What Would Southwest Do If Oil Price Dropped to Zero?

Case Type: industry analysis; operations strategy.
Consulting Firm: Gallup Consulting final round job interview.
Industry Coverage: Airlines; Oil, Gas & Petroleum Industry.

Case Interview Question #00185: Imagine you are the CEO of Southwest Airlines (NYSE: LUV), the world’s largest low-cost carrier. Headquartered in Dallas, Texas, Southwest is the largest airline in the world by number of passengers carried per year as of 2009. It maintains the fourth-largest passenger fleet of aircraft among all of the world’s commercial airlines. As of December 31, 2009, Southwest operates more than 3,200 flights daily.

As the CEO, you have just learned that starting from tomorrow the price of oil will drop to zero. Obviously, this has significant ramifications for your business. Now the question to you is: what three people would you want to talk to regarding this development and why?

Additional Information:

• Price of oil, including transportation and refining costs, is zero.
• Cost of jet fuel is zero.
• Assume that oil companies make oil at zero profits.
• Ignore geo-political issues.
• No other specific information — Candidate must decide on the critical issues.

Possible Answer:

The interviewer should seek to conduct a conversation, where the interviewee creates a structure and works through questions such as the following:

• How does this change impact the business — revenue drivers?
• What is the cost structure of the airline?
  Fuels costs are a significant portion of the operating costs of an airplane. Thus, it is likely that prices could be reduced. This will result in an increase of primary demand. People who might have taken the bus, train, or car might now be willing to fly at the lower cost.
• What effects will increased demand have on utilization rates?
• Do you need more planes? Is there going to be a first mover advantage?
• Are Boeing and Airbus going to be able to make enough planes to meet the new demand? Will the prices of planes go up? Can airports handle more planes?
• Will planes travel farther now since they have no fuel costs?
• How will competitors react to this news?

So, who might you talk to (not an exhaustive list by any means; there are many, many others):

• CFO or Accounting Officer of Southwest who knows about the internal cost structure will be able to tell you what new items will be driving cost and constraining operations.
• Market Researcher — how does one sell the new airline to the public?
• Labor Unions — labor will be a bigger factor in the cost structure
• Airplane Manufacturer Airbus/Boeing – can you get more planes if demand increases? Can you get planes that fly longer (more fuel capacity)
• Airport Authority — can you reserve more landing slots before others?
• Competitors like United, American, Delta, etc — without discussing prices and avoiding collusion, are there other things you can learn from your competitors?

Once again, there are no right answers here — the key is did you discuss the strange issue intelligently? Did you pick three reasonable people and does your logic support the three you picked?