Southwest Airlines' Biz Model Gives Stock Edge

Southwest Airlines Co. (LUV) has become the darling of the U.S. airline industry (and its investors) since its inception in 1971. With a focus on commuter benefits, low airfares and efficient operations, it is known as one of the best airline companies in the entire industry.

While many airlines place heavier weight on amenities and comfort, Southwest Airlines has been a pioneer, with its commuter-focused business model that caters to people looking for quick, cheap and painless flights from point to point.

What specifically makes Southwest Airlines so great? What has helped it to achieve such great success and stand out among its U.S. airline industry competitors? Find out why Southwest Airlines has been able to achieve consistent stock growth to become a leader in the U.S. airline industry.

Plan Efficiency

Many airlines offer a range of service and flight options and have many different types of planes to meet that range of options. While this diversifies an airline's offerings, it also increases operating costs and dilutes the core messaging of the company.

Southwest Airlines, on the other hand, focuses primarily on the Boeing 737. This saves Southwest Airlines millions in yearly maintenance costs and other operating expenses, allowing the company to offer low price solutions to its customers. By 2019, it had 747 planes in its fleet. The planes include the 737-700 which seats 143 and the 737-800 and 737 Max 8 which each seat 175.

Gate-to-Gate Flight Paths

Southwest Airlines is one of the few U.S. airlines that focuses on point-to-point flights, meaning that most of its flights are nonstop direct to a customer's desired destination. This is in contrast to other airlines that focus on airport hubs, where customers are picked up from out-of-the-way airports and transported to a hub airport first, before catching a connecting flight to their desired destinations.

Customer Service

Many airlines offer a range of amenities, such as first class, in-flight meals, and many drink options. Southwest Airlines, with its commitment to low-cost solutions, does not offer any of these amenities. Instead, Southwest offers a single coach cabin that's slightly roomier than other airlines due to a lack of first-class space. While it offers free snacks and a complimentary drink, it doesn't offer the range of drinks and food that other airlines offer. This allows Southwest to clean and stock a plane quickly, getting it ready for an efficient turnaround.

Southwest Airlines offers its customers the flexibility to cancel or reschedule flights with no change fee. If the new flight is more expensive, customers do pay the difference, but if the flight is less expensive, they will be reimbursed for the difference.

No Hidden Fees

The airline industry is notorious for rising costs and low profitability. To combat this, many airline companies have slashed perks and increased fees, such as bag fees for checked bags. Rather than passing on costs to its customers, Southwest Airlines has kept costs down with efficient fuel management, minimal ticket price buckets and other solutions.

This allows Southwest Airlines to keep ticket costs down for its customers, who expect low-cost options. Southwest is also one airline that offers two bags free for its customers.

Management Team and Company Culture

Southwest Airlines has boasted one of the strongest management teams in the entire airline industry. From the original CEO Herb Kelleher to the present-day CEO, and all the way down the management team, Southwest Airlines has stayed true to its value proposition and the way it services its customers.

Southwest Airlines is also a great place to work. The highly ranked company culture is also an aspect of Southwest Airlines that separates it from the competition as its focus on employee happiness also trickles down to customer happiness. Southwest employees have some of the best benefits and compensation packages in the industry, and it shows.

Competitor Comparison

As of February 2021, Southwest Airlines held the second largest industry market share at 18.1%. This is just below American Airlines at 19.6% and ahead of large competitors Delta and United at 14.7% and 11.5% respectively. Through May 12, 2021, the stock is reporting the greatest five-year annualized total return at 48.29%.