SW Airlines

Management Control Systems

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Southwest Airlines Background Southwest Airlines began flight operations in 1971, flying three Boeing B737 aircraft between Houston, Dallas, and San Antonio. Based at Dallas’ Love Field, the airline quickly made its presence known in the airline industry. Through fiscal 2007, the airline company enjoyed 35 years of continuous profitability, a benchmark unmatched by any other domestic airline company and one that is all the more surprising given the current difficulties faced by the domestic airline industry. As of the end of 2007, Southwest served 64 destinations in 32 states in the United States, with 520 Boeing B737 aircraft in operation and 34,378 employees. This fleet of aircraft provides Southwest a total capacity of 70,865 aircraft seats, or an average of a little more than 136 available seats per aircraft. Given these sustained favorable operating results, Southwest Airlines has achieved near legendary status as the prototypical ‘‘low cost’’ air carrier. The firm’s value proposition is low- cost, safe, point-to-point air transportation with a minimum of frills. Southwest typically focuses on flying into under-served regional airports with sufficient passenger volume to be profitable. Key aspects of this strategy are low airfares, fast turnaround of aircraft on airport tarmacs, use of a common aircraft model, tight control of costs, and highly motivated employees. This strategy has not been at the expense of customer satisfaction; according to the U.S. Department of Transportation, Southwest consistently has among the fewest customer complaints per passenger flown. Southwest typically reports relatively low operating expenses on a ‘‘per available seatmile’’ basis. Available seat-miles (ASM) is a standard input activity metric reported by most major airlines, and the operating expenses per available seat-mile can thus be compared across airlines. To illustrate, a 122-seat aircraft flying on a 1,000-mile route would represent 122,000 available seat-miles (even if there are no passengers on the aircraft). Southwest reported GAAP- basis operating expenses per ASM of $0.0880 in 2006, compared to $0.0805 in 2005; these measures are among the lowest reported by the major airlines. Southwest also reports its primary output measure, an operating statistic called ‘‘revenue passenger-miles’’ (RPM). For example, a flight carrying 100 fare-paying passengers on a 1,000-mile flight would represent 100,000 RPM. Revenue passenger-miles is a standard output measure disclosed in the airline industry and helps investors compare airline operation scale across different firms. The ratio of RPM to ASM represents an airline company’s average load factor.
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As implied by Southwest in their management discussion and analysis and in their supplemental disclosures, the firm mixes three fundamental inputs in order to generate their revenue output. In their most basic form, these inputs are employees, flight departures (or trips), and aircraft seats. For example, Southwest places a great deal of
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This document was uploaded on 04/06/2010.

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SW Airlines - Southwest Airlines Background Southwest...

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