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Sometimes, entrepreneurs can’t admit the brutal truth.
They fall in love with their businesses, and they insist that they’re unique and special (supposedly). But that miscalculation leaves them vulnerable to all kinds of external forces.
If they’re willing to see the truth, however, they can find incredible opportunities — especially if their competitors don’t follow suit.
With that in mind, let’s explore an impressive story about Southwest Airlines.
In short, Southwest stands alone among its biggest competitors in that it’s figured out how to take on Wall Street and pay significantly less for jet fuel than the other biggest airlines .
Since the airlines are basically a commodity industry, and fuel makes up a huge part of their costs, this gives Southwest an enormous advantage.
It all starts in Dallas, according to the Financial Times, where Southwest employs a team of four traders who transact oil derivatives with some of the country’s biggest banks. The goal is to predict where oil prices are going to go, so that Southwest can lock in the best fuel costs.
This year, the airline will save $1.2 billion as a result of the work of this small group, according to the recent Financial Times report.
“Send me your most arrogant person on the Street and have them come work for us in the fuel hedge, and we will humble them in about 10 minutes,” Southwest treasurer Chris Monroe, who runs the program, told the FT.
This isn’t a new program, and it hasn’t always worked. Southwest dates its fuel hedging effort to the early 1990s, when oil prices surged after the Persian Gulf War, and there were years when it cost the airline money.
But now, with the price of oil exceeding $100 a barrel, and with none of the other Big Four airlines currently employing a similar strategy, the advantage swings to Southwest.
As an example, Southwest is expected to pay between $3.30 and $3.40 per gallon of jet fuel during the second quarter, while its big competitors pay between $3.70 and $4.02.
The whole thing is “a huge benefit for them,” Helane Becker, an airline analyst at Cowen and Company, told the FT.
Now, I’m going to assume you don’t run an airline. But chances are good that you either own a business of some kind, or plan to.
And, no matter what kind of business we’re talking about, I think there’s something to take away from Southwest’s experience — including tough, targeted questions to ask.
- As we seem to be heading into uncertain times, are there costs that everyone in your industry has to contend with, but that you can use a creative strategy to reduce?
- Are there suppliers who might be willing to cut a deal? Are there transportation, shipping, or other costs you might be able to reduce?
- You don’t have to act as aggressively as the Southwest traders, per se, but are there trends you can predict, and that both you and your competitors will have to contend with down the road?
One of the most interesting things about the U.S. airlines is that they have to work out their problems in real-time, with almost every step tracked by an army of analysts, investors and journalists.
It’s why business leaders in any industry should follow the airlines, and why I’ve published a free e-book of lessons you can learn: Flying Business Class: 12 Rules for Leaders From the U.S. Airlines.
I think it’s especially apt in this case. The top two takeaways?
Face the brutal truths, and then figure out what opportunities reveal themselves as a result.
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