Southwest Airlines Case Study

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Southwest Airlines

MGT 450

Carol Williams

March 18, 2012

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Introduction

Southwest Airlines was incorporated in Texas and commenced Customer Service on June 18, 1971, with three Boeing 737 aircraft serving three Texas cities-Houston, Dallas, and San Antonio. Today, Southwest operates more than 550 Boeing 737 aircraft among 72 cities. Southwest topped the monthly domestic originating passenger rankings for the first time in May 2003. Yearend results for 2010 marked Southwest's 38th consecutive year of profitability. Southwest became a major airline in 1989 when it exceeded the billion-dollar revenue mark. Southwest is the United States' most successful low fare, high-frequency, point-to-point carrier. Southwest operates more than 3,300 flights a day coast to coast, and is the largest U.S. carrier based on domestic passengers boarded as of March 31, 2011, as measured by the U.S. Department of Transportation. On May 2, 2011, Southwest acquired Orlando-based AirTran Airways and expects to complete the integration of the two airlines during the next several years. (Southwest Airlines, 2012)

Southwest Airlines like any company is subject to the changing economy. They are affected by supply and demand just like any other company. They fly to secondary airports in order to keep their costs down. By keeping their costs down they keep up with the shift in supply and demand. They use the elasticity of their product to their advantage. Low prices keep pleasure travelers flying and business trips more cost effective. The company keeps its costs down by hedging their fuel purchases. They are a no frills airline which also keeps costs down. They continue to experience growth. Southwest is adding more destinations and adding to their fleet. Southwest competes with all other airlines that fly domestically. Their prices and their marketing strategy set them apart from other airlines. The business cycle affects Southwest in the same

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ways that any other company, however their prices are what keep them doing as much business as previous years and has led to their growth. The recession may cause Southwest to miss sales because of their already lowered costs of operations. Expansionary monetary policy will affect Southwest by giving consumers new jobs, and lowering taxes. Also the building of new airports will give Southwest new destination to fly to. International markets are a hurdle that Southwest is looking to overcome. "Southwest Airlines Swallows Up AirTran ... Goodbye AirTran!" (BoardingArea)

The interest rates affect Southwest in that higher interest rates keep the company from borrowing money to expand. High interest rates also keep consumers from using their credit cards to buy tickets. Southwest is a company that adapts to meet the market as it changes.

Determinants of Supply, Demand and Equilibrium

Southwest is America's number one low cost airline. Low cost airfares create a large attraction which appeals to customers who are looking for a fast, easy, inexpensive way to travel around the United States.(harpercollege.edu) One of the major factors that helps Southwest Airlines keep their fares so low is they have their planes return to the port of departure every night. They also offer the customer the option of lower fares to ensure all their flights are full. The airline also maintains their lower costs by flying into smaller airports, they offer limited food and beverage choices, and their pilots are very flexible with their schedules. These factors all have a direct effect on the supply and demand of Southwest Airlines.

Since travel is always in high demand, whether for business or pleasure it is crucial for airlines to create the best, most efficient way for the customers to do so. This is where Southwest has truly surpassed its competition. The major player in determining supply and

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demand is price. With many other factors involved within an airline's interworking, price is not solely determined on customers flying from point A to point B. The airline must take into consideration the price of fuel, pilot and attendant salaries, airport fees, maintenance costs, to name a few. Some other non-price determinants of demand with an airline would include; expected price being what a consumer might expect to pay during a specific time of year (major player), and tastes and preferences or known as "everything else" within the supply and demand spectrum. (Healy, 2008)

The equilibrium is determined where there is no further tendency to change. This works hand in hand with the supply and demand curve and for Southwest Airlines it is directly related to the price of the flights. For customers and airlines when the price and cost is low then the demand grows and therefore the supply increase as well.

Reasonable Elasticity

Elasticity is one of the most powerful metrics in business. In a single number, elasticity pins to the wall the relationship between percentage changes in price and quantity. In theory, if the percent change in quantity purchased by customers is greater than the percent change in price paid, demand is elastic. Alternatively, if the percent change in quantity is less than the percent change in price, demand is inelastic. (Cook V. J March 23, 2008).

In the airline industry, price elasticity of demand is separated into two segments of consumers and is considered to be both elastic and inelastic. A good example of how elastic demand is related to the airline industry is in relation to travel for pleasure. Pleasure travelers will be affected by the amount of travel they do based on the demand increase or decrease, affected by

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prices