Strategy for United Airlines to compete with Southwest

1. The sky is the limit -
Off towards new
shores.
Client: United Airlines

2. Sabrina Fruehauf – November 2012
Table of Contents
1. The Client: United Airlines
2. Statement of purpose
a. Static and dynamic positioning of United Airlines and Southwest
3. Recommendations
a. Perceptual Mapping study
b. Conjoint Analysis
c. Value Curve (Blue Ocean Strategy)
4. Appendix

3. Sabrina Fruehauf – November 2012
1. TheClient: United Airlines
United Airlinesreached out to the Solutions Group in October 2012 after facingsteady erosion of its
profitability and market share. Given an increasingly competitive airline industry, in particular the
emergence of a once upstart airline Southwest, United Airlines has gradually lost market share over the
months and is now seeing an opportunity to regain share bysplitting the market and targeting the
individual by offering two customized services:
- A parent United brand to target the business end of the market
- The introduction of “TED” for the consumer segment as a direct competitor of Southwest
The Solutions Group feels honored to be chosen by United Airlines as the chief consultant on this project
to help revamp United’s brand image and compete more effectively by offering a customized service to
both the consumer and the business segment’s needs. United Airlines is the world's largest airline in terms
of number of destinationswith a net income of US$ 840 MM in 2011.1
Ever since its launch, Southwest was able to gain up to four market share points, mostly at the expense of
the client United Airlines. For the latter, sales had been declining in the past years in particular in the
younger demographic segment such as the ages 23-35. After the latest executive board meeting, an
agreement was reached and mission: “Take on Southwest” was initiated.
2. Statement of purpose
a. Static and dynamic positioning of United Airlines and Southwest
In order to make well-grounded recommendations on how to revamp United’s brand image and on
whether it is worth investing in a new model, it is crucial to frame the current industry first by
understanding static and dynamic positioning. The price-performance curve is an excellent way to show
how the airline industry is shaped and where the individual carriers stand. In every industry the
competing organizations can be attributed to one of three customer tiers: Operational excellence,
customer intimacy and product leadership. The following diagram illustrates United’s static positioning
compared to Southwest’s. It is important to keep in mind that the static positioning model underlies the
basic assumption of there being a positive correlation between price and performance.
1
See corporate website of United Airlines, www.united.com

4. Sabrina Fruehauf – November 2012
Figure 1: Static positioning model for airline industry, November 2012
The model indicates that Southwest clearly falls under operational excellence (OE). Their
strategy is focused on high volume and low margins whereas United concentrate on high margins
and high variety. In order to succeed with an OE strategy, the organization is bound to have a
cutting-edge Supply Chain, Operations and Service Delivery Management in place. This low
cost structure implies lower costs across the board, ranging from pure monetary costs to usage,
maintenance and disposal costs. Lower prices and convenience are what Southwest travelers get
at the expense of lower customization and lower level of service. United Airlines customers, on
the other hand can enjoy high performance, more complexity, more functionality and features
but they do have to bear higher prices. A natural evolution within every industry is the north-east
migration. Usually, the competition in the south-west region is so brutal that companies attempt
to move up one tier by differentiating themselves from the rest. For the airline industry,
Southwest’s strategy is truly disruptive. Prior to them emerging, the industry was shaped by one
airline wanting to be better than the other by offering more features, more destinations, better
service at a higher cost. Southwest used a different mindset. While the other airlines were
battling each other on higher margins, Southwest stepped in and completely revolutionized the
industry by offering cheaper ticket prices achieved bylower costs and lower traditional
performance with fewer extras, less perks, only peanuts and no meals, etc. Focusing on some key

5. Sabrina Fruehauf – November 2012
factors like keeping cost low allowed them to attract those customers whose main priority was
just to get from point A to B without any need for extras.
Overserved
customers
Underserved
customers
Figure 2: Disruptive model of airline industry, November 2012
Figure 2 displays the southwest attackers as low-end disruptors. In green you see the demand
slowly changing over time and in blue, the individual airline offerings. What becomes evident is
that the disruptive airline model meets the market needs much earlier than the full service
airlines and hence captures a bigger portion of the industry demand. Satisficing beats optimizing.
The reason why Southwest’s model has worked so well is because the company has recognized
that as technology and features increase, customers soon become overserved. Companies that
operate in that upper spectrum don’t do themselves any favor, let alone the majority of
customers. Most people demand a service that will bring them to their destination at a low cost
and preferably on time. United was able to satisfy the underserved customers by beating
competition with price leadership, functionality and reliability but once the customer’s needs
were fulfilled, this strategy is not optimal any more. Once that point is met, competition is
outdone by operational excellence, speed and low cost.
United Airlines has been struggling to respond to this new threat, in particular because in the
past, all they were ever used to is grow and move up the market by adding features in order to
compete with other like-minded airlines. Now, the only way for United to survive in the long
run, is to move down the curve. As proposed by senior management, one approach could be to

6. Sabrina Fruehauf – November 2012
move the parent United brand more up-market and to create a new offering “TED” for the
consumer segment to compete against Southwest Airlines.The following section will provide the
client United with a detailed explanation on how to best counteract Southwest’s strategy and to
develop a sustainable business model that will guarantee a successful thriving of the company in
the marketplace.
3. Recommendation
The question the Solutions Group is essentially trying to answer is whether there is enough space
for both United and TED within one market. A few carefully-selected cutting-edge marketing
tools were chosen to help give best class responses to the questions that the client had
commissioned us with.In order to unleash the optimal space where United could reposition itself
to, a perceptual mapping study was conducted.The perceptualmap as a data-driven consumer
insight tool that shows the position of United vs. all relevant competitors’ brandsrevealed the
following picture:
Figure 3: Perceptual Map of airline industry, November 2012

7. Sabrina Fruehauf – November 2012
At first glance the map seems very crowded. Most attributes fell along the horizontal axis, along
with the preference vector which makes the horizontal axis the primary vector and the vertical
axis the secondary.
United ranks high on preference and features like “legroom”, “Quality of meals”, “Standby
options”, etc. The verbal combination of the attributes along the horizontal axis resulted in
“Flights with extra delighters”.
Southwest on the other hand is associated with low prices and far away from all the “delighters”.
They managed to find the white space that was located in the complete opposite direction as
every other brand.
Can United find a new position for its new offering TED? The Solutions Group says yes they
can. Judging from the map, there is enough space for United to serve the business traveler on the
upper end by offering all the nice perks and options and additionally introducing TED, the new
consumer segment service that has reduced features but focuses on the most important ones.
In order to best compete with Southwest, TED doesn’t need extras like “Class Seating Options”,
or “Stand by options”. The reduction of features will allow TED to price itself more
competitively and regain share points from Southwest. To make decisions on which features to
focus on and which on the other hand to neglect, a conjoint analysis was added.
In simple words, conjoint analysis has proven a compelling consumer insight tool to many other
Fortune 500 companies that, by breaking the product into different utilities, depicts the relative
value that consumers assign to certain features and levels of a product or service.2
Down the vertical axis you find all the different features that were tested by the consumer,
ranked in order of importance, with the most important at the bottom.Each bar going along the
horizontal axis represents a level of consumer happiness. The intercept at the bottom (0.58) is
crucial as it portrays the minimum level of consumer happiness that they are willing to accept.
The fact that the intercept is not that high implies that the barriers to entry are low, meaning that
United has to pay close attention to the competitive players. What can be concluded is that
average ticket price has the bars with the highest utility values, followed by no layovers and on-
2
See output IV in appendix for the Conjoint bar graph customized to United, November 2012

8. Sabrina Fruehauf – November 2012
time arrival. The individual features combined let us calculate a so-called overall feature
importance.
Percent of In-flight
Desired Meal Overall Feature Importance
Destinations Service, 2%
Available, 2% Flight Class, 2%
Flight
Frequency, 8%
Percent of On-time Average
Arrivals, 14% Ticket Price
, 47%
Number of
Layovers, 25%
Figure 4: Overall Feature Importance for Airline Industry, November 2012
What meets the eye is that 86% of the pie is made up by only three features. These are the so-
called hot buttons that United needs to invest in when offering the new service TED to the
consumer segment. “Average ticket price”, “Number of layovers” and “Percent of on-time
arrivals” are the three features matter most to the consumer. By concentrating on expanding
these, United will yield the most success with TED. Compare these findings with the perceptual
map and you find that the “direct flights” vector is also very close to the preference vector. By
contrast, the lowest ranked features are “flight class” and “meal service”, which consequently are
less necessary to keep.
Taking all these findings together, the optimal product for the new TED brand that United is
highly recommended to offer looks as follows3: The 2.26 is the Total Product Utility(TPU) and
determines the best possible utility for TED’s customer.
3
The data shows a sweet spot for “in flight meals”: hot meal has a lower level of consumer happiness than snack”

9. Sabrina Fruehauf – November 2012
Figure 5: Optimal Product for TED, November 2012
Tweaking features that are more important to consumers will result in a higher TPU and
eventually lead to a higher market share.
What is the advised form that TED should adopt and where does the differentiation from
Southwest lie? This is where the value curve (also known as Blue Ocean Strategy) comes in. It
depicts the three different brands ranked according to their relative performance among
numerous factors of competition.
Figure 6: Value Curve for United, TED and Southwest, November 2012

10. Sabrina Fruehauf – November 2012
What becomes evident is that United ranks relatively high on all the features. Southwest is
known for a high on-time arrival rate, a low price and little to no extras. TED will also be
offering high on-time arrival, low price but the delighter (and the main distinction to Southwest)
is the no-layover factor. Southwest does offer many direct flight options but not enough. TED
can leverage parent brand United’s 78 domestic hubs4 which are usually located more
conveniently than Southwest’s. With a lower price, but the United name over its shoulder, TED
will start attracting more customers and pull more of Southwest’s travelers onto their side.
This leads us to the final recommendation: United will be most successful going forward by
continuing to use United as the main service targeted towards business travelers and TED as the
low-cost consumer-traveler centric carrier under its belt. The perceptual map demonstrated that
United itself is a well-perceived brand since it ranked high on all the main vectors, most
importantly the “brand I prefer” vector. There is no real reason to change this position. However,
the problem lies in the fact that the average consumer is easily drawn to a low-cost carrier that
flies them to their destination for a low price. This describes a need that Southwest took
advantage of. In order to regain market share from Southwest, the client is recommended to
introduce TED as a second offering but targeted solely towards the average consumer: a service
that revolves around the three key features: low price, no layovers and high on-time arrival.
4
See United’s corporate website, www.united.com

11. Sabrina Fruehauf – November 2012
Appendix
1. Output I: Static positioning model for airline industry, November 2012
2. Output II: Disruptive model of airline industry, November 2012

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3. Output III: Perceptual Mapof airline industry, November 2012

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4. Output IV: Conjoint Bar Graph for United Airlines, November 2012
x8 = 3 classes - first, business, and coach 0.00
x7 = 2 classes - business and coach 0.02
missing level = 1 class - only coach 0.05
x6 = hot meal during flight 0.02
x5 = cold meal during flight 0.03
missing level = snack during flight 0.05
missing level = desired destination available 70% 0.05
x10 = desired destination available 80% 0.06
x9 = desired destination available 90% 0.09
missing level = flight frequency every 6 hours 0.05
x12 = flight frequency every 3 hours 0.19
x11 = flight frequency hourly 0.20
missing level = on-time arrival 60% 0.05
x4 = on-time arrival 70% 0.17
x3 = on-time arrival 80% 0.33
missing level = 2 layovers during flight 0.05
x14 = 1 layover during flight 0.27
x13 = no layover during flight 0.54
missing level $900 ticket price 0.05
x2 = $600 ticket price 0.55
x1 = $300 ticket price 1.00
Intercept 0.58
0.00 0.20 0.40 0.60 0.80 1.00 1.20

14. Sabrina Fruehauf – November 2012
5. Output V: Overall Feature Importance for Airline Industry, November 2012
Percent of In-flight
Desired Meal Overall Feature Importance
DestinationsService, 2%
Available, 2% Flight Class, 2%
Flight
Frequency, 8%
Percent of On-time Average
Arrivals, 14% Ticket Price
47%
Number of
Layovers, 25%
6. Output VI: Optimal Product for TED, November 2012

15. Sabrina Fruehauf – November 2012
7. Output VII: Value Curve for United, TED and Southwest, November 2012