SOUTHWEST
AIRLINES
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01 Is The US Airline Industry Attractive?
Contents:
Southwest’s Strategy
02
Strategic Choices:
03
Unique Aspects of the Strategy
04
Threats in the future
05
05
06 Is the strategy sustainable?
Results of Deregulations (The Bad…)
• Permanently Altered in October 1978 after Deregulation
• Price competition was almost non-existent before Deregulation
• Deregulation resulted in dropping of airline fares and entry of many
new firms Before Deregulation the
• 11 Major Airlines ended up being bankrupt Civil Aeronautical Board
was controlling Airline
• Delta, United and American Airline Survived Routes, Fares, Mergers
and Acquisitions.
• Demand fell significantly during recession
• Resulted in Unemployment of 20,000 workers and Financial Losses
Results of Deregulations (The Good…)
• 80% of the Airline cost fixed or semi-variable to deal with this high
cost airline developed sophisticated software tools
• To manage fares and seat inventories “Yield Management System”
was used
• Consumers benefited from low prices, new services and good safety
practices
• In 2013, the major airlines were on track to be profitable (a marked
contrast to the heavy losses of just few years earlier)
STRENGTHS WEAKNESS
Safety Record • Financial Losses
Traditional, brand recognized • Regional Disparity in Ticket
airlines prices
New low cost carriers • Unemployment
Growing Income Levels S W • Bankruptcy
Rise in Productivity • Infrastructure Development
SWOT
OPPORTUNITY THREATS
• Development of New O T • Rise in Fuel Prices
Services • Terrorism
• Technological Advancement • Increase in Competition
• Link-ups with other carriers • Environmental Regulations
can greatly increase • Increasing debt load
passenger volumes
• Growth of Southwest Airline
Porter’s 5 Forces Model
• Low Cost to Switch • Additional Competition
• Alternatives Modes of Transportation due to Deregulation
Threat of Substitute Threat of New Entry
Threat of new rivalry
• Fuel Pricing • Many Alternatives to Buy
• Large No. of Competitors
• Aircrafts and Engine Producers Based on Low Prices
• Little Customers Loyalty
Supplier Power Buyer Power
Southwest’s Strategy
Overall
Strategy Cost Focus
• Emphasizing on cost minimization within a
focused market
• Allowing them to develop into a considerably
robust contender in the airline industry
• Consistently profitable
Cost Leadership
1. Boeing 737
• Their fleet only consisted on one type of aircraft
• Less time and money spent on maintenance
• No training required
• Fuel efficiency
2. No Frills
• No assigned seats; first come first served basis
• No meals
• No hotel rooms or long distance phone calls
Cost Leadership
4. Turn Around Time
• Only 15 minutes compared to the industry’s average
of 45 minutes
• Smaller gate crew
• Pilots pitch in
• Less time on the ground means more time in the air
5. Pricing Strategies
• Consistently low and competitive prices
• Tiered structure based on type of customer
• Recognizing their main market and capitalizing on it
• Co-Branding and B2B relations
Cost Leadership
Focus
• Not deviating from their initial focus
• Short Haul
• High Frequency
• Point to point flights
• Business Travelers
• No international flights or ventures (until recently)
Strategic Choices:
Hub and Spoke approach:
Southwest opted not to apply the "hub-and-spoke"
approach, used by other major airlines (e.g. Delta, United,
and American), as a major source of comparative advantage
and cost reduction.
The Southwest approach was to offer:
short-haul (average flight times of fifty-five minutes)
point-to-point flights, such as Dallas to Houston or Los Angeles to
Phoenix, at a high frequency
Expansion:
Southwest’s expansion in new routes was highly
controlled.
New airports were carefully selected, so as to not
compromise their efficient processes and operations
Only a few cities every year
Avoided availing every opportunity in order to
avoid over expansion
AirTran Deal:
After 2011 Southwest became an international
airline reaching the Caribbean and Mexico City.
Expanding into foreign markets makes possible
access to new customers and potential for more
profit and growth.
30 new markets
Service changes:
New fare categories
New boarding processes
Promotion of the ‘two-bags-fly-free campaign’
Launched their Rapid Rewards program
Aimed at increasing revenue by:
o Expanding their customer base
o Gaining more business from them
Unique Aspects of
the Strategy:
Balanced Strategy
• Southwest had a small fleet
and fewer employees
• Less turnaround time
• Although it didn’t provide a
very luxurious traveling
facilities but it provided a
friendly and satisfactory
service
• Positively Outrageous Service
Human Resource
• LUV potion theme
• The staff is encouraged to participate in decision making and take
initiatives
• Happy and loyal employees
• Employee screening: hiring people with enthusiastic and extrovert
nature.
• Unique employee training
• No layoff policy
• Fun and family oriented culture and a friendly atmosphere
Dealing with Competition
• Coping with new competitor using corporate
sales as a tool
• Successful collaborations with many brands
and surpassing the strategies of the competitors
Flyer • Flyer program based on dollars
spent rather than miles flown
Program • Rapid Rewards Flyer
Other Unique Aspects
• Business traveler’s airline
• Controlled growth & careful selection
of the new locations and markets
• The underdog mentality
Threats on the horizon
• Steeply declining operating margin compared to other US airlines.
• Major backlash and resentment from competitors dates back to the inception of Southwest
who are constantly trying to sabotage Southwest through imitation.
• Marketing campaigns directed at competitors can fuel a threatening rivalry.
• Customers believe the low fares are short lived promotional tactics, and so Southwest may
lose loyal customers.
• Southwest conducts mostly short haul flights and international flights are limited.
• This may affect their plans of expansion as it would take time to build an image and trust
amongst international costumers and increase promotional as well as operating costs in the
long run.
• Point to point service could be economically
unfeasible in the long run due to insufficient
demand.
• Overload and high expectations from
employees can cause dissatisfaction, and
hence work inefficiencies. For e.g.. Pilot
cleanup and dressing up in costumes etc.
• Lack of use of a computerized reservation
system can slow down operations.
• Planes utilized for longer hours can amount to
wear and tear, increase risks of accidents and
tarnish company’s reputation.
• High labor costs/increasing employee recruitments/difficult to manage.
• High cost of employee training programs.
• Challenging accepted norms can be a security threat e.g., continuing to operate
regardless of union strikes.
• 290 out of 737 planes are leased and hence threat of debt accumulation and
possibility pf bankruptcy due to the increasing inflation and operating costs due
to high labor wages.
• Stepping down of CEO Kelleher, founder and visionary leader of SouthWest, and
hence difficulties in retaining customer satisfaction and prosperous image of
company.
• Employee owns 20% shares- Dilution of share ownership - as more shares are
issued each share owned becomes a smaller percentage of the company - could
lose control of the business and right to make important decisions.
• Employees not happy with the idea of expansion.
Is the strategy sustainable
So far…
• To remain at the top for 39 years, in such a brutal
industry is a record on its own
• Number of strategies used to achieve this position
point to point routing system,
having one kind of aircraft and
emphasizing on customer service
• While other airlines are filing for bankruptcy,
Southwest is showing greater margins than ever
But is it sustainable?
• If we see in long run, these strategies are going to be difficult to
control as time passes
• Economies are changing
• For so long Southwest has tried to repute its position as the cheaper
airline, if they are to change anytime soon, it would create a havoc
• Venture into new expansions can create unexpected results
• Operating costs have been increasing, and AirTran is going to give
them a boost even more
Thank you
