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Southwest Airlines is an American low-cost carrier headquartered in Dallas, Texas. The archetype low-cost airline that inspired the low-cost movement around the world, Southwest is among largest airline in the world as measured by passengers carried. Southwest is one of the world's most consistently profitable airlines, adhering closely to its low-cost tradition but differentiating itself through well-regarded customer service and free baggage checks. Southwest remains one of the most influential airlines in the world, with an enormous fleet of Boeing 737NG aircraft which operate over 3500 services each day to over 70 destinations across the United States.
On 27-Sep-2010, Southwest Airlines announced plans to purchase AirTran Airways in a USD1.4 billion share purchase. The AirTran business is being rebranded under the Southwest Airlines brand. The deal significantly strengthens Southwest's presence in eastern and mid-west US markets and the Caribbean.
Location of Southwest Airlines main hub (Chicago Midway Airport)
Southwest Airlines share price
LCCs will continue to evolve into hybrids of the original core model. CAPA and OAG consider Southwest Airlines fits the LCC profile and it is included in our reporting on this basis. Please note: when reporting for an airline is changed from or to LCC the historical data is not affected and it can lead to a distortion in the current reported data. Contact us if you have any queries.
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Southwest Airlines aims to realise its goal of dismantling AirTran’s hub in Atlanta in Nov-2013 as a means to bolster local passengers at the airport in the hopes of improving Atlanta’s performance. The declaration that Atlanta will officially become a point-to-point operation completes efforts by Southwest to eliminate unprofitable flow-through routes and concentrate on areas where it, along with AirTran, has relative strength.
After completing its acquisition of AirTran in May-2011, Southwest set its sights on network optimisation between the two carriers. The exercise essentially resulted in many small markets being eliminated from AirTran’s network and Southwest’s determination that Atlanta would perform more effectively in the combined network through the adoption of Southwest’s point-to-point route management strategy.
Delta Air Lines continues to leverage the competitive strength it holds over its US legacy peers to flesh out its network and build pockets of strength as United and Continental remain in the throes of their merger integration and American and US Airways lay the groundwork to begin the complex process of combining their respective organisations.
During the last couple of years Delta has used the nimbleness it enjoys versus its legacy domestic competitors to broker equity investments in foreign carriers to build a robust network ahead of the completion of US consolidation. Those investments have moved in tandem with Delta’s bolstering its presence in New York through its slot swap deal with US Airways and its investment in facilities at JFK and LaGuardia airports.
During 2013 Delta is attempting to strengthen its position in the fragmented but strategic Los Angeles market through a 12% boost in daily seats year-over-year from Jul-2012 to Jul-2013.
Southwest Airlines sits at an interesting crossroads as the US market reaches a high level of maturity ushered in by legacy carrier consolidation and its own merger with AirTran Airways that is targeted for completion in 2014. With the changes, three distinct business models are emerging in the US – full service, hybrid and ultra low-cost.
But Southwest does not fit neatly into any of those categories, which the carrier might view as a positive attribute as it examines how to evolve its business model. Southwest's history of a skittish approach to change leaves many questions unanswered as to how the airline can retain the attributes that make it a recognisable brand while making key decisions to ensure a large pipe of steady revenue generation.
The low-cost pioneer during the last couple of years has seen its edge in that regard soften as Chapter 11 reorganisations and consolidation among the US majors has resulted in those airlines lowering their unit costs. During 2012 Southwest’s unit costs increased 4.2% year-over-year, and on a stage length adjusted basis there was roughly a 30% difference in its nearly USD7 cent unit costs compared with Allegiant Air, who along with Spirit is considered the new breed of ultra low-cost carrier.
American and US Airways are pressing full steam ahead to close their merger by 3Q2012, including stressing to US legislators that the combination will improve the overall health of the country’s airline industry and make the merged airline a more viable competitor with legacy and low-cost carriers alike. With just a dozen routes that overlap, the carriers should not encounter any resistance from anti-trust authorities, and given that most the markets are hub to hub pairings, few changes are likely to be made to service patterns once the 18 month integration process is complete.
Some of the arguments made by American and US Airways over increasing competition from low-cost carriers and their potential service expansion into overlap markets might be overblown as those airlines in previous mergers have been selective in grabbing the low hanging fruit created by the tie-ups between Delta-Northwest, United-Continental and Southwest-AirTran.
US airlines moved closer to the razor’s edge during 2012 after collectively recording a profit margin of 0.1%. While the 10 largest airlines in the country may be commended for sustaining a three-year profit streak amidst record high fuel prices, they could find it tough to find creative ways to continue to achieve profitability as the potential to tap ancillary revenues reaches its peak.
On top of the seemingly everlasting threat of fuel price volatility, US carriers also face various forms of pressure from the US government, with looming threats of tax increases, as well as possibly significant operational disruptions triggered by bipartisan stalemate in budget negotiations.
Data compiled by US airline trade group Airlines For America (A4A) show the country’s largest carriers earned USD152 million during 2012, a 64% slide from the USD418 million in net income recorded the year prior. ExxonMobil earned around that much each day in 2012.
The 4.7% increase in airline expenses outpaced a 4.5% rise in revenue growth as fuel prices reached an average of USD128 per barrel during 2012. A4A estimates US carriers recorded USD50 billion in fuel costs during 2012, a 28% rise year-over-year.
US ultra low-cost carrier Frontier Airlines has made sweeping changes to its network during the last few weeks as it attempts to find the right mix of profitable routes that act as shields from one of its largest competitors, Southwest Airlines.
The changes include axing a short-lived focus city in Colorado Springs, hopping between airports close in geographical distance and introducing new seasonal flights from its Denver hub. Despite the end to the brief test case of the Colorado Springs focus city, Frontier for now remains committed to building up point-to-point service from Trenton, New Jersey and Orlando, Florida.
While the argument could be made that Frontier’s swift reaction to ever-changing market conditions reflects the nimbleness that its smaller size allows, the constant upheaval could be a turn-off to customers that expect a certain level of network consistency. And as Frontier’s parent Republic Airways Holdings works to secure a sale of Frontier in early 2013, would-be buyers may be scratching their heads over the long-term value Frontier might provide.
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