Southwest Airlines Risk Management Essay

879 words - 4 pages

As with any company, Southwest Airlines has risks that have to deal with. For starters, co-founder and visionary leader Kelleher will soon be less involved in the firm's operations. Mr. Kelleher is responsible for the decision making of Southwest Airlines so it is going to be interesting to say the least when he takes a lesser role in the daily business of Southwest. Perhaps a more important risk, though, is the simple fact that Southwest is an airline. Past financial indicators have shown that members of the airline industry have been poor performers for shareholders because of risks involved.Let us review some of the risks that airlines face and what Southwest has done to combat these to remain the only airline to be profitable in the 31 years of their existence. First airlines usually have to fly each flight, even if a flight is only half-full. The emptier a flight is, the less revenue it generates. Southwest has dealt with this risk by pursuing a low-cost/low-price/no-frills strategy that features offering passengers a single class of service at the lowest price possible fares making air travel affordable to a wide segment of the U.S. population.One of the most noticeable risks faced by the airline industry is price wars that occur when one airline cuts fares on certain routes and forces others to follow suit resulting in reduced profitability. Southwest has almost eliminated this risk by developing a fare structure that is consistently by far the simplest and most straightforward of any major airline. All of Southwest's customers can peruse different fare options at the company's website, and the company's restrictions on tickets are more lenient than fares of its rivals. Most other airlines have complex fare structures with ticket prices varying widely according to several factors such as, how far in advance a ticket is purchased; travel dates including a Saturday-night stay; refundable or transferable, and an assortment of other factors (Thompson| Strickland, 2003, C-611).As airline customers know, the price of fuel frequently puts pressure on profitability in the airline industry. During 2000 when fuel prices were on the rise consumers saw the increase of ticket prices of up to $40 for a round trip ticket. Southwest has used an innovative way of protecting itself against rising fuel prices called hedging. This is when a company simply buys futures contracts on the commodity in question, locking in certain prices early. Since there aren't futures contracts sold on jet fuel, Southwest did research and found that by buying contracts on heating oil, the price of which tends to move in tandem with jet fuel they were able to offset fuel costs. In his annual letter to shareholders, Kelleher noted that Southwest has...

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