SOUTHWEST AIRLINES

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SOUTHWEST AIRLINES
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From the Beginning

• Rollin King and Herb Keller
• -Notion 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.
• No frills with low fares and point to point
  service
• Most profitable for past 34 consecutive years
• Began in 1971 as a small Texas Airline between
  Dallas, Houston, and San Antonio
• Flies over 80 million passengers to 62 cities
  3,100 times a day

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About Southwest

• Known for Customer Service and Rapid Rewards
• 468 of newest jets in the nation
• Some include Shamu 1,2,3, Arizona One, Triple
  Crown, Lone Star, to Slam Dunk One
• First airline to win Triple Crown for a month-
• Best on time record, Best baggage handling, and
  Fewest customer complaints. Five Annual Triple
  Crowns 1992-1996.

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Key Major Issues

• Lost luggage and delayed flights
• Increased incentives for reward customers
• Larger seats for overweight customers

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Internal and External Environment

• Environmental forces
• -International competitiveness
• -Economic
• -Political
• -Technological forces.

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Goals

• Continued Growth and Expansion
• Maintain low cost strategy
• Provide Superior Customer Service
• Many stipulations to expanding to other cities
  nationwide to maintain max profits

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Overall Success

• Extremely successful
• With the use of low cost strategy and outstanding
  customer service allows to be top airline in the
  industry.
• Many competitors have tried to copy
• Within the next five years plan to expand to
  different cities across nation

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Substitutes Bus Automobiles Trains
RIVALRY Moderate Product Differentiation Quality
of Service Try to get best position with reduced
prices Low Switching Costs
Buyers Price Sensitive Consumers
Suppliers Jet Fuel Airframes(Boeing) Labor
Entry Barriers are VERY high High startup
costs Difficult to compete w/ current carriers
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Threat of New Entrants

• High Barriers to Entry
• High startup costs to start new airline
• Fail to establish a spot in industry and file
  bankruptcy
• Post-entry competition from established airlines
• There has only been one successful new airline in
  recent years-JetBlue

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Bargaining Power of Buyers

• Consumers have considerable buyer power in the
  airline industry
• Consumers are very price sensitive
• Terrorist attack on 9/11 had a significant impact
  on consumer demand
• This led to lower ticket prices because of the
  lack of capacity on most flights

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Bargaining Power of Suppliers

• Airline industry is sensitive to supplier power
  through 3 major inputs
• Airframes
• Jet Fuel
• Labor
• Greatest source of increase supplier power comes
  from Jet Fuel

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Threat of Substitutes

• Competes with bus, automobile and train travel
• Primary substitute is the automobile
• Threat of substitutes increases if it is short
  distance traveled
• Extended distance traveling becomes less cost
  efficient to travel by automobile

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Intensity of Rivalry among Competitors

• Little differentiation in airline industry
• Use price competition as primary mode of rivalry
• Non-price competition has mostly disappeared from
  the industry
• Southwest currently has lowest cost per available
  seat mile

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Strengths

• Hedge on fuel prices
• Strong balance sheet in an industry where
  bankruptcies are common
• Unbroken string of 25 years of profit
• Their culture of low-cost and friendly service is
  unmatched in the industry
• Took top honor in the ninth Business Travel News
  Annual Airline Survey
• Only fly one type of plane-Boeing 737
• Keeps maintenance and training costs lower

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Weaknesses

• Expiration of hedging contracts in 2009
• Does not have any corporate contracts, an
  international network, a business cabin or global
  distribution system
• Competitors are increasing air-fares so corporate
  discounts are adding more value to a managed
  travel program, which Southwest does not have

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Opportunities

• Focus on semi-full capacity, not full capacity
• it encourages drastic fare slashing to fill the
  aircraft, which could slow their growth and even
  cut into profits
• International market
• Expand market domestically

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Threats

• An overly aggressive airline can go into any of
  Southwests markets and initiate a profit-killing
  price war that lasts for months
• Continually growing fuel prices(Southwest has
  hedged fuel prices until 2009)
• Terrorist attacks
• New advanced ground transportation

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Environmental Forces likely to impact Southwests
future actions

• International Competitiveness
• Could expand internationally, currently in talks
  to begin flights to Mexico and Canada
• Economic Factors
• Expensive labor contracts, Soaring energy costs,
  Reduced consumer demand
• Political Factors
• Wright Amendment, War in Iraq, Heightened
  security measures
• Technological Factors
• Something to help w/ reducing global warming
  effects, more advanced safety features on planes,
  More rewards for using their online system, which
  opens up more resources

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Analysis of the Organization
Competitive Advantages

• Low Fares
• Point to Point short haul flights
• No assigned seating
• Relaxed flying atmosphere with entertaining crew
• Excellent customer service
• Operating a single type of airline, Boeing 737
• Cost cutting
• Profitability

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Approaches to Strategic Management
Corporate Strategy Focus on core
business Allowance in company wealth
Business Strategy Allowing employees to share in
company wealth
Functional Strategy People department in place of
Human resource department Paying pilots by
trips Pay cuts when business is low
Operational Strategy Caring for employee
happiness, satisfying employees Hiring humorous
candidates Excellent customer service
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• Current or past strategies do they cover the
  matrix of environmental forces?
• Customer service - giving excellent customer
  service and low prices, for new and repeat
  business
• Employee satisfaction - keep them happy and
  satisfied so that you have an ongoing loyalty
• New Markets welcomed, but with a challenge to
  train t its employees to handle the big change
• Maintaining a competitive edge in prices and
  convenience

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• Structure of the company
• Customer service - excellent customer service,
  enjoyable flight experience and low prices, for
  new and repeat business
• Employee satisfaction open lines of
  communication, keep the employee happy, who in
  turn will offer better service to the customer
• New Markets welcomed, but with a challenge to
  train t its employees to handle the big change
• Maintaining a competitive edge in prices and
  convenience
• Herb Kellerhers effective leadership both within
  and without the company, has realized a great
  employee loyalty and a much successful company in
  growth and profits

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Resource and Core Competence Evaluation

• Resources
• Excellent leadership throughout Southwest Airline
  history
• Loyalty of employees and the ability to instill
  the loyalty
• Size of the company and its concentration to
  domestic
• Core Competencies
• The ability to own, run and maintain the same
  kind of jet Boeing 737
• Ability to make profits 34 years in a row
• Cheapest fares in the domestic industry
• Faster flight turn-around and making shorter
  convenient trips
• Friendly personnel and crew offer exception
  flying experience

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Current Strategy

• Southwest has dedicated itself to having one of
  the lowest operating costs of all major airlines.
• Result It offers short-haul, high-frequency,
  low-fare services with point-to-point flying and
  high customer service.

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Scope of its Activities

• Customer Service
• Airplane
• Boeing 737
• Hedged fuel prices
• Flying Routes
• Point-to-point
• Ticketing

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Competitive Advantages

• Directly related to current strategy
• Low-Fare
• Point-to-Point
• Superior Customer Service
• Boeing 737
• Largest US carrier for number of passengers
  traveled
• Brand Name

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Leadership Styles

• Herbe Kelleher Executive Chairmen
• Supportive -Offers a fun environment to work for
• Participative -Involved with everyone in the
  company

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Organizational Structure

• July 15, 2004
• Gary Kelley announced as CEO
• Colleen Barrett as President
• Further flattening of structure
• Better align leadership strengths of officers
• Allows everyone to be involved
• Executive VPs will report directly to Kelly

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Success

• Company Performance(2006)
• Last Quarter 57 Million
• Net Income 499 Million
• Total Passengers Carried 96.3 million
• Total Operating Revenue 9.1 Billion
• Southwest received 284,827 resumes and hired
  3,363 new Employees in 2006.

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Success (Contd)

• Has the current strategy been successful?
• Member of the FORTUNE 500
• Recognized by Fortune magazine as best place to
  work and Top 3 Most Admired Corporations
• Largest Number of domestic and international
  passengers in 2006

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Success(Contd)

• Business Week Top 50 Best Places to Launch a
  Career
• Professional Womens Magazine - Most Admired
  Companies by Women
• Best Airline Among Small Business Travelers
• Express Delivery and Logistics Association (XLA)
  2006 Airline Of The Year for the second
  consecutive year

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Alternatives
Issue Overweight people overflowing into other
seats Alternative Offer larger seats or bench
seats in the rear of the plane Pros Alleviates
the issue by creating a more comfortable
atmosphere, Increased attitudes from other
passengers Cons Cost of removing and installing
the seats, cost of labor, and loss of a plane
while under construction, difficult to define
overweight dividing line
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Alternatives (contd)

• Issue The point system offered is a long-run
  loss.
• Alternative Offer points for every mile traveled
  including points lost baggage delayed flights
• Pros Allocate the costs equally which reduces
  the amount of expenses
• Cons Customer complaints could arise, current
  Rewards System is effective

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Alternatives (contd)

• Issue Market is not as big as many other major
  airlines
• Alternative Expand more nationally but still use
  secondary airports. International comes later.
• Pros Profit potential, expansions into untapped
  markets
• Cons Airlines are catching up to their
  advantages, Potential profit failure, Conflict
  with the Wright Amendment

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Final Key Recommendation
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Expansion of New Markets

• Awareness of Competition
• Use of Travel Sites for Ticketing
• Travelocity
• Expedia
• Etc

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Expansion

• Timing
• Analysis

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Work Within The Mission Statement

• The mission statement of Southwest Airlines is
  dedication to the highest quality of customer
  service delivered with a sense of warmth,
  friendliness, individual pride and company
  spirit.

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Timing

• Appeal of Wright Amendment October 2006
• Expansion Needed
• Expansion should include service plus profit

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Financial Feasibility

• More cost associated with longer flights
• Brand name
• Monitoring of new market profitability

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Implementation of the Strategic Alternative

• Identify possible new markets
• Examine potential airports
• Economic feasibility of market entrance
• Marketing plan

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US National Airport System
http//www.southwest.com/travel_center/routemap_dy
n.html?refwwf_fgn
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Possible New Markets

• Minneapolis
• Charlotte
• Atlanta

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Minneapolis, Minnesota

• Large Metropolitan area with approximately 3
  million people
• Negative aspect of lower efficiency due to the
  delays caused by snowy weather

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Charlotte, North Carolina

• One of the fastest growing cities in the US
• Short distance from other Southwest locations

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Atlanta, Georgia

• Largest population out of the three choices
• Short distance from other Southwest airports
• Possibility of stealing market share away form
  the ailing Delta Airlines

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Potential Airports for Service to Atlanta, Georgia

• The DeKalb Peachtree Airport
• Fulton Co. Airport
• Athens Ben Ebbs Airport

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The Dekalb-Peachtree Airport

• Pros
• Located just 8 miles from the heart of downtown
  Atlanta
• Good infrastructure
• Cons
• Second busiest airport in Georgia
• Many companies store/house their planes here
  already

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Fulton County Airport

• Pros
• Located right outside of Atlanta
• Small amount of airplanes and jets
• Cons
• The air traffic above Atlanta is still very high
• Noise violation

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Athens Ben Epps Airport

• Pros
• Located 50 miles outside of Atlanta
• Close enough to customers in surrounding cities
• Renovating the airport so the larger commercial
  airliners can fly\in out of the airport

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Economic Feasibility

• Entry into other markets should be of similar
  costs
• Georgia Airport Aid Program
• Publicly owned airports can receive financial aid
  on upgrades
• If no federal funding, 100 funding from the
  state can received
• Allows the airport owner to offer lower runway
  fees to potential companies

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Marketing Plan

• Take advantage of the positive brand image that
  Southwest has
• Present the public with the rates of major
  competitors against their own rates
• Give the public special promotional deals during
  the first year

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EXAM QUESTIONS

• What type of plane does Southwest use for their
  entire fleet?
• Boeing 737
• What did the repeal of the Wright amendment
  accomplish?
• Gave Southwest ability to fly beyond bordering
  states of Texas
• What type of management strategy does Southwest
  utilize?
• Low-cost leadership strategy