Southwest Airlines & ValuJet

The air transport industry is highly competitive and characterized by large national airlines (such as American and United) which compete with smaller regional airlines (such as Southwest). Regulated until 1978, airlines created differentiated service in the form of first class and economy seats so that consumers on the same aircraft were likely to have paid very different prices for the trip.

The industry was deregulated in 1978, with the result that companies no longer competed so much on service as on price. Companies such as Southwest recognized potential for low fares, and began building a niche for themselves by offering low fares with commensurably low levels of service. Southwest's success gave rise to a new generation of low fare airlines, with ValuJet entering the market in the early 1990s. Unfortunately, ValuJet suffered a string of accidents which culminated in the complete loss of Flight 592 in May 1996, bringing the future of this low fare carrier into question.

From an investment standpoint, Southwest is the wiser investment, although those investors who may consider ValuJet a takeover target (and who have high risk tolerances) might consider this a highly speculative stock. The litigation in which ValuJet is involved as a result of Flight 592 is likely to make the likelihood of any takeover attempt remote.

The airline industry has been subject to intense price competition since it was deregulated, and the result has been a number of n

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illing all aboard and resulting in a shutdown of the carrier for several months. When ValuJet began flying again, it did so with a reduced schedule, and there is considerable speculation about whether the company will be able to continue operations long-term. The company is also involved in litigation resulting from the crash, and the long-term prospects for the company are questionable. The following chart identifies key operating statistics for Southwest (seat miles are in millions, cost factors are in cents) (Shammas, 1996, p. 5541P): 1995 1994 1993 Revenue Passenger Miles (RPM) 2,624 941 44 Available Seat Miles (ASM) 3,813 1,471 63 Load Factor 68.8% 64.0% 69.7% Revenue per RPM 13.4 13.8 13.1 Cost per ASM 6.8 6.8 9.8 Southwest Airlines Because Southwest's flights are generally an hour or less in length, the airline saves money by not having to serve meals. It has a liberal work rule arrangement with its unions, so productivity is high, and overall costs are low. For example, Southwest gets 672 hours per year on average from pilots versus 371 for American Airlines pilots, and 60 percent more passenger miles per flight attendan

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