Deliberating On Economics In Aviation

Running head: ECONOMICS IN AVIATION 1

Assignment Title: “Assignment 1”

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ECONOMICS IN AVIATION 2

Introduction

Economics is an essential aspect in every nation in ensuring the available scarce

resources are properly allocated and utilized to satisfy human wants and achieve economic

growth and development. Economics in aviation which comprise economic theories and

principles enables airline companies and the entire airline industry to achieve efficiency in its

operations (Whitelegg & Frsa, 2003). As argued by Rudd (2009), the 2009 global financial crisis

affected economic activity in all sectors across the world including the airline industry. The

report aims at analyzing how well the Southwest Airline Company has performed since the

occurrence of the global financial crisis with the application of theories and principles in the

economics of aviation in addressing economic issues. Its strengths and weaknesses contributing

to the overall performance are also addressed.

Background information

Southwest Airline Company is a major airline in the US established in 1971 whose

headquarters are in Dallas, Texas (Hallowell, 1996). It is considered the largest low-cost carrier

in the world. According to Gitell (2003), the airline uses the Boeing 737s only with more than

700 planes in service and it operates 101 destinations within the US and other eight additional

countries. The airline has employed more than 53,000 employees to perform its operations who

are highly motivated and approximately 3900 flights are made in a day making it possible to fly

more passengers than any other airline in the US and more than 100 million customers are served

annually (Gitell, 2003). Southwest airline has been honored in the world due to its continued

profitability. Application of an appropriate business model in its operations and implementation

of competitive strategies have contributed highly to its success in the airline industry (Doganis,

2009). It is a people-oriented airline and its focus on employee and customer satisfaction has also

facilitated to its high performance and growth over the years.

The 2009 global financial crisis negatively affected the global activity and economy. The

crisis was caused by the credit markets in the developed countries like the US, United Kingdom

and Europe (Rudd, 2009). Inability to create new credit lines caused market instability as the

flow of money and economic growth was hindered. According to Rudd (2009), the largest banks

in the US lost their value and industrial average index dropped by more than 50%. The fall in

global industry production experienced during the crisis was the highest in the world since the

ECONOMICS IN AVIATION 3

World War II. As argued by Reinhart & Rogoff (2009), availability of cheap credit caused

increased demand resulting in inflation and all the sectors of the economy including the air

industry were affected by the financial crisis. Economic recession affected the aviation sector

causing a decline in profitability due to the fall in demand for air transport (Reinhart & Rogoff,

2009). However, though most of the airlines were highly affected by the crisis, its impact was

not felt by some. For instance, the Southwest airline performed well and improved its

profitability, unlike other airlines which were facilitated by the strategies implemented.

Strengths of the Southwest Airline.

Southwest Airline Company has various strengths which enable it to achieve high

performance and success in the industry. First, the company has the ability to strategize and

achieve success in the challenging economy. For instance, after the terror attack in the New York

City, most of the airline companies in the industry faced losses (O’Connor, 2001). However,

Southwest Airline Company adopted a strategy which through the help of its innovative

employees enabled huge profits to be achieved. Second, problem-solving techniques created, low

costs, and innovative services provided enable the company to gain a greater market share.

Third, the company’s focus on employee satisfaction helps to create a motivated and happy

workforce improve their productivity and create a culture that promotes success. As a result,

efficient operations are achieved and employee satisfaction also translates into customer

satisfaction through the quality services and help offered.

Fourth, the company has unique ways of operation whereby its functions are carried out

differently from the traditional methods and ways applied by the other airlines. For instance,

Southwest Airline Company uses the point-to-point system while the other airlines use the Hub

and Spoke (Gitell, 2003). Through this kind of system, flights get to their desired destinations in

time helping the company to achieve time performance benefit over other airlines. Customers are

also not assigned seats like in other airlines but a boarding group whereby they are free to find

their own seats on the plane were they feel more comfortable achieving customer satisfaction.

Weaknesses

A weakness identified for the Southwest airline company is the inability to introduce

other types of aircraft other than the Boeing aircraft brand. The introduction of modern aircraft to

ECONOMICS IN AVIATION 4

its fleet which may be preferred by customers may create an additional value to the company.

However, the Boeing brand design has remained competitive in the modern aircraft designs.

Economic issues

It is one of the best airline companies in the industry. Southwest airline has been thriving

since the 2009 global financial crisis, unlike other airlines. The company has adopted the cost-

leadership strategy as it offers low prices for air travel services as compared to its local airline

rivals being considered the cheapest flight carrier (Gillen & Lall, 2004). Pricing is highly

influenced by the operating costs incurred by airline companies. The pricing theory in the

economics of aviation has being applied in the determination of prices to be offered to

customers. The company adopts a cost-based pricing strategy in determining prices to be offered

for its services. At lower prices, customers are able to purchase more. By reducing flight prices,

the company aims at achieving more flight purchase from its customers and improve its

profitability. In order to achieve the low-cost prices, the company ensures reduction of the costs

incurred whereby the business model is built around low operating costs. With reduced expenses,

the company increases its revenue as well as profits (Gillen & Lall, 2004).

The company applies strategic planning model and principles in its operations in order to

develop and implement unique strategies in the market. In order to maintain its cost

effectiveness, the company has adopted a long-term fuel purchasing strategy. The company

purchased fuel buyout options in advance to serve for future years in a case of fuel price

fluctuations resulting from government interventions and price gouging by oil companies. For

instance, during the 2001 and 2008 presidential elections, Southwest airline applied the fuel

buyout practice due to the rising crude oil prices in order to cut costs (Gitell, 2003).

In order to improve customer experience, Southwest airline has better reward programs

than other airlines in the industry since it offers points to its customers for the purchase of flights

which are used to purchase future flights. Through its partnership with Chase Bank, customers

are offered credit cards which allow accumulation of points which are redeemed for future flights

(Gitell, 2003). The company has flexible policies and procedures which make services offered

better thus improving customer satisfaction and loyalty. For instance, customers are able to

cancel reservations within 30mnutes prior to departure under the Southwest cancellation policy

and the funds are carried forward to a future flight (Whitelegg &Frsa, 2003). Customers aim at

ECONOMICS IN AVIATION 5

maximizing satisfaction and benefits by spending their limited resources. The demand for

Southwest flight services has been high as a result of the reduced prices. Based on the theory of

demand and supply increase in prices reduces the quantity demanded and increases the quantity

supplied. This is because due to low prices, consumers are willing and able to spend their scarce

resources.

Southwest airline hires employees who are friendly and approachable to ensure the

provision of quality services to customers. Effective hiring practices and policies are applied to

ensure that the right people are acquired for the available jobs (Gitell, 2003). Improved employee

productivity is achieved as a result as well as improved overall performance of the airline.

Employees are also encouraged to incorporate their innovative ideas in the company operations

to improve performance. The employee-management relationship established in Southwest

airline company enable employees to participate in management affairs. Unlike other airlines, the

company emphasizes on labor/management partnerships. Flexible relationships with internal

workforce and external stakeholders like investors, aircraft manufacturers and air traffic

controllers help to meet their expectations and achieve high performance. The Southwest

airline’s executives and employees strive to improve their service. Acquisition of the AirTran

helped gain a greater market share and expand its services. The fleet of its planes has upgraded

and more lower-cost solutions developed to increase capacity. As a result, its revenue and

profitability have significantly increased.

The company has adopted a strategy to keep its customers relaxed by creating fun in their

planes and making the flight more enjoyable. The staff is trained on how to relate with the

customers in a friendly manner. The company focus on customer satisfaction has helped in

winning the trust of customers in their airline services in order to achieve customer loyalty.

Employees are motivated to work together for the common purpose of the company. The Boeing

737 aircraft in use are equipped with satellite-based WIFI to provide connectivity which enables

customers to use their personal devices while being flown thus improving their experience.

Customer value is created through niche focus whereby a single class is offered to all customers

onboard and they are all treated equally. The perception of the Southwest airline’s service

brandings the expectations of the services branding by the customers.

ECONOMICS IN AVIATION 6

Southwest airline’s revenue has increased over time due to proper revenue management

promoting its success in the industry. For instance, freight revenues in 2011 increased by $14

million (11.2%) as a result of better economic conditions and higher average rates as compared

to the previous year (Zhu, 2011). Operating revenues increased by $3.6billion and other charges

made contributed to increased revenue by $294million in 2011 (Zhu, 2011). Aircraft are assets

for generating revenue for the airlines through the price per seat paid by the customers. Theory

of revenue management is applied in revenue analysis of the airline. Direct and indirect

operating costs are incurred while generating output by the airline which represents the number

of seats flown. Yield from a flight is measured in terms of the average fare paid by all the

passengers flown per kilometer from the total revenue obtained (Doganis, 2009). Operating

revenue which comprises of passenger and other revenues are obtained for the services offered.

Profits made by the airline are determined by deducting the total operating expenses incurred

from the total revenue.

Aircraft productivity is determined by the number of departures, average stage lengths

and the number of seats flown (Doganis, 2009). High aircraft productivity is characterized by

more departures, longer stage lengths, and more flown seats. Southwest Airline Company makes

more departures in a day as compared to other airlines and operates longer stage lengths due to

the point-to-point networks. More seats are also flown achieving high aircraft productivity and

improving employee productivity as well. Computerized revenue management systems are put in

place to ensure maximization of revenue as well as profits.

Southwest airline as a low-cost carrier (LCC) gain competitive advantage and performs

better than the FSCs. LCCs perform better than the Full-service carriers (FSCs) due to the cost

advantage gained as a result of operating fleet of similar aircraft, high utilization of aircraft and

use of secondary airports which are less costly (Gillen & Lall, 2004). For instance, its aircraft

utilization is higher than for FSCs since more time is spent on air due to the point-to-point

network and the FSCs have longer ground time as passengers are flown through Hubs. The LCCs

thus ensure destination time is met and customer satisfaction achieved. The Southwest airline

offers a single class onboard while the FSCs offer multiple classes thus minimizing operation

costs. A less complex pricing structure than that of FSCs is also applied which ensure efficiency

of operations.

ECONOMICS IN AVIATION 7

Conclusion

Based on the discussion, Southwest Airline Company has highly performed since the

2009 global financial crisis. The airline has been able to differentiate its operations from those of

its rivals and implement unique strategies thus gaining a competitive advantage within the

monopolistic competitive market (Gitell, 2003). Its focus on employee and customer satisfaction

and enabled achievement of customer loyalty and improved employee productivity which highly

contribute to its high performance in the industry. It is the lowest-cost carrier in the world which

is achieved through minimization of the operating costs incurred. Due to the high number of

seats flown, more departures, and longer average stage lengths, the airline has been able to

achieve high aircraft productivity.

Running head: ECONOMICS IN AVIATION 8

References

Doganis, R. (2002). Flying off course: The economics of international airlines. Psychology

Press.

Gillen, D., & Lall, A. (2004). The competitive advantage of low-cost carriers: some implications

for airports. Journal of Air Transport Management, 10(1), 41-50.

Gittell, J. H. (2003). The southwest airlines way. McGraw-Hill Audio.

Hallowell, R. (1996). Southwest Airlines: A case study linking employee needs satisfaction and

organizational capabilities to competitive advantage. Human Resource Management,

35(4), 513-534.

Reinhart, C. M., & Rogoff, K. S. (2009). The aftermath of financial crises (No. w14656).

National Bureau of Economic Research.

Rudd, K. (2009). The global financial crisis. Monthly, the, (Feb 2009), 20.

Talluri, K. T., & Van Ryzin, G. J. (2006). The theory and practice of revenue management (Vol.

68). Springer Science & Business Media.

Whitelegg, J., & FRSA, B. P. F. (2003). The economics of aviation: a North West England

perspective. Source Unknown.

Zhu, J. (2011). Airlines performance via two-stage network DEA approach.

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