Southwest Airlines 2013 Annual Report Download - page 28

Competition
Competition within the airline industry is intense and highly unpredictable, and Southwest and AirTran
currently compete with other airlines on a majority of the Company’s scheduled routes. Key competitive factors
within the airline industry include (i) pricing and cost structure; (ii) routes, frequent flyer programs, and
schedules; and (iii) customer service, comfort, and amenities. Southwest and AirTran also compete for customers
with other forms of transportation, as well as alternatives to travel. In recent years, the majority of domestic
airline service has been provided by Southwest and the other largest major U.S. airlines, including American
Airlines, Delta Air Lines, United Airlines, and US Airways. In 2013, the parent company of American Airlines
emerged from bankruptcy and merged with US Airways Group, Inc. The newly merged entity is the parent
company of the following operating carriers: American Airlines, American Eagle Airlines (expected to be
branded as Envoy beginning in early 2014), US Airways, US Airways Shuttle, and US Airways Express. The
DOT defines the major U.S. airlines as those airlines with annual revenues of at least $1 billion; there are
currently 14 passenger airlines offering scheduled service, including Southwest, meeting this standard.
Pricing and Cost Structure
Pricing is a significant competitive factor in the airline industry, and the increased availability of fare
information on the Internet allows travelers to easily compare fares and identify competitor promotions and
discounts. Pricing can be driven by a variety of factors. For example, airlines often discount fares to drive traffic
in new markets or to stimulate traffic when necessary to improve load factors and/or cash flow. In addition,
multiple airlines have been able to reduce fares because they have been able to lower their operating costs as a
result of reorganization within and outside of bankruptcy. Further, some of the Company’s competitors have
continued to grow and modernize their fleets and expand their networks, potentially enabling them to better
control costs per available seat mile (the average cost to fly an aircraft seat (empty or full) one mile), which in
turn may enable them to lower their fares. These factors can reduce the pricing power of the Company and the
airline industry as a whole.
The Company believes its low-cost operating structure continues to provide it with an advantage over
many of its airline competitors by enabling Southwest and AirTran to continue to charge low fares. The
Company also believes it has gained a competitive advantage by differentiating Southwest from all of its major
competitors by not charging additional fees for items such as first and second checked bags, flight changes, seat
selection, fuel surcharges, snacks, curb-side checkin, and telephone reservations.
Routes, Frequent Flyer Programs, and Schedules
The Company also competes with other airlines based on markets served, frequent flyer opportunities, and
flight schedules. Some major airlines have more extensive route structures than Southwest and AirTran,
including more extensive international networks. In addition, many competitors have entered into significant
commercial relationships with other airlines, such as global alliances, codesharing, and capacity purchase
agreements, which increase the airlines’ opportunities to expand their route offerings. For example, an alliance or
codesharing agreement enables an airline to offer flights that are operated by another airline and also allows the
airline’s customers to book travel that includes segments on different airlines through a single reservation or
ticket. As a result, depending on the nature of the specific alliance or codesharing arrangement, a participating
airline may be able to (i) offer its customers access to more destinations than it would be able to serve on its own,
(ii) gain exposure in markets it does not otherwise serve, or (iii) increase the perceived frequency of its flights on
certain routes. Alliance and codesharing arrangements not only provide additional route flexibility for
participating airlines, they can also allow these airlines to offer their customers more opportunities to earn and
redeem frequent flyer miles. A capacity purchase agreement enables an airline to expand its route structure by
paying another airline (e.g., a regional airline with smaller aircraft) to operate flights on its behalf in markets that
it does not, or cannot, serve itself. The Company continues to evaluate and implement initiatives to better enable
Southwest and AirTran to offer additional itineraries. In addition, the Company’s acquisition of AirTran enabled
the Company to (i) expand its presence in key markets Southwest already served, (ii) grow the Company’s
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