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DEVELOPING PRICING STRATEGIES AND PROGRAMS | CHAPTER 14 413

groups (A, B, C) and a number when they check in. The customer service for airlines and receives the lowest ratio
number refers to where they stand in line at the gate. of complaints per passenger.
Group A boards first, and once on board, passengers may Southwest has been ranked by Fortune magazine as
sit anywhere they like. the United States’ most admired airline since 1997, the
Southwest grows by entering new markets other air- fifth-most admired corporation in 2007, and one of the
lines overprice and underserve. The company believes top five best places to work. Its financial results also
it can bring fares down by one-third to one-half whenever shine: the company has been profitable for 37 straight
it enters a new market, and it expands every market it years. It has been the only airline to report profits every
serves by making flying affordable to people who could quarter since September 11, 2001, and one of the few
not afford it before. Southwest currently serves 68 cities in with no layoffs amid a travel slump created by the slow
35 states, usually secondary cities with smaller airports economy and the threat of terrorism.
that have lower gate fees and less congestion—another Although the hot pants are long gone, the LUVing
factor that leads to faster turnaround and lower fares. spirit remains at the heart of Southwest. The company’s
Another unique cost savings strategy is Southwest’s stock symbol on the NYSE is LUV, and red hearts can be
decision to operate Boeing 737s for all its flights. This found across the company. These symbols embody the
simplifies the training process for pilots, flight attendants, Southwest spirit of employees “caring about themselves,
and mechanics, and management can substitute aircraft, each other, and Southwest’s customers.” “Our fares can
reschedule flight crews, or transfer mechanics quickly. be matched; our airplanes and routes can be copied. But
Jet fuel is an airline’s biggest expense. According to we pride ourselves on our customer service,” said Sherry
the industry’s trade group, Air Transport Association, jet Phelps, director of corporate employment. That’s why
fuel now accounts for 40 percent of an airplane ticket Southwest looks for and hires people who generate en-
versus 15 percent just eight years ago. Southwest’s thusiasm. In fact, having a sense of humor is a selection
biggest cost savings technique and competitive advan- criterion it uses for hiring. As one employee explained,
tage has long been its program to hedge fuel prices by “We can train you to do any job, but we can’t give you the
purchasing options years in advance. Many of its long- right spirit.” And the feeling is reciprocated. When
term contracts allow the airline to purchase fuel at $51 Southwest needed to close reservation centers in three
per barrel, a significant savings especially during the oil cities in 2004, it didn’t fire a single employee but rather
shocks of the 2000s that drove oil past $100 per barrel. paid for relocation and commuting expenses.
Analysts estimate that Southwest has saved more than
$2 billion with fuel hedging. Questions
Because lighter planes use less fuel, Southwest makes 1. Southwest has mastered the low-price model and
its planes lighter by, for instance, power-washing their jet has the financial results to prove it. Why don’t the
engines to remove dirt each night. It carries less water for other airlines copy Southwest’s model?
bathrooms and has replaced its seats with lighter models.
2. What risks does Southwest face? Can it continue to
Southwest consumes approximately 1.5 billion gallons of
thrive as a low-cost airline when tough economic
jet fuel each year so every minor change adds up. The
times hit?
airline estimates that these changes saved $1.6 million in
fuel costs over just three months.
Sources: Barney Gimbel, “Southwest’s New Flight Plan,” Fortune, May 16, 2005, pp. 93–98;
Southwest has pioneered services and programs Melanie Trottman, “Destination: Philadelphia,” Wall Street Journal, May 4, 2004; Andy Serwer,
such as same-day freight service, senior discounts, Fun “Southwest Airlines: The Hottest Thing in the Sky,” Fortune, March 8, 2004; Colleen Barrett,
“Fasten Your Seat Belts,” Adweek, January 26, 2004, p. 17; Jeff Bailey, “Southwest Airlines
Fares, and Ticketless Travel. It was the first airline with a
Gains Advantage by Hedging on Long-Term Oil Contracts.” New York Times, November 28,
Web site, the first to deliver live updates on ticket deals, 2007; Michelle Maynard, “To Save Fuel, Airlines Find No Speck Too Small,” New York Times,
and the first to post a blog. Despite its reputation for low June 11, 2008; Daniel B. Honigan, “Fred Taylor Leads Southwest Airlines’ Customers to New
Heights of Customer Satisfaction,” Marketing News, May 1, 2008, pp. 24–26; Matthew
fares and no-frills service, Southwest wins the hearts of
Malone, “In for a Landing,” Condé Nast Portfolio, August 2008, pp. 91–93;
customers. It consistently ranks at the top of lists of www.southwest.com.