Southwest Airlines_Case Study

1. Team: Hope
Afzal Mahmud Nakib Khan- 130301010025
Tuhin Raj- 140101010028
Hifjur Rahman Mahfuj- 140101010032
MD. Mofijur Rahman Sumon- 140201010107
Case Study: Southwest Airlines - Waging
War in Philly

2. CompanyPurpose
To connect People to
what's important in
their lives through
friendly, reliable, and
low-cost air travel.
"Our people are our
single greatest
strength and most
enduring long term
competitive
advantage."
Gary Kelly, CEO
Southwest Airlines
Slogan
“ If It Matters To You, It Matters To Us”

3. Other Airlines have
adopted the same
business model such as
AirTran, JetBlue, and
Frontier.
Today, Southwest Airlines
sits third in market share,
15.4% and 88.1 billion in
domestic revenue
passenger miles.
Southwest Airlines
established March 15, 1967
Co-Founders: Herb
Kelleher and Rollin King
Headquarters in Dallas,
Texas
Fleet size of 576 airplanes
and over 86 destinations

4. Although allowing bags
to fly free is a major
incentive to many
customers, this also
makes for more
baggage to be
checked. As the
number of customers
increase, so does the
amount of baggage
and the time it takes to
move all the baggage
to the desired location,
which creates slower
on-time departure,
exactly what Southwest
prides itself on.
Comedic flight
attendants have always
been accompanied with
Southwest’s flights, but
with the recent
increase in personal
technology many
guests on board would
prefer their own
individual person
entertainment. Other
airline companies have
provided flights with
free wireless internet
and satellite TV/radio
which have been more
attractive to some
travelers.
To try to catch up with
the non-unionized
Southwest, competitors
have ruthlessly slashed
costs in wages and
pensions. Some have
even used bankruptcy
to force steep union
concessions. This has
in turn made Southwest
employees some of the
highest paid in the
industry.
Because of the low
cost structure that
Southwest has to begin
with, there is minimal
room for improvement,
especially when it
comes to third party
agencies. Southwest
must look at different
ways to cut costs rather
than these routes,
where competitors can
easily cut spending in
these areas and lower
costs.
Fuel contracts that
Southwest had smartly
negotiated prior to
2005 are now starting
to expire, consequently
driving their cost of fuel
to skyrocket from what
it was before. The large
gap that they used to
have in fuel prices over
their competitors is
starting to close.
Main Issues and Problems

5. Analysis of Issues
1. When comparing traveling with Southwest
opposed to traveling with U.S. Airways, Southwest
airlines has offered little to no differences with
their airlines in the past few years while U.S.
Airlines and other major airlines have been
changing dramatically. Because of their lean cost
structure, this has been much more difficult for
Southwest to accomplish and many other
companies are closing the gap in CASM (cost of
flying one seat mile) by cutting certain expenses
from their own companies. U.S. Airlines are
adopting ideas such as free wireless internet,
satellite TV and radio which trumps Southwest’s
entertaining flight attendants for many travelers.

6. Analysis of Issues
2. CEO Gary Kelly admits that there are
“growing pains” with the company and the
number of bags that handlers are trying to
process and handle quickly and efficiently.
Because of the increasing number of
passengers, there are increasingly large
amounts of baggage which Southwest is having
a hard time getting to its preferred location on
time. This is exactly what the company prides
itself on, and on-time departures for Southwest
are plummeting. This is a large selling point for
the company and if changes aren’t made in the
near future regarding this matter, travelers may
choose other competitive airlines such as
Frontier, JetBlue and AirTran.

7. SWOT Analysis
Low Fares: Due to Southwest Airlines low cost structure, they are able to
charge much lower fares. In 2004 a round-trip ticket from Philadelphia to
Orlando was $98, compared to $200 for US Airways.
Point to Point: Southwest operates with a “point to point” system, rather than
using the “hub and spoke” pattern that is the backbone of the major airlines.
This allows for more flexibility to match planes with the demand for certain
flights.
• Effective Marketing: By using a strategy to gain customer insight, Southwest
was able to create an effective marketing and advertising campaign, allowing
• Increasing Influence: Southwest is increasing their global influence. By the
end of 2011, the company serviced 72 cities in 37 states, and their AirTran
acquisition now extends their reach into international skies.
• Sales Growth: Year over year sales growth has been in the double digits
over the past years; however, the company’s growth is projected to slow to
the still modest high single digit rate into the future.

8. Threats
Smaller Airlines: Many
smaller airlines are
emulating the Southwest
business model and as a
result are able to achieve
success. This creates the
threat for Southwest to no
longer be one of the
cheaper options for fliers.
Big Airlines: Larger airlines are
restructuring how they operate, and as a
result their prices are lowering; closing
the large gap Southwest previously had.
Vulnerable to Rising Oil
Prices: When jet fuel prices
rise, airline companies are
faced with the decision of
passing the pain onto their
customers and possibly
losing business, or
swallowing the costs and
ruining their margins.

9. When Southwest was first brainstormed on a cocktail napkin,
kelleher, and a partner ‘’decided the company would fly ‘’point to
point’’ instead of ‘’hub and spoke’’ like other airlines, and they
would not serve meals, only snacks in order to save money. They
also decided that the airlines would have any electronic
entertainment, which would also save money. With the money
they saved with this and other strategies. They were able to price
tickets at a lower price than their competitors.

10. September 11th 2001: Air travel, directly after the tragedy of
September 11th decreased by 30 percent and all airlines, except
Southwest, lay off thousands of employees. Southwest did not lay off
a single one. Where other airlines caught wind of the amount of the
money. Southwest making because their cheap flights, they adopted
their strategies. A few smaller airlines such as JetBlue and AirTran
started making money like Southwest, and the bigger airlines that
had not changed their ways, started losing. Now, larger airlines are
slashing employee’s wages to be able to lower costs for travellers.

11. The airline industry is moving toward monopolistic competition. As more
airlines enter the industry and trade over a wide range of prices with
differentiated offers, the market’s nature is changing. As low-fare airlines
entered the market, their low prices affected the way consumers viewed
airline prices. Consumers saw that they could fly from point A to point B at a
much lower price if they were willing to give up some of the frills and extras
that airlines traditionally offered. This affected their view of what the “right”
price was for air transportation. When Southwest entered the Oakland
market, average one-way fares fell from $104 to $42—and traffic tripled. This
indicates that the demand for air transportation is price elastic.

12. Airlines have traditionally practiced value-based pricing. They should know that
airlines have often charged much more for last-minute purchases as compared
with tickets purchased well in advance. The airline industry, led by the low-fare
airlines, is practicing value pricing. The new companies are offering just the right
combination of quality and good service at a fair price. They have introduced less
expensive versions of the “brand name” airlines’ products.
There is also an element of competition-based pricing here. To the extent that
competitors’ prices establish a “going rate” for a particular route, a firm may have
to offer that price also regardless of its particular costs.

13. It is becoming more and more difficult for Southwest to maintain a big cost
advantage, and legacy airlines are getting more cost efficient. And, the presence
of low-cost upstart airlines has increased dramatically. Thus, the difference in cost
structure between Southwest and all other airlines in the industry is shrinking. As
a result, other airlines are more capable of matching Southwest’s fares and being
able to sustain those prices without incurring the damage they once did. The
issues with respect to airlines matching Southwest’s prices are different now than
they were 10 years ago. More airlines will do this, and they will hurt less from it.
Thus, Southwest will either have to dig deeper as far as price cuts (which it likely
will not be able to afford to do) or find some additional point to compete on.

14. Recommendation
1. -Improving route systems
2. -In-flight entertainment and meals
In-Flight Entertainment and Meals
On board entertainment, especially for long
flights, is an absolute preferred luxury that
passengers would enjoy. However, steps must
be taken to maximize profitability and minimize
cost loss. Way to do this would contract a deal
with a major media provider, such as Pandora
or iTunes Radio, to provide media to each
passenger. These providers make most of their
profit on advertisements, so by adding this,
Southwest could charge the provider a fee and
allow them to make a profit as well.
Selling Tickets Through Third Party Distribution
Agents
People live busy lives and anything that is
made convenient tends to be preferred by most
of society. If a potential passenger could go to
a third party, already in their daily tasks, they
could add additional flyers. One way to do this
would be selling tickets from a major store such
as Costco. People could do “one-stop-
shopping” for their consumer goods as well as
planning their next trip or vacation.

15. Effort never dies