It is critical that managers understand how costs and revenues behave. One company that is affected by changes in costs and may not have the capability to rapidly change revenues because of competition is Southwest Airlines. Let’s take a closer look at SWA and its costs and revenues. Log on to SWA’s Web site at www.southwest.com. This Web site serves many purposes for the airline, such as providing flight schedules, making reservations and selling tickets, and displaying vacation and airfare specials.
1. Click on the Air icon and then on “See Where We Fly,” which provides a map showing the cities served by Southwest. What is the closest city to your current location served by SWA? Click on that city as the departure city and then select any city you like for the arrival city. Now select a date about a month from now for leaving and one for returning. Click to continue to the next screen. What types of fares are available? Why do you think that there are different types of fares offered? Click on one of the fare-type captions to see if Southwest places any restrictions on this fare. If there are any restrictions, what purpose do they serve?
2. Return to the reservations screen and select a departure date that is less than a week away. What types of fare choices are available now? Are the rates the same as those that you found for a trip more than a month away? Why do you think that the choices remaining are for the most part the higher-priced ones? Is there any advantage to the fare(s) still available? Who is the most likely user of a ticket purchased at the last minute?
3. Now that you have looked at the revenue side, let’s focus on the expense side. Individuals on the same flight may pay different prices for the ticket. Do you think that the cost of flying a passenger differs because of the price that he or she pays for the ticket? Why or why not?
4. Return to SWA’s home page. Take a look at the costs that SWA actually incurs. Find the list of information available “About Southwest” near the bottom of the page and click on “Investor Relations.” Click on the most recent “Annual Report” icon, which takes you to Southwest's most recent 10-K report. Open the 10K report and notice the summary information that the company has provided in the “Selected Financial Data” section. Give the most recent year’s operating revenues and operating expenses. How much has each changed over the prior year? What does this imply for Southwest’s profitability?
5. Now look further down the page and find “Operating Expenses per ASM.” (ASM stands for available seat miles, a measure of capacity.) What kinds of costs do you suppose are included in operating expenses per ASM? Which of these costs is primarily fixed with respect to ASM?
Which is primarily variable? What other cost drivers might be important causes of costs for Southwest?