Southwest Airlines' & Fuel Hedging

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A “Hedge” of the Pack:
A Review of Southwest Airlines Innovative Fuel Strategy

While many airlines suffer from rising fuel costs, Southwest Airlines continues to emerge victorious in the aeronautical landscape. Other carriers now forced to increase prices to compensate for fuel costs, are now subject to the new mindsets of consumers who are opting for longer bus and car rides, or simply not traveling at all. The woes of the airlines industry have many posing the question if airline travel is fast becoming a travel method for the affluent (Stoller, 2008). In the midst of the situation, Southwest Airlines is able to capitalize on rising costs and maintain its low-price position because of an innovative fuel acquisition strategy known as fuel hedging (Pae, 2008). The following activities will be reviewed in this document as an analysis of this organization. The activities to be addressed are: 1.Organizational History of Southwest Airlines

2.Overview of the Airlines Industry
3.SWOTT (Strengths, Weaknesses, Opportunities, Threats and Trends) Analysis of Southwest Airlines 4.An Analysis of the Impact of varied economic concepts on the CPI 5.An Analysis of varied Economic Indicators

This document focuses on the impact of a volatile environment of consumer demand has impacted this organization, and how its “hedging” strategy has allowed it to maintain its competitive advantage in an ever-changing economic climate.

Organizational History of Southwest Airlines
Southwest Airlines is an organization that has remained true to its operational roots, and continues to expand and to offer a product as well as service that its passengers can consistently depend on. Southwest Airlines was started in 1966 as Air Southwest Co in Texas. Since its inception, its company philosophy and perspective has been “dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.” The company has undergone few changes in leadership and operations, occurrences which have allowed it remain competitive and comparable in the airline industry. For the last 30 years of its corporate existence, Southwest Airlines, also known as “Southwest” or “SWA”, has been a shining example of how low fares and great service culminate in great returns. The company has experienced consistent growth and flies more passengers than any other U.S. airline. At its 30-year operational anniversary, its fleet consisted 417 planes were making 2,900 hops a day to 59 destinations. Revenues continued to increase at a 10 percent, reaching $6.5 billion in 2004. Even in the post-September 11th environment, when other airlines were fearing shutdowns due to decreased consumer demand and travel fears worldwide, Southwest reported earnings of $313 million—a handsome number compared to other airlines at that time. One secret to the success of Southwest is their consistency. In terms of their equipment, Southwest only flies only Boeing 737s, to simplify maintenance and training. In terms of their product, this means low fares and distinct travel locales. For these reason, Southwest has long been considered a maverick. As Southwest began doing business in 2005, it faced many familiar challenges: rising oil prices, intense competition, cumbersome regulations. In the uncertain times that had legacy (traditional) carriers reeling, Southwest was still winging ahead with its ever-popular low-fare formula. One reason for their ability to stay ahead despite the fuel costs that plagued other air carriers is an innovative strategy known as “fuel hedging.” This strategy is another secret of the success that Southwest enjoys to this very day.

Overview of the Airlines Industry
The US Airline industry continues to experience growth and to look optimistically towards the future. A key milestone of the US Airline industry is its deregulation in 1978. While deregulation presented a wealth of opportunity...
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