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Apr 25, 2023

Southwest Airlines has long been one of the stand-out performers in the U.S. airline industry. It is famous for its low fares, which are often some 30% lower than those of its major rivals. This arc was balanced by an even lower cost structure, enabling it to record superior profitability even in bad years such as 2002, when the industry faced slumping demand in the wake of the September 11 terrorist attacks. Indeed, from 2001 to 2005, quite possibly the worst four years in the history of the airline industry, while every other major airline lost money, Southwest made money every year and earned an ROIC of 5.8%. Even in 2008, an awful year for most airlines, Southwest made a profit and earned an ROIC of 4%.

Southwest operates somewhat differently from many of its competitors. While operators like American Airlines and United Airlines route passengers through hubs, Southwest Airlines flies point-to-point, often through smaller airports. lily competing in a way that other airlines do not, Southwest has found that it can capture enough demand to keep its planes full. Moreover, because it avoids many hubs, Southwest has experienced fewer delays. In the first eight months of 2008, Southwest planes arrived on schedule 80% of the time, compared to 76% at United and 74% at Continental.

Southwest flies only one type of plane, the Boeing 737. This reduces training costs, maintenance costs, and inventory costs while increasing efficiency in crew and flight schedules. The operation is nearly ticketless, with no seat assignments, which reduces cost and back-office accounting functions. There are no meals or movies on the flight, and the airline will not transfer baggage to other airlines, reducing the need for baggage handlers.

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