Southwest Airlines beats United Airlines and American Airlines with lower maintenance costs, fewer controllable delays, and higher profits.
Southwest Airlines treats maintenance costs as a competitive advantage, saving $0.04 per Available Seat Mile, while experiencing 8% fewer controllable delays compared to a benchmark including the company, United Airlines, and American Airlines. We know preventive maintenance is worth $0.33/sf, but what is the value of competitive maintenance best practices?
A reputation for effective maintenance
Southwest’s maintenance strategy has earned the airline plenty of headlines–such as this beauty from The Economist, “The secrets of Southwest’s continued success”–and the adoration of stock analysts and shareholders. Others include; “Southwest Airlines’ Seven Secrets to Success” – Wired, “The Southwest Secret: How the airline manages to turn a profit, year after year after year” – Slate, and “Pushing 40, Southwest Is Still Playing the Rebel” – The New York Times.
Gary C. Kelly, CEO of Southwest, discusses maintenance practices in his latest annual shareholders letter, and the third page of the annual report praises its maintenance cost structure as a key competitive advantage. Meanwhile, maintenance hardly earns a mention in the appendix to United’s 2016 annual investor presentation, and it’s altogether absent from the American Airlines CEO’s annual meeting slides.
Caring about maintenance costs, in numbers
And the focus on this controllable dimension of operations shines through in the company’s performance metrics and financial statements.
In 2016, Southwest (Luv) spent $1 billion on maintenance costs, American Airlines (Aal) spent $1.8 billion, and United Airlines (Ual) $1.7 billion. Of course, these raw numbers don’t tell us much. Benchmarked to Available Seat Miles (ASM), Luv’s $0.70 is 4% less than the average, with Aal at $0.76 and Ual at $0.78. Benchmarked to Revenue Passenger Miles (RPM), Luv’s $0.84 is 6% less than the average, with Aal at $0.92 and Ual at $0.94.
What is this 4% cost savings worth to shareholders?
Given that it spends $1 billion on maintenance, that’s $45 million flowing straight into net income. And given its best-in-class 11% profit margin, that’s equivalent to $411 million in new ticket sales. With a 2016 P/E ratio of 14.26, that savings is worth $645 million in shareholder value, and $1 billion if we use Luv’s RPM benchmark. This same savings-based path to higher shareholder value works in buildings, too, as shown in Bentall Kennedy’s report on 10 years of financial data for a portfolio of office buildings.
However, this maintenance cost analysis is not complete–cheapness is not the goal, uptime is.
The Bureau of Transportation Statistics provides monthly data on airline delays dating back to June 2003. Delays are categorized across a handful of dimensions, and maintenance-related delays are included in the “controllable” Air Carrier Delays bucket. Over all the available data, 5.14% of Luv’s flights experience Air Carrier Delays, beating the benchmark by 8%, with Aal at 5.94% and Ual at 5.56%. Such lovable numbers…cheaper, more effective, and more profitable!
A culture that cares about maintenance
It’s hard to miss the focus Southwest has on its operational efficiency. We’ve explored maintenance-related cultures, on the Finely Tuned podcast, at Airbnb, Bell Labs, at mining companies, and at NASA. It’s encouraging to watch Southwest leading its industry this way and to see the results reflected in the numbers.
A sample of Southwest’s One Report, which highlights Luv’s commitment to Performance, its People, and the Planet.
