Southwest Airlines Co. began modestly in 1971 as a Texas-based operation serving Dallas, Houston and San Antonio. Today, thanks to its ability to achieve rapid expansion through a model of lean operations and low overhead costs, the company serves 94 cities in seven countries.
Earning a profit in the airline industry has never been a given. In fact, the industry’s average per-customer profit is only $8.27.1 Cost-cutting strategies, such as reducing leg and headroom to allow for additional seats, may make room for extra revenue, but they often decrease customer satisfaction in the process.
To achieve cost leadership, Southwest targets efficiency. The company uses only Boeing 737s in its fleet rather than a variety of aircraft, which reduces the training needed for pilots, crews and mechanics.2 It also forgoes seat assignments, eliminating the time and cost of reissuing new boarding passes in the event of a last-minute aircraft switch. Open seating contributes to a faster boarding process, which in turn allows Southwest to turn around flights in an average of 25 minutes, compared to 40 for other airlines.3 Quicker turns mean less time on the tarmac, more flights and happier customers.
Southwest also adheres to a “bags fly free” policy for checked luggage, which, in addition to earning customer appreciation, saves time during boarding since customers aren’t trying to carry on oversized bags. And, unlike many of its competitors, Southwest flights follow a point-to-point system so that planes fly from departure city to destination, turn around and repeat rather than funneling through hubs where the volume of air traffic can lead to delays.
By keeping operations simple and lean, Southwest achieves cost and time savings that can be passed along to its customers in the form of low fares and high satisfaction. In fact, the American Customer Satisfaction Index shows Southwest leading the industry for 16 of the last 20 years.4
The lesson? Cost leadership, when used strategically, can be the key to outpricing the competition and growing a satisfied and loyal customer base for your business.
“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines.”
—Warren Buffett in a 2008 letter to investors