Southwest has mastered the low-price model and has the financial results to prove it. Why don’t the other airlines copy Southwest’s model?
Southwest has benefitted from its savvy hedging strategy for oil prices. Other airline companies are behind Southwest’s model because many of them have been tied up in bankruptcy after the September 11 attacks. This means that the airlines had their assets tied up by creditors and were in no position to make decisions regarding such actions as pursuing hedging opportunities. Other airlines just had very limited ability to hedge to get into a position of profit by saving on oil costs. Additionally, many airlines have hesitated to put in the work that Southwest has put in to make their hedges work for them. This resulted in missed opportunities, for example, when oil was $40 a barrel and less, some airlines did not hedge like Southwest did, and then when oil prices rose to $60 a barrel, they were apprehensive of launching a hedging program for fear that the prices might drop below the $60 with them locked in the $60 price (Anders, 2008). In short, it appears that because airlines did not hedge much, if at all, back when Southwest did when oil prices were lower, it is now too late, as oil prices are up to $130 per barrel (Anders, 2008), so now they cannot do it and catch up to Southwest, even if they wanted to. With this in mind, other airlines have to try and cut costs and generate revenue in other areas, which are often tied to passing on extra costs to their customers, unlike Southwest. Southwest enjoys a competitive advantage with its cost savings technique of hedging fuel prices years in advance (Kotler & Keller, 2009).
What risks does Southwest face? Can it continue to thrive as a low-cost airline when tough economic times hit?
Southwest airlines has so far been quite successful with its hedging strategy over the years, as it has turned a profit every year since 1973 (Anders, 2008). However, Snyder (2011) states that hedging fuel holds no guarantee of success for airlines. This is due to oil prices being so volatile over the past few years, which has driven up the cost of locking in a price. There is high risk associated with hedging in this economy so financial institutions are leary. This is definitely true, as seen by the recent drop in oil prices over the last year. At the least, most airlines hedge a third of its fuel costs and typically does not have fixed prices for the other two-thirds, which poses significant financial risks. As far as Southwest is concerned, since the airline has done such an excellent job in creating savings opportunities, it appears that this will cushion the airline in times of fluctuating oil prices. Southwest has front-loaded savings, which will certainly pay off when other airlines are left out in the cold. I think that Southwest also can continue as a low-cost airline, even if they have to raise some of their prices, because they will still be undercutting the competition in a big way. It looks as if it is just impossible for the competition to catch up to them.
Anders, G. (2008, May 28). Why Rivals Don’t Copy Southwest’s Hedging. Retrieved from The Wall Street Journal: http://www.wsj.com/articles/SB121192242646723961
Kotler, P., & Keller, K. L. (2009). Developing Marketing Strategies and Plans. In Marketing Management (p. Chapter 14). Pearson Prentice Hall.
Snyder, B. (2011, March 21). Fuel hedging no guarantee for airlines. Retrieved from CNN: http://www.cnn.com/2011/TRAVEL/03/21/airlines.fuel.hedging/
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