The Archetypical Low-Cost Air Carrier: Southwest Airlines

The Archetypical Low-Cost Air Carrier: Southwest Airlines

Former Student

ECON 211 Macroeconomics

Embry-Riddle Aeronautical University

Abstract

The seventh largest major domestic airline in the United States (US), Southwest Airlines, is commonly known or referred to as a low-cost carrier. Southwest Airlines is the only major airline that provides short-haul, point-to-point service in the United States. In fact it was the first airline of its type ever started; it has become the archetypical low-cost airline. The idea has proven itself so well, that other start-up airlines have based their company strategies upon the basics of Southwest. Today, there are two other low-cost air carriers (the other two airlines are considered national airlines and not major airlines) that are actively and aggressively competing with Southwest Airlines for business and profit turning. The three American low-cost air carriers are currently posting profits even in light of the US economy's current state of affairs, with Southwest Airlines first, JetBlue second, and Air Tran third, in profits. How is this possible when the major six airlines are reporting losses of millions and millions of dollars each quarter? The answer to this question begins about 30 years ago.

The Archetypical Low-Cost Air Carrier: Southwest Airlines

The product one airline can offer is the same exact product the next airline can offer, a single available seat mile (ASM) for sale. The difference between the airlines lies in the marketing, routing, pricing, executive decision-making, and the operating strategies that each airline chooses to espouse regarding that one product. It is through these strategies that an airline must find productivity in total revenue passenger miles (RPM) flown to be profitable. When the ASM is filled with a fare-paying passenger, sales or income is recognized, and it converts to an RPM. The relationship between the ASM and RPM are directly related and is expressed in percentages known as Load Factors (LF). This LF is a management tool used to determine the efficiency and health of the airline. It is necessary to keep these two variables in balance of each other. Southwest Airlines load factors are represented in Figure 1 and 2.

RPM

LF = ASM

Many airlines choose to use the hub network, which induces costly effects in all areas of the airline. It is the point-to-point; short haul airline that is capable of keeping costs low and turn profits, Southwest Airlines has proven just that.

Southwest Airlines survived the initial years of deregulation, years of cyclical business cycles that may have led to recessionary and or inflationary periods, and its 25-year

post-deregulation financial condition remains strong regardless of current economic trends. The airline management has made sound decisions in a governed airline market as well as an ungoverned airline market. It chooses to maintain a conservative financial philosophy and growth is only realized when the company can afford it. Many airlines have been faced with losses on a continuing basis, whereas Southwest has performed consistently and remain unsurpassed through 30 years of service.

Figure