Southwest Airlines Co. (NYSE: LUV) has grown from a tiny airline with three planes serving three Texas cities in 1971 to one that serves more than 100 destinations across the U.S., flying 4,000 flights a day.
Moreover, Southwest has added 41 airports to its route network since 2010, and now serves 14 near-international destinations in 10 countries.
The company's low-cost business model has been an example of consistency, booking 47 consecutive years of profitability through the end of 2019. Even more impressive considering the volatile and economically sensitive airline industry. Southwest has also garnered market share from competitors.
- Southwest Airlines is a major regional airline in the U.S. with 4,000 flights a day, a huge expansion from its start in 1971 with just 3 planes.
- In terms of revenue passenger miles, Southwest holds a nearly 20% domestic market share, just behind American Airlines.
- According to its June 2021 investor presentation, Southwest is the market leader in 22 of the top 50 U.S. metro areas.
- The company has relied on a business model of low-cost, no-frills flights that feature-packed planes but also point-to-point service to otherwise unserviced destinations.
- Southwest is continuing to expand its route network aggressively, having opened or announced 17 new airports since the COVID-19 pandemic began.
There are many ways to measure market share. One could look at domestic revenue passenger miles, a measure of demand.
Southwest Airlines had 18.5% of the domestic revenue passenger miles market share for April 2020 to March 2021. This falls just behind the market share leader, American Airlines (AAL) with 19.6%. Other larger competitors, Delta Air Lines (DAL) and United Continental (UAL) came in with market shares of 14.4% and 11.2%, respectively.
Also, according to its June 2021 investor presentation, Southwest is the market leader in 22 of the top 50 U.S. metro areas.
The Business Model
First and foremost, Southwest has a low operating cost structure. In fact, management states that unit costs are among the lowest in the industry. These are also referred to as cost per available seat mile (CASM) or operating expenses per ASM.
In 2020, the airline posted a CASM of 13.4 cents, representing an increase of 6% over 2019. This allows the company to remain profitable even as it offers low fares to its customers.
The figure is also lower than its major competitors. For instance, operating expense per available seat mile (ASM) was 19.69 cents for American Airlines in 2020. At Delta Airlines, consolidated CASM clocked in at 14.53 cents.
Southwest also provides point-to-point service rather than the hub-and-spoke that most major airlines offer. A hub-and-spoke system concentrates an airline's operations in major hub cities and serves other destinations through connecting services.
Southwest's services are offered outside of this system, allowing the company to offer more direct nonstop flights. This also allows for low fares, since these airports typically have less air traffic, allowing Southwest to schedule more flights, minimizing downtime and employee productivity.
Southwest is undertaking an effort to modernize its fleet.
This includes shifting away from the troubled Boeing 737 MAX aircraft. Southwest only flies Boeing aircraft, which helps keep maintenance and training costs low. The average age of its fleet is around 12 years, which should help keep the operating unit costs low.
Although lower gas prices will benefit the entire airline industry, it is particularly important for Southwest given its commitment to low fares.
Aside from the cost perspective, Southwest is continuing to expand its route network aggressively, having opened or announced 17 new airports since the COVID-19 pandemic began.
Management also continues to take steps towards its environmental sustainability goal to be carbon neutral by 2050.