Yin Yang: Southwest Airlines vs. The Industry 14 Apr 2005

19 comments Latest by Dave

The airline industry loses about $2,000,000,000 in Q1 because of high fuel costs and low ticket prices, yet Southwest Airlines 1Q profit nearly triples because of successful fuel hedging and higher traffic in March.

Hmm…The industry at large pins their losses on high fuel costs and cheap seats, and Southwest has cheap seats, hedges their fuel costs, and comes out way ahead. One of these methods is smarter than the other.

19 comments so far (Jump to latest)

Dan Boland 14 Apr 05

Back in business school about four years ago, we spent about a week talking about Southwest Airlines’ business model and how utterly brilliant it was; for instance, they only use one model of plane (or at least they did). The low-cost business model seems to be the only one that can weather the storms of the airline industry, but that alone isn’t enough. The leadership and vision at Southwest is astounding.

Steve, via Den, Fla and now RDU 14 Apr 05

Hedging can be a risky game. If you are hedged for higher energy prices and energy drops substantially you�re caught with �higher� fuel costs due to the cost of your hedge. Hedges against high prices are looking good now, a smart bet, but will it always be a smart bet? Plus hedging isn�t cheap.

I think that regional carriers have the benefit of running smaller, newer jets in smaller markets where they know they can fill the seats. Large carriers have expensive gates in airports around the world, thus a more complicated system to manage and difficult to maintain profitability.

The aviation sector is in for a huge overhaul. There�s big money from some very technically savvy/intelligent investors that see opportunities in commercial aviation. Smaller, cheaper, more fuel efferent jets (8-12 seats) will bring on-demand travel to a larger group of travelers.

Scaled Composites
Eclipse Aviation

Urbanchords 14 Apr 05

This is why I believe that we should stop giving financial relief to the airline industry. If one of them has figured it out, why can’t all of them? The SW model might now work for them all, but a variation might. SW has been making a profit for years, while the other airlines having been hemmoraging. Stop putting a band-aid on it, and fix the problem.

Then I could add Amtrak in this discussion, and say how our entire transportation sytem needs an overhaul. And how we you are trying to use the same tool for a variety of different task, but that is a different day.

Dan Boland 14 Apr 05

Then I could add Amtrak in this discussion, and say how our entire transportation sytem needs an overhaul.

Amen. Train travel is practically obsolete because the infrastructure is totally fucked. And I’d love to ask our current and previous Secretaries of Transportation how they could let that happen. Funneling money to a lost cause like Amtrak isn’t the way to keep trains alive. You have to rip out the existing tracks and start over. And does anyone that’s ever taken a trip on a train actually prefer a cramped, stuffy plane?

One of several Steves 14 Apr 05

A couple interesting things about the transportation industry:

As of a few years ago, added together cumulatively over 70 years or whatever the lifespan is, the American aviation industry was a break-even proposition. There were either periods of spectacular profits or spectacular losses. It’s a brutal business. And Southwest is good at doing what it does. Were it to try to be a sprawling, be-everywhere airline like United or American, though, it would likely be in the same mess. Really, SW is in a different business than the large carriers. They may all happen to fly planes, but they’re doing so in entirely dissimilar ways.

As for trains, its tempting to say that if the US government would just do trains right, trains would be viable. There is no rail system in the world, that I’m aware of, that makes a profit. Even in Europe, where train travel is extensive and widely used, it doesn’t make money without government support of some sort. Countries that have tried privatization have either run into loads of problems (UK) or had to end up propping up the privatized rail companies (Germnay).

Ed 14 Apr 05

It is also their internal structure. Southwest employees are often paid less than other airlines, but they receive better benefits and receive stock in the successful firm. There is also a much nicer atmosphere amongst the HR, SGA and field teams there.

Anonymous Coward 14 Apr 05

Secrets to Southwest’s success

Anonymous 14 Apr 05

I”m posting anonymously, since I’m related to an employee.

I am constantly astounded as to the business savvy that this company has. They do the small things right and it pays off big for everyone (Southwest has profit sharing).

Ed is right, employees are some of the lowest paid in the industry. New employees get paid a pretty low wage, but the benefits are very very good.

All in all, the keep it real. If you want to interview people about keeping it real in business, start with Southwest.

Also, Southwest is setting a trend for the rest of the industry. The reason they can survive with no meals, open seating and less accomodations than other airlines is because that’s their history. They don’t have the baggage of luxury travel. They never did it.

Furthermore, the recent reduction of free meals on other airlines is a sign that they are being forced down the path of the Southwest business model. The same goes for their labor costs. What is pays to work at an airline is going to normalize from a very high rate in the 90s.

The Southwest model is the future of air travel. Many poo poo their style, but it’s the only way to make money these days.

pb 14 Apr 05

SW is in a different business than the large carriers

How do you figure? They are all in the same business. SW just does it differently. There is nothing keeping the other carriers from operating like SW and JetBlue.

One of several Steves 14 Apr 05

pb, maybe stating SW is in a different business than UAL is overstating it. But they are definitely playing in very different spaces. It’s a bit analagous to saying that Hyundai and BMW are technically in the business of making and selling cars, but they’re working in totally different markets with totally different objectives.

As the article posted by anonymous points out, Southwest’s roots are more in providing an alternative to car transportation. SW started off by focusing on short-haul flights where, if they were priced right, they were economically competitive with a car trip and got you to where you were going quicker. That’s still the lion’s share of their business, although they have started doing more long-haul routes in the last several years.

An airline like United or Delta is in a different market. Their idea is that they can get you from almost anywhere to almost anywhere, including halfway around the world. For a long time, they banked on the fact that business and frequent travelers were aiming to get there comfortably.

Different markets, different objectives, therefore different business models. Part of the reason JetBlue has done well is they’ve taken elements of the SW business model and applied it a bit to the mainline carriers’ markets. But SW is still trying to do something very different than what American and the others are.

pb 14 Apr 05

So SW is different because it focuses on the short-haul but JetBlue does long halls. Oh, but it borrows practices from SW.

Yes, SW is trying to do something very different from American…it’s trying to make money!!

Christopher Fahey 15 Apr 05

Funneling money to a lost cause like Amtrak isn�t the way to keep trains alive.

While I’m sure Amtrak isn’t a paragon of corporate governance, I still bristle when I hear people call Amtrak a “lost cause”. I don’t know the numbers, but I beleive that Amtrak’s government subsidies are a tiny fraction of the kinds of breaks and benefits the airlines get from our tax dollars. If Amtrak is a lost cause, then you’d have to say that the entire airline industry is also a lost cause.

Countless American cities have no trains at all because of the way the government has played favorites with the airlines (and cars). Indianapolis has a magnificent, beautiful train station - and no trains! It seems like half of the flights people take in the US would have been easier for all concerned if it could be done instead by train, in particular in the Northeast.

Would it be incorrect to attribute much of Amtrak’s financial difficulties on the fact that the government has, through overt economic favoritism towards the airline industry, deliberately encouraged travellers to fly instead of take a train?

To speak to Steve’s point of how trains aren’t a profitable industry, even in Europe: I can only say that given the choice between using government leverage to favor a travel system dominated by feul-guzzling air transport versus one dominated by far-cleaner trains, you’d think the government would favor the latter.


Anonymous 15 Apr 05

If Amtrak is a lost cause, then you�d have to say that the entire airline industry is also a lost cause.


Dan Boland 18 Apr 05

I think you guys are taking my “lost cause” comment a little out of context.

The way I see it, Amtrak isn’t a lost cause because it receives government subsidies. It’s a lost cause because traditional rail service as a means of commercial travel is a lost cause.

The bottom line is that train travel in its current state faces major disadvantages when put up against the two most popular means of travel. Cars offer independence and convenience, which train travel can never truly offer. Planes offer speed and can cross oceans. Given the current infrastructure, train travel is simply too slow to be a legitimate viable alternative to traveling by plane in most cases (some regional travel being the exception; e.g. Chicago to Indianapolis). The only way for trains to truly be able to compete with planes is to put a more modern infrastructure in place to deliver higher traveling speed. To use a cliche, time is money.

Urbanchords 18 Apr 05

It�s a lost cause because traditional rail service as a means of commercial travel is a lost cause.

I would SO disagree with this. I hate driving. I would much rather have a bigger chair, have the freedom to move around, and let someone else do the driving than me having to do it.

Just for the record, one of the reasons that passenger trains are so slow, is that freight has the right of way. This is bass ackwards. Why are a bunch of parts more important that humans? That and they allow the trains to make too many stops. Take the state of Missouri for example. There is a lot of intrastate business done between St. Louis and Kansas City. You could fly, you can drive for 4 hours on a packed interstate, or you take the train. Is there a train that make a non-stop route between the two cities? NO! The train has to stop at a dozen or so stops in between. (Many are in a 15-20 minute drive from either downtown.) This makes the train slower than the car. If you took many of the stops out, you could probably save an hour off the trip.

Bryan C 19 Apr 05

Wow, I didn’t realize that Southwest had been that successful. BTW, anyone here watch the Southwest-focused “Airline” reality series on the A&E cable network? It’s an entertaining show and (while allowing for the magic of editing) it does Southwest credit that they were willing to participate.

Dave 15 Dec 05

The reason Amtrak struggles is because the goverment (federal,state,local) spend magnitudes more money on both air and auto. Amtrak and the entire train system in America gets a drop in the bucket in subsidies. It is odd when people say that Amtrak is losing money but don’t then realize most airlines are throwing money out the window at a faster rate, and that we really do subsidies (sp) the airlines with our tax dollars, both in airports and quite simply bailing them out every few years.