Southwest Airlines Business Model


#1

I was curious if someone who is more knowledgeable than I could explain to me how the SW flight tactic of lots of flights of typically short distances at low fares pays off for them? I remember reading up about how things like landing fees and takeoff roll fuel add up to some big numbers…which seems counterproductive. Are they able to fight this by using one aircraft type and avoiding some of the other typical airline services? For instance, you don’t see their booking on expedia.


#2

A lot of SWA’s business tactics are good marginal savings, but the biggest one is likely that they fill the planes. You know what you are going to get with SWA, and they don’t fly routes that lose money.

Also, SWA has been more successful with fuel contracts and hedges than their competitors. This is especially important to them because they use a much simpler business model. Each flight has to be planned to make a profit.

The bigger carriers have much more complexity in pricing, schedules, fleets, contracts, etc. They run very complex schemes to price tickets and pay their liabilities. Many flights are priced to lose money with hopes to fill up really profitable ones on a connection. When the system breaks down, it really starts to roll down hill quickly.

What I don’t know is what will happen to SWA in the future because they have amassed a huge union presence - bigger than any other airline. They may have better union relations because their employees spend much less nights away from home, better corporate attitude, and more stable work.

There is no greater correlation with failure than union presence other than inadequate capital at start up.


#3

There are a lot of things Southwest does, but filling the planes isn’t one of them. Their load factors are usually in the mid-60s, compared with the rest of the industry which is at about 80.


#4

The first quarter for all airlines is usually slow. Take a look at some other months:
November 2006: 71.8%
June 2006: 80.4%
May 2006: 76.8%
April 2006: 76.7%
November 2005: 70.9%
June 2005: 76.2%
May 2005: 72.4%
April 2005: 69.1%

Source: Press releases from Southwest Airlines

Southwest is gradually adding long distance flights also. Take a look at the press releases found in the link above.

In the begining, and for many years after, Southwest’s main competition was surface transportation. In other words, they were going after passengers who would normally drive or take the train or bus.


#5

Southwest does not rely on a hub system as the rest of the major carriers do.

This eliminates a lot of expense and problems when there is a problem at the hub - for example when PHL gets backed up it throws all of the US Air system off.

The other thing this allows them to do is offer more non-stop flights for more passengers. Someone flying from Baltimore to Columbus does not want to make a stop in Cleveland if they can help it. The differentiates them from the rest of the carriers.


#6

Short answer: better expense management. Comparing Southwest to United, for example:

Revenue $ per Revenue Passenger Mile for Southwest = 12 cents vs. 13 cents for United. Operating Expense per RPM = 8 cents for SW vs. 13 cents for United.

How do they do it? Southwest has (or had) several advantages over the other majors. They only fly one type of plane and save substantial dollars on parts and labor (due to efficiency). They have their planes in the air generating revenue rather than on the ground. Since SW has $14 billion in assets, most of it in airplanes that are only producing revenue when they are flying, they are much more capital efficient than others. Their point to point system (vs. hub for most carriers) is also much more efficient. They fly out of fields with lower landing fees and gate costs. They have the best fuel hedging in the industry (saved them almost $1 billion last year alone). They have the fewest employees per plane (71) of any major carrier and fewer union employees than the other majors. I could go on, but think you get the point. They simply have a better business model than anyone else.

By the way, lest you think that safety has suffered because of their focus on low cost operation, they also have the best safety record in the industry as measured by passenger fatalities (which I believe is still zero).


#7

Read the book.


#8

I am really surprised about the load factors being lower, as it totally is the reverse of my personal experience.

I also had heard that SWA actually had the highest unionization of any airline.


#9

Hub, focus city, tom-ay-to, tom-ah-to, they’re the same thing in my book, other than the fact that Southwest has more “focus cities,” which helps:
a)keep most of the flights online when weather is a problem in one of them,
b)increases (slightly) the chances that a focus city is your intended destination, and
c)by spreading the flights out so that you’re most likely to be headed in the “right” direction when flying toward your destination. (As opposed to flying from CLE-ATL-SEA on Delta, for example.)
Whatever they want to call 'em, it works. They’re making $$, which is a rarity with airlines anymore.

As far as the Baltimore-to-Columbus scenario, you make it sound as if someone can fly nonstop to wherever WN flies from wherever WN flies, which is obviously untrue (and unrealistic, albeit convenient :slight_smile: ). If I fly Southwest from Cleveland, I’m stopping in either PHX, BWI, BNA, or MDW. The only exception to this is the soon-to-be-added nonstop to MCO, and I think they have a daily nonstop to Vegas. I’m not sure how this makes them different from anyone else.


#10

Guess it’s time to get a new edition of the book. A focus or hub airport is designed specifically for connections. Southwest doesn’t do that. Any connections available at a given airport are purely coincidental.

The majority (something like 80% - you’d have to check the annual report to confirm) of the passengers on Southwest fly nonstop to their destinations.


#11

Everything that CAFlier said, great post by the way, but I also have two more things to add. As an ex SWA Flight Attendant, we were urged to recycle as much as possible as we had an extra compartment in the galley to do so. We heard that this made enough money to be able to buy wine, beer and liquor that passengers consumed. Meaning pure profit. Secondly, the Pilots actually got out of their seats to help the Flight Attendants clean after each flight. Less time on the ground, like CAFlier stated above.


#12

Like Wal~Mart and most successful small businesses, the secret to SWA’s success is cost control. They make their money at the back door, not the front. Almost every aspect of their successful formula is centered around this very simple principle.


#13

Like beating up suppliers for better wholesale prices or threatening to use alternative products? That’s how Wal-Mart operates. Ask anybody who USED to work at Rubbermaid how the system works.


#14

It’s called a free market. Perhaps Rubbermaid wasn’t willing to change with the times.

I live in an agricultural area where the biggest produce companies here supply Wal~Mart’s grocery business. Their number one concern is not price, it’s supply. One of the local firms went from 50 to 4,000 employees and zero to two jets and three helicopters in the last decade. I would say almost all of the new turbine aircraft here can be attributed to Wal~Mart’s growth.


#15

Let me preface my remarks by saying that I’m a staunch conservative when it comes to free enterprise. Having said that, a good company (Rubbermaid, or “RM” for short) which makes great products has been slashed to a shell of what it used to be, in large part because of Wal-Mart(WM). I have no problem with competition, except for the fact that WM exploits their marketing power as the world’s largest retailer to force businesses to literally decide their fate. Tiny profits are better than losing your marketability with the “giant,” so businesses put their tails between their legs and let the giant win, since it can threaten to sell cheaper, LOWER QUALITY items from other companies, often ones that don’t manufacture a thing in the U.S. (Anyone remember the grand “Made in the U.S.A.” theme that WM ran with for so long?)
I swear to you, I have no personal ties to Rubbermaid at all, but I read the stories in the paper of layoff after layoff at what used to be a large RM factory in Wooster, OH. I’m not even going to discuss the small businesses that can’t compete, not because of unwillingness to change, but because of lack of buying power.
(After all that)Back to the original topic, I don’t know if Southwest operates this way or not; I was just asking. :unamused:


#16

Free-market conservative here. And was personally impacted by WM’s purchasing tactics to the point of layoff - my company ended up going under.

By the way, in our case, WM didn’t pay their bills, either. They owed us $200K at one point. What are you going to do, cut them off???


#17

I have a few guesses:

  1. Unlike may airlines, SWA does not have to pay for food. Besides Peanuts, and Pretzels, and beverages, SWA does not have a meal service. However, on flights over 3 hours we serve a light snack. So, SWA could save money from just serving mainly beverages and a cocktail snack (peanuts).

  2. There are alot of daily flights, so there are alot of paying passengers.

  3. Like a few said before, Southwest does not have a “hub”, so if a airport is shutdown due to weather or something, SWA can still have alot of flights in operation.


#18

IMO this is their biggest draw. This also means more direct/non-stop flights which, especially at the prices SW usually charges, will put butts in the seat very quickly.


#19

Don’t forget the “snack” service for flights over 2 hours’ duration - cookies, cheese, and other light stuff.


#20

SW actually wins at both the ‘front’ and ‘back’ doors. They have the lowest fares on every route and aggressively take share from others whenever they enter a new market. It was interesting to watch fares from SFO the day that SW pulled out to fly only from Oakland. United went from selectively matching SW fares (about $100 one way to SoCal) to about $250 - 300 in a single day and have never gone back down. SW recently announced that they will begin flying from SFO again and I expect to see fares on the other majors head south again. As you can see from the cost per passenger mile numbers above, only SW can win that pricing game at the front door.