🧩Alaska 🧩AIRlines NEw 🧩rEservatioNs 18339524331 nUmbeR🧩
Cost of Labor 🧩Alaska 🧩AIRlines NEw 🧩rEservatioNs 18339524331 nUmbeR🧩typically allocates approximately 37 percent of its operating budget to labor. The most important part of a low-cost airline's successful business model might be getting much higher labor productivity. According to a recent HBS Case Study, Southwest Airlines' salary rates are considered to be at or above average in comparison to the US airline industry. Around 81% of its employees are members of a union, making it the "most heavily unionized" airline in the United States. With the exception of situations where this is prohibited by safety and licensing regulations, the work rules at low-fare carriers are much more permissive, allowing virtually all employees to collaborate. Cross-utilization and a long-standing culture of cooperation among labor groups result in lower unit labor costs. Southwest's total labor expense per available seat mile (ASM) was 58% lower than that of US Airways and 25% lower than that of United and American in the fourth quarter of 2000.
Carriers like Southwest have a significant cost advantage over network airlines simply because their workforce produces more output per employee. A 2001 study found that Southwest employees were more productive by over 45%, despite American and United's significantly longer flight durations and larger average aircraft sizes. By relentlessly seeking the lowest labor costs, Southwest is able to increase its bottom line revenues.
Fuel Costs: After labor, fuel costs account for about 18% of an airline's operating costs, making them the second-biggest expense. Airlines can hedge fuel prices to avoid significant fluctuations in operating costs and profitability. If fuel costs can be controlled, it will be easier to predict airline earnings and budgets. In the face of growing competition and the industry's transformation into a commodity, being price competitive was essential to any airline's survival and success. It became difficult to pass on higher fuel costs to passengers by raising ticket prices because of the fierce competition in the industry.
Southwest has successfully implemented its fuel hedging strategy to significantly reduce fuel costs and has the largest hedging position among other airlines. Southwest's unit costs decreased by 3.5% in the second quarter of 2005 despite a 25% increase in jet fuel costs. Southwest's fuel costs in fiscal year 2003 were significantly lower (0.012 per ASM) than those of the other airlines, with the exception of JetBlue, as shown in exhibit 1 below. In 2005, the airline was able to hedge 85 percent of its fuel requirements at $26 per barrel. Oil prices worldwide reached $68 per barrel in August 2005. Southwest saved $196 million in the second quarter of 2005 just on fuel. The state of the industry also suggests that airlines that hedge have an advantage over those that do not. In 2003, Southwest made the announcement that it would add performance-enhancing Blended Winglets to more of its Boeing 737-700 aircraft. The striking Winglets will improve the aircraft's performance, reduce takeoff noise, conserve fuel, and lower engine maintenance costs.
Point-to-Point Service Southwest utilizes a point-to-point service model for its flights in order to minimize expenses and improve operational effectiveness. With an average distance of 590 miles, the majority of its flights are short hauls. It employs the strategy to boost capacity utilization and increase flight frequency.
Secondary Airports Southwest attempts to cut travel times and provide better customer service by flying to secondary or smaller airports. It has consistently topped the industry in punctuality. Additionally, Southwest has reduced the costs of its airport operations more successfully than its competitors.