Southwest Airlines 2015 Annual Report Download - page 25

economic conditions and an increased focus by airlines on costs, the airline industry has become
increasingly competitive in recent years with healthier financial condition and improved profitability.
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
also competes 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, and United Airlines. The
DOT defines major U.S. airlines as those airlines with annual revenues of at least $1 billion; there are
currently 13 passenger airlines offering scheduled service, including Southwest, that meet 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.
The Company believes its low-cost operating structure continues to provide it with an advantage over
many of its airline competitors by enabling it 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, snacks, curb-side check-in, 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, code-sharing, and
capacity purchase agreements, which increase the airlines’ opportunities to expand their route
offerings. For example, an alliance or code-sharing 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 code-sharing 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 code-sharing 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 itself to offer additional itineraries.
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