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Accounting Essay

3425 words - 14 pages

Southwest Airlines

Kaushal Desai Vaishali Patel Debra Quach

Introduction Although the airline industry is no longer experiencing the rapid growth it exhibited before 1990; commercial air travel in the U.S. remains the preferred method of transportation for a majority of Americans due to cost-effectiveness and timesaving characteristics. From 1980 to 1990 the number of passengers traveling by air increased by approximately 72%, in contrast, in the 1990-1998 period, the airline industry only experienced 36% growth. Furthermore, during 1965-1978, the government regulated the airline industry by forcing artificial wage increases and artificial price levels. In the postderegulation era, ...view middle of the document...

Rivalry The extent to which rivalry exists will influence the overall profitability of the industry. Market concentration remains a significant factor affecting rivalry. In 1989, no



single airline solely dominated the industry, but the eight largest carriers retained a total market share of 92%. Routes, airports, and hubs served by many carriers experienced intense rivalry. Profitable hubs are those set up in high traffic cities with high demand for air travel. In order to gain profits, airlines must beat out the competition by offering as much or more flights with time flexibility to a variety of destinations. Other factors contributing to rivalry include high fixed costs, excess capacity, low differentiation, price wars, and readily available prices via the Internet. Due to the nature of the industry, high fixed costs are expected. “The airline industry’s extremely high fixed costs made it one of the worst net profit margin.” 2 Contributions to fixed costs in the airline industry include the costs of planes, fuel, pilots, flight attendants, and additional staff for baggage and customer service. The need to meet government regulations and hire experienced employees can cost an airline company millions of dollars. Another high cost includes high-tech computer systems that are capable of tracking frequent flier miles, differentiating between advance purchase and last-minute purchased tickets, accommodating customer flight changes, and offering an efficient operation schedule of departure and arrival times. To help recover these fixed costs, airlines must maximize their load factor by increasing revenue for passengers per miles. Currently there has been excess capacity on many routes; as a result, airlines have been participating in price wars in order to attract customers at all costs. Minimal differentiation among airlines and switching costs for passengers also magnify rivalry. An example of switching cost is the cost incurred if individuals or corporations change airlines and forgo the benefits of adding frequent flier miles onto previously accumulated miles on another airline. The decision to go with a new airline becomes burdensome since miles between airlines cannot be transferred. Even though the introduction of frequent flier programs was intended to increase customer loyalty, low cost airline strategies have diminished the effectiveness of these membership plans. Rivalry has also increased greatly due to prices being readily available for comparison through the Internet. For instance, “Delta Air Lines, like most major carriers, distributes about 70% of its tickets through travel agents. Each one of those round-trips


costs the airline $10 in fees,” therefore increasing prices for consumers. One of Southwest’s strong contributions to profit emerges from accepting online reservations and processing e-ticket for reduced prices by ticket-less travel. Many major...

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