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Southwest’s creativity

August 19, 2005

Southwest’s brand promise of low fares is clearly part of the organizational DNA. While many of its competitors are still reeling from post September 11 effects and rapidly escalating jet fuel costs, Southwest continues to thrive and make money. Its secret lies in the creative containment of costs. While creativity isn’t often associated with cost control, in Southwest’s case it is.

Fuel costs are Southwest second biggest expense after salaries and they control it by fixing their jet fuel pricing years in advance, using a range of different financial plays in the market as Business Finance magazine describes.

“The goal of Wright and her colleagues is to hedge 50 percent of the company’s exposure two years out and to be 80 percent to 100 percent hedged during the current period. “It’s a structured program,” she says. “We start early, establish a budget, build positions and layer them in.”

This results in Southwest now paying approximately half of what its competition pays for jet fuel, a significant competitive advantage.

Southwest are merely practicing hedging; a widely used financial tool-box that allows companies control pricing. One other example; utility companies are controlling the price of energy by buying into futures markets and weather insurance. These tools are used behind the scenes to ensure consumers don’t experience sticker shock, allowing brands to deliver their promise of value.

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