Fuel Hedging by Southwest Airlines

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Southwest Airlines Fuel Hedging and Relations to Profitability

Abstract

In order to stay airborne, a passenger airline has to consistently generate profits. Profits come only from paying passengers, hence all stratagems must be customer oriented. In a scenario where there are many airlines competing with each other, one way of attracting passengers is to keep the cost of flying low, while providing value for money. On the other hand, expenses must tightly controlled to reach and stay at the lowest possible. Certain expenses are unavoidable; however, one variable that can be kept low through decisive planning and foresight is the cost of fuel, which, at best, can be called volatile. A good way to achieve this is by hedging fuel cost, which is a complex, but rewarding process, as this Case Study of Southwest Airlines proves beyond doubt.

Southwest Airlines Company: A Case Study in Managing the Cost of Aviation Fuel

Southwest Airlines Company, an American low-cost airline is the third largest airline in the world as well as the U.S.A. by the number of passenger aircraft among all of the world's commercial airlines (Arlene Fleming, About.com Guide; www.nationsonline.org), operating more than 540 Boeing 737 aircraft today between 67 cities in the U.S.A. (Southwest Airlines Fact Sheet of 2008). Today, Southwest operates approximately 3,300 flights daily and boasts of being the only major airline to post profits every year for the last thirty six years. It justifiably claims to be the United States’ most successful low-fare, high frequency, point-to-point carrier (www.southwest.com).

Given the fact that it is a no-frills airline, it is still streets ahead of other low-cost carriers the world over and, in an atmosphere darkened by virtually global recession− where almost every airline is cutting back on staff, leased aircraft, number of sorties per day and skipping low or loss-making sectors− the fact that it has been rarely gone into the red is most impressive. It would be worthwhile examining its modus operandi and strategies employed to stay profitable every year, though it did suffer a minor hiccup when its nose just dipped under the waterline in two quarters in 2008. Southwest keeps its aircraft in flight for more than twelve hours a day, with carefully selected destinations that could be called secondary airfields ( www.southwest.com), which facilitate fast turnaround averaging less than fifteen minutes from switching off and which charge low administrative fees. Using the same logic, they use only one aircraft type, the Boeing 737 which has a reasonable passenger capacity of around one hundred and twenty five to one hundred and fifty. These are fitted with the most fuel efficient engines and aerodynamically lowest drag wet wings available. ( www.simviation.com).

Strategies for Cost Control

Some facts need to be listed prior to studying Southwest Airlines’ strategy in terms of cost cutting on fuel consumption. These are taken from its Factsheet 2008 ( www.southwest.com): • The Company’s fleet has an average age of approximately 10 years. • Southwest’s average passenger airfare is $113.97. • The average aircraft trip length is 635 miles with an average duration of one hour and 55 minutes. It must be noted that such large averages are possible in North America only. • Southwest aircraft fly an average of 6.2 flights per day, or almost 12 hours and 9 minutes per day. • It has the lowest turnaround time after switching off, post flight, averaging fifteen minutes. Holding time on the ground is thus minimized. • In 2008, Forbes magazine ranked the dependability of U.S.A.’s 10 major carriers and Southwest Airlines topped the list as the number one Most Reliable Airline. • After soliciting feedback from almost 10,000 travelers, SmarterTravel recognized Southwest Airlines as ‘Best Airfare Prices’ in its Readers’ Choice Awards in fall 2008....
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