ACE INSTITUTE OF MANAGEMENT

MBAe
Section: B

Strategic Management
Assignment: II
Case Analysis: SouthWest Airlines 2008
Date of submission: 28th October, 2017

Submitted by: Submitted to:

Bishop Panta Mr. Sohan Babu
Khatri
The paper discusses the case of SouthWest airlines, the first successful low-cost carrier in USA.
SouthWest Airlines is a major U.S. airline that primarily has the lowest operating cost structure
in the domestic airline industry and consistently offers the lowest and simplest fares, provides
short haul, high frequency, point- to point, low fare service. SouthWest was incorporated in
Texas and commenced operations on June 18, 1971 with three Boeing 737 aircraft serving three
Texas cities- Dallas, Houston, and San Antonio.
At the time when Herb Kelleher believed “If you get your passengers to their destinations when
they want to get there, on time, at the lowest possible fares, and make darn sure they have a good
time doing it, people will fly your airline” the industry was highly unattractive. Since its
inception the air transportation industry has been a dynamically changing industry.  From the
leaps and bounds that technology has brought on, through the terrorist attacks in 2001, there are
many challenges that the air transportation industry has faced. From 1970 through 2001 air
transportation grew and at a fast rate. In 1970 the airlines were transporting nearly 172 million
passengers, growing to 615 million in the year 2000. Unfortunately for the financially tight
airlines, the recession and terrorist activities on September 11th immediately cut passenger levels
back to their 1995 equivalents.  A move that all companies within the industry were not
anticipating, setting many up for bankruptcy. The industry is also cyclical, capital and
technology intensive, heavily taxed, and heavily regulated, combining for very low profit
margins for domestic airlines. Costs had been rising significantly across the industry in recent
years and over the past decade, the total financial losses exceeded more than $50 billion during
the 2000. The increasing cost of fuel had been the primary source of rising costs for the industry,
and its volatility makes hedging often inefficient. Fuel costs have risen over 300 percent since
2000.
The United States commercial airline industry was forever changed in October 1978, when
President Jimmy Carter signed the Airline Deregulation Act. Prior to the deregulation, the Civil
Aeronautics Board regulated airline route entry and exit, mergers acquisitions, passenger fares,
and airline rates of return. During this time, two or three airlines provided service in the given
market; but, each route was covered by only one carrier. Price competition was virtually
inexistent, leaving the various costs increases associated with air travel to be passed along to
customers. Deregulation caused airline fares to reach record lows and allowed many new firms to
enter the market. Eight of the 11 major airlines dominating the industry in 1978 ended up filing
for bankruptcy, merging with other carriers, or simply disappearing from the radar screen.
Subsequently, the fuel crisis of 1979, the air traffic controllers' strike of 1981, and a recession all
added to major difficulties during the first decade of deregulation. This period of time saw more
than 150 startup airlines collapse into bankruptcy. However air travel increased from 200 million
customers in 1974 to some 500 million by 1995. From the industry analysis, we can conclude
that, historically, the airline business has been unattractive. In the late 1990s and until 2001,
profitability had improved because of several factors: low fuel prices, increased demand in a
strong economy, and more moderate fleet expansion by the airlines.
The CSFs of SouthWest Airlines is basically
 Stick to what you’re good at: Since 1971, SouthWest Airlines offered single class service
on lots of short to-medium range flights to convenient airports. It’s an idea that propelled
SouthWest to new heights with all its 737s
 Keep it simple: SouthWest Airlines honored some simple no-no’s: No assigned seats. No
meals. No hassles. No problems. You could say they’re simply nuts about it!
 Keep fares low, costs lower: SouthWest Airlines believed in low fares by philosophy.
The only way to keep fares low is to keep costs even lower. It’s the primary goal.
 Treat Customers like guests: SouthWest Airlines won the annual Triple Crown four
times: Highest Customer Satisfaction and had best On-time Record & best Baggage
Handling.
 Never stand still: SouthWest Airlines provided quick turnarounds at gates. It responded
quickly to the changes in the business environment. Which helped it to keep one step
ahead of the competition.
 Hire great People: SouthWest Airlines is a People Company. Spirited, altruistic, fun-
loving Employees who work hard, follow The Golden Rule, and provide the best
Customer Service in America. Team Work and trust further increased it cohesiveness
amongst each other.
Within the industry, SouthWest operates as a low-cost carrier, focusing on profitable point-to-
point routes and good customer service. As a result, they operate fewer long-haul routes and tend
to avoid some of the more congested airports. While many airlines have accepted being subject
to fluctuating fuel prices, SouthWest adopted a dynamic hedging strategy allowing them to use
hedging to create a cap on higher prices in the future which gave it the edge over the competitor.
Not only this Southwest does not charge for the first two checked bags, which it has heavily
promoted through the ‚Bags Fly Free‛ program. This has served them well, allowing SouthWest
to distinguish itself from the rest of the industry, even many low-cost carriers (LCCs).
One of the most impressive characteristics about Southwest Airlines is their fun, loving,
determined company culture that believes first in making employees happy which then results in
happy customers. SouthWest airlines was ranked United States most admired airline since 1997,
the motto of the company was LUV airline, they featured a bright red heart as its logo and relied
on outrageous antics to generate word of mouth. They served Love Bites (peanuts) and Love
Potions (drinks). The most success of SouthWest is acknowledged by its unique market niche for
serving only fewer states in United States especially in cities that has fewer airports and lower
gate fees and less congestion. SouthWest is a low-cost airline that focuses on fast, no frills
service. It has never served meals, does not have advanced seat reservations, and flies only
specific type of Boeing airplanes. Southwest's culture, which underlines employees as the
airline's "first customers" and passengers as the second, it means employees are considered as an
internal customers. SouthWest Airlines' business model leverages extremely efficient operations,
deep focus on the customer experience, low-cost pricing and logistics solutions, active forward
thinking, and a motivated team of employees and associates. SouthWest was also the first major
airline to use ticketless travel which eliminated the need to print and process paper tickets. They
were also the first to allow customers to make reservations and purchase tickets at their website;
this allowed them to bypass the need to pay commissions to travel agents for handling the
ticketing process and reducing staffing requirements at reservation centers. Through this sound
strategy, Southwest has achieved multiple competitive advantages in the recent years.
The industry of airline characterized by notoriously poor labor relations and authoritarian
management. SouthWest is different: Trust, Non-adversarial relations, Open sharing of
information, High productivity. These decisions have helped them to be flexible in the face of
decreases in airplane passengers during the economic crisis. SouthWest is one of those airlines
who are consistently earning profits despite the problems the industry is facing. With such
stability, the corporation is able to make decisions and adjust policies, which other heavily
burned airlines may not be able to imitate.
Some of the imitators were: Continental lite which is low cost service (even lower than
SouthWest) started in 1993 with 171 departures from 14 cities, cutting fares by over 60%. It
followed SouthWest best practices related to cost minimization, employee engagement
Continental’s performance despite imitating SouthWest practices was very poor. For example
flight turnaround time 30 minutes vs. 15 for SouthWest, in addition there were many customer
complaints and lost bags. Though profits were weaker than expected but it witness sharp increase
in market share. Similarly United Shuttle: In 1994, United too announced an airline with in an
airline, having direct competition to SouthWest With lower fares, it was all out war between
continental lite, SouthWest and The shuttle. Despite such severe competition, SouthWest
succeeded due to its organization culture, committed employees and impeccable top management
team.
The most important concepts that Southwest developed and grasped in their strategy was that it
was not enough to be a low-cost provider; they needed to have a sustainable competitive
advantage. The company addressed this by stressing that through the low-cost provider strategy,
customer service, and customer satisfaction, they are able to achieve a sustainable competitive
advantage, which is demonstrated in their financial and statistical data. A manager from
Southwest stated “our fares can be matched; our airplanes and routes can be copied. But we pride
ourselves on our customer service.” Although no strategy is without fault or mistake, Southwest
has managed to significantly make its strategy into one that can thrive in both a short and long-
term vision. With its focus on ways to keep cost low for customers, from paperless tickets to
special programs for frequent flyers, the company has been able to effectively provide service to
their customers and hold true to their mission.
The need to expand internationally arises out of Southwest's growth and the changes that may
arise in the airlines business industry. For the last decade, the carrier has strengthened its
presence in the U.S. by offering lower fares, using a point to point business model, and a single
Boeing fleet which is cheaper to service and maintain. Further, it has almost exhausted the list of
cities it would like to serve domestically. In such a scenario, it becomes important for Southwest
to spread its wings to foreign destinations. It should focus on countries like Mexico and Canada
which are relatively closer to it than other countries. The success or failure of the flight between
these countries should be able to determine what they should do.
 In conclusion, Southwest started as a small company, offering very few flights. As their vision
grew, so did their company – one that has continued to grow, even in a shaky economy where
other airlines faced bankruptcy. Southwest Airlines has managed to stay focused on the
customer by providing a high level of customer service and the ability to compete with larger
airlines by offering incentives such as rewards programs and free luggage check-in. As the
Southwest brand continues to grow, so does their innovation, which results in more flights
booked and higher revenues. Keeping with the times and still being affordable is what customers
strive for and it seems that Southwest is consistently meeting those needs and being the first to
offer efficient programs, such as Early-bird and ticketless check-in. Being the first to offer these
conveniences is appealing to customers and is more incentive to use Southwest over any other
airline.