southwest-airlines-business-model

The Southwest Airlines Business Model In A Nutshell

  • Southwest Airlines is a low-cost American commercial airline company founded by Herbert Kelleher and Rollin King in 1967. The company began operations in Texas at a time when interstate travel was heavily regulated.
  • Southwest Airlines makes money across three categories: passenger revenue, transport revenue, and revenue for ancillary services such as early check-in.
  • Southwest Airlines recorded profits for 47 straight years, with the streak only broken by the coronavirus pandemic. The success of the company in an industry with slim to non-existent profits is due to intelligent route selection, flexible seating, free checked baggage, and a point-to-point destination strategy.

Southwest Airlines origin story

Southwest Airlines is a low-cost American commercial airline company founded by Herbert Kelleher and Rollin King in 1967.

Kelleher and King developed the concept for Southwest Airlines in a San Antonio hotel bar. The original business plan was illustrated on a cocktail napkin with a triangle connecting the Texan cities of San Antonio, Dallas, and Houston.

Initially, the company operated flights within the state of Texas only. Federal authorities controlled interstate air travel in the United States at the time, deciding where an airline could fly and how much it could charge. This turned out to be a blessing in disguise for Southwest Airlines, enabling it to establish a strong presence in Texas where it was free to undercut competitors including Braniff and Texas International. During those early years, the company was also known for its ability to turn planes around in just ten minutes.

When President Jimmy Carter signed the Airline Regulation Act on October 24, 1978, the company began introducing routes around the United States. A service between Houston and New Orleans was the first such route, with additional flights to Tulsa, Oklahoma City, and Albuquerque following in 1979. That same year, the company introduced self-ticketing machines to make the check-in process more efficient.

Over the following decades, Southwest Airlines stayed true to its low-fare brand. For a customer checking in two bags, the company claims its fares will be the lowest on offer in 87% of cases. Competition-beating prices are possible because Southwest operates Boeing 737s exclusively, enabling it to save money on training mechanics and pilots on a range of different aircraft. The company also prefers routes between smaller airports where taxes and gate access are more affordable.

Third-quarter operating revenue for 2021 was $4.7 billion, representing a 161% year-over-year increase. The company now services routes to over 100 destinations across the United States, Mexico, Central America, and the Caribbean. 

Southwest Airlines revenue generation

Southwest Airlines generates revenue by providing domestic and international airline services. 

Revenue is spread across three categories:

  1. Passenger revenue – or the sale of domestic and international airline tickets to travelers. 
  2. Transportation revenue – encompassing shipping and freight services, and
  3. Other revenue – derived from the sale of ancillary services such as early check-in and in-flight purchases. Unlike other airlines, Southwest does not charge premium seating fees and offers light refreshments such as peanuts and crackers for free. 

Profitability

While the company uses a revenue generation strategy common to many airlines, its successful business model deservers further mention. Before the COVID-19 pandemic grounded planes around the world, Southwest Airlines made a profit for 47 consecutive years between 1973 and 2019. 

Despite operating in an industry where it is notoriously difficult to do so, the company has managed to not only survive but thrive. 

This has been achieved in the following ways:

  • Intelligent route selection – as noted in the previous section, the airline prefers to operate routes where airport taxes are minimal. It also chooses routes where it is more likely to sell every seat.
  • Flexible seating – Southwest doesn’t assign seat numbers to passengers. This means that if a plane is swapped out with a different seating configuration, the company doesn’t have to reissue boarding passes.
  • Free checked baggage – while most airlines charge for checked baggage, Southwest does not. Former Vice President of ground operations Chris Wahlenmeier explained the reasoning: “When you charge people to check bags they try to carry more on, sometimes more than can fit in the overhead bins. That results in more bags being checked at the gate, right before departure. And that wastes time.
  • Point-to-point destinations – lastly, Southwest flights are point-to-point. This means the plane lands, turns around, and travels back to where it came from. The point-to-point strategy is seen as less vulnerable to delays than flying into major hubs, which are connected to hundreds of different airports and experience heavy air traffic as a result. A simpler network also means the company wastes less time searching for lost luggage, with Southwest boasting a bag completion rate of 99.6%.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which reached over a million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get The FourWeekMBA Flagship Book "100+ Business Models"