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The Airline Industry Challenges

The Airline Industry Challenges. Cyclical Capital-intensive Labor-intensive Energy-intensive!!! Technology-intensive Heavily regulated Heavily taxed Customer Service demands Brutally competitive. Southwest Airlines’ Success. 36 years of consecutive profitability (1973 – 2008)

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The Airline Industry Challenges

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  1. The Airline Industry Challenges • Cyclical • Capital-intensive • Labor-intensive • Energy-intensive!!! • Technology-intensive • Heavily regulated • Heavily taxed • Customer Service demands • Brutally competitive

  2. Southwest Airlines’ Success • 36 years of consecutive profitability (1973 – 2008) • Largest airline in the world in terms of originating passengers (as of June 30, 2009) • 20% of domestic passenger market share • 3,200+ daily flights • Service to 67 airports in 34 states (MKE – November) • Over 500 Boeing aircraft • Nearly 35,000 Employees • Never furloughed Employees (most heavily unionized airline ~80%) • World famous Culture

  3. The Southwest Brand • Low fares • Lots of flights • Simplicity • Reliable • Friendly • Safe

  4. Southwest Business Strategy • Best Customer Service • Low Fare leader • Low Cost producer • Dominant market leader • Excellent labor relations • Consistent financial performance • Strong balance sheet • Direct Customer relationship • Safe, clean, efficient operation

  5. Best Customer Service • DOT Metrics • #1 in Customer Satisfaction • OnTime • Baggage handling • Fewest cancelled flights • Fewest denied boardings • Generous frequent flyer program • Easy ticket terms • All tickets reusable • Two free checked bags, free snacks, etc. • Great schedule • Lots of flights • Expanding network (MSP, BOS, LGA, MKE, PFN)

  6. Best Customer Service

  7. Low Cost Producer • Point-to-point route network • High asset utilization (Aircraft, Airports) • High Employee productivity • Common fleet strategy (Boeing 737) • Lower distribution costs • Primarily avoid congested/restricted airports • High quality execution • Successful fuel hedging program • Work hard Culture • Low Costs are not low wages, old aircraft, lousy service

  8. Fuel Hedging

  9. Sustainable Low CostsCost per Available Seat Mile (CASM)

  10. Dominant Market Share “The Southwest Effect” • Select underserved/overpriced markets • Lower coach fares by two-thirds • Significantly increase flights • Traffic explodes • Quick market penetration • Favorably impacts local economies • Southwest in high demand

  11. Dominant Market Share

  12. Dominant Market Share • #1 share in 90 of our top 100 O&D markets • 60% share in our top 100 O&D markets • 66% share of Intra-Texas traffic • 69% share of Intra-California traffic • 47% share of Intra-Florida traffic • 38% share of Las Vegas traffic • 39% share of Phoenix traffic

  13. Excellent Labor Relations THE MISSION OF SOUTHWEST AIRLINES The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. TO OUR EMPLOYEES We are committed to provide our Employees a stable workenvironment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer.

  14. Consistent Profitability(excludes special items)

  15. Strong Balance Sheet • Investment grade balance sheet • BBB – S&P and Fitch (senior unsecured rating) • Baa3 – Moody’s • Modest debt • Leverage under 50% • Strong cash balance of $2.4 billion • Revolving credit facility fully available – $600 million • Access to capital • Unencumbered aircraft worth $6 to $7 billion • Reduced capital spending • Able to withstand “shocks” • Prepared

  16. Direct Customer Relationship Distribution today vs. ten years ago

  17. Direct Customer Relationship • Nielsen/Netratings recently reported that southwest.com was the largest airline site in the world in terms of unique visitors. • southwest.com is the 4th largest travel site in terms of unique visitors (source: Comscore MediaMetrix). • Approximately 80 percent of Southwest Customers are checking in online or at a kiosk. • More than 7 million people subscribe to Southwest’s weekly Click ‘N Save e-mails.

  18. Strong Safety Record • Robust data analysis/sharing programs • Top down commitment to Safety from Senior Leadership • Work with Union groups and the FAA to foster a proactive Safety Culture • No accidents resulting in an onboard fatality in SWA history

  19. Southwest Airlines Co. The Future • Challenging environment • Reengineering business model for higher costs • Well prepared to adjust • Among the Lowest Cost structures • Fuel hedge protection • Committed and engaged Employees • Operational excellence • Strong Brand rankings • Tops in Customer service rankings • More “Value” approach (No 1st and 2nd Bag Fees)

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