How to run/start an Airline business profitably for 48 years & counting: Southwest Airlines business Case Study thumbnail

How to run/start an Airline business profitably for 48 years & counting: Southwest Airlines business Case Study

11th of September 2001 turned out the most horrific event in American history. A group of terrorists hijacked 4 planes, one of the structs the Pentagon, and two of them collided write into the World Trade Centre. What followed next was a Catastrophe that sent shockwaves all across the world All planes was grounded immediately people too scared to fly and the American emission sector was in such a terrible state that almost look like domestic air travel will be shut Down forever, As a result, all the major American Airlines started bleeding money resulting into millions of dollars of losses with each passing day 46000 job lost in condition of so bad that even major airlines like the United Airlines and the US airways start to file for bankruptcies but you know what gay’s even during such a terrible time the world was shocked to see that the one airline that remains profitable and did not register the single a quarter of loss throughout 2001 and 2002.

The question is which airlines is this and is so miracle about the airline that it had remain profitable even during such a terrible time to well this is ladies and gentlemen no other than the legendary Southwest Airlines And the most astonishing thing about Southwestis that it had remain profitable 47 consecutive years until the pandemic hit and this 47 year include 2 oil crisies 9/11 attack and even 2008 recession so this beg a question what is so special about southwest airlines that it has remain profitable even during such terrible time of business what exactly is their business strategy And most importantly considering Mr Jhunjhunwala is latest venture and go air IPU announcement from the investor standpoint.

The first part of this answer is the incredible model of opertaion that southwest follows to tell about atin the aviation space there are two major model that airlines use in order to connect their destination the first is the hub and spoke model And the second model is the point-to-point model and hers they workout let see we have six destination A B C D E and F if you want to offer fight connecting all this destination using point to point model her’s out it would workoutyou need to a flight to go from A to B B to C C to D D to E and E to F and F to Athen you need to connect A to C A to D A to E A to F so on and so forth.

So in total if you want to contact all this 6 destination you need 15 planes but hub and spoke model this become relatively easier Insanf contacting all these destinations using the separate flight you Creat hub o between such Thatif you want to contact A to C this is how to model workout hell we be plane A which will carry all the passenger who want to go B C D and E F and then when plane A lands of the hub All the passenger go to their respective flights which are B C D E F And when those plane fly back to their destination automatically All the customer will arrive their destination.

Now on the outside this might look little complex but here of 4 incredible benefits that’sthis provides over the point-to-point model 1. you only need 6 plans as compaire to 15 plans in point to point model 2. Using the hub and spoke model planes are more ooccupied because now you are surving the same number of customer with only 6 flights 3. Dow to the present Central hub maintenance become extremely easy 4.its is very very easy to expand your network because all it dois just add another spoke to by adding another plane to network And then you well automatically gate connecting 6 destinations using the hub.

Whereas if you want to add another destination to the point to point model you will need another 6 planes there for the hub and spoke modelis that model which can connect people for anywhere to everywhere in the most efficient manner but surprisingly southwest doesn’t use this hub and spoke model Instant it Usse the point to point model now the question is when hub and spoke model such a cost effective model why is southwest airlines useing point ot point model and more importantly how did generate profit out of an inefficient system.

Well that is because the hub and spoke model has some key disadvantages that Southwest decided to minimize 1. the jermey Dam increasing by large extent because is not going to A to B you go form A to O and then O to B As a result of which the fuel prices also increases Which leave to higher prices and thirdly the passenger and luggage how to be move to one plane to another plane at the hub which take lots of time increases the down time at the aircraft then lead more costand lastly if they emergency or storm delay the first flightthe customer misses missing the connecting flight which again needs to be pad for by the Airlines.

Now even southwest understood the enorde to connect 6 destination useing the point-to-point model they would need 12 aircraft but the caught her’s is this match is 15 planes is been done with underline convention that the airline won’t to connect all these destinations let Traveller go from anywhere to everywhere but you know what gay’s southwest decided that they will not connect citizen for anywhere to everywhere inset they decide select onlythose destination which have got height traffic so is having 5 planesthat go to A to B C D E F.

They said we well connect only A B and C because they are high traffic points and her’s we the exfactor of profit comes in If you looking comparison of two modelin the hub and spoke model the filght well go form A to O and then O to B Where is southwest well directly go form A To B without any stop in between Therefore because of the long journey in hub and spoke model they will need more fuel which lead to more cost And also lead to more time as compared to point to point model.

So all the customer who want to travel between A B and C by default they were choose Southwest why Because it was both cheaper and faster therefore these master stroke of southwest got them all the benefit of point to point system like less downtime low cost and less fuel uses and at the same time the They escaped from the disadvantage of hub and spoke model like luggage transfer Costly Hubfees or the hasees of missing of connecting filght This is how southweast carefully choose their model and hit the sweet spot of both cost and convenience which eventually.

Become a widal pillar to turn them into billion-dollar profitable airline And this inturn give them turn of cashflow That kept them even during the time of crisis like 9/11 and even during the 2008 recession Now question is southwest wasn’t the only airline to use point to point model right? There were other Airlines tothen why weren’t thoes airline as profitable as Southwest Airlines Well this brings to me the second superpower that Southwest cultivated That is something called the oil/heding This is the story days by 1990when the Gulf War had its peak And because of the war there was certain speaking oil pricess.

Where in the price of the oil went up by 100% in less than 1 year Now in the contest of Aviation fuel is the second most expensive element in supply chain Therefore any increasing in oil prices directly lead to increasing ticket price and causes The lot of trouble to Airlines but immediately after the war was over the all prices came down drastically But even during this time while The Other Airlines was enjoying high profit margin in low ticket prices The CFO of Southwest Garry kelly being a history student took this event very very seriously Because he realise that the world is not too far from another oil spike So he decided to develop a strategy to oil heding in simple word It’s call fuel insurance Where an Southwest would make a deal with financial institution such that.

They would pay a premium for there fuel today so that’s tomorrow if they oil pricess suits they well Steel by there fuel pre determined price for exampleif today oil prices $20/barrel southwest would pay $35/barrel with the condition that tomorrow if the price of the suits up ot $60/barrel southwest would steel pay $35/barrel only so form 1994’s on word southwest starting hedging 20 to 30 paresnt of its fuel and by 2001 they had hedg 100% of their fueluseing there state of the art hedging platform and guess what this oil hedging strategy ladies and gentlement turn out to be such a amazing move that form 1998 to 2008 southwest instant up saving 3.5 billion dollar.

Over what it what to do if it paid the industry standard Jet fuel prices fun fact 13.5 million dollars translate to 83% of the prophet in the same span between 1998 to 2008 and while leading money of the oil prices shot of in 2008 Southwest was very comfortable enjoying their profits this is second reason why southwest Airlines is extremely profitable even during the times of Crisis now this beg the question how do they channelize all of their money in how to hack their Future Growth and finally this brings to me the thired perhaps the most important pillar of Southwest that is employee and customer satisfaction you now peoples sieman cine coffin speaks about this Legend calledBob Chapman he says that when your family you are 4and if you get food only 3what you do do you let one of your children starveso that other children can have belly fullno right?.

You dived food amoung for 4so tthat one of them doesn’t starve Similarly great organisation build a culture weren’tthe organization just like a family Divide the heart shaped such that all of them suffering a little so that same of them don’t suffer a lot This is how Southwest operate after 9/11 will all other Airlines engaged in layoffs leading to lose of 46000 job’s The CEO of Southwest made a public statement in he saidan I quote and as for as the customer were concerned many of airlines refused to give refund and try level best to make a hard for customer to get their refunds Because those airlines needed to cash flow but southwest only Airlines to offer no question asked full refund policy.

Such was the compensinate value that the wonderful companies by stood by even that it was bleeding money and ladies and gentlemen what flow next was nothing short of fairy tail the decision inspired the entire company to work together to word gathering the planls in the air As quickly as possible when the grounding was lifted and from the very next day itself All the employees return to work and did everything in their capacity to get the plans in the air The finance team extendaly work no cost cutting and the insurance issues were rectified New flights schedules which usually took weeks to be created were just a few days Some employees violently pleasing a part of their income to help the company survive And give their profit share money just so that the company doesn’t suffer losses.

The entire staff work in day in out to establish security protocol as quickly as possible Some work 18 to 20 hours a day to other did not take a weekend off You know that most touching instant was that some customer were writing $1000 check to the Airlines Saying that the just want to make a valuable contribution for the extra ordinary services Southwest provided You know that like you writing 20000 rupees check to hear India’s saying that to you when to make valuable contributions so that Air India servives Therefore this extra ordinary level of consumption love persistency integration Unity unble Southwest Airlines to cut cost to remain profitable even during the 9/11 crises And even during the 2008 recession And this are bring us to the last part of episode and that is what is the business lesson that we need to learn from this case study And what are the factor that we need to consider while we analyse and potential ssuccess or the failures of the players in the aviation industry.

Lesson n. 1 from a business standpoint always remain just because the industry is pointing on from a standard protocol You don’t have to extend it into two in this case it was bold choice of southwest Choose the point-to-point model with the strategic for side of minimise and weakness and maximize the strength of both the model And from the investor standpoint you always need to keep finding out the strategies developed by the companies That separate them from the rest of world in this case that was the point-to-point model of southwest In case of Indigo it was the sales and less back model lesson n. 2 Herb kellener saysat Southwest we manage in good times so that all of us will be protected from the bed time In this case it was the for sight for Gary Kelly about upcoming risk become of which they were able to use oil holding strategies to protect the day during the bad times Therefore as an entrepreneur during the good times you must work the hardest spot medicated and prepare for the risk.

During the times of crisis you are way ahead of your competition and from the investor standpoint you need Dig into the company specific to find out what a particular company is doing in order to prepare for upcoming risk As compared to the what the competition is doing in same market And last and most important always remember hold good leader focus on only profit great leader focus on channelizing those profit for the betterment of employees Just so that innocent family does not suffer just become business is not doing well.

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