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Case study MBA - C Team A

11/14/2009

Annie, Luigi, Myra, Wichai, Yonggang MBA -C

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US Airline Industry
 Before 1978 derogation …  Civil Aeronautic Board regulated airline route  2-3 carriers provided the service in a given market  cost passed along to customers, no price competition  After derogation…  many new firms enter the market  Fuel crisis of 1979  1981 air traffic control strike=more industry

difficulties  More than 150 bankrupt carriers during the 1st decade of deregulation
11/14/09 Annie, Luigi, Myra, Wichai, Yonggang MBA -C 2

2001 attack= chaos in the market 11/14/09 Annie.US Airline Industry  1980s: financial debts increase due to expanded demand brought about by low fares  1990s: new aircraft orders lowered (not profitable market) to avoid debts  Mid-1990s: increase demand. global improvement of airline industry  September 11. Wichai. Yonggang MBA -C 3 . Myra. from 200 million (1974) to 500 million(1995)  In 1999. Luigi.

Yonggang MBA -C 4 11/14/2009 . Luigi. stricter government regulation for older planes Debt servicing: airline industry debt load exceeded US industry averages Fuel cost: big impact on the total cost was uncertain Air traffic delays: due to higher travel.New Pressures on Airline Industry  Security : need to increase war risk insurance  Customer dissatisfaction: service problem. airport congestion=negative influence on profitability. call for      regulation Labor costs: pressure expected to increase Aircraft maintenance : higher maintenance/replacement costs. Annie. Myra. Wichai.

1971: 1st fly in Texas-Houston. Wichai.Southwest Airlines Background  1967: Herb Kelleher and Rollin King founded SW  1970: management team built  June 18.high frequency flights. Yonggang MBA -C 5 .1995)  2000: biggest aircraft order (94 737s Boeing) >>> 355 fleets in 2002  2003: 4th largest US airlines in terms of domestic passengers carried 11/14/2009 Annie. Myra. Luigi. Dallas. only 737 Boeing. no international flights  1st national carrier to sell seats online ($1 per booking)  1st airline to use ticketless travel (January 31. San Antonio (“Golden Triangle) with 3 Boeing 737s aircrafts and 25 employees  Operation focus: short-distance flights (>500 miles). point-to-point flights. low fares.

Wichai. Yonggang MBA -C 6 . Luigi. Myra.  Revenue passenger miles one paying passenger flown one line 11/14/2009 Annie.Southwest Performance  Passenger load factor is the percentage filled with paying passengers.

Luigi. Wichai. Myra. Yonggang MBA -C 7 .Analysis with Porter´s 5 Force Model 11/14/2009 Annie.

so their bargaining power is low  There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins 11/14/2009 Annie. Wichai. there are many fragmented sources and therefore their power is of almost no significance  The cost (maintenance and training) of switching from Boeing 737 to Airbus A320 is very high  The suppliers' customers are fragmented. Yonggang MBA -C 8 . Luigi. Myra.Power of Suppliers  The market is dominated by a few large airplane suppliers  As for the catering. gift services and other indirect materials.

or time-oriented The product is not of strategic importance for the customer because there are many other short distance transportation means There is the possibility for the customer (travel agent only) integrating backwards 11/14/2009 Annie. Myra. Wichai. Luigi. there’s a concentration of buyers.Power of Customers  Travel agents buy large volumes.      therefore their switching to a different supplier might have larger impact on the profits Individual buyers usually act as individuals and therefore have no strong bargaining power Switching to an alternative product is relatively simple and is not related to high costs Customers are either price-sensitive. Yonggang MBA -C 9 .

qualified expert staff) To train people for technical skills is possible...g.  the highest passenger miles per employees ratio  lowest employees per aircraft ratio  debt-to-equity ratio is much lower than the industry average 11/14/2009 Annie. Yonggang MBA -C 10 . thus has       reached sufficient economies of scale High initial investments and fixed costs: New entrants difficult to compete financially with profitable Southwest Brand loyalty of customers: SW reputation makes it hard to win SW customers Scarcity of important resources: (e. Wichai. but to imitate SW culture is very difficult Distribution channels: SW has no special control over distribution channels Legislation and government action: Not so difficult to set up airline company in the US Operational efficiency: many imitators failed to compete with SW„s. Myra. Luigi.Threat of New Entrants  Economies of scale: Southwest is # 7 in market share in 2000.

not much cheaper. 11/14/2009 Annie. Wichai. Luigi.Treat of Substitutes  Brand loyalty of customers…so customers are unlikely to switch to other transportation means. or gasoline cost for self-driving are comparable to the price of Southwest ticket for the same route. care  fun to their customers  Switching costs for customers to train/car for the Southwest routes…  requires more travel times  cause a lot of inconvenience  Relative price for performance of substitutes…  Price for trains. Myra. such as train  Southwest provides low price or time-optimized tickets  good service. Yonggang MBA -C 11 .

age of airplanes. hence. expensive and highly specialized equipment) 11/14/2009 Annie. Wichai. trainings of the staff. Yonggang MBA -C 12 . there is much price competition  Only visible differentiation is in the scope of the service offering.Rivalry in the industry  There are many players of about the same size  Players have similar strategies  All players have their own customer intimacy program  Not much differentiation between players and their products. Luigi.g. and heartiness of flight attendants where SW ranks very high  Low market growth rates (growth of a particular company is possible only at the expense of a competitor)  Barriers for exit are high (e. Myra.

Luigi.Southwest Business Strategies and Service Models 11/14/2009 Annie. Wichai. Myra. Yonggang MBA -C 13 .

Business Strategies/Service Models  Short –haul (less than 500 miles)  Point to point flight  Only Boeing 737  High frequency flights  Low fare  No international flights 11/14/2009 Annie. Wichai. Myra. Luigi. Yonggang MBA -C 14 .

12 working hours/plane)  Operation without major hubs=customer convenience. 2. timesaving  Uses “no frills” approach to services (first come first serve seating. Myra.Business Strategies/Service Models  Two-tiered pricing structure ($13 or $26 w/ free bottle of liquor)  Consistent with their primary focus (531 miles average trip length of 1. Wichai.800 flights/day to 58 cities. color-coded passes)  Online booking (no need for travel agents) 11/14/2009 Annie. Luigi. Yonggang MBA -C 15 .35 hours. 8 flights/plane.

company videos) Regular training for advanced employees “Leading with Integrity” classes for newly promoted managers/supervisors “Walk-a-Mile Day” program to promote respect for co-workers and increase company awareness Mentoring program 11/14/2009 Annie. Wichai.Human Resource Management Strategies  “Positively Outrageous Service” (customer service exceeds the norm)  Communication and camaraderie highly valued  Unique new employee orientation (Wheel of fortune game show. Myra. Luigi. scavenger     hunts. Yonggang MBA -C 16 .

Human Resource Management Strategies  Employee initiative supported by management  Emphasis on cooperative labor relations  Employee own 10% company stocks  Average age of Southwest employee was 34 years  SW among the highest paid employees in the industry and the company  Enjoyed low employee turnover relative to the airline industry  More than 1.000 employees) worked for the airline 11/14/2009 Annie. Yonggang MBA -C 17 . Luigi. Myra. Wichai.000 married couples (2.

pilots hired pilots. Yonggang MBA -C 18 .g. baggage handlers. Wichai. Myra.New Employees Hiring Strategies  In 2001.406 new employees  Unique: Peers screened candidates and conducted interviews (e. then used these profiles to identify top candidates 11/14/2009 Annie. Southwest interviewed its top employees in each job function (e. pilots.g. Southwest reviewed 194.821 resumes and hired 6. Luigi. ground crew) and identified their common strengths. gate agents. gate agents hired gate agents)  To better understand what the company sought in candidates.

Myra. And that makes the shareholders happy.” Herb Kelleher. Wichai. dedicated. they’ll take real good care of the customers. they come back. Luigi. When the customers are happy.Southwest spirit employees first “If they’re happy. and energetic. satisfied. Southwest CEO and Founder 11/14/2009 Annie. Yonggang MBA -C 19 .

Luigi.Costs of Imitating Southwest Practice 11/14/2009 Annie. Myra. Wichai. Yonggang MBA -C 20 .

Wichai. Yonggang MBA -C 21 .SW Imitators  By second half of 1994 many imitators  One third of the total industry capacity  Almost was start up airlines  Main Shuttle by United. first competition after “take over “ 11/14/2009 Annie. Myra. Luigi. Continental Line (CaLite)  Morris Air.

Yonggang MBA -C 22 . frequency of flight  Reserved seating .cost of delays  Fee travel agents . Luigi.Costs of imitating Southwest  increase productivity.Lower fare rate  Hub congestion . Wichai.commission fee 11/14/2009 Annie. Myra.

Yonggang MBA -C 11/14/2009 23 . Wichai.Future Challenges for Southwest Airlines Annie. Luigi. Myra.

Yonggang MBA -C 24 . Myra.Future Challenges for SW  Interesting and unique position  Good financial status/stability  Increase operation in Northeast  Provide additional service (Wi-fi on all plane 2009) 11/14/2009 Annie. Wichai. Luigi.