Southwest airline case_study final version

Case study MBA - C

Team A

11/14/2009 1Annie, Luigi, Myra, Wichai, Yonggang MBA -C

US Airline Industry Before 1978 derogation …Civil Aeronautic Board regulated airline route 2-3 carriers provided the service in a given marketcost passed along to customers, no price

competition

After derogation…many new firms enter the market

Fuel crisis of 19791981 air traffic control strike=more industry

difficulties More than 150 bankrupt carriers during the 1st

decade of deregulation


US Airline Industry

1980s: financial debts increase due to expanded demand brought about by low fares

1990s: new aircraft orders lowered (not profitable market) to avoid debts

Mid-1990s: increase demand, from 200 million (1974) to 500 million(1995)

In 1999, global improvement of airline industrySeptember 11, 2001 attack= chaos in the market


New Pressures on Airline Industry

Security : need to increase war risk insurance Customer dissatisfaction: service problem, call for

regulation Labor costs: pressure expected to increase Aircraft maintenance : higher

maintenance/replacement costs, stricter government regulation for older planes

Debt servicing: airline industry debt load exceeded US industry averages

Fuel cost: big impact on the total cost was uncertain

Air traffic delays: due to higher travel, airport congestion=negative influence on profitability.

11/14/2009Annie, Luigi, Myra, Wichai, Yonggang MBA -C 4

Southwest Airlines Background 1967: Herb Kelleher and Rollin King founded SW 1970: management team built June 18,1971: 1st fly in Texas-Houston, Dallas, San Antonio

(“Golden Triangle) with 3 Boeing 737s aircrafts and 25 employees

Operation focus: short-distance flights (>500 miles), point-to-point flights, only 737 Boeing,high frequency flights, low fares, no international flights

1st national carrier to sell seats online ($1 per booking) 1st airline to use ticketless travel (January 31,1995) 2000: biggest aircraft order (94 737s Boeing) >>> 355

fleets in 2002 2003: 4th largest US airlines in terms of domestic

passengers carried


Southwest Performance Passenger load factor

is the percentage filled with paying passengers.

Revenue passenger miles one paying passenger flown one line

11/14/2009

Annie, Luigi, Myra, Wichai, Yonggang MBA -C 6

Analysis with Porter´s 5 Force Model


Power of Suppliers

The market is dominated by a few large airplane suppliers

As for the catering, gift services and other indirect materials, there are many fragmented sources and therefore their power is of almost no significance

The cost (maintenance and training) of switching from Boeing 737 to Airbus A320 is very high

The suppliers' customers are fragmented, so their bargaining power is low

There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins


Power of Customers Travel agents buy large volumes, there’s a concentration of

buyers, therefore their switching to a different supplier might have larger impact on the profits

Individual buyers usually act as individuals and therefore have no strong bargaining power

Switching to an alternative product is relatively simple and is not related to high costs

Customers are either price-sensitive, or time-oriented The product is not of strategic importance for the customer

because there are many other short distance transportation means

There is the possibility for the customer (travel agent only) integrating backwards


Threat of New Entrants Economies of scale: Southwest is # 7 in market share in 2000, thus has

reached sufficient economies of scale High initial investments and fixed costs: New entrants difficult to

compete financially with profitable Southwest Brand loyalty of customers: SW reputation makes it hard to win SW

customers Scarcity of important resources: (e.g. qualified expert staff) To train

people for technical skills is possible, but to imitate SW culture is very difficult

Distribution channels: SW has no special control over distribution channels

Legislation and government action: Not so difficult to set up airline company in the US

Operational efficiency: many imitators failed to compete with SW‘s... the highest passenger miles per employees ratio lowest employees per aircraft ratio debt-to-equity ratio is much lower than the industry average


Treat of Substitutes Brand loyalty of customers…so customers are unlikely to switch

to other transportation means, such as trainSouthwest provides low price or time-optimized tickets good service, care fun to their customers

Switching costs for customers to train/car for the Southwest routes…

requires more travel timescause a lot of inconvenience

Relative price for performance of substitutes…Price for trains, or gasoline cost for self-driving are comparable to

the price of Southwest ticket for the same route, not much cheaper.

11/14/2009

Annie, Luigi, Myra, Wichai, Yonggang MBA -C 11

Rivalry in the industry There are many players of about the same sizePlayers have similar strategies All players have their own customer intimacy programNot much differentiation between players and their

products, hence, there is much price competitionOnly visible differentiation is in the scope of the service

offering, age of airplanes, trainings of the staff, and heartiness of flight attendants where SW ranks very high

Low market growth rates (growth of a particular company is possible only at the expense of a competitor)

Barriers for exit are high (e.g. expensive and highly specialized equipment)


Business Strategies/Service Models

Short –haul (less than 500 miles)Point to point flightOnly Boeing 737 High frequency flightsLow fareNo international flights


Business Strategies/Service Models

Two-tiered pricing structure ($13 or $26 w/ free bottle of liquor)

Consistent with their primary focus (531 miles average trip length of 1.35 hours, 2,800 flights/day to 58 cities, 8 flights/plane, 12 working hours/plane)

Operation without major hubs=customer convenience, time-saving

Uses “no frills” approach to services (first come first serve seating, color-coded passes)

Online booking (no need for travel agents)


Human Resource Management Strategies “Positively Outrageous Service” (customer service exceeds the

norm) Communication and camaraderie highly valued Unique new employee orientation (Wheel of fortune game show,

scavenger hunts, company videos) Regular training for advanced employees “Leading with Integrity” classes for newly promoted

managers/supervisors “Walk-a-Mile Day” program to promote respect for co-workers and

increase company awareness Mentoring program


Human Resource Management Strategies

Employee initiative supported by management Emphasis on cooperative labor relations Employee own 10% company stocks Average age of Southwest employee was 34 years SW among the highest paid employees in the industry

and the company Enjoyed low employee turnover relative to the airline

industry More than 1,000 married couples (2,000 employees)

worked for the airline


New Employees Hiring Strategies

In 2001, Southwest reviewed 194,821 resumes and hired 6,406 new employeesUnique: Peers screened candidates and conducted interviews (e.g. pilots hired pilots, gate

agents hired gate agents)To better understand what the company sought in

candidates, Southwest interviewed its top employees in each job function (e.g. pilots, gate agents, baggage handlers, ground crew) and identified their common strengths, then used these profiles to identify top candidates


Southwest spirit employees first

“If they’re happy, satisfied, dedicated, and energetic, they’ll take real good care of the customers. When the customers are happy,

they come back.And that makes the shareholders happy.”

Herb Kelleher, Southwest CEO and Founder



By second half of 1994 many imitators

One third of the total industry capacity

Almost was start up airlines

Main Shuttle by United, Continental Line (CaLite)

Morris Air, first competition after “take over “


increase productivity, frequency of flight

Reserved seating - Lower fare rate

Hub congestion - cost of delays

Fee travel agents - commission fee

11/14/2009

Annie, Luigi, Myra, Wichai, Yonggang MBA -C

23


Interesting and unique position

Good financial status/stability

Increase operation in Northeast

Provide additional service (Wi-fi on all plane 2009)

Southwest airline case_study final version

Entertainment & Humor

Transcript of Southwest airline case_study final version