Southwest Airlines 2008 Annual Report Download - page 27

Management Information Systems
Southwest continues to invest in technology to
support its initiatives and its ongoing operations.
During 2008, Southwest implemented a system to
replace its point of sale application in the stations and
its refunds system in the back office. Additionally,
Southwest has purchased technology that will replace
its ticketless system and revenue accounting system.
The new systems are designed to, among other things,
enhance data flow and thereby increase Southwest’s
operational efficiencies and Customer Service
capabilities. Southwest is also working to replace its
back office accounting systems, payroll system, and
human resource information system, with a goal of
completion sometime in late 2009 or early 2010.
Competition
The airline industry is highly competitive.
Southwest believes the principal competitive factors
in the industry are:
• Price;
• Customer Service;
• Costs;
• Frequency and convenience of scheduling;
• Frequent flyer benefits; and
• Efficiency and productivity, including effective
selection and use of aircraft.
Southwest currently competes with other
airlines on almost all of its routes. Some of these
airlines have larger fleets than Southwest and some
may have wider name recognition in certain markets.
In addition, some major U.S. airlines have
established extensive marketing or codesharing
alliances. These alliances enable these carriers to
expand their destinations and marketing
opportunities. Airlines that do not fly exclusively
domestically are less exposed to domestic economic
conditions and may be able to offset less profitable
domestic fares with more profitable international
fares. As discussed above, Southwest continues to
address this competitive factor through its
international codeshare efforts.
Southwest is also subject to varying degrees of
competition from surface transportation and may
have more exposure to this form of competition than
airlines with longer average stage lengths. Surface
competition can be more significant during economic
downturns when consumers cut back on discretionary
spending.
The competitive landscape for airlines continues to
change. Following the terrorist attacks on September 11,
2001, the airline industry as a whole incurred substantial
losses through 2005. Many carriers reduced capacity,
grounded their most inefficient aircraft, cut back on
unprofitable service, and furloughed employees.
Significant increases in the cost of fuel through most of
2008 have continued to exacerbate industry challenges.
As discussed above, during 2008, many carriers reduced
capacity to cope with the spike in fuel costs. In addition,
a number of carriers have sought relief from financial
obligations in bankruptcy. During 2008 alone, the
following airlines filed for bankruptcy: Frontier
Airlines, Inc., Aloha Airlines, ATA Airlines, Skybus
Airlines Inc., Eos Airlines, Inc., and Champion Air. All
but Frontier also discontinued operations. Other airlines
that have filed and emerged from bankruptcy in recent
years include UAL Corporation, the parent of United
Airlines, US Airways, Northwest Airlines Corporation,
the parent of Northwest Airlines, and Delta Air Lines.
In some cases, this has led to industry consolidation. For
example, US Airways and America West Airlines
merged in September 2005, and Delta and Northwest
merged in 2008. Reorganization in bankruptcy, and
even the threat of bankruptcy, has allowed carriers to
decrease operating costs through renegotiated labor,
supply, and financing contracts. As a result, differentials
in cost structures between traditional hub-and-spoke
carriers and low cost carriers have significantly
diminished. In addition, distressed carriers may price for
cash flow to remain in business, which can cause a
reduction in pricing in the industry generally. Southwest
has nonetheless continued to maintain its cost
advantage, improve Employee productivity, and provide
outstanding Service to its Customers. Southwest cannot,
however, predict the timing or extent of any further
airline bankruptcies or consolidation or their impact
(either positive or negative) on Southwest’s operations
or results of operations.
Insurance
Southwest carries insurance of types customary
in the airline industry and at amounts deemed
adequate to protect Southwest and its property and to
comply both with federal regulations and certain of
Southwest’s credit and lease agreements. The
policies principally provide coverage for public and
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