20160303 Examining Southwest Airlines Strategic Execution 2

COURSE 4 – JOURNAL | 3 March 2016

Examining Southwest Airlines’ Strategic Execution : A Strategic Variance Analysis GROUP 2 :

Paula Noviar Armien

1406515324 1406590192

Sistem Pengendalian Stratejik | AKM 14-1S Fakultas Ekonomi dan Bisnis | MAKSI PPAK Universitas Indonesia

Examining Southwest Airlines’ Strategic Execution

US Airlines industry revealed to improved performance metrics in 2005 compare to 2004. 2005 Operating Revenue Operating Losses

2004

$ 111 B

$ 101 B

($ 2,1 B)

($ 3,5 B)

↑ Traffic

4,1 %

Domestic U.S. Airlines

↑ RPM

4,5 %

↑ APM

0,9 %

• • • •

Increase traffic Used capacity more efficiently Higher fuel price adversely Adversely affected their progress toward more sustained profitability

# passengers as 77,2 % 74,5% a percentage of • RPM : Revenue Passenger Miles = Number of passenger and miles flown available seat • ASM : Available Seat Miles = Number of available seats, empty or occupied, flown and number of miles flown A Strategic Variance Analysis

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Examining Southwest Airlines’ Strategic Execution

Individual domestic airlines

Southwest Airlines

2005 Operating Revenue Operating Profit

$ 7,6 B $ 820 M

↑ Operating Revenue

$ 1,054 B

↑ Expenses

$ 788 M

↑ Operating Income

$ 266 M

↑ RPM

12,75 %

↑ ASM

10,8 %

A Strategic Variance Analysis

• How airlines manage to improve its performance? • How performance affected the success of its cost leadership strategy? How to determine the increase of Op. Income attributable to : • The airline keeping up with the increase in the domestic air traffic market • Its increased market share in the domestic air traffic market • Increased average air fares • Increased cost of resource acquired • Improvement in operating efficiencies • Utilization of its existing human and aircraft capacities 3

Examining Southwest Airlines’ Strategic Execution Executive Summary Using Strategic Financial Analysis

Increase 2005 operating income

$ 266 M

Increase in domestic air traffic

$

Increase – greater market share

$

Fuel

($ 277 M)

Passenger-related cost

($ $

52 M

Airline ticket

$

222 M

Decrease – higher costs to customer

A Strategic Variance Analysis

Fuel usage efficiencies – passgr

126 M

19 M)

Flight-related cost

Fuel usage efficiencies – longer flight

70 M

($ $

43 M

$

23 M

22 M)

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Examining Southwest Airlines’ Strategic Execution

Strategic Variance Analysis Analysis operating income with combination components :

Growth

Price Recovery

Changing in sales unit while sales prices, input costs, and input output relationships constants. Sales Volume Variance : • Market Size Variance : changes in industry size (Uncontrollabe) • Market Share Variance : depend on product differentiation or low cost (Controllable)

Changing in sales prices and unit input costs while sales unit and input output remain constant.

Capacity Underutilization Changing caused by variation in cost of unused capacity between the years.

Productivity Changing caused by variations in the input – output relationships

A Strategic Variance Analysis

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Examining Southwest Airlines’ Strategic Execution

Data Used in SWA’s SWA’s Strategic Strategic Variance Variance Analysis •. Operational data •. Domestic operati onal revenues and expenses •. Fuel usage and costs •. Financial Data : Revenue Opex > Fuel costs Flight related costs Passenger related •. Market Size

A Strategic Variance Analysis

Cost drivers : •. Operating revenues – revenue passenger miles •. Fuel costs – available seat miles •. Flight related costs – available seat miles •. Passenger related costs – passenger enplaned

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Examining Southwest Airlines’ Strategic Execution SWA’s Data Used in Strategic Variance Analysis

A Strategic Variance Analysis

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Examining Southwest Airlines’ Strategic Execution SWA’s Data Used in Strategic Variance Analysis

A Strategic Variance Analysis

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Examining Southwest Airlines’ Strategic Execution SWA’s Data Used in Strategic Variance Analysis

A Strategic Variance Analysis

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Examining Southwest Airlines’ Strategic Execution

SWA’s Strategic Variance Analysis

A Strategic Variance Analysis

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Examining Southwest Airlines’ Strategic Execution

The Growth Compone nt Favorable $196 M Impacted by market size and market share. Increase in market share because of its successful cost leadership.

1. Increase in SWA’s revenue due to increase in 2005 RPMs Increasing in RPM impact to increasing in Operating Income – Favorable $832 M

2. Expected increase in SWA’s costs due to increase in RPMs Increasing in RPM impact to increasing in Cost : • Fuel Cost – Unfavorable $127 M

• Flight Related – Unfavorable $285 M

• Passenger Related – Unfavorable $225 M

A Strategic Variance Analysis

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Examining Southwest Airlines’ Strategic Execution

SWA’s Strategic Variance Analysis

A Strategic Variance Analysis

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Examining Southwest Airlines’ Strategic Execution

The Price Recovery Compone nt

1. Increase in SWAs 2005 average airfares Increasing in Revenue/RPM impact to increasing in Operating Income – Favorable $222 M

2. Net increase in fuel costs

Increasing in Price of fuel costs per gallon – Unfavorable $277 M

Unfavorable $22 M Increase in cost was recover by increase in airfares.

3. Net decrease in flight related costs Decreasing in cost/ ASM – Favorable $51 M

4. Net increase in passanger related costs Decreasing in cost/ passenger – Unfavorable $19 M

A Strategic Variance Analysis

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Examining Southwest Airlines’ Strategic Execution

SWA’s Strategic Variance Analysis

A Strategic Variance Analysis

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Examining Southwest Airlines’ Strategic Execution

The Productivi ty Compone nt

1. Decrease in Fuel usage per gallon due to fuel efficiencies Decrease in gallon used per ASM – Favorable $45 M

2. Decrease in fuel usage due to a larger passenger Decrease in gallon used per ASM – Favorable $23 M

Favorable $261 M SWA improved its low cost position. Improve quality and service also improve efficiencies and grow market share.

A Strategic Variance Analysis

3. Decrease in passenger-related costs due to increase in miles per passenger Increase miles per passengers – Favorable $66 M

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Examining Southwest Airlines’ Strategic Execution

SWA’s Strategic Variance Analysis

A Strategic Variance Analysis

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Examining Southwest Airlines’ Strategic Execution

The Capacity Under Utilization Unfavorable $42 M Capacity utilization ↑12,75% Capacity acquisition ↑10,8% Investment in capacity inline with growth, price recovery, and productivity.

1. Net decrease in costs of acquiring capacity that was unused Decreasing in cost/ ASM – Favorable $21 M

2. Increase in costs of available capacities Increase in Capacity – Unfavorable $347 M

3. Increase in cost of used capacities Decrease the cost of capacity under utilization – Favorable $285 M

Success as cost leader impacted to increase in market share.

A Strategic Variance Analysis

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Examining Southwest Airlines’ Strategic Execution

SWA’s Strategic Variance Analysis

Conclusion Successful cost leadership • Overall growth airlines industry • Aggressive growth strategy, increase market share • Efficiencies by longer flights, improve passenger load factor and average miles per passenger • Able to recover cost

The Strategic Variance Analysis Show the impact of strategic changes made : 1. Improve profits from gains in market size and share 2. Improved financial performance from efficiencies 3. Reduce operating profits from rising costs that were not completely offset by increasing in pricing 4. Reduce operating profits due to increase cost of investment in capacity A Strategic Variance Analysis

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