Business Model Canvas of Discount Airline case study Southwest Airlines - Short version


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Business Modeling case Southwest Airlines
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Business Model Canvas

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Business Model Canvas of Discount Airline case study Southwest Airlines - Short version

  1. 1. Business model canvas of Discount Airline Strategy Case Study © Cone Advisor 1 Image via Flickr user columbuscameraop
  2. 2. © Cone Advisor 2 Author Dr. Ala-Mutka is founder of Cone Advisor and Ocean Race 60 (Tokio II race boat) & Senior Research Fellow and lecturer at Aalto University School of Economics. Dr. Ala-Mutka is the author of the Agile Strategy Methodology, which focuses on business modeling, innovation, visualization, strategic agility, sensitivity, transparency, diversity, efficient interaction, resource fluidity and shared leadership. The key elements of the Agile Strategy approach are business model innovations and business modeling, of which builds the flexible business architecture for the whole strategy execution from ideas to business models and return on investments.
  3. 3. Background of the case: Discount Airline • Case description based on analysis of Southwest Airlines, but the rules of the strategy can be applied to discount airlines in general. • A low-cost airline is also known as a no-frills, discount or budget carrier or airline. It is an airline that generally has lower fares and limited services. • The term originated within the airline industry referring to airlines with a lower operating cost structure than traditional airlines. • Low-cost carriers should not be confused with regional airlines that operate short flights without service, or with full-service airlines offering some reduced fares, because they have different business model. © Cone Advisor 3
  4. 4. Methodology of the Analysis • The structure of the analysis is based on so called Business Model Canvas and strategy as a visual model • The Business Model Canvas is a strategic management template for developing new or documenting existing business models. It is a visual chart with elements describing a firm's value proposition, infrastructure, customers, and finances[1]. • It assists firms in aligning their activities by illustrating potential trade-offs. The Business Model Canvas was initially proposed by Alexander Osterwalder[2] based on his earlier work on Business Model Ontology.[3] • See more from Wikipedia Business Model Canvas. • See creative commons license from © Cone Advisor 4
  5. 5. Customer-driven approach to business modeling 1.2.3. 4. 5. 6. 7. 8.9. 1. Customers 2. Value Proposition 3. Activities 4. Resources 5. Partners 6. Customer Relationships 7. Channels 8. Revenue Streams 9. Cost Structure 5© Cone Advisor
  6. 6. One simple notion – the core idea of the discount airline business • About 40 years ago, Rollin King and Herb Kelleher got together and decided to start a different kind of airline. • Southwest Airlines founded in 1971 and it was a novel business model innovation that breaks all the rules. • They began with one simple 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. 6© Cone Advisor
  7. 7. Southwest Airlines - growth • 1971: begins service between Dallas, Houston, and San Antonio. • 1975: Southwest expands to five aircraft • 1981: 2,129 Employees and 27 aircraft • 1991: 9,778 Employees and 124 aircraft • 2001: 29,274 Employees and 344 aircraft • 2007: Southwest Airlines flies over 104 million passengers a year to 64 great cities all across the country, and we do it more than 3,400 times a day. • Net income: $645 million • Total operating revenue: $9.9 billion • Make profit since 1975! © Jukka Ala-Mutka 7 Source:
  8. 8. Key Facts: Southwest Airlines • Southwest received 329,200 resumes and hired 4,200 new Employees in 2007. • Southwest’s average passenger airfare is $114.48 (2007) • The average passenger trip length is about 826 miles. • The airline adopted the first profit- sharing plan in the U.S. airline industry in 1973. Through this plan and others, Employees own at least eight percent of the Company stock. • The airline is about 86 percent unionized. © Jukka Ala-Mutka 8 Source:
  9. 9. Key Facts: Southwest Airlines • In a 2008 survey of the friendliest and stingiest airlines, Southwest Airlines ranked no.1 for being the Friendliest Airlines. • For the 12th year in a row, FORTUNE magazine recognized Southwest Airlines in its annual survey of corporate reputations in 2008. Southwest Airlines is the only airline to make the top 20 list and has also earned the top spot on the Most Admired Airline list. • The average aircraft trip length is 630 miles with an average duration of one hour and 52 minutes. • Southwest aircraft fly an average of 7 flights per day, or 13 hours per day. © Jukka Ala-Mutka 9 Source:
  10. 10. Key differences: Network vs. Discount Airline Network Airline • Hub-and-spoke route system • Connected and continental & intercontinental flights • Premium passenger services (seating, meals, lounges) Discount Airline • Nonstop point-to-point routes • Short haul • Limited passenger service (no meals, no seating, no lounges) © Cone Advisor 10 HUB
  11. 11. Southwest Airlines’ Mantra • The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. Source: 11© Cone Advisor
  12. 12. Low-cost airline’s customers • Frequent flyers are people, mostly business, who frequently travel between destinations that are average ~800 miles (average aircraft trip length is 630 miles) apart. • Frequent flyers such as ales representatives, construction workers, students, city travelers,… © Cone Advisor 12
  13. 13. Value Proposition • Low-cost airline allow business travelers, who could not fly in First Class, to enjoy a premium service. • The key issues keep planes in the air the most of the time (flight time/day). • Southwest is named America’s Most Reliable Airline by Forbes. Southwest proves that low fares don’t have to mean poor service. © Cone Advisor 13
  14. 14. Value Proposition linked to Key Activities, Partners and Resources © Cone Advisor 14
  15. 15. Customer Relationship & Channels • Business model based on direct and friendly customer relationship • SWA not offering “connections” to other airlines and that’s why there is no need for travel agencies and other resellers. © Cone Advisor 15
  16. 16. Must-Win Battle #1: Growth • These the key issues keep planes in the air the most of the time (flight time/day). • Southwest is named America’s Most Reliable Airline by Forbes. • Southwest proves that low fares don’t have to mean poor service. © Cone Advisor 16
  17. 17. Must-Win Battle #2: Efficiency through simple structures © Cone Advisor 17 • The process perspective based on simplicity of mainly in-house operations directly with customers • Just one type of aircraft (Boeing 737) keeps costs down related to pilots’ training, spare parts, maintenance, etc. • Create lean organization, flexible, engaged and productive personnel
  18. 18. Must-Win Battle #3: Productive personnel © Cone Advisor 18 • Own personnel is the 2nd corner stone of productivity • Company Spirit • Union contracts • Multiskilled personnel • Recruitment
  19. 19. Must-Win Battle #4: Very low ticket prices © Cone Advisor 19 • Economic business model: • Low margin & high volume • High utilization rate is the key to keep business profitable all the time
  20. 20. Simple Rules • 1.Decision making rules • Midsized cities & secondary airports • Standardized fleet of Boeing 737 aircraft • Only hire persons fit in profile • 2.Boundary rules • Very low ticket prices • Limited Service: No meals, No seating, No baggage transfer • No connections with other airlines • Short haul flights • 3.Activity rules • Point-to-point service • Frequent departures • 4.Performance rules • 25-minutes gate turnaround • High utilization rate © Cone Advisor 20 Source: Ala-Mutka 2008 p. 185-188, see also Eisenhardt & Sull 2001 Simple Rules
  21. 21. © Cone Advisor 21
  22. 22. The whole BMC Model © Cone Advisor 22