Background:

Southwest Airlines is the largest airline measured by quantity of passengers carried every year within the United States. It is also known as a discount airline in contrast to its large rivals in the industry. Rollin King and Herb Kelleher founded Southwest Airlines on June 18, 1971. Its first flights were from Love Field in Dallas to Houston and San Antonio, short hops with no-frills service along with a simple fare structure. The airline began with one easy strategy: If you get your passengers to their destinations once they would like to get there, promptly, at the smallest possible fares, and make darn sure there is a good time doing it, people will fly your airline. This approach has been the key to Southwests success. Currently, Southwest serves about 60 cities (in 31 states) with 71 million total passengers carried (in 2004) with an overall total operating revenue of $6.5 billion. Southwest is traded publicly under the symbol LUV on NYSE.

Facts:

* The very first major airline to fly just one kind of aircraft (Boeing 737s)

* The first major airline to offer ticketless travel system wide together with a frequent flier program based on quantity of trips and never quantity of miles flown.

* The first airline to provide a profit-sharing program to its Employees (instituted in 1973).

* The very first major airline to develop a Web site and provide online booking. In 2001, about 40 percent ($2.1 billion) of their passenger revenue was generated through online bookings at [http://www.southwest.com]. Southwest’s cost per booking via the Internet is about $1, compared to a cost per booking through travel agents of $6 to $8.

Key competitive advantages:

* Low Operational costs / High Operational Efficiency

* Top rated customer support

* Human Resource practices / Work culture

Operations Analysis Competitive Dimensions:

Southwest clearly has a distinct advantage when compared with other airlines in the industry by executing an effective and efficient operations strategy that forms an important pillar of its overall corporate strategy. Given below are some competitive dimensions that’ll be studied in this paper.

1. Operational Costs and Efficiency

2. Customer Service

3. Employee/Labor Relations

4. Technology

1. Operational Costs and Efficiency

In the end, the airline industry overall is in shambles. But, how does Southwest Airlines stay profitable? Southwest Airlines has got the lowest costs and strongest balance sheet in the industry, according to its chairman Kelleher. The two biggest operating costs for any airline are labor costs (approx 40%) then fuel costs (approx 18%). Another methods Southwest has the capacity to keep their operational costs low is – flying point-to-point routes, choosing secondary (smaller) airports, carrying consistent aircrafts, maintaining high aircraft utilization, encouraging e-ticketing etc.

Labor Costs

The labor costs for Southwest typically accounts for about 37% of its operating costs. Probably the most important component of the successful low-fare airline business model is achieving significantly higher labor productivity. Based on a recent HBS Example, southwest airlines is the most heavily unionized US airline (about 81% of its employees belong to an union) and it is salary rates are thought to be at or over average compared to the US airline industry. The low-fare carrier labor advantage is in much more flexible work rules that permit cross-utilization of almost all employees (except where disallowed by licensing and safety standards). Such cross-utilization along with a long-standing culture of cooperation among labor groups translate into lower unit labor costs. At Southwest in 4th quarter 2000, total labor expense per available seat mile (ASM) was a lot more than 25% below that of United and American, and 58% less than US Airways.

Carriers like Southwest possess a tremendous cost advantage over network airlines simply because their workforce generates more output per employee. In a study in 2001, the productivity of Southwest employees was over 45% greater than at American and United, despite the substantially longer flight lengths and larger average aircraft size of these network carriers. Therefore by its relentless pursuit for lowest labor costs, Southwest is able to positively impact its main point here revenues.

Fuel Costs

Fuel costs may be the second-largest expense for airlines after labor and accounts for about 18 percent of the carrier’s operating costs. Airlines that are looking to avoid huge swings in operating expenses and bottom line profitability choose to hedge fuel prices. If airlines can control the price of fuel, they are able to more accurately estimate budgets and forecast earnings. With growing competition and airline travel being a commodity business, being competitive in price was answer to any airlines survival and success. It became hard to pass higher fuel costs onto passengers by raising ticket prices due to the highly competitive nature of the profession.

Southwest continues to be able to successfully implement its fuel hedging technique to save on fuel expenses in a big way and it has the biggest hedging position among other carriers. Within the second quarter of 2005, Southwests unit costs fell by 3.5% despite a 25% increase in jet fuel costs. During Fiscal year 2003, Southwest had reduced fuel expense (0.012 per ASM) when compared to other airlines except for JetBlue as illustrated in exhibit 1 below. In 2005, 85 percent of the airlines fuel needs continues to be hedged at $26 per barrel. World oil prices in August 2005 reached $68 per barrel. In the second quarter of 2005 alone, Southwest achieved fuel savings of $196 million. The state of the also shows that airlines that are hedged possess a competitive edge on the non-hedging airlines. Southwest announced in 2003 that it would add performance-enhancing Blended Winglets to its current and future fleet of Boeing 737-700s. The visually distinctive Winglets will improve performance by extending the airplanes range, saving fuel, lowering engine maintenance costs, and reducing takeoff noise.

Point-to-Point Service

Southwest operates its flight point-to-point service to maximize its operational efficiency and stay cost-effective. The majority of its flights are short hauls averaging about 590 miles. It uses the strategy to keep its flights up more often and therefore achieve better capacity utilization.

Secondary Airports

Southwest flies to secondary/smaller airports in order to reduce travel delays and therefore provide excellent service to its customers. It has led the in on-time performance. Southwest has also been in a position to tone down its airport operations costs relatively better than its rival airlines.

Consistent aircrafts

In the centre of Southwest’s success is its single aircraft strategy: Its fleet consists exclusively of Boeing 737 jets. Having common fleet significantly simplifies scheduling, operations and flight maintenance. The training costs for pilots, ground crew and mechanics are lower, because there’s only a single aircraft to understand. Purchasing, provisioning, along with other operations will also be vastly simplified, thereby lowering costs. Consistent aircrafts also enables Southwest to utilize its pilot crew more proficiently.

E-Ticketing

The idea of ticketless travel was a major benefit to Southwest because it could lower its distribution costs. Southwest became electronic or ticketless during the mid-1990s, and today they are about 90-95% ticketless. Customers who want credit cards qualify for online transactions, now Southwest.com bookings account for about 65% of total revenue. The CEO Gary Kelly thinks that this idea would grow further and that he wouldn’t be surprised if e-ticketing accounted for 75% of Southwests revenues by end of 2005. In the past, when there is a 10% travel agent commission paid, it used to cost about $8 a booking. But currently, Southwest is paying between 50 cents and $1 per booking for electronic transactions that translate to huge cost savings.

2. Employee and Labor Relations

Southwest continues to be respected for its innovative management style. It keeps a relentless concentrate on high-performance relationships and its people-management practices have been the key to its unparalleled success in the airline industry.

Mission Statement

To the Employees
We are devoted to provide our Employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for increasing the effectiveness of Southwest Airlines. Above all, Employees will be provided exactly the same concern, respect, and caring attitude inside the organization that they’re likely to share externally with every Southwest Customer.

The Southwest mission statement implies that the organization includes a strong commitment to its employees. The organization affords exactly the same respect to its employees that’s presented to its customers. The Southwest mission statement is exclusive for the reason that it recognizes the significance of its employees within the broader business strategy, which emphasizes superb customer support and operational efficiency. The workers reciprocate the respect, loyalty and trust that Southwest demonstrates. Southwest workers are recognized for their loyalty, dedication, attitude and innovation. The employees are the distinguishing factor between Southwest and the remaining airline industry.

Hiring

Southwest hiring policy is unique not just inside the airline industry, but also more broadly, and involves finding individuals with the right attitude which will thrive within the Southwest culture. Extensive procedures are employed to hire for positive attitude and dedication. Those who don’t posses those qualities are weeded out. Colleen Barrett, a non-operational officer at Southwest, states that

Hiring is crucial, since you cannot institutionalize behavior. Instead, you have to identify those people who already practice the behaviors you are looking for. Then you can allow Employees to be themselves and make decisions about Customer service according to common sense as well as their natural inclinations. 1

Recruiting and interviewing at Southwest is a two-step process. The first step is really a group interview, conducted by employees, where communication skills of potential candidates are evaluated. The next stages in this method is one on a single interview, where the candidates’ attitudes and orientation toward serving other medication is evaluated. These hiring criteria affect all job functions since all Employees at Southwest play a customer service role. A critical a part of Southwest operational strategy is that every job at Southwest is really a customer service position, whether it directly pertains to the customer or whether it’s internal.

The table below shows that despite the fact that Southwest is the most heavily unionized airline, at approximately 80%, that contract negotiations between your unions and Southwest tend to be shorter in duration than of the other major carriers. This shows the caliber of relationship that Southwest has with its employees along with the unions that represent them.

Culture

Southwest was created as a different of company and from the beginnings a distinctive culture was nurtured. In 1990 Colleen Barrett formed the Southwest Culture Committee. This really is unique inside the industry and among all large companies. The committee also offers a mission statement:

This group’s goal would be to help create the Southwest spirit and culture where needed; to enrich it and make it better where it already exists; and also to liven it up in places where it might be “floundering”. In short, this group’s goal would be to do “whatever it takes” to create, enhance, and enrich the special Southwest spirit and culture which has made this this type of wonderful Company/Family.

It is primarily the unique method of company values which has created a culture that differentiates itself from others. Southwests culture is the reason why it’s successful.

3. Customer Service

The Mission of Southwest Airlines
The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered having a sense of warmth, friendliness, individual pride, and Company Spirit.

Approach

Herb Kelleher, founder of Southwest, has been quoted as stating that “We’re within the Customer service business; we simply occur to provide airline transportation”.2 Award winning customer support is really a distinguishing sign of Southwest and it is known internally as Positively Outrageous Service. It means that from the head to feet everyone does whatever they might to fulfill the customer. Including Herb Kelleher, who has been known for assisting baggage handlers on Thanksgiving. It’s through emphasizing the client and employee that Southwest is able to differentiate itself from others within the airline industry. On a more technical level, each employee or group within Southwest has his very own customer. Which means that every employee serves in a single way or any other despite not directly involved with the passenger. The mechanics customer may be the pilot and the caterers is the flight attendant.

Results

It can be said that the “Positively Outrageous Service” that’s unique to Southwest is not the result of a department, or a program, or a mandate from management. It is not secondary towards the product; it is the product. This approach produces the conditions where Workers are more likely to treat customers in ways that distinguish the company from others. There are many accounts of passengers who have received exceptional treatment from Southwest employees.

The question that should be answered is how Southwests customer service is different and why? Is it common for customers of other airlines to rave about their special service? The reply is that it is not. While Southwest doesn’t have a monopoly on those who are kind and who’re willing to exceed to fulfill a person, such behavior is nurtured at Southwest to a much greater extent.

It can then be concluded that the customer service that’s inherent to Southwest is really a part of its culture. This culture is supported through employee encouragement to complete the extra to fulfill the client. This approach inspires people who would ordinarily only on occasion go out of their way to help someone, to become consistent performers that offer exceptional service constantly. Southwest workers are what differentiate its customer support from the other airlines.

4. Technology

Southwest utilizes technology in many ways to fulfill its business objectives and gaze after its efficient operations. According to its CEO, technology equals productivity. Launched in 1996, ticketless travel was initially introduced by Southwest. On May 1st 2000, Southwest Airlines introduces “SWABIZ,” a portal that assists company travel managers in booking and tracking trips made through its web site [http://www.southwest.com]. There are many new technology initiatives being undertaken currently plus some are in the pipeline.

Barcode symbols in Boarding Passes

Southwest Airlines has invested $12 million during the past 3 years to standardize corporate and terminal operations on about 10,000 Dell OptiPlex desktop and Latitude mobile computing based on its company executives. Southwest wanted to replace its well-known, brightly colored plastic boarding passes by having an electronic system with bar-code paper boarding passes. Therefore it installed about 350 touch screen ticket readers powered by Dell OptiPlex desktops. The bar code gives Southwest more details to automatically reconcile the number of boarding passes with the number of passengers that actually board the plane.

Even though technology will help Southwest Airlines remain efficient by consolidating passenger information for the company’s 3,000 daily flights, there have been concerns it might lengthen time to get travelers on board. Nevertheless it was found that scanning each barcode on the boarding passes didn’t increase or shorten boarding schedules, but it did take minutes from administrative processes, such as searching for customer records. The new paper bar code system is giving Southwest ticket agents a chance to match a customer record within needing to scroll through and log into multiple software screens. The operation is a lot more automated. Once the barcode on the boarding pass is scanned in the terminal gate it checks from the person from the passenger list instantly.

The old process was manual that involved locating the information, scrolling through several software screens from reservations to check-in to boarding. The barcode hardware to scan the boarding passes continues to be deployed. The organization is in the process of replacing customer service back-office equipment at airports including at its headquarters in Dallas.

Software Upgrades

Computer programs, for example those utilized by clerks to check on in passengers, are now being replaced. Southwest Airlines’ internally written “Airport Application Suite” is anticipated to rollout the coming year because the company transitions from green screens to Window-based interface. Similar to Wal-Mart Stores Inc., Southwest Airlines believes in developing in-house the program that runs its operations. The organization uses very little off-the-shelf software. You will find between 75 and 100 projects in the works every year based on approximately 900 IT employees.

RFID

Rf identification technology, a favorable alternative to bar-coding for luggage identification, is also on Southwest’s radar. It intends to test RFID technology sometime in 2006. Despite the fact that, Southwest is playing just a little catch-up along with other airlines such as Air Tran, Alaska and Champion Airlines, oftentimes they are able leapfrog to more sophisticated applications easily having waited longer.

Challenges:

Southwest has emerged successful, regardless of the most troubled times in the airline market. However, it faces new challenges in the face of increasing competition from other low fare airlines such as JetBlue, ATA airlines, America West.

Reserved Seating

Because of increasing security guidelines since September 2001, Southwest would need to get ready for assigned (reserved) seating to track its in-flight passengers. This change calls for large technology investments and could impact its gate operations negatively since the current method of unassigned seating has helped in quick gate turnarounds.

Passenger Demand

The keep-it-simple philosophy has served Southwest well. But since it’s own business grows and grows more complicated, with intends to purchase dozens of new aircraft as well as an expected upsurge in passenger visitors to about 80 million boardings a year, the tranquility of strategy that has been reflected in the airline’s IT philosophy is evolving. The CIO Tom Nealon says that “It’s time for you to adapt our business processes for efficiency. As our airline scales for all of us to supply the same kind of high-touch customer support, we must automate several things we’ve been able to do without technology previously. The challenge is doing that without conceding the customer touch.” Southwest is also aggressively pursuing customer relationship management (CRM) techniques and it has applications to get understanding of customers wants and dislikes. According to a job interview using its CEO Gary Keller, Southwest has its concentrate on improving in two areas – customers airport experience and in-flight experience.

In-Flight Entertainment

Within an overall effort to enhance customers in-flight experience, in-flight entertainment is one thing that Southwest happens to be evaluating and which JetBlue continues to be very successful at already because of its introduction in the long-haul flights. In contrast, Southwest has 415 airplanes to consider which represents an investment decision in a whole new dimension. Additionally, Southwest has to consider how things may fit into their environment. At this time, 60% of their service is still very short haul. Southwest must be mindful of the fact that a particular approach that’s been successful because of its competitor might not be necessarily work to its advantage.

Summary:

Southwest has long been regarded as a benchmark in the industry for operational excellence. Southwest Airlines is a fine example of a business that is committed to its core competencies – efficient operations they are driving its low cost structure, outstanding delivery of customer support and innovative HR management practices. We hope this paper provided a great insight into Southwest operations, as part of its overall strategy, to achieve success and gain competitive advantage.

How can small firms choose their capital structure? When is it right for a small business to fund its operations with borrowed funds? What is the nature and purpose of effective leverage in financial management? These questions relate to the perfect capital structure of a business enterprise-the appropriate mix of debt and equity that maximizes the return on investment and shareholders’ wealth while minimizing the cost of capital, simultaneously. Clearly, effective leverage is essential to some sound business strategy made to increase the wealth producing capacity from the enterprise. In these series on effective financial management, we’ll focus on the pertinent financing strategic questions and supply some guidance. The overriding purpose of this information is to highlight some basic financial theory and industry practice in effective financial leverage. For specific financial management strategies please consult a reliable professional.

Please note that the appropriate amount of financial leverage for each firm differs markedly in line with the overall industry dynamics, market structure-level of competition, stage of industry life cycle, and its market competitive position. Indeed, associated with pension transfer market indicators firm-specific leverage position is insightful only in reference to the industry expected value (average) and usually accepted industry benchmarks and finest practices.

Types of Leverage:

Financial Leverage: Level of financial leverage is the ratio of the EBIT/EBT-earnings before interest and taxes divided by earnings before taxes. Whenever a business depends on borrowed funds for its operations-the financial leverage is created as the business incurs fixed financial obligations or interests on the borrowed funds. Confirmed percentage alternation in the firm’s operating income (EBIT) produces a larger percentage alternation in the firm’s net income (NI) and earnings per share. Indeed, half the normal commission alternation in operating income (EBIT) is magnified into a larger percentage reduction in net income. The degree of monetary leverage (DFL) measures a firm’s exposure to financial risk or the sensitivity of earnings per share (EPS) to alterations in EBIT. Therefore, DFL indicates the share alternation in earnings per share (EPS) emanating from a unit percent change in earnings before interest and taxes (EBIT). Generally, a firm’s short-term financing needs are influenced by current sales growth and how effectively and efficiently the firm manages its net working capital-current assets minus current liabilities. Observe that ongoing short-term financing needs may reflect a need for permanent long-term financing including an assessment from the appropriate mix and use of debt and equity-the capital structure.

Operating Leverage: Fixed operating costs, for example general administrative overhead expenses, contractual employees’ salaries, and mortgage or lease payments create operating leverage and often elevate business risk. The impact of operating leverage is evident whenever a given percentage changes in net sales results in a greater percentage change in operating income (EBIT)-earnings before interest and taxes. Operating leverage is calculated the following: DOL = CM/EBIT-contribution margin divided by earnings before interest and taxes or percentage change in EBIT divided by percentage change in sales (revenues).

Combined Leverage: Degree of combined leverage (DCL) may be the combination of the results of business risk and financial risk. Degree of operating leverage (DOL) and level of financial leverage (DFL) combine to magnify a given percentage alternation in sales to some potentially much greater percentage alternation in earnings or operating income (EBIT). There is a direct relationship one of the degrees of operating leverage (DOL), financial leverage (DFL) and combined leverage (DCL). A firm’s degree of combined leverage (DCL) = DOL X DFL or CM/EBIT X EBIT/EBT that’s CM/EBT. Their education of combined leverage (DCL) can also be calculated as percentage change in EPS divided by percentage change in sales that’s the percentage alternation in earnings per share emanating from a unit percent change in sales volume.

Optimal Capital Structure: This is the appropriate utilization of debt and equity that minimizes the firm’s price of capital and maximizes its stock price. Please be aware that the non-optimal capital structure or insufficient optimal debt and equity mix can lead to higher financing costs and the firm may reject some capital budgeting projects that would have raised shareholders’ wealth with an optimal financing. Further, the results of different capital structures and differing examples of business risk are reflected inside a firm’s income statement. Please note that operating leverage has a tendency to magnify the result of fluctuating sales (revenues) and convey a percentage change in operating income (EBIT) bigger than the modification in sales (revenues) while financial leverage tends to magnify the percentage change in EBIT and convey a larger percentage change in EPS. Therefore, a change in sales (revenues) through operating leverage affects EBIT. This change in EBIT through the effect of financial leverage subsequently affects EPS.

Some Useful Guidelines:
When a firm grows, it requires capital which can be funded by equity or debt. Debt financing has costs and benefits. Debt has two significant benefits: Interest paid is tax deductible, which minimizes debt’s effective cost; and debt carries a fixed charge, so stockholders do not have to share their net income if the enterprise is extremely profitable. However, high debt ratio indicates greater risk and therefore higher cost of capital; and when the firm does not earn sufficient income to cover its fixed charges it has to produce the shortfall or face bankruptcy. Therefore, firms with volatile earnings and operating cash flows must limit their use of debt financing. Certainly, effective income and leverage management is crucial to prudent and sound strategy made to increase the wealth producing capacity from the enterprise. Additionally, strategic analysis, market analysis and financial analysis ought to be internally consistent and congruent. The EBIT/EPS analysis allows a strong to evaluate the results of different capital structure on operating income and the level of business risk. The variability of sales or revenues over time is a basic operating risk. Please note that in capital budgeting for any specific project to improve shareholders’ wealth, it has to earn a lot more than its cost of capital or hurdle rate.

CIMA is the world’s first program developed according to international standards of education of the International Federation of Accountants.

In 1919, they founded The Institute of Cost and Works Accountants, its activity would be to collect information and study methods and methods for planning and control over modern business. In 1986, the Institute changed its name to The Chartered Institute of Management Accountants. The decision was dictated by importance of accounting and management.
Up to now, CIMA (The Chartered Institute of Management Accountants) may be the world’s first program developed according to international standards of education of International Federation of Accountants – IFAC, 2003. It is considered a world leader in training of highly qualified specialists in financial management. It’s about 155 members and students in additional than 158 countries.

Since 2004, growth rates reveal that CIMA qualification is very popular. As today’s job market requires well-rounded professionals, and never only painstaking accountants and financiers, 99% of CIMA students work in business and practice in accounting. This enables to understand specified qualification includes a dual core: business management and strategic management accounting.

Academic training and working experience, in addition to innovations help achieving the best effect.

This program significantly is different from other postgraduate courses in finance and accounting. CIMA Courses are primarily designed for professionals with higher education and work experience in finance, who know English. Training and certification from the program allow its proprietors to build a successful career in financial management.

CIMA qualification is recognized and appreciated in most developed countries. Applicant for the position having CIMA certificate is much more valued by employers. CIMA qualification demonstrates its owner’s knowledge in the region of management accounting, strategy and analysis, management in all spheres of activity.

During CIMA training, graduates receive an international professional qualification in neuro-scientific managerial and financial accounting, what implies having deep knowledge and skills in financial management, in addition to information systems, leadership and communication, business, analytical and strategic skills. Students also recieve an international diploma and also the title of ASMA (Associate of the Chartered Institute of Management Accountants) and be members of CIMA, making using various resources, researches and data possible.

Strategic management and planning could be vitally important to a corporation. It is necessary for a company to understand where they’re currently, in addition to where they’re planning to go in the future. It is also important to have specific goals which are to become met according to a collection timeline, in order to develop a business properly. Here are three strategic management concepts that should be at the forefront of any company.

Effective Usage of Resources

In order to succeed, a business has to make good use of its available resources. Including human resources in addition to financial resources. It is important for an organization to completely know very well what it has to work with, in order that it can be cultivated a plan to leverage these resources in the most effective manner. Once this understanding is achieved, a company is better prepared to develop a plan of action that will allow it to achieve its goals.

Continual Evaluation of the Process

Simply creating a plan of action isn’t enough. There has to be a continual evaluation process in place. By evaluating the process on an ongoing basis, a business can adjust the plan if conditions change. This evaluation process can also be vital that you make sure that the program is having the desired effect. When the overall strategic business plan is not proving to work, the evaluation process will show early warning signs of the problem to ensure that adjustments can be made quickly.

Identification of Risks and Opportunities

Within every company process, there are risks as well as opportunities. The strategic management process might help a business identify these factors and evaluate them so that the best course of action could be chosen. In some cases, the chance for opportunity may outweigh the risks involved, but the opposite may be also true. With no good strategic management process, a company is at an absolute disadvantage.