1、low-cost carrier because of its unique business model. The model includes flying one aircraft type, the Boeing 737, on high-density routes throughout the United States. Southwests low-cost business model is further defined by the airline not offering many services, which are a standard offering on m
2、ost traditional American carriers, such as a First Class cabin, airport lounges, reserved seat assignments, and video/audio programming. By not offering these services, Southwest claims that it can offer lower fares and produce a higher return on invested capital than other airline companies. Herber
3、t D. KelleherHerbert D. Kelleher (born March 12, 1931) is the co-founder, and Chairman Emeritus and former CEO of Southwest Airlines (based in the United States).Kelleher was born and raised in Haddon Heights, New Jersey, where he graduated from Haddon Heights High School. He has a bachelors degree
4、from Wesleyan University and a Juris Doctor from New York University. At Wesleyan he was a member of Delta Kappa Epsilon fraternity. He is married to the former Joan Negley and they have four children. The Kellehers moved to Texas intending to start a law firm or a business.Legend has it that Kelleh
5、er and one of his law clients, Texas businessman Rollin King, created the concept that later became Southwest Airlines on a cocktail napkin in a San Antonio, Texas restaurant. After overcoming a years worth of legal challenges from competitors who tried to keep it grounded Southwest has succeeded by
6、 daring to be different: offering low fares to its passengers by eliminating unnecessary services and avoiding the hub-and-spoke scheduling system used by other airlines in favor of building traffic in such secondary airports as Albany, Chicago-Midway (instead of Chicago-OHare) and Orange County. Du
7、ring his tenure as CEO of Southwest, Kellehers colorful personality created a corporate culture which made Southwest employees well-known for taking themselves lightlyoften singing in-flight announcements to the tune of popular theme songsbut their jobs seriously: Southwest has never had an in-fligh
8、t fatality. Southwest is consistently named among the top five Most Admired Corporations in America in Fortune magazines annual poll. Fortune has also called him perhaps the best CEO in America. Mr. Kelleher was inducted into the Junior Achievement U.S. Business Hall of Fame in 2004.On July 19, 2007
9、, Southwest Airlines announced that Kelleher would step down from the role of Chairman and resign from the board of directors in May 2008, though he would remain a full time employee for another five years. Kelleher ultimately stepped down as chairman on May 21, 2008. Immediately following, Southwes
10、t Airlines named current CEO, Gary C. Kelly the new Chairman of the Board of Directors.In July, 2010 Kelleher was appointed Chair of the Federal Reserve Bank of Dallas board of directors for 2011. Kellehers term will expire in 2013. Previously, he had served as Deputy Chair.Competitive environmentTh
11、e Airline Deregulation Act of 1978 redefined the industry by eliminating the ability of the Civil Aeronautics Board (CAB) to set fares, allocate routes, and control entry and exit into markets. Unfortunately, most airlines were hamstrung by high cost structures, including exorbitant labor costs, and
12、 highly inefficient planes and infrastructure facilities. In the aftermath of the complete removal of entry and price controls by 1980, competition intensified considerably as new entrants cherry-picked the large carriers most profitable routes. This led to an extended period of severe industry shak
13、eout and consolidation.Structural characteristics The industrys structural characteristics make it a tough place to be very profitable. The overall industry is not highly concentrated, although it has become more concentrated since deregulation. Nevertheless, most discrete markets are served by a li
14、mited number of carriers. In the oligopolistic markets in which most airlines compete, the pricing actions of one company affect the profits of all competitors. Intense price wars have been a frequent event in the industry. Because competition varies from route to route, a carrier can dominate one m
15、arket, be dominated in another and face intense rivalry in a third. As a result of the hub-and-spoke system, airlines face head-to-head competition with more carriers in more markets.Suppliers tend to have relatively high bargaining power. Certain unions are in a position to shut down airlines. Airp
16、lane manufacturers (Boeing, Airbus) have considerable power in altering the terms of purchase for planes. Furthermore, the business is capital intensive and requires very large expenditures for airplanes and other infrastructure.Despite difficult economics, the industry is still attractive to new en
17、trants. There are few substitutes for long-haul air travel. In addition, most of the incumbents have high cost structures that are exceedingly difficult to improve significantly. Carrier failures and downsizing have also created a large supply of relatively new used aircraft and the cost of acquirin
18、g aircraft is reduced further by the practice of aircraft leasing. Given high debt levels and low profitability in comparison to other industries, most airlines, including Southwest, have begun to lease their planes rather than purchase them. In light of high debt and low profits, the depreciation t
19、ax shield is not as valuable to the airlines. By leasing, carriers can sell that tax shield to the leasing company, actually creating value for the carrier. As a result, entry barriers are not as high as one would expect in other capital-intensive industries.Furthermore, new entrants generally gain
20、significant cost advantage by securing lower labor costs because they are not burdened by the unfavorable union contracts that affect many older airlines. Many of the union contracts agreed to by the major airlines call for higher pay and contain work rule provisions that reduce labor productivity.
21、In addition, new entrants are sometimes able to gain favorable terms by purchasing excess capacity of other airlines, such as training and maintenance.ProfitabilityIn order to survive and profit in this tough environment, airlines attempt to manipulate three main variables: cost, calculated as total
22、 operating expenses divided by available seat miles (ASM); yield, calculated as total operating revenues divided by the number of revenue passenger miles (RPM); and load factor, calculated as the ratio between RPMs and ASMs, which measures capacity utilization. Thus, profitability, defined as income
23、 divided by ASM, is computed as:Profitability = yield X load factor costThe major airlines have faced intensive competition from low price airlines in the 1990s. While these low priced airlines expanded the market for air travel they also placed great downward pressure on the prices of the majors, t
24、hereby reducing their yields. To compete, the majors engaged in great cost cutting efforts. Delta announced the goal of reducing its cost/ASM to 7.5 cents by June 1997. It fell from 9.6 cents in April 1994 to 8.75 cents in March 1997. While this resulted in significant savings, it did not prevent De
25、ltas stock price from falling after the company announced earnings well below Wall Streets expectations. Strains arose between Delta CEO Ronald Allen and the board as a consequence of the damage done to Deltas reputation for stellar service, due in part to the cost cutting. This apparently contribut
26、ed to the boards decision in May 1997 to replace Allen.Capacity JP Morgan analysts believe that the most important factor influencing pricing in the long-term will be the falling industry cost curve. They point out that low-cost airlines have already lowered and inverted the traditionally downward s
27、loping industry cost curve. With it they have pressured fares industry-wide, but particularly in short-haul markets where their impact on costs have been most dramatic.the airlines that are increasing capacity are those lowest on the industrys cost curve. This shift has occurred because of the growt
28、h in low-cost, short-haul travel.Outlook Lehman Brothers analysts concluded in 1996 that the US airline industry was entering a mature and more stable phase, as the major restructuring it required was largely accomplished. In their view, this restructuring was driven by two key developments. First w
29、as the retrenchment of the majors into their core hubs. Second was technology diffusion, which occurred when the weaker airlines upgraded their systems technology regarding pricing and yield management and eliminated many disparities among major carriers.Arenas of competition have also shifted. Low-
30、cost carriers, including Southwest Airlines and Shuttle by United, dominate short-haul capacity in the west. Expansion of the low-cost carriers seems to be slowing, and competition appears to be stabilizing. Meanwhile the East Coast is still dominated by high-cost carriers such as USAir. Consequentl
31、y, it is not surprising that the low-cost airlines have targeted the east as a major arena for expansion. Southwests invasion of Florida and Providence, RI is a noteworthy example. In the Northeast, capacity reduction by high-cost competitors such as American, USAir, and Continental has also enhanced the opportunities for low-cost airlines. As carriers learn to adapt the low-cost formula to the geographic, climatic, and market intricacies of the Northeast, low-cost operations will likely continue
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