Deconstructing… Southwest Airlines

A recent Wall Street Journal article provides some insights about challenging times for Southwest Airlines, where revenue growth has slowed, and its cost advantage from hedging fuel costs has slipped. ( “As Competition Rebounds, Southwest Faces Squeeze,” 27 June 2007 )

Copycats: Southwest’s competitive advantage has been low costs and efficiency, but other airlines (e.g. JetBlue) have learned the same tricks.

Cost metric: Its “unit cost” — the cost per seat, per mile flown — was 8.8 cents last year, up 17% from four years ago. The company expects cost-per-seat to continue rising and then level off in 2010.

Prices: Southwest raised ticket prices six times last year, which boosted its average fare by 11.4%, but passengers are starting to resist fare increases.

Profits: Southwest probably won’t hit its 15% profit-growth target this year.

Future plans: CEO Gary Kelly plans to shake things up. He wants to identify underperforming flights with an eye to shifting planes to more lucrative routes. To woo business travelers, he may opt for assigned seating. He’s requested bids on in-flight entertainment systems.

Technology: Southwest is using new software (developed in-house) to squeeze 50 more hours of flying time out of its fleet each day, the equivalent of four additional planes.

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