Southwest Airlines in Baltimore Case Study Q/A

1. Analyze the financial performance of Southwest Airlines between 1996 to 2000 using
the data provided in Exhibit 2. Provide an interpretation of the financial ratios used in
the analysis and their implications for financial performance of Southwest Airlines. (10
Marks)

Highly exclaimed Management Guru Peter F. Drucker once said that “Profitability is the sovereign
criterion of an enterprise”. None of the analysis matters unless it boils down on how to improve
profitability of a business. And when it comes to Southwest Airlines first thing one notice is that the
net income has increased by 202% over the period against the revenue increase of around 66%
suggesting that the operational have improved considerably during the period.

To understand what went on, look at the table below:

Some of the observations from the above table are:

1. Average passenger fare has increased by 30% while the fuel cost and employee count has only
increased by 20% and 28% respectively. This improved performance is reflected in the Net
Income which as increased by over 200% while the revenue has only increased by 66%.
 Southwest Airlines in Baltimore Case Study Q/A
2. Occupancy of an aircraft also known as Passenger Load has improved consistently over the five
years which means that the Average fixed cost to fly an airplane has decreased

These factors have contributed to higher profitability.

While staying profitable is important, staying solvent is quintessential. A solvency ratio is a key
metric used to measure an enterprise’s ability to meet its long-term debt obligations and is used
often by prospective business lenders. A solvency ratio indicates whether a company’s cash flow is
sufficient to meet its long-term liabilities and thus is a measure of its financial health. An
unfavorable ratio can indicate some likelihood that a company will default on its debt obligations.

Southwest airlines have performed very well in terms of managing its long term debts. Debt equity
ratio indicates how a company is funded, in this case, by debt. The higher the ratio, the more debt a
company has on its books, meaning the likelihood of default is higher. The ratio looks at how much
of the debt can be covered by equity if the company needed to liquidate. It is therefore a very
positive that the company has improved its ratio from 0.39 to 0.22.

Another solvency ratio is Asset coverage ratio which measures how well a company can repay its
debts by selling or liquidating its assets. The asset coverage ratio is important because it helps
lenders, investors, and analysts measure the financial solvency of a company. Company’s
performance has improved from 5.3 to 8.76.

2. How does Southwest Airlines compete? What are its advantages relative to the
competitors? (10 Marks)

Southwest Airlines compete in short-haul, competitive low fare business model. It depends on
low cost structure such as focusing on airports underutilized and close to a metropolitan area . It
defines and broadens its market broadly so that considers people who may drive their car as
potential customers. In summary, lowering the fares and increasing frequency of flights are key
drivers of making money.

Advantages
1) The company has managed to under price its competitors in the airline industry. This
implies that the company is able to provide low prices and still retain its
competitiveness.

2) its ability to retain its employees that has been in the industry for a long time. These
employees are experienced and are able to come up with effective measures to save
various problems effectively since they has passed very difficult times in its early stages
of development

3) Another advantage is Southwest Airlines puts more emphasizes on the ability of an

employee to contribute creatively to the organization. This strategy has helped the
company to absorb innovative employees.
 Southwest Airlines in Baltimore Case Study Q/A
4) Effective management of Fuel rise shock

Even though its competitive advantage is on the basis of low cost structure, most important
source of Southwest’s competitive advantage lies in its people, carrying out its remarkable
productivity, which is far ahead of other airlines‟ one and cannot be easily imitated. People in
Southwest share its culture such as team spirit, fun, family, dedication, cost consciousness and
so on.

Southwest Airlines, being a Low Cost Carrier (LCC), is famous for its uniquely competitive low
fares, which are often some 30% lower than most of its major rivals. They have achieved this low
cost leadership position in their industry by emphasizing on:

              Faster than average gate turnarounds to yield higher utilization rates.
One class of seating.
No meals or movies on flight.
One type of airplane – Boeing 737.
Point-to-Point flight routes.
High employee productivity.

A very successful fuel hedging program (long-term contract with oil companies to buy
fuel equivalent to $51 per barrel through 2009 that has reduced a major fraction of its
operating expense).

              Serves relatively less-congested airports to achieve high asset utilization and reliable on-
time performance (however later it had spread its operations to major airports as well).

3. Analyze the aircraft turnaround process of Southwest Airlines using concepts from
operations management such as resource optimization, capacity, bottlenecks and
information flows. How does the operations strategy of Southwest Airlines enable its
competitive advantage? (5 Marks)

Turnaround Process Evaluation: At Baltimore passenger connections are a major operational

challenge. Minimum connecting time is 35 minutes. The coordination is decentralized.
Operations coordinators and supervisors manage the inbound and outbound flights of the
station while operations agent mange each flight’s turnaround. The successful turnaround is
heavily dependent on strong coordination and cooperation between various functions.

OTIS is used for tracking flight information allowing the ground crew to gauge the expected
arrival time of a flight. On the station, the gate assignment and timings are displayed on FIDS for
all of the employees and passengers. There is a special attention to “hot passengers” that have
less than 35 minutes connection time.

During the turnaround, a stable flying configuration and appropriate fueling is ensured. Fuel
invoice and Cargo Bin Loading Schedule is hung by the jetway. The passenger who have
connecting flights are dismounted with their baggage. Then the boarding process for the new
passengers is started. In the meantime, cleanup and other necessary operations are also
 Southwest Airlines in Baltimore Case Study Q/A
performed. Finally, the copy of the trim calculations and information about passengers and
baggage is passed onto the captain before the plane starts moving to its take off point.

Turnaround is being achieved quite efficiently. Although over the years the turnaround time has
increased from 15-20 minutes to about 30 minutes yet, when needed, the SWA staff can turn
around a plane in fifteen minutes. A highlight of the process is that each individual knows his job
very well. This clarity is central to a quick turnaround. Balancing of workload is already under
way and by limiting a supervisor’s responsibility to two contiguous gates and ensuring that flight
turnarounds were not scheduled at both gates simultaneously.

Capacity: Southwest Airlines had access to 16 gates at Baltimore airport. They flew more than
100 flights in a day.
Capacity          Resource Utilization:
Terminals / gates    16        Actual     127
Supervisors    2        Resource Utilization
(128/192)    66.14 %
Terminals available at one time    8            
No. of shifts    2            
Total available    2*8*60*8=7680            
Service time    30 + 10 = 40 m            
Total capacity    192            
By increasing the number of supervisors, the utilization can be enhanced. At present, the
capacity appears to be underutilized.

Bottlenecks: The bottlenecks are being caused at luggage unloading and passenger loading. The
times taken are 9.30 minutes and 9 minutes respectively. The passengers can be loaded quickly
by shortening the queues and assigning more personnel to facilitate quick boarding. But it will
be of little value if, concurrently, the time for unloading is not shortened. This may be done
either by using multiple conveyors or faster conveyors.

Information Flow: This is quite rapid with constant updates available for monitoring the
situation. It is hinged on need-to-know basis. The decentralized system makes it simpler to use
since headquarters are contacted only occasionally.
How is the Process Working: The system is under heavy pressure due to disproportionately high
number of connecting passengers. Given the inexperience of the workforce and material
limitations, the system is working well. It can be further improved by reducing the bottlenecks.
The bag handling area is a major concern since it has reached its capacity. This will have to be
rectified to ensure fast turnarounds in the future especially on days when there is increased
number of flights.

4. How does the Marketing approach of Southwest Airlines enable its competitive
advantage? (5 Marks)
 Southwest Airlines in Baltimore Case Study Q/A
The marketing strategy of low-price has been in use, in the southwest airline, from the
beginning. They offer cheap flights and therefore able to crush competitors. The strategy of
pricing has been successful because it was the opposite of the competitors.

This marketing approach enables its competitive advantage in two main strategic areas:

1. Operating Costs:-  Southwest Airlines has the lowest fares among its competition. Its
lowest fares partly came from low operational costs. What Southwest is doing?
Southwest flies one airplane type, the Boeing 737 series. The competitors are using all
kind of airplanes and models. That saves millions for Southwest in maintenance cost,
spare-parts inventories and mechanics training. More, every pilot and crew members
will be familiar with every plane. On the other hand, using one type of airplane gives
Southwest the opportunity to move the aircrafts through the route network without
costly reconfigurations. Southwest is using less congested airports (secondary or
downtown) and of course they have lower average fares. Most of Southwest flying is
point-to-point rather than competition that is hub-and-spoke. That strategy and short
haul approach with an average flight time of 55 minutes minimizes the time that
airplane sit on the ground waiting delay-prone hubs. According to Flight stats, on-time
performance in June was eight percentage points higher than the industry, and higher
than any of its competitors. As a result, 78 percentages of Southwest’s customers fly
nonstop.

2. People:- Even though its competitive advantage is on the basis of low cost structure,
most important source of Southwest’s competitive advantage lies in its people, carrying
out its remarkable productivity, which is far ahead of other airlines‟ one and cannot be
easily imitated. People in Southwest share its culture such as team spirit, fun, family,
dedication, cost consciousness and so on.

5. How does the HR policies of Southwest Airlines enable its competitive advantage? (5
Marks)

Southwest believes their competitive advantage lies mainly with their people and how they are
managed and not so much with their pricing structure. The leverage lies with the people! Among
other things that were not so easy for the other airlines to imitate, Southwest encouraged their
employees to deliver great customer service and have fun (which often go hand-on-hand).

Their philosophy is to treat their employees well and put them ahead of their customers.

The benefits it gives it employees, include: profit-sharing and empowering employees to make
decisions. The logic is if the employees are valued, they will treat the customers well and that
will spread the reputation of the Airlines further.

-The airline employs a fun and casual work environment. Southwest Airlines is popular for asking
its candidates one time to change from suit clothing to Bermuda shorts. Those who were fast
enough were selected.
 Southwest Airlines in Baltimore Case Study Q/A
- No formal hierarchy is enforced. It’s not uncommon to see the pilots assisting the flight
stewards in helping them check the passengers in the plane or cleaning the plane. This helps in
achieving the swiftest turnaround of the aircraft.

6. Why is the operational performance of Southwest Airlines eroding? What issues do you
identify that require action? (10 Marks)

Increasing number of flights:  Baltimore station was introduced by Southwest airlines in 1993. In
just 7 years Southwest’s share of passengers in BWI reached 34%. Baltimore became the mega-
station by offering 100 departures per day. With increasing number of flights BWI estimated to
reach its capacity in 2001 and its bag’s sorting area had already reached its capacity. This was
slowing down the entire flight process. This problem also requires immediate attention.

Passenger Connections: Overall Connections have been in the 20% range for the past ten years.
But at Baltimore, they are 30%. Passenger connections are a challenge in that the passengers
are not able to connect flights that are scheduled in less than 35 minutes of each other.
The staff on station has to take the decisions and implement them by not burdening the entire
process. This requires a lot of coordination to serve the connection without delaying other
passengers with the wait time. The baggage handling in the given time also is a big challenge.
With the increase in the number of gates the company should get more area for baggage
handling from the BWI.

Staffing – The stations was understaffed and there was a problem in getting and keeping the
labor. The Baltimore had high labor market and the company expected employees to work for
16 hours. Specifically, for Baltimore, it can result in a low efficiency and poor internal
communications with others. Looking at the high number of flights and connections the staff
had to be more organized and required process improvements. To have the right process in
place the staffing situations had to corrected by aggressive hiring and rightly compensating the
employees.

7. What would you recommend Matt Hefner to do? (5 Marks)

 Matt should combine the options of more investments and process improvement:
 Matt should suggest the facility expansion so that pressure on gates an baggage area is
relieves.
 More staff need to be recruited by shortening the staffing process and additionally
measures should be taken to retain the current staff by reducing the working hours and
compensating rightly.
o The above options will be time taking and will require long term strategic decisions
as it involves risk of major investment. So better to go for a stable and progressive
growth.
 Matt should suggest increase in connecting time between the flights to lower the pressure
on staff. At the same time, it will improve the service quality
 More advertising/marking of the service quality needs to be done.