Southwest Airlines is a US based company and the world largest lowest carrier company. Having more than 121 domestic destination flights and 10 additional countries makes its third largest airline in north America based on passenger flown. Being a cost accountant the thing that most attract me is that they use exclusively Boeing 737 jets in their fleet. Due to this curiosity I researched and found some interesting about this company that is relevant for cost accountants and costing students.
Southwest Airlines has carved a unique niche in the airline industry as a low-cost carrier offering high-frequency flights and exceptional customer service. This case study delves into the key elements of Southwest's success, focusing on how it leverages cost accounting principles to achieve and maintain its competitive edge.
Key Components of Southwest's Cost Leadership Strategy:
Standardization: Utilizing a single aircraft type (Boeing 737) simplifies maintenance, training, and inventory management, leading to significant cost savings. its a amazing thinking. If there were more different different aircrafts then there would have different types of experts required causing more cost to the airline.
Operational Efficiency: Quick turnarounds on the ground (typically 20-30 minutes) maximize aircraft utilization and increase flight frequency. Point-to-point routes eliminate the need for hub-and-spoke systems, further reducing operational costs.
Employee Engagement: Southwest fosters a culture of employee ownership and empowered service, resulting in high productivity and low employee turnover. Additionally, a non-unionized workforce offers greater flexibility in managing labor costs. If there is high labor turnover ratio in any organization that means that will cost more to that organization compared to low labor turnover ratio. The reason is simple that is experience curve and training cost.
Direct Sales: Eliminating traditional travel agents and relying on online and telephone sales channels reduces distribution costs.
Unbundled Fares: Passengers have the option to pay for additional services like seat selection and early boarding, allowing Southwest to personalize fares and generate further revenue.
Now talks about the costing techniques they used
Activity-Based Costing (ABC): Southwest implements ABC to accurately allocate costs to specific activities, such as boarding, baggage handling, and flight operations. This helps identify cost drivers and prioritize cost reduction efforts.
Break-Even Analysis: Understanding the minimum number of passengers needed to cover operating costs allows Southwest to set competitive fares and ensure profitability.
Variance Analysis: Without measuring performance no one can make better itself. Southwest monitored and analyzed deviations from budget helps that helps them to identify areas where performance can be improved.
By using costing techniques or cost focused strategies the Southwest gained the followings:
Competitive Advantage: Southwest consistently delivers low fares and high profitability, making it a formidable competitor in the airline industry.
Customer Satisfaction: Its efficient operations and friendly service contribute to high customer satisfaction and brand loyalty.
Market Growth: Southwest's success has contributed to the growth of the low-cost carrier market, offering more affordable travel options for passengers.
In nutshell Southwest Airlines' success demonstrates the power of a well-defined cost leadership strategy coupled with effective cost accounting practices. By prioritizing operational efficiency, employee engagement, and direct sales, Southwest has achieved sustainable profitability and continues to disrupt the airline industry and makes a perfect case study for cost accounting professionals.
Hope this short blog have improve your thinking about how costing focused techniques can leads to business to new heights.
Thanks and Namaste
Will meet you in next blog.
