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Economic Business Environment- Southwest Airline

Economic Business Environment- Southwest Airline

Background and History

Texas-based Southwest Airlines is the largest carrier in the United States as measured by the number of originating passengers boarded. Combined with its recent acquisition of Air Tran, Southwest operates a fleet of nearly 700 aircraft comprising an all Boeing fleet. The airline specializes in short-haul routes using a point-to-point network and offers frequent flights to around 110 markets cities. The combined firm employs almost 43,000 workers and generates approximately $15 billion in annual revenue on a consolidated basis.

Southwest Airlines began carrying passengers in 1971 between Dallas, Houston, and San Antonio. From the start, the business strategy was to offer frequent, conveniently timed flights and low fares on short-haul routes. Restricted by the 1979 Wright Amendment from flying out of Dallas to non-neighboring states, the airline nonetheless grew both organically and by acquisition so that by the end of 2006 it served 63 cities in 32 states. In 2006, Southwest's 482 aircraft carried more than 95 million passengers on more than 3200 daily departures. Profits were $499 million on revenues of $9.1 billion. Southwest's history of profitability was partly due to having the lowest operating costs, on a seats-per-mile basis, of all the major airlines. Several factors contributed to their low-cost structure, including the use of a single aircraft type, a high-utilization point-to-point route structure, and a fuel hedging program that protected the company from the full impact of rising fuel costs. In early 2007, Southwest was functionally organized.

Vulnerability and Costs

Southwest Airlines Co., which benefited from a big bet on hedging a few years ago, is spending $150 million this year to lock in prices, said Laura Wright, chief financial officer of the nation's No. 4 airline by traffic. Sixty percent of Southwest's 2011 volume is covered up to $90 a barrel; 55% at up to $95 a barrel; 30% at up to $105 and 55% above $105, she said. US Airways Group Inc., by contrast, let its hedge positions expire in mid-2009 and figures it saved $126 million in the first nine months of 2010 by buying jet fuel on the open market. Hedging is "a large wealth transfer from industrial companies to Wall Street trading desks, “Scott Kirby, the US Airways president, said in an interview. "It's an incredibly expensive insurance policy." Southwest Airlines., which benefited from a big bet on hedging a few years ago, is spending $150 million this year to lock in prices. US Airways Group let its hedge positions expire, calling it an "incredibly expensive insurance policy." Here, a Southwest plane at Love Field in Dallas. But now the No. 5 carrier by traffic is paying for its principles. For last year's fourth quarter, when prices took off, "we will have among the highest cost of fuel," Mr. Kirby acknowledged. Airlines' vulnerability to volatile fuel prices is a fact of life, though, he added, and it is usually balanced out because rising fuel prices generally coincide with a stronger economy, which helps the ...
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