Aviation Essay Research Paper The airline industry — страница 2

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The following chart identifies key operating statistics for Southwest (seat miles are in millions, cost factors are in cents) (Shammas, 1996, p. 5541P): 1995 1994 1993 Revenue Passenger Miles (RPM) 2,624 941 44 Available Seat Miles (ASM) 3,813 1,471 63 Load Factor 68.8 % 64.0 % 69.7 % Revenue per RPM 13.4 13.8 13.1 Cost per ASM 6.8 6.8 9.8 Because Southwest s flights are generally an hour or less in length, the airline saves money by not having to serve meals. It has a liberal work rule arrangement with its unions, so productivity is high, and overall costs are low. For example, Southwest gets 672 hours per year on average from pilots versus 371 for American Airlines pilots, and 60 percent more passenger miles per flight attendant (Levinson, 1993, p. 34). These figures enable the

company to realize profits during years in which the industry as a whole was suffering. The following chart identifies key operating statistics for Southwest (seat miles are in billions, cost factors are in cents) (Klein, 1996, p. 2077): 1995 1994 1993 Revenue Passenger Miles (RPM) 23.33 21.61 18.83 Available Seat Miles (ASM) 36.18 32.12 27.51 Revenue per RPM 11.83 11.56 11.77 Cost per ASM 7.07 7.08 7.25 In addition, the company has a 70 percent average load factor in an industry that averages 63 percent, and operating costs per passenger mile are 22 percent less than industry average. It has one of the youngest fleets in the industry (6.9 years compared with an industry average of 12.9 in 1992), and the best on-time and baggage handling records in 1992 (Gold, 1993, p. 29). Each

of these factors contributes to the company s financial and marketing success. Southwest s success has come about because it is providing a product that the market wants, no-frills regional air travel, at a price that is attractive. Despite its no-frills orientation, the company maintains strong customer service satisfaction and high levels of customer service, encouraging repeat business. When the airline enters a new market, such as Baltimore, its fares are as much as 85 percent less than those of its higher-priced competitors, attracting passengers quickly and forcing the competition to either match the price or lose market share. In its target markets, Southwest has positioned itself to even compete favorably with traveling by car (Thorpe, 1996, p. 262). Southwest s success

has not been without problem, and the company has again demonstrated an ability to find creative solutions to those problems. For example, the company has traditionally expanded its 737 fleet by adding older aircraft available at discounts (sometimes as much as 30 percent) (Kripanlani, 1992, p. 20). Since the company s ability to enter new markets is determined in part by the size of its fleet, and since the company is committed to staying with homogenous fleet of 737s, it runs the risk of ending up with a large number of older aircraft that it no longer needed (depending on the market), or that do not meet new environmental standards. Southwest solved this problem by beginning a lease-back program in 1988. Under the program, Southwest sells some of its older 737s, then leases

them back for its own use. As of the beginning of 1992, the company had done this with more than half of the Boeing 737-200 aircraft that it operated (Brown, 1992, p.57). This program enables the company to release aircraft that it no longer needs or that no longer meet the stringent new environmental standards. At the same time, the company can modify its remaining 737-200s in order to make them compatible with noise and pollution regulations if it needs the capacity. The company s stock has split three times since 1990, and its price-earnings ratio is a healthy 13.1 percent. Its load factor is well within the industry norm of 67 percent (Sanborn, 1996, p. 251), and the company s commitment low fares and its safety record should help it maintain good performance even in light of

the ValuJet crash (which brought increased attention to all low fare carriers). The crash of Flight 592 has brought increased scrutiny to ValuJet (and to low-fare carriers in general), and the long-term effect on ValuJet is not yet known. The stock, which had two, two-for-one splits in 1995 and which peaked at more than 30 dollars per share in late 1995, has plummeted to below 12 dollars per share in late 1996. Investors with high tolerance of risk might consider the stock at this low level, and the company might be a takeover target in the future as other carriers seek its routes. However, the company s aging aircraft fleet would not be an asset to most carriers, and it is unclear whether stockholders would realize a reasonable profit, even at today s low prices. The outlook for