Southwest Airlines: SWOT Low-Cost Carrier

Southwest Airlines: SWOT

Low-cost carrier Southwest Airlines airline has long been a consistently successful company with a record of more than thirty years of profitability in the increasingly beset airline industry. The airline industry as a whole is still suffering from consumer fears about terrorism, higher fuel costs, decreased business demand due to telecommuting, and vacation flyer's ire about cutback in their perks of in-flight meals. These industry threats, combined with labor disputes, are the reasons that United Airlines, Delta, and Northwest are all now operating under Chapter 11 bankruptcy protection. (Zimmerman, 2005)

Yet low-cost Southwest remains strong. Despite Hurricane Katrina, the company remains strong, boasting its third fiscal quarter gain of 2005. The company earned $174 million, an increase in net income of more than 46% from a year ago. (Zimmerman, 2005) One of the reasons it can do so is because such offers as "ravel between select Midwest cities for $39 one-way with 14-day advance purchase!" (SW Website, 2005) In other words, the low-cost company is highly cost efficient. "Even after doling out richer (and no doubt well-deserved) salaries to its employees in recent years, the company's cost structure is still...buttoned-down." (Zimmerman, 2005) As always, Southwest, even after 9/11"kept its employees happy and their compensation fat when other airlines could do neither. It expanded into several major new markets while others were quitting some cities altogether and reducing service elsewhere. It capped prices to deal with the intense fare wars encouraged by the Internet. It hedged its fuel costs while others watched helplessly as prices doubled in a matter of months." (Maynard, 2005)

The larger airlines seem to be floundering, thus Southwest is not threatened by the Chapter 11 trio. However, rival JetBlue is trying to match capacity to demand, flying smaller planes during non-peak times or to second-tier markets, of course, makes sense. But even JetBlue is not as streamlined as Southwest. JetBlue flies two kinds of aircrafts, Southwest only one. "Indeed, with the exception of fuel costs, Southwest did its business during the third quarter with even more cost efficiency than it did during the comparable period in 2004." (Zimmerman, 2004) The hedging contracts that have protected Southwest from spikes in the price of oil.

But these contracts will offer less protection starting in January. "Paying market prices for a third of its fuel needs could add as much as $600 million to its bill next year, according to an analysis by the federal Bureau of Transportation Statistics," almost twice "the $313 million profit that the airline made in 2004, and well above the $440 million analysts expect it to earn this year," meaning that Southwest's main competitive threat really comes from the end of its previous business strategy. However, "Southwest is planning for the day when things get even worse. The airline is already looking at 2010, when its fuel hedges completely disappear, leaving it with a fuel bill that would be $1.4 billion higher than in 2005 - an increase equal to 20% of its current revenue - if prices stay the same as they are today. Southwest's fuel costs now average $15 a passenger, according to a study by the federal statistics bureau that will be released this week. That compares with $9 a passenger in 2000." (Maynard, 2005)

However, Southwest is reluctant to raise fares, as it has branded itself as a budget airline, and it has no real perks to eliminate for passenger or staff. Some industry analysts suggest it has a little wiggle room with salaries, but will that lead to the labor disputes that blighted the major carriers?