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Case Study in Managerial accounting Case 1: Southwest Airlines Part A : General Information Company Name: Southwest Airlines Co. Company is traded on the New York Stock Exchange trade market (NYSE) with symbol LUV. Corporate Headquarters are located at the physical address: 2702 Love Field Drive, Dallas, Texas 75235. Corporate Web Site: http://www. southwest. com. Corporate Web Site for business travelers: http://www. swabiz. com/ Industry Classification Company operates in the Industrial Sector – Services, and Industry – Regional Airlines.
According to the Standard Industrial Classification System (SIC), company belongs to the industry group 451: Air Transportation, Scheduled, and Air Courier, and particularly to the industry 4512: Air Transportation, Scheduled. Companies covered by this classification code are primarily engaged in furnishing air transportation over regular routes and on regular schedules, including air cargo carriers, scheduled and air passenger carriers, scheduled (DOL). According to the North American Industry Classification System (NAICS), Southwest Airlines relate to the Code 481111: Scheduled Passenger Air Transportation.
Industry description per this classification is as follows: “This U. S. industry comprises establishments primarily engaged in providing air transportation of passengers or passengers and freight over regular routes and on regular schedules. Establishments in this industry operate flights even if partially loaded” (NAICS). Industry Overview The United States air carriers transport about one third of the amount of worldwide traffic, serving over 1. 5 billion passengers a year.
Over the past two decades, air travel has grown at an average of about 5% per year. In general, the annual air travel growth has been twice as much as the annual growth in GDP. Productivity improvements and cost management have been two of the greatest concerns for US airlines, especially with sharp recent increase in the oil prices. As market competition keeps increasing, airline management is trying to improve productivity, using different methods to reduce unit costs, and increasing total network revenues without raising fares.
Advances in computer and internet technologies have allowed for airlines to distribute their products to customers through an alternative method, striving to improve the overall performance efficiency (Mistry, Moy, & Owens, 2003). In 1978, the United States have “deregulated” their airlines. Before, the government dictated airfare, route networks, and other operational requirements for each airline in the very details. Since deregulation, airlines have been largely free to negotiate their own operating arrangements with different airports, enter and exit routes easily, and to charge airfares and supply flights according to the market demand.
The entry barriers for new airlines were lowered in a deregulated market, and so the U. S. has seen hundreds of airlines start up. This has produced much higher competition than before deregulation in most markets, and average fares tend to drop 20% or more, stimulating new sources of demand (Aviation Explorer). General Description of the Firm’s Operations, Organization, Products, and Markets Southwest Airlines Co. runs as a passenger airline that provides scheduled air transportation in the United States. As of December 31, 2007, the company operated 520 Boeing 737 aircraft and provided service to 64 cities in 32 states.
Founded in 1966 and incorporated in 1967, Southwest Airlines is the world’s third-largest airline by passengers carried and has been profitable every year since 1973. Actually, Southwest Airlines is the only major airline carrier to remain profitable in every quarter since 9/11, in comparison with competitors who have posted significant losses or even declared bankruptcy. The company was able to handle perfectly well the post-9/11 crisis situation and outperform all its competitors in almost all aspects of accounting performance.
Even during 2001, one of the worst years in United States aviation history, Southwest Airlines remained profitable, earning $511. 1 million on revenues of $5. 55 billion (Flouris & Walker, 2005). Over the years, company sustained low operation costs and tickets prices following well-developed strategy. Among other measures, it was able to keep prices low by flying only one airplane type, minimizing service and maintenance expenses, and convincing employees to cut gate turn-around times and make the airline more efficient (Fitzpatrick, 2005).
Southwest does not use the standard, traditional “hub and spoke” flight routing system, accepted by most of the major airlines, preferring instead the “Point to Point” system, performing more than 3,200 flights a day (most of them are direct flight). Currently, Southwest does not serve any destinations outside the United States, but it is planning to begin international services or ticket international flights in 2009 (Wikipedia, 2008).
The company has established a code sharing partnership with just a single airline on the USA market – ATA Airlines, and the plans of international expansion were partially based on this partnership. However, in March 2008, ATA Airlines declared bankruptcy and filed for Chapter 11 protection after it lost a key military charter contract in the middle of skyrocketing fuel prices, leaving Southwest Airlines alone (Dance, 2008). In terms of the captured US market share, Southwest Airlines are the second largest air carrier on the domestic market. Part B: Cost Behavior and Cost-Volume-Profit (CVP)
Southwest Airlines, as the most successful low-cost air carrier on the market, performs thorough evaluations of the possible effects of any operational decision on the amount of designated flights, their roots and related airports on company revenues, operational costs, and net revenues. Every strategic or tactical move is researched by preliminary estimate of the break-even point, where the level of the potential air tickets sale represents the end effect, when generated revenue will be equal to the related expenses, resulting in zero net profit.
The unique Southwest Airlines operational cost structure can be characterized by the following features: 1. Airplane space utilization. The Southwest Airlines offers exclusively coach seats with no business or first class offerings. That allows maximizing the aircraft useful space utilization in every flight. This approach might be less popular among passengers who care not able to fit into the regular seats, since company is enforcing the rule, requiring purchasing an additional seat in the case. 2. Type of Aircraft. The Southwest Airlines is the only major US airline, whose fleet consists solely of one type of airplanes – Boeing 737s.
The uniform planes allow cutting significantly on service and maintenance costs, on the spare and replacement parts inventory, and, among other advantages, on the pilots and maintenance crew training expanses and on significantly increased flexibility of the operations (Flouris & Walker, 2005). 3. Choice of markets. At the moment, Southwest Airlines operate exclusively on the US consumer market, targeting (which is makes this airline different from all its competitors) the potential customers who would usually drive the distance than fly.
Southwest can offer a service priced at the level that it might be economically more effective than driving. By offering such short distances flight arrangement company ensures that it is the only airline to cater for such flights (Smith, 2004). 4. In-flight services. Southwest Airlines chose not to offer in-flight meals to its passengers, providing limited amounts of peanuts and other snacks. Since most of the flights are relatively short, it might be considered as minor inconvenience by the hungry customers.
Forced to cut operational expenses, other airlines are also switching to eliminate previously provided complimentary in-flight meals. Southwest Airlines also does not provide some “luxury” features, available on other carriers, as television in backseats, internet connection, or any other means of electronic entertainment (Serwer, 2004). 5. Reservation system. Southwest Airlines does not use any intermediate travel agencies and therefore it is able to cut expenses on commissions, making more than 30 percent of the bookings over the internet (Smith, 2004). . Method of ticketing and seats assignment. Company’s ticketing and seats assignment procedure is simple and straightforward, following the reusable plastic boarding passes and direct rule “first come – first serve”, helping to cut additional expenses on the registration and associated extra paperwork. The boarding procedure also allows turning planes around much faster than at the competitors. During fourth quarter 2007, company enhanced a boarding procedure, reducing the time customer spends in line at the gates.
The enhanced boarding process automatically reserves a place in the customer’s boarding group at the time of check-in (SEC, 2008) All the Southwest arrangements and policies are serving the main goal of the operations: to be “a primarily short-haul airline that flies directly from city to city, with just one type of plane -the Boeing 737 – and the lowest costs”. There are plenty of customers that, while recognizing certain disadvantages of the business offerings, are ready to accept them as far as they are gaining significantly from the cheapest ticket prices on the market.
Southwest’s average passenger airfare is $105. 37 and the average passenger trip length is about 836 miles (www. southwest. com). Recommendations Southwest Airlines are utilized the costs calculation approach in every tactical and strategic decision-making. Due to the highlighted business approach, focused on the low-cost short flights arrangements, company is extremely flexible in capturing new areas of operations. While choosing the new airports to establish its presence, it would be recommended to center its attention on the smaller airports, rather on the major.
It will give the better leverage for the business negotiations, address the new customers with lower amount of the possible flight arrangements, and avoid frequent delays, usually associated with busy airports. Part C: ABC, Job Order, and Process Costing and Cost Allocations Activity-Based Costing To be successful in business operations, every company has to synchronize its activities and processes with the corporate mission statement, being consistent in delivering the product. Southwest Airlines promotes itself as an on-time, low cost provider of air travel, delivering the promised basic services to the customers.
Company effectively aligns its organizational structure and all related operations on providing these consumer services on the announced mission and goals. As a result, Southwest Airlines is the most effective low cost provider of air travel in the United States. Throughout the periods of economic downturns, company was able to sustain its profitability, while its major competitors could not. Activity-Based Costing (ABC) is one of the tools, actively used by the company, to determine, confirm, and control low cost products, services and procedures in the process of business operations (Pryor).
ABC system is significantly more efficient costing approach than a traditional one for the Southwest Airlines, since it is emphasizing costs allocation to the key operational activities instead of the regular costs allocation to the functional departments or other organizational units (Horngren, Sundem, & Stratton, 2002). ABC Implementation at Southwest Airlines Activity-based costing concept has been tested by many manufacturing and service organizations, but has been finally implemented just in a small amount of them, in spite on the proven overwhelming advantages.
Southwest Airlines was one of the first airline carriers that adopted it and is using it successfully thereafter. There are certain basic conditions, fully applicable to the Southwest Airlines, which made the ABC approach to be a good fit to the company (Ali, 2003): •Company is providing exclusively customer-oriented services. •The cost drivers proved to be major sources of motivation and decision making. •The cost and value of the provided services can be clearly defined. •The formal structural accountability framework has been established. Horizontal thinking and staff creative approaches are encouraged. •Practical efforts to utilize effectively equipment, human resources, and related technologies. •Benchmarking is performed regularly to improve performance on a continuous basis. As a result, the company is able to test effectively and introduce efficient measures that serve the main ideology: providing quality flight services to satisfied customers, while keeping the flight tickets prices the lowest in the industry. The company’s pricing strategy is to keep fares consistently low regardless of the general market trends.
Therefore, to be profitable, the Southwest Airlines is required to consistently increase productivity of its personnel and efficiency of the equipment utilization. Examples Southwest Airlines is committed to the short and frequent flights between the destinations that are, in average, of just four hundreds miles, or an hour flight, apart. It averages 10. 5 daily flights using each gate, while the industry average is 5. 0 daily flights, showing the much higher facilities utilization rate. So, the overhead cost of the idle facilities has been significantly reduced.
Similarly, the ground crew productivity is considerably higher with increased amount of the served flights (Freiberg & Freiberg, 1996). While most of the airlines adopted hub-and-spoke approach, following the air industry deregulation in 1978, Southwest chose point-to-point strategy. This system that was completely different and unique at the time in comparison with all the established industry standards helped the company to improve planes utilization (a typical plane Boeing 737 in the Southwest fleet is used in average 11. hours a day – refer to the Attachment B, while industry average at other airline carriers is about 8. 6 hours only) and align perfectly well with the flights frequency increase target, while keeping uniform mid-size planes and short flight segments. Interesting, that airline industry experts later recognized the objective advantages of the revolutionary Southwest approach and followed its steps to increase profitability. Per Boeing commercial trends review, “competition among airlines has driven a steady increase in flight frequencies, including new non-stop point-to-point service.
Boeing sees no reason to expect this trend to change” (Boeing, 2005). The related trends are graphically articulated in the Attachment C. Southwest Airlines realized that the company can generate revenue only when its planes are in the air, so any time spent on the ground, can be considered as burden and should be decreased as much as possible. So, one of the obvious measures of cost cutting was directed on arranging of minimum possible airplanes idleness spending time on the ground.
At the beginning of its operations, Southwest could decrease the plane turn-around time to 10 minutes, cutting as much as 25 percent of operating expenses. With recently changed, much more complicated, ground procedures and overcrowded airports, company could preserve the prominent planes turnaround time as low as 20 minutes, which is still half of the industry average. All the members of ground crews are trained for the most efficient operations and are committed to sustain the minimum possible ground time for the planes (Freiberg & Freiberg, 1996).
Part D: Budgeting and Variance Analysis Budgeting Advantages and Shortcomings Budgeting and forecasting is essential for every business organization, providing the following main advantages (Horngren, Sundem, & Stratton, 2002, p. 271): 1. Budgeting encourages managers on all levels to review and formalize their expectations of the future activities and associated funds allocation. 2. Budgeting provides certain expectations that are later use as benchmark against the actually received outcomes. . Budgeting helps managers to correlate their units’ operational goals with the whole organization plans. In spite of the huge theoretical budgeting advantages, many companies suffer from inefficient budgeting processes which do not stimulate achievement of targets and are not giving noteworthy assistance to the operational management. Budgeting consumes an enormous amount of executives’ time, forcing them into endless rounds of time-consuming meetings and tense negotiations.
Instead of serving to increase cooperation between managers and their departments, it might cause the severe confrontation, creating distrust and ill will between colleagues, and even distorting incentives, while motivating managers to promote activities that at the end are not in the best interests of the company (Jensen, 2001). The most frequent problems with traditional corporate budgeting are: •Excessive structural use of top-down budgeting processes, irrelevant to efficiency requirements. •Lack of clarity and consistency in budgeting procedures, responsibilities and timelines. Failure to follow-up and analyze variances. •Inability to deal transparently with flexible environment changes to budget assumptions. •Low effectiveness of the manual processes, creating an administrative burden. Budgeting at Southwest Airlines Southwest Airlines, famous by its innovative and non-traditional approaches, was one of the first companies that abandoned traditional “command-and-control,” top-down approach to budgeting and planning and adopted a new approach of rolling forecast and the empowerment of all company employees to drive better results (Marshall, 2007).
Rolling forecasting and budgeting is the process of simulating profit and loss accounts for a company on rolling basis. In the conditions of the rapidly changing business environment, Southwest Airlines use of quarterly rolling forecasting is giving more flexibility and is allowing effective utilization and analysis of all available information and future trends, encouraging the company decision makers to be more pro-active and innovative. While requiring more frequent updates, the budgeting process appears to be less costly and time consuming.
Flexible Budget As a company, using activity-based costing system, Southwest Airlines has applied an activity-based flexible budget, allocating budgeted costs for each activity and related cost drivers. Company is using the flexible budgeting for operational performance evaluation, comparing the practical outcomes to the expected results through developed flexible budget for the same actual level of activity. Based on the character of the company’s operations, it is heavily depends on the fuel pricing, which soared drastically over the last few years.
The Company’s 2007 CASM (cost per available seat mile) increased 3. 4 percent compared to year 2006. Approximately 80 percent of this increase was solely due to the increase in fuel expenses, in spite of the hedging, heavily utilized by the company to get some protection from the unexpected fuel prices fluctuations. Refer to the Attachment D to review the trend of the consumed fuel cost share in overall company’s operating expenses over last 5 years (SEC, 2008).
The Southwest Airlines was able to lock in more than 70% of the total fuel amount, it expected to consume this year at about $51 a barrel, far below the current level of the crude oil prices, flirting now with $135 a barrel. In comparison, other large airlines have arranged this year just about 20% to 30% of their total fuel consumption at an average cost of $100 a barrel (Pae, 2008). Responsibility Accounting As result of the top management leadership approach, Southwest Airlines tend to lean towards decentralized decision-making style in its daily operations.
Top management concentrated its efforts on strategic company development, while leaving the day-to-day processes and decision-making tasks to lower-level personnel. Due to the high level of the decision making dispersion, evaluation and monitoring of the operating effectiveness of each manager and part of the organization under his supervision, is performed through responsibility centers performance (at the level of cost centers) (Walther, 2008). Successful implementation of the responsibility accounting allowed Southwest Airlines to adapt quickly to the sharp changes in the business environment.
For example, the ground station managers have enormous operational responsibilities. Each station is established to perform independently like business unit, and the managers are fully responsible for promoting Southwest strategy and business culture at the workplace. It includes accountability for recruiting and hiring new employees, and organizing and supervising professional functions, job scheduling, personnel training, and other tasks, covering full range of the ground crew operations.
Customer service agents are entrusted the highest level of decision making responsibility, having major authority to handle various conflicting and challenging situations, like, for example, managing seats over-sales, baggage related problems, flights cancellations and missed connections, and others (Freiberg & Freiberg, 1996). Part E: Cost, Profit, and Investment Center Decentralized Decision Making From the beginning, the Southwest Airlines was trying to delegate the decision-making authority to its managers throughout all levels of organization.
Managers on lower levels occasionally have the best available information on the local conditions, and therefore they are able to make more efficient decisions in the shorter time frames, instead of delegating the decision making process to their superiors. The innovative atmosphere and employees-oriented human resources company policies encourages and empowers employees and managers on all levels of authority to develop their own professional decision-making abilities and management skills to operate the most effectively for the airline interests.
Due to the high probability of the airline carrier potential complications on the different stages and operational processes, the local manager with appropriate level of the decision-making authority is able to find optimal ways to resolve the conflicts, technical and organization malfunctions with the lowest possible deviation from the established flights schedule. Commitment to the exceptional customer service is recognized trademark of the organization.
Ginger Hardage, Southwest’s senior vice president for corporate communication, shared a true story about one Southwest pilot and his out-of-box decision making: “On September 11, 2001, after terrorists had brought the planes down, all other planes that were already in the air were grounded. A Southwest plane was directed to land at an airport that Southwest did not serve, and the passengers and crew were put up in a hotel.
When Southwest management called the hotel to inquire about the passengers and crew, they were told that no one was there — the pilot had taken everyone from that plane out to the movies” (US Chamber of Commerce). Economic Value Added Performance Evaluation One of the measures of the company operations profitability, heavily used by Southwest Airlines, is Economic Value Added (EVA). EVA can be presented as the difference between the net operating profit less adjusted taxes (NOPLAT) and capital charge which is based on the cost of capital times the net operating assets employed.
An EVA management system focuses not just on the airline operations net income increase, but on the task of making these operations highly profitable focusing on the satisfaction of all shareholders. This approach aligns the interests of employees with shareowner value to promote and reward high performance. Company is expected to develop in depth the following features that are required for successful adoption of this business model (Madanoglu, Chang, & Chu, 2004): •High decentralization of the ownership accountability. •Developing strong business understanding throughout all employees. Encourage economic discipline on all levels of the managerial decision making. •Establish the business culture encouraging and rewarding for efficient decision making and development of the high performance teams. Comparing performance of the several major US airlines between 1990 and 1999, the data clearly reveals that the United Airlines and American Airlines led all the industry in terms of the NOPLAT with $11. 948 and $11. 815 billion respectively, whereas Southwest was ranked just fifth with significantly lower NOPLAT of $3. 78 billion for the same ten year period of time. However, EVA analysis shows that the Southwest Airlines was the only company that managed to create economic value for their shareholders with an average of $32 million (Attachment E), while all other airlines failed to earn a rate of return over their cost of capital and thus the firms destroyed economic values (Madanoglu, Chang, & Chu, 2004). Balanced Scorecard So, how come the company was able to be profitable even on the most drastic industry downturns?
The company established the strategy of achieving desired financial outcomes by providing the range of services to the customers to keep them happy, while decreasing operational costs. We have reviewed already several measures, developed by company in order to support both articulated strategic tasks. To be able to align properly the company strategy with practical actions of all managers and employees on daily basis, balanced scorecard approach has been introduced. One of the main advantages of the balanced scorecard is ability for employees and managers to see the relationship between their own performance evaluation and inancial measures related to the organizational goals. The balanced scorecard, developed by the Southwest Airlines, is presented in the Attachment F (Anthes, 2003). The balanced scorecard clearly illustrates the company strategy to the main stakeholders, especially to the company employees. For example, Southwest Airlines balanced scorecard shows that the company is seriously focused on the practical implementation of its strategy towards encouragement (by proper training and valid effective motivation) of its ground crew to turn planes around quickly.
Reaching the better outcomes will decrease ground time, improve scheduling accuracy, decrease technical delays, and bring more customers due to the overall higher consumer satisfaction. That will increase company revenue, while each plane spending more productive time in the air, might led to reduction of the operation costs and, consequently, to air fares decrease. The end result is greater company profitability results, when the revenues are bypassing costs in the growth trend.
To track execution and outcomes, Southwest Airlines has chosen to measure the percents of ground crew trained and the percents with stock options; minutes on the ground and percents of on-time departures; customer ranking in terms of low-price fares and the FAA ranking of on-time departures; and finally, plane lease cost, seat revenue and overall enterprise market value (Kinahan, 2004). After the Balanced Scorecard is complete, Southwest Airlines tied related assigned budgets and compensation plans to the document, and then establishes it as the basis and the starting point for the monthly management meetings.
In general, the balanced scorecard system provided a good basis for Southwest Airlines for executing its strategy and managing the strategy implementation and the practical actions successfully. It helped company employees and managers to change their mindsets for personal effectiveness improvement, while assisting them in this process by developing and implementing new processes and procedures that are translating company business strategy in the practical daily operations (Rohm, 2002). Recommendations The corporate culture at Southwest Airlines is one of the legends in the business world. All businesses follow three major constituencies – employees, customers and financial backers,” said Dr. Adam Pilarski, SVP of Avitas, a Washington, DC-area airline analyst firm. “Southwest has consistently said if you do the first, keep employees happy, they will make customers happy, and that will bring results – and by golly, it works” (Green, 2004). Indeed, Southwest Airlines is famous by valuing and compensating its employees. It initiated the first profit-sharing plan in the US airline industry as early as in 1974 and offered it ever since.
In 2000, Southwest distributed to its employees a record-setting $138M in profit sharing. This tax-deferred compensation represented an additional 14. 1 percent of each employee’s annual salary. However, we have to note, that as in every major US airline, the 34,000-plus Southwest Airlines workforce is heavily unionized – 82 percent as of December 2007 (SEC, 2008). So far, company was able to successfully negotiate with Unions the special arrangements that are giving more flexibility in employees’ efforts to increase company profitability and lower the planes ground time.
Sometimes, it was not easy, and required informal and creative approach. For example, when legend of modern aviation, Heb Kelleher, Southwest co-founder and chairman and CEO for many years, was personally negotiating in 1995 with pilots’ union a five-year pay freeze, he announced that his compensation would be frozen as well for the same term. It cost him from $75 million to $100 million in compensation, but it bought him trust and caused agreement to be signed (Parker, 1996).
In spite on the traditional superb relations between the management and employees, Southwest Airlines might face a significant labor challenges in the process of discussing new contracts with pilots and other unionized employees. If the agreement can not be reached between the negotiating sides, it might seriously jeopardize company performance, and lead to the service disruptions to the customers. Company might benefit in long-term perspectives, trying to develop an alternative plan of the preserving employees’ rights on non-union basis, and promote this plan to its workforce.
Historical industry development gives substantial proof that in many cases de-unionization could be beneficial to all parties, both employer and employees. I understand that the policy in the Airline Industry might cause serious conflicts, so the heavy preparation is advised before announcing the de-unionization changes to the public. Following the investigation, it is possible that the potential danger of the major workforce contracts changes would be considered to outweigh the potential advantages, and the project will be closed.
Part F: Decision-Making Policies Southwest Airlines serves as an industry example of how the company can remain profitable even at the most complicated business conditions. The carrier has “a unique ability to generate strong revenue growth in a weak economic setting, while maintaining the lowest cost structure in the industry, despite a high fuel-cost environment,” noticed Michael Derchin, an airline analyst with FTN Midwest Securities (Banstetter, 2008). Being profitable and successful determines developing and following appropriate decision-making policies.
In many cases it means making certain business decisions by creating comparable models and choosing between several possible courses of actions, based on the available financial, technical, marketing information, as well as any relevant data from other sources. As company decision making process is heavily decentralized, managers or individual employees are all making certain business and technical decisions that can determine the future financial outcomes at their levels.
Definitely, strategic decisions related to the company operations on the top management level are shaping the overall business growth and development directions. While operating with big numbers and general concepts, top managers might become eventually disconnected from the practical air carrier operations. Therefore, Southwest Airlines promotes upper management representatives participation in low level work activities. For example, Southwest Airlines upper managers traditionally perform one day each quarter as reservation agents, ticket agents, baggage handlers, etc. in order to maintain a good practical feel for what is going on in the field operations and understand the difficulty of these jobs. Airline pilots as well frequently help checking in customers or cleaning airplanes to shorten turn-around times of the planes (Bunz & Maes, 1998). Examples We already mentioned that after deregulation in 1978 Southwest Airlines adopted point-to-point strategy versus hub-and-spoke strategy, which has been accepted by most major airlines in the industry. Following its strategic doctrine, Southwest Airlines has avoided as much as possible ub-and-spoke standard route network destinations. For example, while Southwest’s top three airports collectively accounted for roughly 18% of its aircraft departures in 2001, Northwest’s top three airports accounted for 52% of its domestic departures and United’s top three airports accounted for 43% its domestic departures. While the Southwest Airlines original approach was related to flying lots of short trips, it has not been stigmatized, and company’s entry strategy has significantly evolved over the last decade.
After establishing an overwhelming domination over the majority of very dense short-haul routes, Southwest expanded its operations into medium-haul vacation markets, attracting customers who have not travelled on these routes before. From 1995, Southwest began entering into a number of relatively thin, long-haul markets that it had previously avoided (Boguslaski, Ito, & Lee, 2004). This flexible approach makes Southwest Airlines a great company – following its business strategy, but also being open for any new ideas and attempts to increase value of organization.
While establishing its presence in the big airports (like SFO – San Francisco Airport in 2007), in most cases, Southwest is trying to arrange lease of the least convenient gates (further away from the airport entrance), since the cost of lease can be significantly reduced. In this case, customers are ready to stride a longer distance from the entrance as far as they are getting the bargain tickets rates. Interesting is that Southwest entry to San Francisco Airport last year has not been a first attempt.
Southwest flights from SFO were stopped in 2001, since the airline’s relatively small operation out of San Francisco had not been profitable for a considerable time and a disproportionate number of flight delays out of the airport adversely affected the airline’s overall system. There is also a new interesting trend in Southwest Airlines of focus shifting, proving the innovative company approach to the business operations. It made several organizational changes, focused on promoting its services to the business customers.
Since standard Southwest planes do not have a designated space for the First Class passengers, many frequent flyer executives stayed away from the Southwest, partially due to psychological reasons, as there they felt themselves as part of the crowd. Following the recent changes, they do not have this psychological barrier any more. Company developed a new plan of drawing more passengers, typically business travelers, who tend to pay higher prices for fares because they are purchased at the last minute.
At the beginning of the year, the airline initiated its new “Business Select” fare, which is generally about 10 percent higher than its average prices. The business fare includes priority boarding and a free alcoholic drink, while it is fully refundable. So far, about 5% of overall tickets purchases are made of the new “Business Select” fare, and this pricing difference has already generated about $15 million in additional revenues during the first quarter of 2008 (Banstetter, 2008). References Ali, M. F. (2003). Activity Based Costing/Management in Service Industry. Retrieved June 9, 2008, from http://www. imamc. com/staci/articles/abcm. htm Anthes, G. (2003, February 17). ROI Guide: Balanced Scorecard. Retrieved June 16, 2008, from http://www. computerworld. com/printthis/2003/0,4814,78512,00. html Aviation Explorer (n. d. ). Airline Industry overview. Retrieved June 18, 2008, from http://www. aviationexplorer. com/airline_industry_overview. htm Banstetter, T. (2008, June 1). Southwest Airlines still flying high. Retrieved June 17, 2008, from http://www. star-telegram. com/arlington_news/story/674736. html Boguslaski, C. , Ito, H. , & Lee, D. (2004). Entry patterns in the Southwest Airlines route system.
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