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Economics In Aviation

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Introduction

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

resources are adequately 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 discussed.

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 carrier has employed more than 53,000 employees to perform its operations which

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,

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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. Comfortable credit conditions shifted to a

tight credit situation affecting the global activity. According to Rudd (2009), the fall in global

industrial production experienced during the crisis was the highest in the world since the World

War II. Regulatory regimes were ineffective in ensuring the growth of financial risk-taking in the

developed countries and the financial conditions deteriorated worsening the economic activity

levels. 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

carriers which were facilitated by the strategies implemented.

Strengths of the Southwest Airline.

Southwest Airline can strategize and achieve success in the challenging economy which

helps deliver its high performance. Second, problem-solving techniques created, low costs, and

innovative services provided enable the company to gain a more significant 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

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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 means applied by the other airlines. For instance,

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

and Spoke (Gitell, 2003). Customers are also not assigned seats like in other airlines, but a

boarding group whereby they are free to find their positions 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

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

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

Comparison of Southwest Airline’s performance and that of Jetstar Airways

The performance of Southwest Airline is higher than that of Jetstar Airways although both of the

airline companies use the Low-Cost Carrier operating business model. The level of profitability

is higher in Southwest Airline than in Jetstar Airways. The on-time performance for both

departures and arrivals at Jetstar Airways is lower than that of Southwest Airlines. For instance,

the on-time performance of Jetstar Airways declined from 82.4% in 2014 to 73.1% in 2006 while

that of Southwest Airlines rose from 81.02% in 2014 to 81.5% in 2016 (Reinhart & Rogoff,

2009). Unlike Southwest Airline which highly focus on employee motivation, Jetstar Airways

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offer low wages and benefits to their employees which result in lower productivity and

performance than Southwest Airline.

Economic issues

Southwest Airline 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 profoundly influenced by the operating costs incurred by airline

companies. The pricing theory in the economics of aviation has been applied in the

determination of prices to be offered to customers. The firm adopts a cost-based pricing strategy

in determining rates to be provided for its services. To achieve the low-cost prices, it ensures

reduction of the costs incurred whereby the business model is built around low operating costs.

With reduced expenses, the company increases its revenue and profits (Gillen & Lall, 2004). For

instance, Southwest airline includes few types of aircraft which exclude amenities like in-flight

movies thus promoting cost reduction. Southwest airline also serves smaller airports which

involve lower costs and no fees charged on the first and second bags and a change in flight plans

by customers. Maintenance of low-fare brand, growth in domestic market share and increased

profitability has been achieved by the airline.

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

and implement unique strategies in the market. To maintain its cost-effectiveness, the company

has adopted a long-term fuel purchasing strategy by purchasing 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 to

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cut costs (Gitell, 2003). Through the application of innovative and creative strategies different

from those of the competitors, the company has been able to thrive in the industry.

The company focus on customer satisfaction has helped in winning the trust of customers

in their airline services achieving customer loyalty. The Boeing 737 aircraft in use are equipped

with satellite-based WIFI to provide connectivity which enables customers to use their 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. A positive outcome result from the difference implying that customer

satisfaction is achieved.

To improve customer experience, Southwest airline has better reward programs than

other carriers in the industry. 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 can cancel

reservations within 30mnutes before departure under the Southwest cancellation policy, and the

funds are carried forward to a future flight (Whitelegg &Frsa, 2003). Based on the theory of

demand and supply reduction in price increase the quantity demanded. At Southwest airline, due

to the lower flight prices than those of competitors offered, the need for its services has

increased.

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). Employees are also

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trained and motivated to work together for the common purpose of the company. Improved

employee productivity and high airline performance are achieved. Employees are also

encouraged to incorporate their innovative ideas into the company operations to improve

performance. The employee-management relationship established in Southwest airline company

enables employees to participate in management affairs. 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 services. Acquisition of the AirTran

helped gain a more significant 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.

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). Theory of revenue

management is applied to revenue analysis of the airline. Direct and indirect operating costs are

incurred while generating output by the carrier which represents the number of seats flown.

Yield from a flight is measured regarding the average fare paid by all the passengers flown per

kilometer from the total revenue obtained (Doganis, 2009). Operating income which comprises

of passenger and other revenues are obtained for the services offered. Low expenses have been

incurred by the airline, and high yield acquired resulting in high profitability.

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High aircraft productivity is characterized by more departures, longer stage lengths, and

more flown seats (Doganis, 2009). 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. Seat inventories are controlled to provide

availability when required for booking by passengers, and the systems also help in the

management of overbooking. Ancillary revenues generated from non-ticket sources are

maximized.

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 more prolonged average stage lengths, the airline has been

able to achieve high aircraft productivity. Its strengths have contributed highly to its performance

such as the ability to strategize and application of problem-solving techniques.

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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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