Mission and Business Model

Southwest Airlines states that its purpose is “To connect People to what is important in their lives through friendly, reliable, and low-cost air travel” and that its mission is “dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride and company spirit.[1] This customer-first mentality is the foundation of the airline’s business model.

While Southwest began as a regional low-cost carrier, today, legacy carriers (e.g. American, Delta and United) and newer low-cost carrier entrants (e.g. JetBlue and Spirit) have diminished Southwest’s ability to differentiate itself on ticket price alone.[2] Instead, Southwest differentiates itself through its customer-friendly policies. These policies are possible because of the company’s success in achieving industry-leading operational efficiency.

Treating Customers Right Separates Southwest from the Pack

Southwest has adopted a number of customer-friendly policies that differ markedly from its rivals.

For example, the rest of the airline industry earns over $3.5B in baggage fees annually. [3] Southwest eschews these fee and instead uses it’s free checked bag policy to differentiate itself from its competitors (e.g. its “Bags fly free!” ad campaign). Similarly, Southwest does not charge change fees when customers need to alter a previously purchased ticket. And in flight, the airline offers free snacks and free streaming video content over Wi-Fi while its competitors typically charge for both. Finally, the airline does not charge a premium for one-way tickets (unlike legacy carriers on most routes); instead all of its roundtrip tickets are unbundled into two one-way flights so that customers can select the flight that works best for them based on price, schedule, and stops during the online purchase process.

While the above policies are costly, they contribute to Southwest’s reputation and its customer loyalty. As a testament to this, Southwest placed 2^nd overall in JD Power’s 2014-15 customer satisfaction ranking, beating out all of the legacy carriers, and coming in just behind its low-cost rival JetBlue.[4]

Operating Model Design Choices Lower Costs

Southwest has made a number of design choices in its operating model that allow it to achieve remarkably low operating costs.

Perhaps most notable among these is its decision to operate only a single aircraft type (the Boeing 737) on all routes. This is unusual (by contrast, Delta operates 14 aircraft types[5]) and greatly simplifies operations. First, pilots need only be rated on a single airframe, greatly reducing training costs and allowing for far more flexible pilot scheduling. Second, the single aircraft approach reduces maintenance costs since the airline achieves almost 100% parts-commonality across the fleet and maintenance staff only need certification for a single airframe. Third, aircraft are more easily interchangeable in the event of a maintenance problem or other schedule disruption. Finally, as Boeing’s largest 737 customer, Southwest is able to negotiate discounts and help refine future model designs.[6]

A second key focus for Southwest is on its aircraft turnaround time. Southwest has consistently achieved the lowest turnaround times in the industry, allowing it to earn more revenue per aircraft.[7] In fact, in 2013, the airline was able to add the equivalent of 16 additional aircraft to its schedule by adjusting ground operations and route scheduling without adding a single aircraft.[8]

The airline also operates a point-to-point network rather than a hub and spoke system, and frequently flies to less busy airports that offer lower landing fees (e.g. ONT in LA, MDW in Chicago or MHT outside Boston).[9]

The net result of these and other operational decisions is that the airline’s cost to fly one seat-mile, a common cost metric in the airline industry is only 11.96 cents; for Delta, the next largest airline, the equivalent cost is 16.75 cents.[10]

Low Cost Operations Enable Customer-Friendly Policies

Because Southwest’s customer-friendly policies increase costs, all else equal, one might expect Southwest to be comparatively less profitable than its rivals. On the contrary, and in sharp contrast to both its legacy and low-cost rivals, Southwest has been profitable for 42 years in a row.[11] This profitability can be traced to a number of factors, but perhaps the most significant is the design of its operating model. With its highly efficient operations and low unit costs, Southwest can afford to spend more on the customer-friendly policies that define its brand and have helped it become the US’s largest domestic airline.[12]

[1] www.southwest.com/html/about-southwest/

[2] http://www.etopaz.com/uploads/PDF/2013%20Southwest%20Study.pdf

[3] http://www.rita.dot.gov/bts/press_releases/bts022_15

[4] http://fortune.com/2015/05/13/airlines-jd-power-survey/

[5] http://www.delta.com/content/www/en_US/about-delta/corporate-information/aircraft-fleet.html

[6] http://www.boeing.com/commercial/customers/southwest-airlines/

[7] http://www.cnbc.com/id/43768488

[8] http://aviationblog.dallasnews.com/2014/09/southwest-airlines-exec-thinks-the-carrier-has-licked-its-on-time-problem.html/

[9] http://app.quotemedia.com/data/downloadFiling?webmasterId=101533&ref=10046368&type=PDF&symbol=LUV&companyName=Southwest+Airlines+Co.&formType=10-K&dateFiled=2015-02-06

[10] http://www.transtats.bts.gov/carriers.asp

[11] http://www.swamedia.com/channels/Corporate-Fact-Sheet/pages/corporate-fact-sheet

[12] By domestic passenger revenue miles, September 2014-August 2015; see http://www.transtats.bts.gov/