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Southwest Airlines

Brief Introduction
Airline industry can be divided into two sub-sectors. The first is traditional airlines such as American Airlines, United Airlines and Delta Airlines. These carriers have global air networks and serve both long-distance and medium-distance routes. The second is low-cost airlines such as Southwest Airlines and JetBlue, which mainly operate medium or short distance routes and only serve domestic clients. In today¡¯s competitive environment with high oil prices, most traditional airlines suffer huge losses while lost-cost carriers still record sizable profits due to their unique strategy and flexible operations. Southwest Airlines epitomizes the business model of low-cost airlines.

Low Cost and High Efficiency
The most important asset of Southwest Airlines is its low operating cost, which is currently the lowest in the industry. Over the past thirty years air fare price has been keeping going down and therefore a low cost structure places Southwest Airlines in a competitive advantage over its peers. It can price its fares at or even below industry level but still makes money. Chart 1 compares its unit cost with other major carriers. Southwest Airlines¡¯ unit cost is only 8 cents per ASM, about 58% lower than Delta Airlines and 29% lower than JetBlue. Given Southwest Airlines¡¯ low stage length, this cost saving is even more encouraging, signifying the company¡¯s sound cost control.

If we dig more deeply, we can compare Southwest Airlines¡¯ cost structure to that of JetBlue (Chart 2). Staff costs and fuel costs are the two largest expenditures. Due to successful oil hedging, fuel costs only account for 19% of Southwest Airlines¡¯ total expenditure while 29% of Jetblue¡¯s. In the high oil price environment, this cost savings translates into significant earning improvements. In the meanwhile, Southwest Airlines allocate more to staff costs, 40% of the total compared to only 26% of JetBlue. Higher employee compensations are powerful incentives...