence. Southwest
Airlines is on a path to expansion with the addition of international flights, increased cargo services, and
sound financial decisions. Potential investors should take a close look, as this company’s success could
also be their own.
History
In an industry which experiences regular ups and downs, Southwest Airlines has
managed to stay at the top of their game. A product of the innovative minds of Rollin King and
Herb Kelleher, the originally named Air Southwest Company was incorporated in 1967 (History
of Southwest Airlines, n.d. ). With the vision of a commuter airline serving Dallas, San Antonio,
and Houston, King and Kelleher were granted permission to fly by the Texas Aeronautics
Commission in 1968 (International Directory of Company Histories, 2005). However, three
competing airlines filed suit against Air Southwest Company, determined to keep them on the
ground (International Directory of Company Histories, 2005). After a lengthy legal battle,
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which ended up in the U.S. Supreme Court, Air Southwest Company was cleared for takeoff
(History of Southwest Airlines, n.d.).
On June 18, 1971, after changing its name to Southwest Airlines, the company finally
began operations in Texas with a fleet of three Boeing 737’s (Fact Sheet, 2012). Targeting the
commuter market, and staying within the confines of Texas to avoid federal pricing regulations,
Southwest Airlines was able to undercut the competition (Innovators: Herb Kelleher, n.d.).
Under the direction of M. Lamar Muse, the company set themselves apart with “beautiful flight
attendants with unique personalities”, and dressed them in hot pants and go-go boots
(International Directory of Company Histories, 2005).
With the deregulation of the airline industry in 1978, Southwest Airlines had the
opportunity to expand outside of Texas, and cautiously entered new markets (International
Directory of Company Histories, 2005). One advantage of the company’s leadership is their
ability to find market demands not addressed by the major carriers. These untapped markets were
approached with the highest standard of customer service, safety, and a unique style that
incorporated fun into the otherwise mundane event of business air travel. The result was top
customer service rankings, a sound safety record, and more departures than any other U.S.
airline.
Southwest Airlines quickly climbed the ranks and positioned itself as a top competitor in
the airline industry, never losing sight of the motivation to keep costs down. While other airlines
tout first class amenities, Southwest has consistently offered only coach class, open seating, and
no meals (Drake, 1998). With the realization that a single type of aircraft would reduce training
and maintenance costs, Southwest Airlines flies only B737’s with the GE engine. Additionally,
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in 1997, the online booking site was launched, further contributing to their ability to offer
inexpensive travel options for the budget-minded flier (International Directory of Company
Histories, 2005).
In 2011, Southwest Airlines experienced its 39th consecutive year of profitability (Fact
Sheet, 2012). This astounding record has held strong through turbulent times, as Southwest
watched other airlines declare bankruptcy and leave the industry. The visionary leaders of this
company have everything to do with its long-term success. With moves such as reducing the
average plane turn-around time to 15 minutes, Kelleher estimates a savings of $600 million in
fleet costs, as compared to the 45-minute average turn-around that has become the industry
standard (Jaffe, 1991).
Company Drivers
There are generally two types of airline, those that focus on lowering cost, and those that
focus on generating revenue. The managerial focus of the airline determines the specifics of the
operating environment, including the choice of point-to-point or hub-and-spoke operations,
leasing or buying the aircraft, type of aircraft flown, and the number of people hired to support
the endeavor. According to a study on the drivers influencing an airline’s operating income,
“…an airline can either choose to be a cost-driven or revenue-driven airline, but it is hard to be
both” (Chopra & Lisiak, 2006).
While each airline has a choice, the focus of one is not necessarily better than the other.
Both systems of operation play a vital role in the aviation industry by complementing each other
and satisfying different portions of the market demand. According to Chopra & Lisiak,
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low-cost carriers with point-to-point networks have an advantage in terms of
employees per ASM [Available Seat Mile] that allows them to lower cost. In
contrast, legacy carriers with hub-and-spoke networks have an advantage in terms
of revenue per RPM [Revenue Passenger Mile] and load factors that allow them
to grow revenue. (2006)
Southwest Airlines operates on a point-to-point route structure, which is supportive of
their low-cost company focus. The main airports served by Southwest Airlines include locations
such as Chicago (Midway), Phoenix, Denver, and Oakland (Table 1).
Table 1
Top Ten Airports- Southwest Airlines
Cities
Daily
Departures
Number of
Gates
Nonstop
Cities Served
Established
Chicago (Midway) 238 29 56 1985
Las Vegas 225 19 55 1982
Baltimore/Washington 195 22 48 1993
Phoenix 180 24 49 1982
Denver 162 17 51 2006
Houston Hobby 138 17 34 1971
Dallas (Love Field) 120 15 15 1971
Los Angeles (LAX) 109 11 21 1982
Oakland 106 13 19 1989
Orlando 102 12 33 1996
Source: Fact Sheet, 2011
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Southwest Airlines Fleet: Operational Lease vs. Ownership
Currently Southwest Airlines has 574 active B737’s in their fleet (Table 2), with an
average age of 11.7 years (Fact Sheet, 2011). The majority of these aircraft are owned by the
company, with a small portion under operational lease contracts. Because of their focus on low-
cost, Southwest Airlines has typically held larger margins than their competitors. This enables
them to purchase aircraft as opposed to operational leasing. Southwest mangers realize the cost-
savings of ownership, and according to an article on aircraft leasing published in The Economist,
“in the long-term, buying is cheaper than renting” (Aircraft Leasing: Buy or Rent, 2012).
Table 2
Southwest Airlines Fleet Matrix
Aircraft
Type
Current Future Historic
TotalActive Stored
On
Order Due
To other
Operator Stored Scrapped
Written-
Off
Boeing
737 574 17 46 36 18 1 692
Boeing
737-200 45 12 5 62
Boeing
737-300 158 1 22 13 1 195
Boeing
737-500 23 2 25
Boeing
737-700 376 1 377
Boeing
737-800 17 16 33
Total 574 0 17 0 46 36 18 1 692
Source: Southwest Airlines Fleet Matrix, 2012
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The operational lease is typically used with start-up companies, due to the
requirement for little or no down payment. Many legacy airlines lease their aircraft because
leasing protects against obsolescence and airlines “typically have low margins” and cannot
afford to pay cash for their fleet (Aircraft Finance, n.d.). Southwest Airlines’ most popular
aircraft, the B737-700, costs approximately $70.9 million, making a fleet of aircraft a very large
company expense (Table 3).
Table 3
Jet Prices
737 Family 737-600 737-700 737-800 737-900ER 737 MAX 7 737 MAX 8 737 MAX 9
Cost* 59.4 70.9 84.4 89.6 77.7 95.2 101.7
Source: Boeing Commercial Airplanes, 2011 *$ in Millions Average
Direct cost-savings excluded, there are additional company benefits to leasing aircraft.
According to Kimmel, Weygandt & Kieso, “operating leases allow the lessee to account for the
transaction as a rental, with neither an asset nor liability recorded” (2009). This is beneficial to
the company because, “reporting lower assets improves the return on asset ratio…reporting
fewer liabilities makes the company look less risky” (Kimmel, Weygandt & Kieso, 2009). For
Southwest Airlines, owning their aircraft means a balance sheet that accurately depicts the state
of the company, which is more appealing to potential investors.
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Scheduling Considerations
Producing an airline schedule is a dynamic event that attempts to balance operations
between equipment, facilities, crew, market and other factors present in each airline’s operational
environment. The schedule is where efficiency is realized, and can either make or break the
airline. The scheduling considerations of Southwest Airlines are streamlined by the selection of a
single type of aircraft. Each aircraft can be substituted in any route, without major changes to
personnel, maintenance, or ground support equipment. This is in stark contrast to legacy airlines,
which use several types of aircraft with various maintenance schedules, and require multiple
crews trained on each type. Additionally, with point-to-point service there are no system-wide
delays such as those experienced in hub-and-spoke operations.
Although scheduling is streamlined at Southwest Airlines, there are several locations
which experience regular delays due to weather and other factors (Table 4). Because of the
anticipated airport delays, additional time must be added to flights scheduled during these events.
Southwest schedulers typically add ground time for expected weather delays, or schedule arrivals
30 minutes early to make an airport curfew.
Accurate scheduling is vital to meet the maintenance requirements of the aircraft and rest
requirements of the crew. Scheduling mistakes such as breaking an airport curfew are
accompanied by hefty fines; others may result in reduced asset utilization for the company. A
primary reason for Southwest Airlines’ success is the knowledge that the aircraft and the people
who provide operational support are its most important assets. The realization that reductions in
scheduling errors directly influence operating revenue keeps Southwest schedulers on their toes.
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Table 4
Anticipated Delays Affecting Scheduling, Southwest Airlines
Location Type Delay Reason
San Francisco Weather Morning Fog
Burbank Weather High winds around mountains
Philadelphia Other Congestion/Ship crossing area
LaGuardia Other Congestion
San Diego Weather Evening Fog
Orange County Other Airport Curfew
Source: Inside Southwest Airlines: Schedule Planning, 2009
Southwest Airlines Marketing Strategy
Southwest Airlines has shown a profit for the last 39 consecutive years, a feat unmatched
in the airline industry. Their pricing strategy is simple and effective, charge the lowest possible
fare that still enables the airline to make a profit (YouSigma, 2008). While price is the major
competitive variable for the airlines post-deregulation, the unique marketing application of
product, price, promotion, and place distinguishes this airline from its competitors.
The product of Southwest Airlines is air transportation with no extra services (Hubpages,
2010). While first class seats and meals aren’t available, they do add value to the product by
providing excellent customer service, baggage handling, easier ticketing, flexible flight
schedules, and easier check-in and check-out at the airport (Hubpages, 2010). At first glance the
product may seem somewhat lacking, but with a high perceived value the customers keep
coming back.
11. Running head: SOUTHWEST AIRLINES PORTFOLIO 11
Prior to introducing their product in a new place, Southwest Airlines does extensive
research and launches a public relations and awareness campaign to establish a positive image in
the minds of their customers (Hubpages, 2010). Upon entry into the market, they typically offer
fares that undercut prevailing rates by 50%, quickly launching into a price war with the
competing airline (Hubpages, 2010). With rapid expansion of existing flights, the “Southwest
effect” takes over, causing airfares to go down and tourist traffic to increase (YouSigma, 2008).
Southwest Airlines is able offer lower fares by continually finding ways to cut operating
costs. They run ads which direct people to their website for the best online deals, offer ticketless
travel, and skip paying booking fees by not using travel comparison websites such as Orbitz.com
(The Pricing Journal, 2011). The point-to-point system of operations produces greater on-time
reliability, as a single aircraft delay in the hub-and-spoke system can result in a chain reaction
which affects multiple connecting flights. By encouraging passengers to check bags with their
“bags fly free” campaign, they are able to turn planes at the gate faster. Not linking with other
carriers eliminates any disparity in luggage accommodation due to aircraft type, luggage tracking
errors due to mismatched networks, and ensures more people are reunited with their luggage
(Joiner, 2010). Greater on-time reliability means Southwest planes are able to spend more time in
the air, which equates to more flights per day and more revenue for the company.
Because they offer short-haul flights, Southwest Airlines not only competes with other
airlines, but also with ground transportation. Current competition includes legacy airlines such as
Delta and United, which went bankrupt and restructured their operations, and new low-cost
copycats such as Jet Blue and AirTran (Stock: Southwest Airlines Company, 2012). Recently
Southwest Airlines purchased AirTran Holdings, the parent company of AirTran Airways, for
$1.4 Billion, which includes several international flights (The New York Times, 2010).
12. Running head: SOUTHWEST AIRLINES PORTFOLIO 12
Personnel
While most companies put the customer first, Southwest Airlines has experienced great
success in putting their employees first. The concept is to satisfy the employees, and they will
satisfy the customers (Lin, 2008). The end result is a lower employee turn-over rate, which
reduces time spent training, and contributes to a healthy bottom line. Additionally, keeping good
employee relations also adds to the success of the company, as approximately 77% of Southwest
Airlines is unionized (Southwest Airlines Co. Annual Report, 2008).
Labor costs at Southwest are significantly lower than their competitors, mostly due to the
ability of employees to accomplish cross-functional tasks (Braginsky, 2010). Unless specifically
restricted by the requirement of a license, employees in one job can assist employees in other
jobs. This allows for greater labor productivity, which translates to a more cohesive team and
reduces labor costs.
Asset Utilization
According to an article published in USA Today, “the U.S. airline industry is undergoing
a major alteration in the way the carriers compete” (Airline’s Swap Assets in New York,
Washington, D.C., 2012). Legacy airlines are striking mutually beneficial deals for slot
ownership, which has become a significant tradable asset for many airlines (Airline’s Swap
Assets in New York, Washington, D.C., 2012). In trading slots, the airlines have the opportunity
to restructure their operations and improve their asset utilization ratio. “The asset utilization ratio
calculates the total revenue earned for every dollar of assets a company owns. This ratio
indicates a company's efficiency in using its assets” (Southwest Airlines Asset Utilization, 2012).
As of March, 2012, Southwest Airlines’ asset utilization is 0.8761 (Southwest Airlines Asset
13. Running head: SOUTHWEST AIRLINES PORTFOLIO 13
Utilization, 2012). In comparison to other low-cost carriers, such as Jet Blue (0.6683) and
Ryanair (0.481), Southwest Airlines has optimal asset utilization (Southwest Airlines Asset
Utilization, 2012).
AirTran Acquisition: Additional Assets
With the recent acquisition of AirTran Airways, Southwest Airlines has added 52 B737-
700’s to their fleet, along with 88 B717-200’s. However, because of the standardization enjoyed
by a single type of aircraft, Southwest Airlines has decided to lease the all of the B717’s to Delta
Airlines (Delta Plans to Lease 717s From Southwest, 2012). In addition to 140 aircraft, the 8,000
former employees of AirTran are also being integrated into Southwest Airlines (2011 Southwest
Airlines One Report, 2011). The complete integration of personnel and aircraft is expected to
take 2-3 years (2011 Southwest Airlines One Report, 2011). Because of the AirTran acquisition,
Southwest Airlines now has entry into several new markets, including slots in Atlanta and New
York LaGuardia, and access to near-leisure markets in the Caribbean and Mexico (2011
Southwest Airlines One Report, 2011). One major challenge with this acquisition will be
converting AirTran’s hub-and-spoke operations into Southwest’s point-to-point service.
International Operations
Southwest Airlines acquired several international flights with the purchase of AirTran,
and plans to establish international service from Houston’s Hobby Airport (Fly2Houston-
Houston Airport System, 2012). Currently AirTran and Southwest operate under a single FAA
operating certificate, but are still run as separate companies. With approval from the city of
Houston, Southwest Airlines is taking full financial responsibility for the construction of an
international terminal and immigration facility at Hobby (Seagraves, 2012). After construction is
14. Running head: SOUTHWEST AIRLINES PORTFOLIO 14
complete, the city of Houston will own the terminal, and Southwest will pay no rent for use of
the facilities (Seagraves, 2012).
Southwest Airlines also has plans to incorporate a travel-reservation system for its new
international flights, as the reservation system for domestic flights won’t support international
operations (CBS DFW, 2012). The travel-reservation system, from Amadeus IT Group, is
scheduled go online in 2014, when AirTran’s international flights become integrated into
Southwest (CBS DFW, 2012). The planned integration of services is expected to take 2-3 years,
putting the launch of international flights around 2015. AirTran’s international flights include
Aruba, Cancun, San Juan, and Montego Bay (Table 5).
Table 5
AirTran Nonstop Flights
Domestic U.S. Cities International Destinations
Atlanta
Aruba, Cancun, Nassau, Montego Bay, Punta Cana,
San Juan
Austin Cancun
Baltimore/Washington,
D.C.
(BWI)
Aruba, Bermuda, Cancun, Nassau, Montego Bay,
San Juan
Chicago Midway
(MDW)
Cancun*
Ft. Lauderdale San Juan
Denver Cancun
Milwaukee Cancun
Orange County Cabo San Lucas/Los Cabos, Mexico City
Orlando Aruba, Montego Bay, San Juan
San Antonio Cancun, Mexico City
Tampa Bay San Juan
Source: Southwest Airlines, 2012
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Cargo Management
Southwest Airlines not only provides passenger services, they also run a very successful
air cargo business. In 2009, revenue from air cargo totaled $118 Million (AfA Member Profile,
2010). Shipping to 83 destinations, Southwest offers three types of air cargo services:
Next Flight Guaranteed, where the shipment is 100 percent guaranteed to be on
the next available flight; Rush Priority Freight, where the shipment is guaranteed
to be at its final airport destination within 24 hours from the time it is tendered;
and Freight, where shipments move on the next flight with available space. (AfA
Member Profile, 2010)
Although air freight has been popular in recent years, ocean container freight has grown
at twice the rate of air cargo, and domestic trucking has also seen an increase (Inbound Logistics,
2007). One factor that may contribute to the declining trend in air freight is “long-term price
deflation”, which will create “challenge for these companies to continue using air freight on a
planned basis” (Inbound Logistics, 2007). According to Matt Buckley, senior director of cargo,
Southwest Air Cargo, “carriers that want to stay in business must invest in the resources to
provide cargo customers high service levels” (Inbound Logistics, 2007).
Southwest Air Cargo is no stranger to providing excellent service, and has been
recognized with several prestigious awards over the years. In 2010, they took home Logistic
Management’s Quest for Quality Award for the 14th
consecutive year, with the highest scores of
any airline (Southwest Cargo, 2010). Critical categories included: Ontime Performance, Value,
Information Technology, Customer Service, and Equipment and Operations (Southwest Cargo,
2010). They were also awarded the Airforwarders Association’s “Domestic Air Carrier of the
Year” award for 2010 and 2011 (Nuts About Southwest, 2011).
16. Running head: SOUTHWEST AIRLINES PORTFOLIO 16
Southwest Air Cargo has several opportunities to expand operations and improve their
services. As a result of the AirTran acquisition, Southwest Air Cargo will begin servicing the
Atlanta area, and has added a “26,000-square-foot cargo facility” in Atlanta’s north cargo
complex (Hartsfield-Jackson Atlanta International Airport, 2012). Another new addition is the
use of Descartes Air Messaging Service, which provides real-time shipping messages to their
cargo customers (Descartes, 2011).
Financial Status
In 2011, Southwest Airlines had a net income of $178 million and total operating revenue
of $15.7 billion (Fact Sheet, 2011). Operating 574 B737 jets, with service to 73 cities in 38
states, they are currently the largest U.S. carrier, based on domestic passengers boarded, as
reported by the U.S. Department of Transportation (Fact Sheet, 2011). Over the last ten years,
Southwest Airlines has experienced a steady increase in Revenue Passenger Miles (Table 6). The
RPM for 2002 was 45 billion, with a Load Factor (LF) of 65.9% (Southwest Airlines, 2010). In
comparison, the RPM for 2011 was 98 billion, with a LF of 80.9%, which reveals a drastic
increase in operational efficiency (Fact Sheet, 2011).
The strategic management decisions of the company’s leadership have consistently
resulted in more efficient methods of operation. A prime example is hedging 70% of their fuel
needs, as compared to the 20% hedging of their competitors (Pae, 2008). This strategy reduces
the impact of fuel spikes that can undercut profit, and allows them advance notice in budgeting
for a major operating expense.
Additionally, Southwest only flies the B737, which reduces training and maintenance
costs, and ensures they can always make aircraft substitutions when the situation dictates
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(Strategic Report for Southwest Airlines, 2006). With standardized aircraft, gate turn-around
time is improved, and with only one set of procedures to master, the crew has greater opportunity
to discover and implement time-saving techniques. Faster turn-around at the gate means more
flights per day, and point-to-point service paired with the use of less congested airports
contribute to increased profit (Enhancing Service at Southwest Airlines, 2009).
First Quarter 2012
Financial results of the first quarter in 2012 show Southwest Airlines with a net loss of
$18 million, which was a result of a $478 million increase in first quarter economic fuel costs,
over the first quarter of 2011 (Southwest Airlines Reports First Quarter Results, 2012). As fuel
hedging contracts expire, the operating costs of Southwest Airlines will rise, decreasing the
profit margin enjoyed in previous years. However, according to CEO Gary Kelley, “Energy
price increases continue to pressure costs, which only serve to reinforce our commitment to
eliminate waste and maximize efficiency throughout our Company” (Southwest Airlines Reports
First Quarter Results, 2012).
Conclusion
Southwest Airlines specializes in doing more with less, and this is the driving force
behind the strength of their company. With a unique business model and innovative application
of the marketing mix, Southwest Airlines has established a very successful marketing strategy
that continues to usher in profits. This company is a prime example of using persistence,
innovation, and appropriate risk taking for entrepreneurs world-wide. However, as fuel prices
consistently rise, the business savvy leaders at Southwest will be tested in their ability to keep
costs down.
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With a solid track record of successful operations, this company is a first look for
investors. Because of their continued profits, many businesses have tried to model their
operations after Southwest. However, the unique combination of leadership present in this
company is rare, and without the right leadership, any comparable service looks like a cheap
imitation.
21. Running head: SOUTHWEST AIRLINES PORTFOLIO 21
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25. Running head: SOUTHWEST AIRLINES PORTFOLIO 25
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