Is Southwest Airlines Co (NYSE:LUV) Current Success Sustainable?

September 14, 2017, 10:37 am ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

A brief look at the historical performance of Southwest Airlines Co (NYSE:LUV) reveals that the company has been profitable for 44 consecutive years since 1973. The company founded in 1971 by Herb Kelleher has never been bankrupt despite the various crises that have affected the US airline industry such as the oil embargo and the 9/11 terrorist attacks among others.

The company is not a price leader given that it has some of the lowest airfares among the major US airlines such as American Airlines Group Inc (NASDAQ:AAL) and Delta Air Lines, Inc. (NYSE:DAL). Southwest’s competitive advantage cannot be attributed to a labor advantage because its workers are some of the highest paid in the industry.

Southwest Airline’s operational model is based on keeping fares low, cutting costs and ensuring that customers have fun while flying with the airline. The company focuses on short-haul flights with the main goal of increasing the volume of flights and adding new routes over time.

The airline’s strategy has worked in the past where the company would identify a particular city and then enter the city’s air transport market offering low fares. The airline would ensure that its fares are much lower than that of the lowest carrier serving the city, which would then force other carriers to match its prices in order to remain competitive.

After entering a market with extremely low fares, the airline would then schedule numerous short-haul flights to different destinations that addressed the needs of its target customers. This strategy has resulted to an increase in air traffic of up 500% in some of the cities served by the company.

Upon increasing the number of flights from a particular city and attracting a huge number of customers, the airline would then spread its fixed costs, which would result in lower unit costs per customer.

Therefore, the success of the airline can be attributed to an obsessive focus on serving short-haul customers, maintaining low fares and creating a fun environment for its customers. However, the question remains whether this operation model shall remain successful into the future.

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