With Low Cost Business Model, Southwest Airlines Is Poised for Growth

| About: Southwest Airlines (LUV)

Southwest Airlines (NYSE:LUV) ranked fourth in Fortune’s World’s Most Admired Company list for 2011 and was also the largest domestic carrier by total passengers in 2010. [1] The carrier has gained tremendous respect and popularity for its low-cost business model and thrives on maintaining low operating expenses, in part due to its fuel hedging programs. Because of its low costs, it has been stayed profitable for the past 40 years, which is unprecedented in the industry. With the recent acquisition of AirTran, we expect Southwest’s market share will continue to rise as it integrates AirTran’s hub and spoke system used by most other competitors like American Airlines (NYSE:AMR), Delta Air Lines (NYSE:DAL) and United Continental (NYSE:UAL).

Our price estimate for Southwest’s stock stands at $14, and we expect market share will rise from an estimated 15% in 2010 due to various initiatives and aggressive marketing campaigns.

(Chart created by using Trefis' app)

Aggressive Marketing Campaigns to Boost Share

Southwest is also the only major U.S. airline that does not impose a fee for a customer’s change in flight plans. In January 2011, it introduced a marketing campaign to promote this point of differentiation from its competitors. Unlike most of its competitors, Southwest does not impose additional fees for items such as seat selection, fuel surcharges, curb side check-in and telephone reservations. These features, at no additional cost, help it attract more customers.

During 2010, Southwest introduced “Bags Fly Free” campaign, wherein the airline wouldn’t charge for the first two checked-in bags. Southwest aggressively promoted this campaign to differentiate itself from competitors, thereby gaining market share.

Maintaining a Low Cost Structure

Southwest has historically entered into fuel derivative contracts to protect against rising fuel costs. Southwest hedges more oil than any other airline, which has ensured the lowest prices on jet fuel following the spike in oil prices in 2007 and 2008. Significant fuel hedging helps Southwest maintain a low cost structure which allows it to pass on the savings to consumers, thereby reducing the fares and thus increasing market share.


  1. World’s Most Admired Companies, 2011

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