Assets & Airlines

Southwest Airlines' Asset Advantage

Southwest Airlines has by far the best financial performance record in American commercial aviation. It has been profitable every year in its 47-year history, including during the crisis period following 9/11. When American Airlines, Delta Air Lines, and United Airlines all lost billions of dollars during the Great Recession, Southwest was still earning hundreds of millions of dollars per year.

How has Southwest achieved such sustained profitability? One big factor is its efficient use of its assets. Let’s take a look at some examples:

1. Streamlined fleet management. Efficiency is all about doing more with less. Most commercial airlines use many models in their fleets, but Southwest uses only one: the Boeing 737. The resulting savings in crew and ground-service personnel training, maintenance, and inventory — plus the ability to substitute any aircraft for nearly any other — also help Southwest consistently produce industry-leading turn times.

2. Fast turn times. One way to improve asset efficiency is by maximizing asset output. Southwest not only fits more seats on its planes, but it also averages 25 minutes to unload and reload flights, a very efficient time compared to the industry average of 35–60 minutes. Additionally, the company’s strategy of point-to-point flights (rather than the traditional hub-and-spoke pattern) reduces connection times, flight delays, and total trip times. This means that its key assets, such as airplanes and pilots, are idle for about two hours less than competitors’ assets every single day. “That’s like getting one airplane in five for free,” said a former Southwest executive.

3. Fuel hedging. If Southwest’s success is any indication, a little bit of planning can go a long way. Since 1999, it has employed an aggressive fuel hedging program and paid up to a dollar less per barrel of fuel than its competitors. Between 1999 and 2008, it saved $4 billion through hedging, allowing it to come out ahead during the 2000s energy crisis that hurt many other airlines. While it hasn’t been a win 100 percent of the time, hedging has helped Southwest weather plenty of storms in the turbulent energy market.

4. No fees or frills. “Stick to your strengths” is advice often forgotten, so in such a complicated industry, Southwest’s business plan is refreshingly simple: sell tickets. Southwest is the last remaining airline to offer two free checked bags and zero change fees, and it sells only one-way flights and offers no seat assignments. (It also sells tickets online exclusively through its website, not through third-party agents.) Without various upgrade processes and systems to manage, Southwest is able to maintain an astounding 2,700-to-1 passenger-to-employee ratio; in comparison, Lufthansa maintains a 500-to-1 ratio. Other airlines may want to consider trimming some fat if they want to keep up.

5. Happy employees. Keep your employees happy and you may just keep them employed. It’s well known that Southwest’s employees are among the happiest in the industry: its employee turnover is one-sixth to one-half of the typical rate, and the company has never had a layoff. In 2017, Southwest shared $586 million in profits with its 55,000 employees; this averaged to about a 13% bonus for each employee. This goodwill has fostered an environment where employees go above and beyond to care for the company’s assets and provide customers the best possible experiences.

Through its great management of assets, Southwest has charted a flight path to consistent profit. Southwest flies more passengers each year than almost any other airline, repeatedly receives top consumer-satisfaction awards, and reliably presents an awe-inspiring balance sheet.