What Does it Take to Make a Profit?

Source: Ric Payne's Blog

Following includes excerpts from a blog entry posted by Ric Payne from Knowledge@Wharton, an online publication from The Wharton School of Business, reproduced with permission.

This blog entry challenges the idea that consolidation is the way to make airlines profitable once again and suggests that Southwest Airlines — a smaller company with a solid business model — has an approach worth emulating.

I couldn't help thinking, why don't these guys take a leaf out of Southwest Airlines' book. That company creates a flying experience that consistently WOWs its customers and is very cost efficient to both customers and itself because it implements a sensible operational strategy; employs (and retains) amazingly loyal, engaged and empowered people; and makes air travel for both its customers and its team members a fun experience.

In my opinion consolidation will NOT make the airlines more profitable if past experience is any guide. It will make air travel more expensive but that does not translate to higher profit. SWA consistently makes a profit because it has a superior business model. It's that simple. What that means is they achieve higher utilization of their assets (they turn their planes and the team members in them) around faster than other airlines, and they have higher occupancy rates so their net margin is higher. These two things result in significantly higher ROI (asset turn x net margin = ROI). Simple isn't it? This is Business Finance 101!

To read the complete post, click here.

From Ric Payne's Blog — Confessions of a Lazy Accountant, http://theconsultingaccountant.com, April 29, 2010, “Big is not better.”