Southwest Airlines 2007 Annual Report Download - page 26

technology that will replace its existing 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 during 2009.
Competition
The airline industry is highly competitive. The
Company believes the principal competitive factors in
the industry are:
• Fares;
• 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
all of its routes. Some of these airlines have larger fleets
than Southwest and some may have wider name recog-
nition in certain markets. In addition, some major
U.S. airlines have established extensive marketing or
codesharing alliances, including Northwest Airlines/
Continental Airlines/Delta Air Lines; American Air-
lines/Alaska Airlines; and United Airlines/US Airways.
These alliances are more extensive than Southwest’s
arrangement with ATA Airlines and enable these carriers
to expand their destinations and marketing opportunities.
In addition, some airlines are able to offset less profitable
domestic fares with more profitable international fares.
As discussed above, the Company is evaluating interna-
tional code sharing opportunities.
The Company is also subject to varying degrees of
competition from surface transportation in its shorthaul
markets. This competition can be more significant during
economic downturns. Although price is a competitive
factor in these instances, the Company believes frequency
and convenience of scheduling, facilities, transportation
safety and security procedures, and Customer Service are
also of great importance to many passengers.
The competitive landscape for airlines has changed
significantly over the last few years. Following the ter-
rorist attacks on September 11, 2001, the airline indus-
try, as a whole, incurred substantial losses through 2005.
The war in Iraq and significant increases in the cost of
fuel have exacerbated industry challenges. As a result, a
number of carriers have sought relief from financial
obligations in bankruptcy, including UAL Corporation,
the parent of United Airlines; ATA Airlines; US Airways;
Northwest Airlines Corporation, the parent of Northwest
Airlines; and Delta Air Lines. UAL Corporation and
ATA Airlines emerged from bankruptcy in 2006, and
Northwest Airlines Corporation and Delta Air Lines
emerged from bankruptcy in 2007. US Airways’ emer-
gence from bankruptcy in 2005 culminated in its merger
with America West Airlines in September of that year.
Other, smaller carriers have ceased operations entirely. In
addition, post-9/11, many carriers shrank capacity,
grounded their most inefficient aircraft, cut back on
unprofitable service, and furloughed employees. Reorga-
nization in bankruptcy, and even the threat of bank-
ruptcy, has allowed carriers to decrease operating costs
through renegotiated labor, supply, and financing con-
tracts. As a result, differentials in cost structures between
traditional hub-and-spoke carriers and low cost carriers
have significantly diminished. Nevertheless, throughout
this entire time period, Southwest has continued to
maintain its cost advantage, improve Employee produc-
tivity, pursue steady, controlled growth, and provide
outstanding Service to its Customers. The factors dis-
cussed above have, however, led to more intense compe-
tition in the airline industry, generally. In 2006, some
carriers began reporting profitable results for the first
time since 9/11.
The re-emerging competitiveness of some of the
larger carriers, such as United, US Airways, and Amer-
ican, has put pressure on smaller carriers such as AirTran
Airways, JetBlue, and Frontier. Like Southwest, several
other carriers, large and small, have announced scaled
back growth plans, and some carriers have expressed
interest in industry consolidation. The Company cannot
predict the timing or extent of any such consolidation or
its impact (either positive or negative) on the Company’s
operations or results of operations.
Insurance
The Company carries insurance of types customary
in the airline industry and at amounts deemed adequate to
protect the Company and its property and to comply both
with federal regulations and certain of the Company’s
credit and lease agreements. The policies principally
provide coverage for public and passenger liability, prop-
erty damage, cargo and baggage liability, loss or damage
to aircraft, engines, and spare parts, and workers’
compensation.
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