Maximizing Capacity Utilization as a Startup Premise

January 5, 2012
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In stark contrast to other major airlines, Southwest has been profitable for 40 years. If Southwest had one core “startup premise” it was this: for every second the planes sat on the ground, their airplanes and people were costing them money but not generating revenue. So Southwest designed an airline from the ground up that maximized capacity utilization. They avoided the hub-and-spoke system that led to cascading delays.

In stark contrast to other major airlines, Southwest has been profitable for 40 years. If Southwest had one core “startup premise” it was this: for every second the planes sat on the ground, their airplanes and people were costing them money but not generating revenue. So Southwest designed an airline from the ground up that maximized capacity utilization. They avoided the hub-and-spoke system that led to cascading delays. They removed meals to reduce ground crew times, along with assigned seating so passengers would hurry onto the plane to get good seats. They used only one aircraft type to reduce maintenance times.

Some of the most interesting startups today are founded on the same premise of maximizing capacity utilization. Being information technology startups, their method for doing so is generally by matching demand for capacity with supply of un-utilized capacity. AirBnB lets people rent out unused space, increasing the utilization of their homes. Uber lets drivers rent out their unused time, increasing the utilization of their cars and labor. Services like TaskRabbit are trying let people fully utilize their “labor capacity”. Over time, services that increase capacity utilization tend to drive prices down (even if, at first, they sometimes have higher prices).

Whenever Southwest would begin servicing a new city, it drove prices down so dramatically that economists began referring to it as the “Southwest Effect“. One particularly remarkable aspect of the Southwest Effect: when Southwest began servicing a city, it would stimulate new business activity – and thus air travel – to such an extent that even Southwest’s less efficient competitors ended up benefiting.