How Has Southwest’s Cost Efficiency Improved?
The low-cost carrier, Southwest, has consistently grown its revenues and increased its profits over time. This is in sharp contrast to the other airlines who were weighed down by the high oil prices, and other expenses. While Southwest did see its fuel costs go up, until last year, it reigned in its non-fuel expenses. In this note, we talk about how the airline managed to control its cost inflation, where other airlines failed.
- Fleet Modernization
Fleet modernization is a major contributor towards controlling costs. As can be seen in the graph below, without up-gauging its fleet, Southwest’s unit costs would have been much higher than they are now.
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The Classic fleet, which was historically used by Southwest, is inefficient due to the absence of auto-throttle, WiFi, required navigation performance, and an electronic flight instrument system in the cockpit, which uses electronic display technology. The company’s decision to retire its less efficient Classic fleet has and will continue to aid its operational performance.
Fleet modernization also helps by promoting cost efficiency by the use of more fuel efficient aircraft. In addition, the additional capacity per airplane (seats per airplane) push unit costs down by helping transport increased number of people from one place to another at lower cost.
- Fuel-Saving Initiatives
The carrier has undertaken a number of fuel-savings initiatives, besides modernizing its fleet. These initiatives include new seats, single engine taxi, electronic flight bags, galley refresh, and split scimitar winglets which help cut fuel costs by as much as 2%. [1] A measure of fuel efficiency is the average seat miles flown by the airline per gallon of fuel. As can be seen in the chart below, Southwest’s fuel-efficiency in the last five years has consistently grown as it flew more miles for each gallon of fuel it consumed.
- New Maintenance System
By enabling better inventory management and planning, the new maintenance system has helped Southwest establish a better operational platform. Other steps the carrier has undertaken to control its costs are reducing the square footage per employee by 30%, and transitioning to a paperless system to provide a better customer experience at lower costs. Consequently, the carrier expects an accretion of net benefits of over $100 million in the next few years from reduced expenses.
- New Hangar Facility
The company is investing in up-gradation of its hangar facility in order to improve efficiency. The new utilities will be able to support four aircraft wash bays, and will have a 6 aircraft facility.
Have more questions about Southwest Airlines (NYSE:LUV)? See the links below:
- Why Trefis Revised Southwest’s Price Estimate From $46 To $38 Per Share
- Southwest Drops Post 2Q’16 Results As The Airline Restricts Its Capacity Growth For 2017-2018
- Southwest Q2’16 Earnings Preview: Capacity Growth To Partially Offset The Impact Of Declining PRASM
- How Will Different Capacity And Fuel Cost Forecasts Impact Southwest’s 2016 EBITDA?
- Rapid Capacity Additions And Lower Fuel Expense Drive Southwest’s 1Q’16 Earnings
- What Will Be The Impact On Southwest’s EBITDA, If Crude Oil Prices Rebound To $100 Per Barrel by 2018?
- Will Southwest’s International Operations Contribute A Significant Portion Of Its Revenue By 2020?
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- What Factors Caused A Sharp Jump In Southwest’s 2015 Operating Margin?
- How Has Southwest’s Revenue And EBITDA Composition Changed Over The Last Five Years?
- Southwest Airlines: The Year 2015 In Review
- What Is Southwest’s Outlook For 2016?
- What Is Southwest’s Fundamental Value Based On 2016 Estimated Numbers?
- What Is Southwest’s Revenue And EBITDA Composition?
- How Has Southwest’s Revenue And EBITDA Grown Over The Last Five Years?
Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Southwest Airlines
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Notes:
- How Split Scimitar Winglets Make The 737 A Whole New Plane, Gizmodo, July 2013 [↩]