Question:

Briefly outline and evaluate the Low Cost Airline Model,Examine each element of the economic production function  for a Low Cost Airline of your choice analysing the ways in which the company you choose manages each of these elements.Undertake a SWOT analysis of the company is likely to face over the next 10 years, including macroeconomic conditions and any proposed changes to transport infrastructure.

Answer:

Southwest airlines is a very successful low cost airline service operating out of USA which started
offering air travel at low air fare in the beginning of 1970s. It is known for its point-to-point services
which avoids travel to major hubs to get access to connection flights. It is unique in the fact that it has
been able to generate profits for the 42nd consecutive year as per its annual report to shareholders for
2014. Its consistent profitability has contributed to its image as a stable participant in the stock markets
resulting in increased stock prices over the years recently making it the top performer of the S&P 500
list. Southwest Airlines is the only US Airlines which continues to be investment grade-rated by the three
major credit rating agencies. Southwest was recognized as the “2015 Airline of the year” by Air
Transport world for its distinguished performance in 2014. For the past 21 years Southwest has
appeared in the list of World’s most Admired Companies brought out by the Fortune magazine and it is
the only airline which was included in the top 10 companies of the list (2014 Annual Report, 2015).

The special services offered by Southwest include vacation deals which offer the best rates for travel as
well as accommodation for its customers. While retaining its focus on the provision of low cost services
to its customers, the collaboration with other segments which make travel and stay a meaningful
experience have increase the overall potential and appeal of the business (Southwest 2015).

The capital of the company is handled in such a way that there is simultaneous focus on both the costs
and the revenues. The company resorts to hedging to ensure profitability and protect the airlines
against increasing fuel expenses. Priority is given to deriving the maximum out of all the investments, be
it maximizing the utilization of the fleet they have at their disposal or in using cost cutting measures
while ensuring an enjoyable travel experience to its customers. It employs the method of incremental
cost of accounting to provide the customers with the Rapid Rewards Programme. The focus has been to
invest only in Boeing 737 aircrafts with a maximum of three crew members and modernizing the existing
fleet to cut down on future expenditure. With its recent entry into the international market Southwest
hopes to continue to provide air travel at the lowest rates possible. Southwest had a strong cash and
short term investment as big as $3 billion with full access to bank line of credit (2014 Annual Report,
2015).

The unique work culture at southwest ensures satisfied labour which is reflected through its policy of
‘Employees first, customer second’. The employees are instilled with the warrior spirit, motivating them
to be proactive in providing assistance to the customers and evolving innovative and cost cutting
measures to make air travel enjoyable. The cordial workforce is also extended flexible working hours to
ensure their job satisfaction and thus in turn improve their work efficiency (Southwest 2015).

For a long time southwest had operated only at midsized cities and secondary airports to avoid the
congestion at the main airports and also as a cost cutting measure. But recently southwest has
reconsidered its practice and acquired some assets from ATA airlines in 2008 at $7.5 million to gain
access to the 14 landing slots it had at La Guardia Airport at New York. It has also acquired slots at
Washington Reagan national. Southwest is seeking to cover new grounds by accessing the areas
previously catered to by AirTran which it acquired (2014 Annual Report, 2015).

The entrepreneurship at Southwest focuses on creating a brand name and ensuring that they remain the
airlines providing the lowest airfares to such an extent that it has been feared by other low fare airlines
that if Southwest reduces its travel fare any further , it will drive the others out of business.
Entrepreneurship has prioritized the fact that luxury can be compromised and alternate entertainment
can be provided through low cost measures and by making all purchases while onboard using credit
cards only so that all customers are ensured maximum satisfaction. Excluding bags from extra charges,
travelling without tickets, allowing pets into the aircraft, not proving complementary meals onboard and
maximum utilization of the existing workforce and fleet is done for improving the appeal of its services
to the customers (Southwest 2015). The entrepreneurship also ensures that the existing fleet is
modernized, the destinations are chosen carefully and in phases such that ticket charges for short
distance destinations can be comparable to travel expense by road (2014 Annual Report, 2015).

The technology being relied on by Southwest from the beginning of its services is the Boeing 737. The
annual report of 2014 says that Southwest aims to have 700 Boeing 737 aircrafts by the end of 2015. In
its attempt to expand its market in the domestic front as well as internationally, Southwest aims to
acquire more Boeing 737’s in addition to modernizing its existing fleet to avoid unnecessary expenditure
and wastage (2014 Annual Report, 2015).