Southwest Airlines 2014 Annual Report Download - page 30

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carriers: American Airlines, American Eagle Airlines (branded as Envoy beginning in 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 15 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 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 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, 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 or points. 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 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 presence in key markets Southwest did not
previously serve, (iii) extend service to smaller domestic cities Southwest did not previously serve, and
(iv) provide access to the Commonwealth of Puerto Rico and key near-international markets in the
Caribbean and Mexico.
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