Southwest Airlines Co. (NYSE: LUV) has grown from a tiny airline with three planes serving three Texas cities in 1971 to one that served 93 destinations in 40 states, Washington D.C., Puerto Rico and five nearby international locations in 2014.

The company's low-cost business model has been a model of consistency (42 consecutive years of profitability through the end of 2014) in a volatile and economically sensitive industry. Southwest has also garnered market share from competitors.

Market Share

There are many ways to measure market share. One could look at revenue per passenger mile (RPM), a measure of demand, which was 108 billion in 2014, or over 18% compared to the four remaining competitors Southwest outlined in its proxy (Alaska Air, Delta Air, JetBlue Airways, and United Continental Holdings). This has grown from 16% in 2010. Larger competitors Delta and United Continental were the only ones in the group with bigger shares of RPM, at 40 and 30%, respectively.

According to the Centre for Aviation, Southwest had 18.8% market share in January 2015 based on domestic available seat miles (ASM), which is a measure of capacity. This has been relatively constant over the last five years, second only to Delta Airlines' 19.2%, despite the industry going through a period of intense consolidation.

Based on these four competitors, Southwest had about a 12% market share in 2014 when examining worldwide passenger revenue. This is a strong position, considering the other companies are larger and have a bigger international presence. The other four companies' market share ranges from 20 to 23%.

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 ASM or operating expenses per ASM. After increasing from 2010 to 2012, it declined for more than two years, including the 0.8% drop last year to 12.5 cents. The unit costs continued to fall this year, down to 11.18 cents for the nine-month period through Sept. 30, 2015, or an 11.1% decrease year over year. This allows the company to profit even as it offers low fares to its customers.

The figure is also lower than its major competitors. For instance, operating expense per ASM was 13.42 cents for American Airlines' mainline operations in 2014 and 23.16 cents for its regional operations. At Delta Airlines, the figure was 15.92 cents in 2014.

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.

Favorable Trends

Southwest is undertaking an effort to modernize its fleet. This includes the Boeing 737 MAX aircraft. The company is scheduled to start taking delivery in 2017. These planes will be more fuel-efficient and require less maintenance. In fact, the fleet will have the lowest operating unit cost in the single-aisle category, according to management.

Although lower gas prices will benefit the entire airline industry, it is particularly important for Southwest given its commitment to low fares. The cost per gallon has grown from 80 cents in 2003 (16.5% of operating expenses) to $3.30 in 2012 (37.2%). It was $2.63 a gallon, or 29.1% of operating expenses in the fourth quarter of 2014.

Aside from the cost perspective, Southwest is continuing to integrate its AirTran acquisition. This allows the company access to other areas such as Atlanta and the Caribbean.

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