Southwest Airlines Economic and Pricing Strategy Analysis

1
Southwest Airlines Economic and Pricing Strategy
Analysis
Carl

• CARL Economics, Ltd.

November 1, 2001
ECO 533 Final Presentation
2
Southwest Airlines Overview

• SWA Analysis Team Introduction
• SWA History
• Founded by Rollin King and Herb Kelleher in 1971
• Founding Philosophies
• Get passengers to destinations on time
• Lowest possible fares
• Has grown to 5th largest domestic carrier
• Had 57 million passengers in 2000

3
SWA Competition Analysis

• Major Competitors in Target Markets
• United Airlines
• Alaska
• Comparison of Mission Statements
• SWA dedicate the highest quality of customer
  service and maintain the warmth, friendliness,
  and pride while keeping the company spirit
• United to develop, implement, and communicate
  their commitment to community service by
  sponsoring and supporting charitable
  organizations
• Alaska philosophy of providing the lowest fares
  for which a customer is eligible for a particular
  flight

4
Competitive Advantages for SWA

• Focus on Customer Service
• Embracing the New Economy through the use of
  Internet ticket sales
• Focus on lowest cost fares
• Increases demand
• Keeping fares lower through cost reduction
  methods
• Lower cost due to no assigned seating
• No meals on flights
• Lower overhead expenditures
• Use hubless system to reduce costs

5
Profit Analysis

• Analyzed viability of increasing profits by
  reducing airfares 20
• Investigated a SWA high volume route for this
  analysis (LA / Oakland)
• Current route demographics

6
Current SWA Costs
7
Price Elasticity of Demand
8
Costs
9
Revenues Profit
Max Profit Point
Max profit point realized with a 15 reduction in
ticket price
10
Cost vs. Revenue vs. Profit
TR
TC
Profit
11
New Economy Performance

• 30 of total revenues
• Total of 1.7 billion from online sales
• Online purchases reduces ticket commission costs
  by 9 per ticket over travel agent purchases
• Travel Agent Commission 10
• Website Fee 1
• SWA websites provide a variety of reservation and
  vacation service to attract and retain customers

12
Strategies for the New Economy

• Seating Enhancements
• Premium seating offering at nominal price for
  internet customers
• Attract customers by offering a low cost premium
  service
• Less waiting in line
• Can get to gate closer to departure time
• Centralized Inventory Control (Reduces Costs)
• Inventory for entire company centralized through
  the internet
• Reduces waste and allows distribution of assets
  between airports
• Can request excess inventory from one airport to
  be delivered where needed

13
Competitive Reaction

• Competitors will have two primary reactions to
  the SWA price reduction strategy
• Reaction 1 Reduce their own fares
• Will be difficult due to SWA cost cutting
  strategies which are not used by UAL or AA
• Seating, meals, online ticketing
• Reaction 2 Emphasis service differences
• Airlines, like UAL, may emphasis services not
  offered on SWA
• Pre-seating passes, meals

14
Strategies to Counter Reactions

• Emphasis costs savings to customers
• Investigates low cost alternates to current
  seating philosophy
• Previously mentioned philosophy for using
  internet ticketing to offering low cost
  pre-issued seating passes.
• Partner with other long distance carriers for
  shared frequent flyer programs
• Attracts customers who fly SWA and other not SWA
  routes

15
Macroeconomic Assessment

• Three major factors affecting SWA at this time
• Shock effect of WTC Crisis
• Effects of slowing economy
• Effects of low inflation
• WTC Crisis
• September 11th caused an aggregate demand shock
  to the airline industry because of customer fears
• SWA less affected due to the short range nature
  of its routes
• Company committed itself to provide continuing
  service
• 110 million lost due to WTC crisis
• Some loss made up by Federal Grants

16
Macroeconomic Assessment

• Slowing Economy
• Slowing economy has slowed demand, especially
  from the business sector
• Slow growth predicted through end of 2001
• Economist see a rebound in the works for 2002 due
  to
• Tax Rebates
• Lower Interest Rates
• Increased consumer confidence
• Expenditures needed to recovery from WTC crisis
• Rebound will increase demand for airline tickets,
  but for now SWA should delay any expansion planes
• Inflation Effects
• Will keep ticket prices at current levels with
  slow growth in prices over next 2 years

17
Conclusions

• SWA focus on customer satisfaction inspires
  customer loyalty
• Price reduction strategy can increase
  profitability of routes by up to 39
• Delay any expansion plans until after expected
  2002 economic rebound
• Continue to refine online tools to make it easier
  for the customer to do business with SWA