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khala

Southwest Airlines
A Rough Patch or Permanent Descent?

SUBMITTED
SUBMITTED TO:
BY:
Dr. Rajan Saxena
Faculty-in-Charge Anurag Kalita
Roll No. 331
Customer Acquisition &
Div. D, MBA (Core) I Yr.
Retention
TABLE OF CONTENTS

OVERVIEW...................................................................................................................................3

GENESIS (1967)...........................................................................................................................3

THE GROWTH STORY (1967-2000)............................................................................................3
ENRICHING VALUE..................................................................................................................................................................4
Price...........................................................................................................................................................................................4
Location.....................................................................................................................................................................................5
People........................................................................................................................................................................................5
Frequency..................................................................................................................................................................................5

KEY DIFFERENTIATORS.........................................................................................................................................................5
Values and Culture.....................................................................................................................................................................5
Limited Markets Service............................................................................................................................................................6

INDUSTRY IN DOLDRUMS (POST 2000)...................................................................................6
Industry Bailout.........................................................................................................................................................................6
Taxation.....................................................................................................................................................................................6
Security and Regulations...........................................................................................................................................................6

COMPETITION ANALYSIS...........................................................................................................8
Standalone Low Cost Carriers...................................................................................................................................................8
Low Cost by Major Carriers......................................................................................................................................................8

TURNAROUND STRATEGIES...................................................................................................10
Short haul against Long haul...................................................................................................................................................10
Security Procedures.................................................................................................................................................................10
Increase Reach.........................................................................................................................................................................10
Utilise Cash Flow....................................................................................................................................................................10

REFERENCES............................................................................................................................11
OVERVIEW

In the year 2001, the Airline Industry faced what would be its longest and deepest
crisis to date: many of the airline companies were losing hundred of millions of US
dollars; several had collapsed entirely, whilst others had to be rescued by their
government. This crisis was precipitated by the terrorist attack of September 11,
2001 in United States of America. Southwest Airlines, which had the enviable
record of registering profit for 30 continuous years, was also badly hit by the
developments post September 11 terrorist attack. Since 9/11 terrorist attacks, the
aviation industry went into a period of panic and gloom. Situation was so bad that
passenger numbers plummeted drastically for all airline companies, balance sheets
were showing up in red and investors hammered down stock prices of each and
every company. Immediate reaction to it was that almost all airlines companies had
gone into massive lay-offs and route rationalization.

This article will analyze the changes that have occurred in the business dynamics
of the airline sector and its impact on Southwest Airlines as the focal point of
discussion.

GENESIS (1967)

In 1967, Rollin King and Herb Kelleher founded Southwest Airlines in response to a
need for increased capacity within travel routes of major Texas cities. These routes
were service by large carriers but the fares were high because almost all carriers
used these routes as intermediate stops. The idea for Southwest Airlines to make it
successful was through keeping costs low such that the fares for route between two
Texan cities was less than cost of driving a vehicle over the same route.

THE GROWTH STORY (1967-2000)

Value Proposition of Southwest Airlines for the customer has always been the price
and convenience. Some of the key aspects of strategy by which Southwest brought
in the value proposition are captured below:

Southwest Airlines was perhaps the best airlines success story ever scripted
worldwide. It soon became the most widely implemented low cost solution in the
premium industry across geographies. Once Southwest Airlines had entered into
the market, it entirely changed how people in United States of America took to air
travel. The value discipline that Southwest Airlines was following was to observe
operational efficiency. Each of its practices and steps were cornered around this
objective and this made it to attain and maintain market leadership.
Southwest Airlines operating strategy was unique in the U.S. airline industry. While
the rest of the industry had matured, the niche customer segment serviced by
Southwest remained to be a growing market across decades. By offering point-to-
point short-haul flights at low fares with a high-frequency, it became a service
model in itself. The operations were efficiently designed to maximize productivity
which reduced costs and maintained high quality service. It remained the low-cost
producer in the U.S. airline industry, and hence it could profitably deliver the
philosophy of everyday low fares.

ENRICHING VALUE

It is often said in marketing that for a product to be sold it should be available at
the Right place, for Right price, on Right time. Southwest Airlines took this
marketing philosophy a step further by ensuring that the product was available
through the Right people. The value discipline of operational efficiency of
Southwest Airlines was built on the following key points:

Price

The pricing followed was low fares for every seat on every day. That was quite a
differentiating factor for Southwest Airlines. And that’s what customers also
wanted; fares so low that they had the freedom to fly. Low fares were even more
important in the short-haul market niche where customers had the ground
transportation as a viable alternative. The key to success was to charge low fares
to regardless of what other airline competitors charge. Customers started thinking
of Southwest when they thought of low fares. In a Consumer Reports survey
conducted in July 1997, Southwest was ranked as having the lowest fares amongst
the nine major airlines rated by customers. The verdict was out that the undisputed
price advantage was there to stay for quite sometime.

Location

In an effort to further increase operating efficiency, Southwest Airlines looked out
for using convenient satellite or downtown airports such as Dallas Love Field,
Houston Hobby, Chicago Midway, Oakland, Providence, Baltimore and Manchester
to avoid the congestion created in bigger airports by its competitors. Since the
competitors operated within a hub and spoke model, the use of bigger airports was
inevitable for them. The use of smaller downtown airports also reduced the total
trip time and transportation expenses to and from the airport for its business
customers. Further, it became possible to sustain high on-time performance by
avoiding congested hub airports.

People

One of the most crucial points for Southwest’ success was having a people force
that was motivated, intuitive and result oriented. Although being a low cost carrier
it didn’t equate to lower wages for employees. Although it did offer competitive
compensation packages, it had a rich culture and dedicated people that made
Southwest Airlines such a special place. It was the most heavily unionized airline at
that time but the transparency in setting wages and cooperative union policy by
Southwest, resulted in very favorable operational results. Independent agencies
like Fortune magazine had named Southwest Airlines one of the best companies to
work for in America, a testament to the outstanding people and relationships within
the company. Fortune also recognized Southwest Airlines as America’s most
admired airline and one of America’s most admired corporations. Finally, Southwest
was also recognized as one of the world’s safest airlines.

Frequency

Southwest used to offer lots of daily flights within the cities it served. That’s the
“high frequency” part of the short-haul, low-fare, high-frequency strategy that
Southwest Airlines used to employ. This kind of the asset utilization was high and,
therefore, the unit costs were low. But evaluating from the customer’s perspective
which was more important, it was an opportunity of convenience, especially to the
business customers. It got perceived very soon to customers that entire operations
were built to meet the needs of the short-haul business traveler.

KEY DIFFERENTIATORS

Values and Culture

Southwest operated on the following basic principles as:
• Focus on the situation, issue, or behavior, not on the person;
• Maintain the self-confidence and self-esteem of others;
• Maintain constructive relationships with your employees, peers, and
managers;
• Take initiative to make things better;
• Lead by example

While growing right throughout Southwest had its core values as: profitability and
low cost intoned with the human values of family, fun, love, individuality,
ownership, legendary service, egalitarianism, common sense/good judgment,
simplicity, and altruism.

Limited Markets Service

Southwest had an option to spread its flights thinly over an extensive system.
However it limited its operations to a service market ad provided high-frequency
departures to a given destination. It took to its expansion strategy in a phase wise
manner as it entered one geographical location at a time. This deferring of service
to potential customers actually created a huge excitement when Southwest
eventually started service in those areas.

INDUSTRY IN DOLDRUMS (POST 2000)

As already mentioned in the beginning of this report, entire airline industry was so
taken by surprise that it took more than two quarters to gain back the air traveler
confidence and reverse the decline of numbers.

Industry Bailout

Most of the carriers which didn’t have much cash reserves, from past years, to fall
back upon were on the verge of winding up. The government had to come out with
a industry bailout package in the form of long term loan commitments to help these
firms. Southwest also received an amount 0f $228 million based on the seat miles
capacity it had on September 10, 2008.

Taxation

Since security at airports and within airlines was to be provided by federal
government, the cost had to be recovered by the government. The government
proposed to levy two tax components to airlines. One was to tax airlines as per the
segment flown by the passenger and the second tax was on the basis of the
security costs that each airline incurred before taking over by the government.

Security and Regulations

The aftermath of 9/11 terrorist attacks was an immediate panic and fear among air
travelers. The best way for government authorities to pacify was to come up with
extensive security procedures. This resulted in average passenger on-boarding
time to rise tremendously. Southwest being a high frequency low turnaround flier
got hit due to this sudden change in procedures. Air travelers were required to go
through this extensive process and at times it became quite time consuming
compared to past situation.
COMPETITION ANALYSIS

By the turn of the century, the low cost model proved to be so profitable for
Southwest airlines that many carriers joined the fray. Either there were
independent carriers who replicated the Southwest model albeit some changes or
there were low cost versions of other established carriers.

Standalone Low Cost Carriers

Carriers like PeopleExpress which directly replicated the southwest model. But the
company didn’t last long due to its change in service goals. JetBlue was started by
an employee of a company acquired by Southwest and it appeared to be
competitor for Southwest. The strong points for JetBlue were that it was non union
organization operating substantially longer flights than Southwest. It sought to
differentiate customer service and high aircraft and labor productivity through
extensive use of technology.

Low Cost by Major Carriers

Southwest was initially put as a niche player and hence major airlines thought of it
as a totally non adaptive model. However there were soon low fare equivalents
from the major airlines such as Continental light, United Shuttle, Delta Airlines etc.
Since these were low cost versions of the major airlines was still run on
management philosophies of their parents, it came out that low cost model was not
something they could implement well.

Profitability

Particulars 2001 2000 1999 1998
Operating Revenues $5,555,174 $5,649,560 $4,735,587 $4,163,980
Operating Expenses $4,924,052 $4,628,415 $3,954,011 $3,480,369
Operating Income $631,122 $1,021,145 $781,576 $683,611
Operating Margin 11.36% 18.07% 16.50% 16.42%
Total Assets $8,997,141 $6,669,572 $5,563,703 $4,715,996
Operating Asset Turnover 61.74% 84.71% 85.12% 88.29%
Return on Assets 7.01% 15.31% 14.05% 14.50%

From the profitability perspective Southwest showed very good figures during the
period up to 2001. It constantly cleared the industry average values. However in
2001 it showed a fall in this figures of profitability. This was not something
unexpected and might not be a death blow. However, was a knock well enough that
it will take some effort to attain profitability figures comparable to past figures.
Dupont profitabilityanalysis
0.96
0.90 2000
0.84 1998
1999
0.78
0.72
OperatingAsset Turnover

0.66
0.60 2001
0.54
0.48
0.42
0.36
0.30
0.24
0.18
0.12
0.06
0.00
0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 18.00% 20.00%

Operatingmargin

Reach

Southwest airlines had gradually geographically expanded in all directions. It
started its first transcontinental flight from Baltimore, Washington to Oakland, San
Francisco area. This shift in interstate destinations made average flight miles to rise
and Southwest was moving away from its short haul strategy. Also southwest was
operating in between 50 city-pair routes and still growing into new territories.
TURNAROUND STRATEGIES
Short haul against Long haul

Southwest had gradually increased its service coverage from short haul operations
to longer routes. This operational strategy came out well when unit costs per flight
mile were considered. However for increasing long haul flights will necessitate
utilization of bigger flights and bigger airports. This will in contrast to Southwest
traditional strategy of operating from smaller less congested downtown airports
with comparatively smaller flights.

Security Procedures

The security procedures had made the process of on boarding a time and resource
intensive process for Southwest. It had the option of investing in additional security
to bring down the average passenger on-boarding time by bearing the cost for
additional security. However this was something that needs to be considered as a
short term strategy only.

Increase Reach

Southwest can take up a steady expansion plan and move into the geographies
which have not been catered yet. The states which still have the air traffic market
not developed in the northern side can be explored and expanded into either
through service expansion or by acquiring with a carrier servicing those markets.

Utilise Cash Flow

Southwest has a increase in cash flow due to the government assistance it received
as part of the industry bailout. This increase in liquidity position can be utilised to
strategically align towards its partners like Boeing for competitive acquiring of
newer aircrafts. Also it can utilise this situation for renewing its leases for aircrafts
for better operational costs. Also it can negotiate with the State authorities for
utilizing the downturn airports at an exclusive basis.
REFERENCES

A. Electronic:
• www.southwest.com
• www.wikipedia.com

B. Published:
• Southwest Airlines 2002: An Industry under siege, Harvard Business School
case study
• The Southwest Airlines Way, Gittell J.H., McGraw Hill