How Southwest Pioneered The Low Cost Carrier Model

Not only did Southwest's low price strategy allow people to fly cheaper, it also drew many people into flying who would otherwise have taken a ... HowSouthwestPioneeredTheLowCostCarrierModel byJoannaBaileyJuly29,2019 2shares 2 0 0 4minuteread Theyarethelargestlow-costcarrierintheworld,andholdtherecordforconsecutiveprofitableyears,reporting46yearsofmoney-makingsuccessinarow.Clearly,they’redoingsomethingright,butwhatisitthathasmadeSouthwestAirlinessuchamassivesuccess? Southwesthasledthechargeforlow-costtravel,buthow?Photo:Unsplash ThewholeideabehindSouthwestAirlineswastomakeairtravelaccessibletoall.WhilethelegacycarriersintheUSatthetimewerefocusinginonthewealthytraveler,Southwestsetouttodisruptthemarketatthelowerend,givingmorepeopletheopportunitytofly. NotonlydidSouthwest’slowpricestrategyallowpeopletoflycheaper,italsodrewmanypeopleintoflyingwhowouldotherwisehavetakenatrainorbus.ItopenedairtravelintheUStothemassesanddidsowhilestillbeingabletomakemoney,whichisnomeanfeat. Thefirstlow-costairline Theworld’sfirstlow-costairlinewasPacificSouthwestAirlines,whobeganoperatinginterstateflightsbetweennorthernandsouthernCaliforniain1949.TheirstrategyofstickingtojustCaliflightsavoidedtheexpensesoffederalregulationinotherstates.For30yearstheywerepracticallytheflag-carryingairlineofCalifornia,untilderegulationin1978whenitexpandedtootherstates. ThesmilingfaceofPSA,theworld’sfirstLCC.Photo:Wikimedia Thisideaofkeepingcostaslowaspossibleattheairline’sendwasfundamentaltoHerbKelleher’sstrategyforSouthwestAirlines.EmulatingthesuccessofPSA,hereplicatedtheideaofinterstate,low-costflightsinTexaswhenhelaunchedSouthwestin1971.WhilePSAwoundupfairlysoonafterderegulation,however,Southwestwentfromstrengthtostrength,tobecometheworld’sbiggestlow-costcarriertoday. WhereasPSAhadsomegoodfundamentalsintheirlow-coststrategy,Southwestreallytookittothenextlevel.Infact,Southwesthasbeensosuccessfulwiththeirlow-costmodel,they’vebecomethetemplateforallsuccessfullow-costairlinesaroundtheworld. Howdotheydoit? Southwesthasasolidstrategyfortheirbusiness,onewhichhasbeenreplicatedtheworldover.Thisis: Lowfares:Unrestrictedfaresavailableatalowprice Cheaperairports:Usingsecondaryairportsreducesthecostoflandingthere Singlefleettype:Usingonlyoneaircrafttypereducestrainingforpilots,skillsrequiredofmechanicsandsparepartsbankrequiredtoremainoperational Schedule:Anintelligentlyputtogetherschedule,withshortturnaroundtimesandroutesthatmaximizetheairtimeofeveryaircraftinthefleet Pointtopoint:Short,in-demandroutesoperatingatahighfrequency OneofthekeystoSouthwest’ssuccessiskeepingemployeeshappy.Whiletheyrelyonkeepingcostslow,theyalsoaimtopaytheirstaffafairwageandhaveintegratedperkslikeprofitsharingtomaintainhighstaffsatisfactionandtostimulateaproductiveworkforce. Fewerfrillsbutstillagoodcustomerexperience.Photo:Southwest Forpassengers,theydomorethantheaveragelow-costairlinetoo.TheirpolicyoftwocheckedbagsforfreebucksthetrendofmostLCCs,andofthebasiceconomyfaresfromlegacycarrierstoo.Whilemanyofthe‘frills’suchasfoodanddrinkaremissing(whichhelpsthemkeenturnaroundquick)Southweststrivetoprovidedecentcustomerservicesothatpeoplearehappytoflywiththemagain. The‘SouthwestEffect’ TheairlinehasbeensosuccessfulindisruptingUSairfaresthatitevenhasaneconomictermnamedafterit.The‘SouthwestEffect’wasfirstcoinedbytheUSDOTin1993,todescribedhowSouthwest’sentryintoanewmarketaffectedaviationservicesonthatroute. Theeffectoftheairline’sentryoccurredinthreestages.Firstly,theyincreasedsupplyandofferedlowerpricesonthatroute.Thiswouldleadtheincumbentairlinestolowertheirfaresinordertocompete.Asaresult,thethirdelementoftheSouthwestEffectwouldbethatsalesforallairlineswouldrise.Thelowerpriceswouldleadtoanincreaseddemandforairtravel,meaningthateventhoseairlineswhohadtolowerfareswouldseeariseinprofitsasaresultofbetterloadfactors. Southwest’sarrivalintoamarket(suchasHawaii)canforceincumbentstolowerfares.Photo:Southwest Southwestisn’ttheonlyairlinetohavesuchanimpactonaviationataregionalscale.JetBluehasbeennotedtocausesimilartrendsintheUS,ashaslow-costgiantRyanairinEurope.However,Southwestisthegranddaddyofthelow-costflight,andCEOsofotherlow-costairlineshaveopenlyacknowledgedtheirdebttotheairlineforasolid,cost-savingstrategy. Whileotherlow-costairlineshavefailed,Southwestremainsstrong.Althoughtheir‘effect’islessprevalenttodaythanitoncewas,thankstomanylegacycarriersbringingintheirownlowpricedfares,SouthweststillholdthetorchastheoriginaldisruptorandtheGodfatherofallLCCstoday. 2 0 0 2Shares: Share Tweet Share Share JoannaBailey ManagingEditor- Joannahasworkedinpublishingformorethanadecadeandisfastbecomingago-tosourceforcommercialaviationanalysis.ProvidingcommentaryforoutletsincludingtheBBC,CNBC,ReutersThomsonandothers,sheworkscloselywithIATA,AviaDevandvariousairlinesandsupplierstogettheinsidetrackontheglobalmarketplace. 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