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

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
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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)

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

Examining Southwest Airlines Strategic Execution

Data Used in SWAs SWAs 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

Examining Southwest Airlines Strategic Execution

SWAs Data Used in Strategic Variance Analysis

A Strategic Variance Analysis

Examining Southwest Airlines Strategic Execution

SWAs Data Used in Strategic Variance Analysis

A Strategic Variance Analysis

Examining Southwest Airlines Strategic Execution

SWAs Data Used in Strategic Variance Analysis

A Strategic Variance Analysis

Examining Southwest Airlines Strategic Execution

SWAs Strategic Variance

Analysis

A Strategic Variance Analysis

10

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 SWAs revenue due to increase in 2005 RPMs

Increasing in RPM impact to increasing in Operating Income Favorable $832 M

2. Expected increase in SWAs 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

11

Examining Southwest Airlines Strategic Execution

SWAs Strategic Variance

Analysis

A Strategic Variance Analysis

12

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

13

Examining Southwest Airlines Strategic Execution

SWAs Strategic Variance

Analysis

A Strategic Variance Analysis

14

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

SWAs Strategic Variance

Analysis

A Strategic Variance Analysis

16

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

17

Examining Southwest Airlines Strategic Execution

SWAs 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

18

Thank You