Airline Productivity and Cost Analysis for South West

Airline Productivity and Cost Analysis for South West Airlines Student: Karym Z. Zabara

South. West Airlines (LCC) v South. West Airlines serves as a Low Cost Carrier, incorporated in Texas and commenced service on June 18, 1971 v As of December 31, 2012, Southwest and Air. Tran operated 694 Boeing jets v Southwest and Airt. Tran provide their services in 97 destinations in 41 states, including the District of Columbia, and the Commonwealth of Puerto Rico v Southwest Airlines Representatives booked approximately 11. 4 million reservations in the last 12 months. v In 2012, Southwest's average passenger airfare was $147. 17 one way. Characteristic Single Aircraft Family Single Cabin Service No Seat Assignment South. West

Term Definitions v Revenue Passenger Miles (RPM) = Sum of all the paying passengers multiplied by the distance travelled. v Available Seat Miles (ASM) = Sum of all the seat flown (available) multiplied by the distance travelled. v Revenue per Available Seat Miles (RASM) = Obtained by dividing operating income by available seat miles. v Cost per Available Seat Miles (CASM): Obtained by dividing the operating costs of an airline by available seat miles (ASM). v Average fare paid by passengers, per mile flown (Yield): Revenue per RPM. v Passenger Revenue per Available Seat Miles (PRASM) : calculated by dividing passenger revenue by available seat miles. Typically the measure is presented in terms of cents per mile. v Fuel Consumed: Sum of all the fuel expenses for all the flights operated. v Fuel Cost per ASM : Fuel consumed divided by Available Seat Miles (ASM). v Non Fuel Cost per ASM : Total non fuel costs divided by Available Seat Miles (ASM).

Chart of (RPM, ASM, & SLF)

Chart Description: (RPM, ASM, & SLF) v An overall correlated rising trend exists for RPM, ASM, & SLF for the third quarter of all the years from 2001 – 2012 though some minor deviations appear. v A decrease of RPM, ASM, & SLF occurs every year on the month of September, most likely due to the end of vacation season and the return of employees to work as well as beginning of classes for school. v The greatest two drop in SLF occurs on September of 2001 and September of 2008 due to the events that occurred at the time.

Chart of (Income, Expense, & Revenue) None Income, Expense, & Revenue by Year 450 400 350 Values ($) 300 250 200 150 100 50 0 -50 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year (Q 3) Operating Revenus Operating Expenses Income Pre-Tax 2011 2012

Chart Description: (Income, Expense, & Revenue) v The general trend shows the operating revenues and expenses growing together, they display a close relation to each other through out the years with a minor deviation where revenue is greater than the expenses. v Due to the sky rocketing increase in the price value of crude oil lead to the loss of income on the year of the 2008 and 2011, leading the expenses to catch up with the revue values. v Airtran -supposedly the smaller rival of southwest airlines- was bought by southwest airlines for 1. 4 billion dollars in 2010, the process of running the new fleet increased revenues but also posed its own risks in costs in the following year of 2011.

Chart of (RASM, CASM, Yield/RPM, & PRASM) RASM, CASM, PRASM, & Yield/RPM 0. 0002 0. 00018 value(Cents) 0. 00016 0. 00014 0. 00012 0. 0001 8 E-05 6 E-05 4 E-05 2 E-05 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Year (Q 3) RASM CASM Yield/RPM PRASM 2010 2011 2012

Chart Description: (RASM, CASM, Yield/RPM, & PRASM) v A growing trend for RASM, CASM, & PRASM appears over all years with a minor deviation where RASM is greater than that of CASM and PRASM. v The Yield/RPM displays a similar growth to RASM, CASM, & PRASM, yet due to the increase in fuel prices in 2008 the Average fare paid by passengers per mile flown was increased accordingly to make up for the cost of fueling the flights.

Chart of (Fuel vs. Non fuel) 500 4000 450 3500 400 350 300 2500 250 200 1500 150 100 500 50 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Year (Q 3) Fuel Operating Expenses Non-Fuel Operating Expenses * 1000 Fuel Consumtion (GALLONS) Millions 4500 Fuel Consumed (Gallons) Expenses ($) Millions Fuel & Non-fuel Operating Expenses, and Fuel Consumption by Year

Chart Description: (Fuel vs. Non fuel) v Fuel Operating Expenses carry on a gradual increasing trend over the years following closely the growth in air travel demand , and increases accordingly with increase in fuel price in and after the year of 2008. v Non-Fuel Operating Expenses though scaled to fit on the graph it is a fraction of the Fuel Operating Expenses has growing trend that grows exponentially after 2010 due to the merger of Southwest Airlines with Air. Tran. v Fuel Consumption at its lowest in 2001 raises gradually until 2009 where a drop in fuel consumption occurs most likely due to a decrease in the amount of flights to reduce costs or due to an improvement of technologies outfitted in fleet.

Chart of (Costs/ASM & Fuel Price) 0. 18 4 0. 16 3. 5 0. 14 3 0. 12 2. 5 0. 1 2 0. 08 1. 5 0. 06 Fuel Price ($) Fuel and Non fuel / ASM ($) Fuel Costs per ASM and Fuel Prices by Year 1 0. 04 0. 5 0. 02 0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Year (Q 3) Fuel Operating Expenses/ASM Non-Fuel Operating Expenses * 1000 / ASM Jet fuel Prices Indexmundi Fuel prices: httpwww. indexmundi. com/commodities/? commodity=jet-fuel&months=180&commodity=jet-fuel: //

Chart Description: (Costs/ASM & Fuel Price) v Fuel Operating Costs per ASM has a gradual increase over the years yet not significant noticeable other than the minute spike in 2008. v Non- Fuel Operating Costs per ASM though scaled to fit in the same graph, has the a gradual increase until 2008 where a the trend becomes exponential, most likely due to the increase of air travel demand, and the merger that occurs in 2010 with Air. Tran. v Generally the jet fuel prices acquired from index-mundi display an extreme spike in 2008 by almost 75 % followed by drop in 2009 where efforts of mining more fuel was increased.

Effect of Fuel Price on Expenses (Chart 5, 4, 3) v Fuel price has had a significant effect on overall South. West operating cost. v Between early 2008 and mid of 2010, fuel expense as a proportion of overall operating expenses ranged from 50% to 80% spikes. v Even during the years when fuel price was steady, the fuel operating expense is a large factor to the overall southwest's operating expenses especially after the merger.

Airline Finance (Chart 2) v Fuel price has had a modest effect on overall income of Southwest's operation in general. v Almost all the periods when fuel price has increased appreciably are accompanied by an appropriate charge to accommodate for a close breakeven value with income. v Yet in some situations the effects were significant enough to force the southwest airlines to operate in a negative territory for example in the years (2008 and 2011)

Airline Network Structure v Comparatively, fuel price has had minimal effects on RPM, ASM and Load Factor. v For the most part, RPM and ASM have increased through the years and Load factor changed very slightly in spite of fuel price. v Though, during the time when fuel price was significantly high, (2001 and 2008 ), RPM and ASM stagnated and fell.

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Back up slide for Chart of (RPM, ASM, & SLF) 12000 0. 9 0. 8 10000 8000 0. 6 0. 5 6000 0. 4 4000 0. 3 0. 2 2000 0. 1 0 0 Year (Q 3) Revenue Passenger Miles (RPM) Availiable Seat Miles (ASM) System Load Factor (SLF) SLF (%) 0. 7 20 01 20 7 01 20 9 02 20 8 03 20 7 03 20 9 04 20 8 05 20 7 05 20 9 06 20 8 07 20 7 07 20 9 08 20 8 09 20 7 09 20 9 10 20 8 11 20 7 11 20 9 12 -8 RPM & ASM Millions RPM, ASM & SLF by Yearly Quarter