Southwest Airlines' Cost Optimization to Create an Attractive Price for Economy Class Travelers - Case Study Example

Southwest Airlines The world is currently facing tough economic conditions. Both governments and individuals are spending less as their purchasing power has declined considerably (Gallop, 226). Under such circumstances it becomes imperative to study those corporations that are able to maintain their profitability even under global economic slowdown. One American company which has shown remarkable success and instinct for survival is Southwest Airlines (Gittel, 21). Southwest Airlines is an immensely successful airline which has maintained profitability even in extremely tough economic conditions (Freiberg, 25). There are many factors which have helped the airline in its survival and success. This essay attempts to outline those factors and strategies on the basis of following parameters - 1- Financial Planning 2- Financial control 3- Costing 4- Decision making Financial Planning Financial planning has played a vital role in growing its business. The correct timing of its decisions has made a huge difference in increasing market capitalization (Sims, 68). Southwest Airline has gained further advantage by packing more seats into the aircrafts which increase the seat kilometer revenue generated per block hour. Instead of buying more jets to deal with its growing business, Southwest planned and got better deals on lease. Hence it paid substantially less per block hour for lease rental, than other carriers. Southwest has implemented its financial planning in such a way that low fares when combined with high frequencies and excellent punctuality have resulted in increase of its revenues. Southwest plans its finances very efficiently. It hires new pilots with ten years contract and motivates them by offering share in profits. This is an example of astute planning. It means that if Southwest was making losses at any particular time then the losses can be shared with the pilots. This strategy also makes the staff much more accountable. Another important aspect of financial planning was operating on low distance routes and targeting of road passengers. Southwest plans its expenditure very efficiently and effectively. The customer service strategy of providing full meal was costly in two ways. One, it increases the per unit costs and secondly more staff is required to provide the service. Southwest’s plan of not following this trend has saved it the cost of food as well as the number of staff employed. In other airways, when six to eight employees per flight were required, southwest managed to function with only four. This kind of planning was crucial for decreasing the costs and increasing the revenues. Financial control Financial control was another aspect which was very important for the new emerging airline Southwest. As it was new to business and already spent four years in legal issues, it was very necessary to control the finance for Southwest. It did so by many ways. For example, by providing minimal catering services Southwest reduces the cost of this service to less than 0.5 per cent of its total costs. Limited catering and single-class cabins also mean fewer cabin crews. Southwest flies its Boeing 737 with three stewards or hostesses, whereas most airlines fly this aircraft with five or six cabin crew. All of these factors reinforce the direct operating cost advantages. Southwest uses smaller secondary airports, which were keen to attract such airlines and were willing to cut their own charges to do so. By doing so it saves the cost as well as increases its productivity because in smaller and secondary airbases less traffic helps in smooth and quick fly of Southwest which in turn helps in increasing its frequencies. Another important example of financial control was not buying immediate jets when there was opportunity to increase the fleet, When US domestic deregulation came in 1978 Southwest was well placed to expand beyond Texas. But it did so cautiously, avoiding the calamitous over-expansion of many of the new start-up carriers of the 1980s. It took twelve years to grow its fleet to fifty aircraft. Whenever there was high requirement of jets, instead of buying the new ones, Southwest managed to pay substantially less per block hour for lease rentals than other carriers. Costing Costing is vitally important for the Southwest as it helps in managing the expenditure, and, the revenues. Southwest also achieves economies of scale in many areas of indirect operating costs because of the nature of the products it offers. The use of secondary airports, whenever possible, usually means that airport charges and related costs for gates and so on are on the lower side. There are savings in distribution costs also. Traditionally southwest has done its own ticketing and has not made its seats available on Sabre, Galileo or other global CRS systems, thus saving $3 or more per booking. It was also the first to introduce direct online booking. As a result and in contrast to the US major airlines, around half of Southwest's sales are direct, which is a very high proportion. On these sales it saves agents' commissions which are 7-10 per cent or so of the ticket price. Limited catering and single-class cabins also mean fewer cabin crews. Southwest flies its Boeing 737 with three stewards or hostesses, whereas most airlines fly this aircraft with five or six cabin crew. For costing purpose only in Southwest Passengers are offered fast snacks, usually of cheese and crackers or peanuts, with soft drinks or cheap alcoholic beverages. But absence of proper meals decreases the per unit cost of the company. Decision making Decision making is very important and provides the turning point for southwest. The first decision which make southwest stand away from regular airlines was about meal. It did away with the traditional scheduled frills such as meals, pre-assigned seats and connecting flights, but developed a brand image of 'flying is fun' and trained its staff to ensure that it was. Another decision was not expanding the airline immediately. When US domestic deregulation came in 1978 Southwest was well placed to expand beyond Texas. But it did so cautiously, avoiding the calamitous over-expansion of many of the new start-up carriers of the 1980s. It took twelve years to grow its fleet to fifty aircraft. Another important decision was of not flying on longer routes. Basing itself at Love Field, only 10 km from downtown Dallas (whereas the main airport at Dallas Fort Worth International was 35 km out), Southwest concentrated on a strategy of operating short sectors offering low and unrestricted fares, high point-to-point frequencies and excellent on-time departures. The management also decided to focus more on ground transport. The decision of operating from lower and secondary Airbase also proved to be very effective. Another Important decision which southwest took was operating in routes where no one was operating, these kind of decisions could have proved to be wrong but Southwest made these profitable by giving low fares and high frequencies on such routes. The main focus of Southwest was to target Road transport. Its decision to focus on road transport proved to be mile stone as it added new customers and doesn’t influence much of the existing customer base of other airlines. After taking all the above mentioned 4 factors under consideration it can be said that Southwest Airlines has been very successful at applying various strategies. Although the company can improve in many sections of its business such as increase in passenger numbers and slight increase in pricing, the management has shown business awareness which is many times found lacking in other corporations. While other corporations suffer from short-sightedness, Southwest has managed to retain its holistic view. Works Cited Newport, F. The Gallop Poll: Public Opinion 2009. New York: Rowman & Littlefoeld, 2010. Print. Gittell J. The Southwest Airlines Way. New York: McGraw-Hill Professional, 2005. Print. Freiberg, K. Nuts! Southwest Airlines’ Crazy Recipe for Business and Personal Success. New York: Illustrated, Texere, 2001. Print. Sims, E. Corporate Success Through People. New York: Academic Foundation, 2006. Print. Read More