Southwest Airlines: Spend Management as a Core Business Strategy

I’m writing this blog on a flight from Pittsburgh to Chicago. A few minutes ago, I read a story in the local paper that discussed Southwest Airlines' entrance into the Pittsburgh market and how it would upset the dynamics of the incumbent carrier, US Airways. Reading the article reminded me how Spend Management can help market leaders like Southwest Airlines change the basis of competition. In Pittsburgh, Southwest plans to offer tickets (including walk up fares) at a quarter to a half of what the major carriers charge. How can they do this? Because the company embraces a culture of Spend Management, avoiding frivolous expenses, and investing its dollars in what it needs to (in fact, contrary to what many people believe, the airline’s salary structure is similar to its full fare competitors; in fact, many of its pilots are compensated above the industry norm for the airplanes they fly). Below are three Spend Management examples that enable Southwest Airlines to compete and win in the markets it chooses to compete in today: 1) Integrating the sourcing and trading function for volatile commodities (e.g. Jet fuel hedging). 2) Product standardization for everything from the planes it flies to its technology environment. 3) Employing strategic sourcing and reverse auctions for a number of products and services. At Southwest, Spend Management is not a department or job function. It’s a core business strategy that has fundamentally changed the economics of the airline industry. -Jason Busch

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