Reference no: EM131607378

Supply and Demand Conditions of Southwest Airlines

Supply and demand conditions for any company are determined by many different factors. The airline industry is a "volatile industry subject to numerous challenges" (Southwest Airlines Company Profile, 2016), such as terrorist attacks, weather and natural disasters, and of course, demographic trends just to name a few. The airline industry is currently experiencing a drop, in fuel prices, and it ultimately contributed to a "182% increase in fourth-quarter net income with $536 million," (Jansen, 2016) for Southwest, but it still remains the company's largest operating cost at 23 percent. Other airlines are facing market shift in demand due to checked bag fees and their history of nickel-and-dime habits for in-flight services, Southwest's services continue to be in high demand due to their well-priced fares, point-to-point services and commitment to remain steadfast in their Bags Fly Free (up to two) promise.

According to Leocha (2008) "Southwest is making a millions-of-dollars bet that passengers are intelligent enough to move toward lower airfares and fees," and based on their 2015 annual report findings, that bet is paying off. Airline passengers are intelligent, price savvy, and business oriented people who know a good deal when they see it. Southwest continues to be the only major U.S. airline that offers to all ticketed Customers up to two checked bags that fly free, of course weight and size limits apply (Southwest Annual Report, 2015). In a market where leisure travel is optional and videoconferencing is replacing an expensive business travel schedule, Southwest has managed to increase its passenger unit revenue growth by 8 percent in 2Q2014, "the largest gain of any US airline," (Center for aviation, 2014).

The Southwest Airlines moto is simple "keep cost down, fly all the same planes, 737's so parts and maintenance are easy, treat customers like kings and queens and employees even better" (Destination CEO Video Series). Moreover, the freedom to "move about the country" at a low fare-no-frills price is the result of strategic fuel hedging and the use of only one size plane, the 737. Gary Kelly, the CEO of Southwest Airlines, was able to lock in fuel hedging contracts that has Southwest paying far less than any other competitor; saving Southwest millions (Destination CEO Video Series). Although he has helped the company in many ways, Kelly faces new challenges as fuel hedging no longer guarantees cost protection from high jet fuel costs. Southwest Airlines has grown to be one of the most admired companies in Fortune magazine, listed seventh in 2016. Kelly's leadership has triggered Southwest Airline to become the biggest carrier of domestic passengers.

The ability to lower labor costs through the collective-bargaining agreements currently in place for 83 percent of the company's employees has granted the operation elasticity in ticket fares and other freebies that are no longer taken for granted in an industry all too willing to ascribe a price hike. icket sales have also remained profitable for Southwest, even as their market demands and operating costs have increased off and on throughout the years.

Additionally, the purchase Air Tran in 2011 continues to prove significance for the airline by increasing available seats by 43 percent (Southwest Annual Report, 2015). The demand for those seats and the ability to fill them amidst a market full of large airlines and customers who are hesitant to fork out hundreds of dollars on an airline ticket and unnecessary fees, still led to a "recorded 2015 earnings of $2.4 billion, or $3.52 per diluted share, which was 75.1 percent higher compared with 2014" (Southwest Annual Report, 2015). In 2014 Southwest introduced its own-branded international service after many years of talking about expanding to adjacent international markets. The purchase of AirTran and a reservations system upgrade helped accelerate the process and now Southwest offers service to Aruba, Cancun, Los Cabos, Nassau, Montego Bay and San Juan. "The addition of international service is important network diversification for Southwest as it has arguably penetrated most of the domestic US, 85 domestic destinations as of 2014" (Center for Aviation, 2014). Compared to its biggest competitor Delta Air Lines, Southwest has remained significantly less volatile in its volume and stock market price month over month indicating a successful strategic plan that allows the company to leverage operating costs against shifts in market demand such as customer income, and industry competition (see below). Southwest Airlines, like any other airline, faces on-going challenges with the American economy changing.

Although there has been a growth of about 12 percent, they still see opportunities to grow such as focusing on a new U.S. reservation system next year, adding more international flights in the future and rolling out 15 new planes. Without great employees and customer service, no organization could grow this large in just several years, which goes to prove that treating their customers like royalty and their employee's even better can make all the difference for a company.

Price Elasticity of Demand

According to Hubbard and O'Brien, (2014, p., 172) Price elasticity of demand is "the responsiveness of the quantity demanded to a change in price, measured by dividing the percentage change in the quantity demanded of a product by the percentage change in the product's price". The availability of airline options, in-flight luxuries and market share present a steady stream of competition for the point-to-point airline, but more often than not it is the convenience of flight options, flexible scheduling and reasonable (if not cheap) fares that keep Southwest in demand.

Their methods have been thoroughly tested with the implementation of friendly service and competitive, affordable airfare. Through the years other airlines have been forced to increase their prices, but Southwest Airlines has been able to keep their airfare affordable. Their wide array of options including in-flight options, flexible scheduling, and affordable fares keep them in high demand. By recognizing that their customers simply want affordable fares to get where they're going, they leave out unnecessary options and concentrate on keeping their flights affordable and comfortable.

Rollin King and Herb Kelleher began with one simple notion: "If you get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and make darn sure they have a good time doing it, people will fly your airline" (Southwest Airlines Company Profile, 2016). Southwest Airlines continues to separate itself from other air carriers by providing exemplary customer service by understanding what their customers want and the reasons behind their competitors having to raise prices, they are able to continue to provide the great customer service and low fares is what has helped them remain unmatched in its industry and has obtained profitability consecutively for each of its 45 years in business.