Session 3:

Southwest Airlines

MGCR 423 Strategic Management

Mitali Banerjee
Sept. 11, 2023
What is Strategy?

• It is a set of integrated actions to maximize firm performance.

Strat Mgmt
2
Value Creation

Customer’s willingness to pay

Customer
Value
Value
Price
Created

Firm Value

Cost

Supplier
Value
Opportunity Cost of
Supplier (OC)

Strat Mgmt
3
Value Creation

Customer’s willingness to pay

(WTP) Customer
Value
Goal of
strategy is to Price
maximize this Value
gap by Created Firm Value
increasing
WTP or
Cost
lowering cost
Supplier
Value
Opportunity Cost of
Supplier (OC)

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4
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5
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6
Industry Profitability, 1995 - 2015

ROCE – WACC (%)

Cosmetics 36.1
Tobacco 26.7
Soft drinks 19.1
Pharmaceuticals 18.1
Medical supplies 14.5
Computer software 12.7
Printing and publishing 8.5
Financial services 7.6
Petroleum products 4.8
Retailing 4.1
Aerospace / defense 3.7
Computers & periferals 3.2
Auto parts 3.1
Building materials 3.1
Automobiles & trucks 1.6
Telecom services 0.5
Airlines - 2.4
Textiles - 2.9
Iron and steel - 3.7
Paper products - 4.2
Telecom equipment - 6.1

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7
 Airline Industry: Not for the faint-hearted

“The easiest way to become a millionaire is to start off a

billionaire and go into the airline business.”
--Richard Branson
Why is it hard to be profitable as an airline?

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9
Why is it hard to be profitable as an airline?

• Capital intensive
• Competition on Price
• Substitutes

Strat 10
Mgmt
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Mgmt
 Stock Price Southwest Airlines
(1980-2020)

• Only airline (in the world) that has been profitable for 40 straight years
• Unprofitable for only 1 quarter in last 86

Strat 12
Mgmt
Southwest vs. American Airlines
(1980-2011)

Strat 13
Mgmt
Southwest vs. Delta
(1980-2005)

Strat 14
Mgmt
Southwest vs. Airline Index
(1993-2020)

Strat 15
Mgmt
Southwest vs. SP500
(1980-2020)

Strat 16
Mgmt
Strat 17
Mgmt
 Why has Southwest Airlines been so successful for so long?
Why has no other competitor successfully imitated their strategy?

Strat 18
Mgmt
Cost Advantage of Southwest: Distribution & Logistics

Landing Fees ($14-$5) X 135 pax = $1.2bn

Reservations ($14 - $5) x 135m pax = $1.2bn

Travel Agent Fees (50% - 15%)x $17bn x 10% = $595m

Fuels $2546m x 25% = $636m
Meals $5 X 135 pax = $675m

Strat 20
Mgmt
Cost Advantage of Southwest Airlines: Capacity
Utilization

SW Average Airline
Fleet Size 500 1358 (approx)
No. of trips/day 5000 ?
No. of trips/aircraft/day 10 ?
Mins that an aircraft used 65 mins +15mins =80mins 65 mins + (0.20)*65 +55
per trip mins = 133 mins
Mins an aircraft used 80 X 10 mins (=13 hours)
everyday

Strat 21
Mgmt
Cost Advantage of Southwest Airlines: Capacity
Utilization

• What is Southwest’s capacity utilization compared to other airlines?

• How is this linked to their flight time and turn around time?

Strat 22
Mgmt