Southwest Airlines 2010

Airlines industry analysis Source

The case needs to be looked at with this industry back drop and the

organisation’s passion to serve as low cost but high quality leader

The hub and spoke operation

Vs

Point to point operation

Southwest free Seating promotes quick turnaround

2007 upgrades is South West

To improve its product. Southwest, which launched a sweeping set of boarding and seating changes said it will test Internet service on four of their A/C

The sweeping changes, include its higher-priced Business Select tier, which has been well-received by passengers. That program alone triggered a $7 million increase in revenue

Southwest. It saved the carrier $300 million in the fourth quarter and $727 million for the full year by fuel hedging Kelly said.

The carrier had more than 70 percent of its fuel hedged for 2008 based on a $51-a-barrel price of oil.

It also had that price locked for 2009 but percentage of fuel covered drops to 55 percent.

Southwest has less than 30 percent of its fuel hedged at $63 per barrel in 2010.

It has more than 15 percent of its fuel hedged at $64 per barrel in 2011 and $63 per barrel in 2012

Core competency in hedging

Southwest's history of financial strength is it's been able to hedge aggressively.

Southwest has been the most profitable carrier in the USA and it's the only U.S. airline with an investment-grade credit rating from Standard & Poor's and other rating services.

It has the cash and the access to lines of credit to pay the upfront premiums required to hedge.

Its credit rating means the oil producers and financiers with which it makes those hedging deals don't worry about Southwest's ability to come up with more cash.

A second factor in Southwest's hedging success, is the carrier's philosophical commitment to hedging.

Core competenceSouthwest has for a decade locked in the prices

it pays for large amounts of jet fuel months and even years ahead of time..

Since 1998, it has saved $3.5 billion which is equal to about 83% of the company's profits over the last 9½ years.

To illustrate spot market, jet fuel sold at an average price of $3.95 a gallon for the week ended 24.7.2008. American Airlines paid an average $3.17 a gallon last quarter. Delta, $3.13.

And Southwest? Its recent estimate was about $2.35 a gallon.

Introduction of baggage charge

When American said that it would begin charging for a single checked bag because of fuel costs, Southwest quickly responded by saying that it was doing “everything” to boost revenue, “but it’s not our goal to nickel and dime our customers.”

“We want to assure you that Southwest Airlines still allows you to check up to two free bags when you travel with us,” the airline said on its website. “We look forward to seeing you onboard very soon. And bring your luggage!”

SUCCESS IN A “NUTSHELL”

Profitable 37 years Steady Growth Conservative Balance

Sheet Stock Performance Low Fare Leader Market Dominance Productive Employees Low Turnover No Layoffs Effective fuel hedging Best Safety Record Most Emulated Free to Have Fun

Mission Statement of SouthwestMission Statement of Southwest

Low CostsLow CostsPositively Positively

Outrageous Outrageous ServiceService

Growth Growth and and

ProfitsProfits

StrategyStrategy

Southwest Airlines’ activity system

Focusedpassenger

service

Short,direct routes

between midsize cities &

secondaryairports

Very lowprices

High aircraftutilization

Frequent,reliable

departures

No meals

No seating

20-minutegate turn-arounds

Low (base) pay for allemployees

Limited useof travelagents

Employeestock

ownership

Flexibleunion

contracts

Only Boeing 737

aircraft

No connect-ions

No baggagetransfer

Adapted from: Michael E. Porter: What Is Strategy? Harvard BusinessReview. November-December: 73.

Limitedspecialization

of tasks

What would a balanced score card look like?

Elements of a balanced scorecard for Southwest Airlines

• % Ground crew trained

• % Ground crew stockholders

Objectives Measures

• # Customers

• FAA On Time Arrival Rating

• Market Survey

• On Ground Time• On-Time

Departure

Strategic Theme:Operating Efficiency

Initiatives

• Cycle time optimization

• Ground crew training

• ESOP

• Customer loyalty program

• Quality management

Targets

• 30% CAGR

• 20% CAGR

• 5% CAGR

• 12% growth

• Ranked #1• Ranked #1

• 20 Minutes• 90%

• yr. 1 70%yr. 3 90%yr. 5 100%

• Profitability

• Grow Revenues

• Fewer planes

• More Customers • Flight is on -time• Lowest prices

• Fast ground turnaround

• Ground crew alignment

Strategic Theme: Operating Efficiency

Profits and RONAFinancial

Learning

Ground crew alignment

Fewer planes

Customer

Internal

Fast ground turnaround

Attract & Retain More

Customers

Grow Revenues

Lowest prices

On-time Service

Source: Kaplan & Norton (2007)

Activity Mapping: Southwest Airline’s Low Cost Competitive Advantage

Courteous, but limited passenger

service

Lean, productive employees

Short haul, point-to-point routes, often to secondary airports

High aircraft

utilization Standardized fleet of Boeing 737

aircraft

Frequent, reliable

schedules

Competitive Advantage:

Low Cost


Courteous, but limited passenger

service

•No seat assignments•No baggage transfers•Automated ticketing machines•No meals


Short haul, point-to-point routes, often to secondary airports

•Lower gate costs at secondary airports

•High number of flights, reduces employee idle time between flights


Frequent, reliable schedules

•High number of flights reduces employee idle time between flights•Saturate a city with flights reducing administrative costs per passenger for that city


Standardized fleet of Boeing 357

aircraft

•Pilot training on only one type of aircraft•Reduced maintenance inventory required because of only one type of aircraft•Excellent supplier relations with Boeing has aided financing•Average age of fleet 9years


High aircraft

utilization

•Flexible employees and standard planes aids scheduling•Flexible union contracts•Maintenance personnel trained on only one type of aircraft•20 minute gate turnarounds


Lean, productive employees

•High level of stock ownership•Hire for attitude, then train•Good employee compensation•Empowered employees•Automated ticket machines

Give People the Freedom to be Give People the Freedom to be ThemselvesThemselves

Hire for Attitude,Train for SkillsHire for Attitude,Train for Skills

Provide a Learning EnvironmentProvide a Learning Environment

Career Development and Growth Career Development and Growth OpportunitiesOpportunities

Don’t Keep Employees Who Don’t Fit the Don’t Keep Employees Who Don’t Fit the CultureCulture

CommunicateCommunicate

Be Flexible Do the Right ThingBe Flexible Do the Right Thing

Forgive MistakesForgive Mistakes

Recognize, Reward and Recognize, Reward and Everything!Everything!

Encourage People to Act Like OwnersEncourage People to Act Like Owners

SOUTHWEST AIRLINES EMPLOYEE PROFILE

SOUTHWEST AIRLINES EMPLOYEE PROFILE

Customer Focused

Team Player

Self Motivated

Takes Initiative

Open and Flexible to Change

Sense of Humor

Takes Pride in Work

Southwest Airlines in July told about 8,500 employees:

We love you, but if you go away, we won't mind.

And here are some lovely parting gifts.

Southwest said the costs -- $25,000 flat payments, plus continuing medical and dental coverage and travel privileges, would bring a $25 million charge against third-quarter earnings.

But it will save an estimated $20 million a year through 2012, it told investors. Meanwhile, the departing employees have option to stay back.

Fuel hedging can be a double edged sword

Current scenario Southwest reported a net loss of

$120 million in the third quarter 2008, its first quarterly loss since first quarter 1991 and the biggest quarterly loss in its history.

The airline made money on an operating basis, but it was pushed into the red by $238 million in accounting charges that reflected the decreased value of the fuel derivative contracts and other hedging impacts.

OCTOBER 16, 2009

Southwest Airlines Results Signal Clearer Skies.

Southwest Airlines Co. kicked off the third-quarter 2009 earnings with a small loss, but provided evidence that the worst days may be behind the recession-wracked industry.

It booked a net loss of $16 million. A year earlier, Southwest posted a loss of$120 million.

The loss was airline's fourth in the last five quarters after cash-strapped consumers and corporations cut back on

Distinctive competence

Outstanding human resource policies

Imaginative fuel hedging

All pervasive cost consciousness

Distinctive value chain advantages

Documents

Southwest Airlines 2010