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A case presentation on "Southwest airlines culture, values and operating practices" for Startegic Management course.

A case presentation on "Southwest airlines culture, values and operating practices" for Startegic Management course.

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  • Southwest owns long-term contracts to buy most of its fuel at the equivalent of $51-a-barrel oil through 2009. The value of those hedges soared as oil raced above the $90-a-barrel mark and they are now worth more than $2 billion. Those gains would mostly be realized during the next two years.

Southwest airlines culture, values and operating practices Southwest airlines culture, values and operating practices Presentation Transcript

  • Culture, Values and Operating Practices 25002 ABHEEK BISWAS 25012 BISHNENDU ROY 25037 PALANIAPPAN K 25044 SAMEER SHIRISH CHAUBAL 25049 SHENBAGA DEVI P 25056 SURENDERAN E 25064 APARNA K 25068 CHAWLA JITEN INDER MAMTA 25100 SAKET RANJAN 25105 SHARAN KUMAR R 25114 VIKRAM JHA 25117 VISHNU VARSHAN S
  • US Airline Industry Overview
  • Industry History
    • Wright brothers’ first successful flight in Kitty Hawk in 1903
    • American Airlines in 1928 and United Airlines in 1931
    • Development of the mail system by the U.S. Postal Service helped create the airline industry
    • Increased R&D of aircraft after World War II
    • Introduction of jet airplanes for commercial use in the 1950s
    • FAA created in 1958 to develop an air traffic control system
    • Development of wide-body “jumbo jets” in the 1970s
    • Deregulation in 1978
  • Today…
    • Approximately 100 certificated passenger airlines operate
    • Over 11 million flight departures per year
    • Carry over one-third of the world’s total air traffic 
    • US airlines enplaned 745 million passengers in 2006
    • Over $160 billion in total revenues
    • Approximately 545,000 employees and over 8,000 aircraft operating 31,000 flights per day
  • Map of US Airline Industry
    • Airplane Manufacturers
    • Boeing
    • Airbus
    • Embracer
    • Bombardier
    • Fokker
    • Airlines
    • American
    • United
    • Delta
    • TWA
    • Continental
    • US Air
    • Northwest
    • Southwest
    • Ticket
    • Agents
    • Internet
    • Airlines
    Customers
    • Airport Authorities
    • Maintenance
    • Catering
    • Financing
  • US Airline Industry Profits
  • Airline Industry Net Profit Margins (%): 2001 to 2010F
  • Porter Competitive Model Intra-Industry Rivalry SBU: American Airlines Network (traditional) Rivals: United, Delta, Northwest, US Air Low-cost Rivals: Southwest, JetBlue, ATA Bargaining Power of Buyers Bargaining Power of Suppliers Substitute Products and Services Potential New Entrants Airline Industry Analysis – U.S. Market
    • Travel Agents
    • Business Travelers
    • Pleasure Travelers
    • Charter Service
    • Federal Government
    • U.S. Military
    • Cargo and Mail
    • Alternate Travel Services
      • Fast Trains
      • Boats
    • Private Transportation
    • Videoconferencing
    • Groupware
    • Aircraft Manufacturers
    • Aircraft Leasing Companies
    • Labor Unions
    • Food Service Companies
    • Fuel Companies
    • Airports
    • Local Transportation Service
    • FAA
    • Hotels
    • Foreign Carriers
    • Regional Carrier Start ups
    • Cargo Carrier Business Strategy Change
  • Airline Industry Strategies Markets Routes and Route Structure Company Structure Information Systems Scheduled Flights Chartered Flights Air Freight Mail Products/Services Business Travelers Personal Travelers Seniors Families Government Customers Fare Strategy North America Europe Asia Latin America Independent Alliances Code Sharing Low Fares Premium Fares Short Haul Long Haul Hub and Spoke Point to Point Customer Systems Operational Systems Logistical Systems Business Systems
  • Airline Industry Value Chain INBOUND LOGISTICS OPERATIONS OUTBOUND LOGISTICS MARKETING AND SALES SERVICE PROCUREMENT TECHNOLOGY DEVELOPMENT HUMAN RESOURCE MANAGEMENT FIRM INFRASTRUCTURE -Financial Policy - Accounting - Regulatory Compliance - Legal - Community Affairs Pilot Training Safety Training Agent Training In-flight Training Baggage Tracking System
    • Promotion
    • Advertising
    • Advantage
    • Program
    • Travel Agent
    • Programs
    • Group Sales
    • Ticket Counter
    • Operations
    • Gate Operations
    • Aircraft
    • Operations
    • On-board Service
    • Baggage Handling
    • Ticket Offices
    • Route Selection
    • Passenger Service
    • System
    • Yield Management
    • System (Pricing)
    • Fuel
    • Flight Scheduling
    • Crew Scheduling
    • Facilities Planning
    • Aircraft Acquisition
    Information Technology Communications Product Development Market Research
    • Lost Baggage Service
    • Complaint Follow-up
    • Baggage System
    • Flight
    • Connections
    • Rental Car and
    • Hotel Reservation
    • System
    Computer Reservation System, In-flight System Flight Scheduling System, Yield Management System Baggage Handling Training Flight, route and yield analyst training
  • Major Airline Issues
    • Dysfunctional labor situation
    • High taxes, fees and other government-mandated costs
    • Inadequate long-term plans for air and ground infrastructure
    • Restrictions on airline consolidation and foreign investment
    • Volatility in ATF rates
  • Suppliers Services Passengers Travel & Tourism Airline Industry Carriers, General Aviation, Airports
    • Aircraft
    • Engines
    • Electronics
    • Computers
    • Chemicals
    • Insurance
    • Financing
    • Distribution
    • Telecom
    • Maintenance
    • Fuel
    • Business Travelers
    • Leisure Travelers
    • Travel Agents
    • Tourist Attractions
    • Conferences and
    • Conventions
    • Hotels
    • Restaurants
    • Retailers
    Lower Sales Lower Sales Decreased Productivity & Weaker Relationships Lost Revenue Impacts of a Weakened Airline Industry Induced Costs
  • Trends Over These Years
  • The U.S. Airline Industry Airline Reservation Systems
    • The airlines really began using IT in a significant way when American Airlines and United Airlines introduced the first airline reservations systems.
      • SABRE
      • APPOLO
  • The U.S. Airline Industry Frequent Flyer Programs
    • Frequent flyer programs are a great example of using IT to alter Porter’s five forces.
      • They reduced buyer power by making it less likely a traveler would choose another airline.
      • They reduced the threat of substitute products or services by increasing switching costs.
      • They erected entry barriers by making a frequent flyer program a practical necessity for any airline to compete effectively.
  • The U.S. Airline Industry Yield Management Systems
    • Yield management systems are designed to maximize the amount of revenue that an airline generates on each flight.
    • Yield management systems are the reason that an airfare you’re quoted over the phone can be $100 higher when you call back an hour later.
  • The U.S. Airline Industry Yield Management Systems
  • The U.S. Airline Industry Disintermediating the Travel Agent
    • Expert surveys have estimated that the number of travel agents in the U.S. will be sharply reduced as a result of disintermediation.
  • The U.S. Airline Industry Utilizing Emerging Technologies
    • Permission marketing - when you have given a merchant your permission to send you special offers.
  • US Airline Industry Must Restructure or Die Aviation Week & Space Technology November 2002 Low-Cost Airlines, Not September 11, Have Transformed Industry Fundamentals "When people say the traditional industry model is broken, they are moving their jaw without putting their brain in gear," responds former American Airlines CEO Robert Crandall. He added that he is skeptical that the industry will ever be competitive as long as there are so many carriers selling what has evolved into a commodity product.
    • Southwest Airlines
  • Southwest Airlines
    • The low-cost model was pioneered by Southwest Airlines
    • The third-largest airline in terms of fleet size
    • Largest airline in the world by number of passengers carried per year
    • Southwest Airlines is one of the world’s most profitable airlines today
  • History
    • Founded in 1971 by Rollin King and Herb Kelleher after considerable legal struggle
    • Started serving Dallas, Houston and San Antonio based on
        • Convenient schedules
        • Low fares
        • On time arrival
    • After many operational difficulties, SW Airlines gained foothold
  • Vision & Mission
    • Vision
      • To have a conservative increase growth, capitalize and cutback schedules of other airlines. To continue expanding conservatively in long-haul success
      • Mission
      • 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. To give ordinary people the opportunity to fly.
      • To the employees
        • We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer.
  • Goals and Objectives
    • Ensure highest quality Customer Service in the air or on the ground.
    • Ready to help customers under any circumstances.
    • Are there to ensure you make it from point A to point B safely
    • To stay the most successful with low-fare, high frequency point-to-point carrier.
    • Business Model
  • Southwest’s Business Model
    • Providing safe
    • Reliable
    • Short duration air service
    • Lowest possible fair
    • Quality service
    • Point to Point
    • Blanketing strategy
  • SW’s Top Ten Airport-Daily Departure
    • Southwest avoided congested airport.
    • High employee productivity.
    • Reliable on-time performance.
    • Hedging of ATF done to gain competitive advantage
  • Activities
    • Southwest the low fare airlines
    • Standardized fleet of 737 aircrafts
    • 15-minute gate turnaround
    • Limited use travel agents
    • High compensation of employees
    • High level of employee stock ownership
    • Flexible union contracts
  • How SW strategy is Implemented Passenger related departure Very low ticket prices No seat assignments No baggage transfers No connection with other airlines No meals Short hual,point to point travel Limited Passenger service High aircraft utilization
  • SW:Anatomy of a 15-minute Turnaround - Planes average 11 hours in air (Industry average = 8.0) - Planes average 10.5 flights per gate (Industry average = 4.5) 7:55 Ground crew chat around gate position 8:08 Boarding call ,baggage loading, refueling complete 8:03:30 Ground crew move to their vehicles 8:07 Passenger off plane 8:04 crew moves towards gate 8:06:30 Baggage unloaded, refueling 8:15 Jet way retracts 8:10 Boarding complete. ground crew leaves 8:15:30 Pushback from backs 8:18 Pushback disengages plane leaves for runway
  • Other Steps
    • Tickets must be bought from the airline itself, the phone or online
    • Extra Rapid Rewards
    • - frequent flier program
    • - credits for online booking users only
    • Customers are assigned to a boarding group depending on check-in time
    • Colorful boarding announcements and crews that burst out in song instead of no video entertainment .
    • Meal service is less than on historically full service airlines
    • Flight attendants and pilots help clean planes
      • pilots paid per trip
      • flight attendants paid per trip
    • Marketing Initiatives
  •  
  •  
  •  
  • Radio Ad for Southwest Airlines
    • Southwest Airlines half-fare flights. Every flight between San Antonio and Dallas every day. Only $13
    • [Irate Male Voice] "Hey! If you people fly Southwest Airlines during this half-price sale, you're gonna have a lonely bus driver on your conscience. Take the bus. It only costs a little more and is just 4 hours longer."
  • Southwest Airlines
    • How did Southwest arrive at their initial price of $20?
    • " Break-Even Analysis ": "Pick a price at which you can break even with load factor that you can reasonably expect to get within a short period of time…the price ought to be as low as you can get it without running out of money"
  • Break Even Analysis Total revenue $ total costs # of passengers
  • Break Even Analysis Fixed cost= $670 per flight Variable cost= $2.80 Fixed cost Unit Price – Unit VC BEQ = $ costs revenue
  • Break Even Analysis Fixed cost= $670 per flight Variable cost= $2.80 Fixed cost Unit Price – Unit VC BEQ = $ costs 39 revenue ??
  • Break Even Analysis losses from charging intramarginal customers less Additional variable costs   (93-39) * $2.80 additional revenue from increased demand $20 $10 39 78 93 -$390 -$150 +$540
  • Was Demand Elastic with Respect to Price? Price Quantity 1973 (Jan) $26 17 Yes, very elastic !! 1973 (Feb) $13 48 Price Quantity 1972 (June) $20 29 Much more than a previous calculation would imply 1972 (July) $26 26
  • Pricing Strategies: a Timeline
    • June 1971 SW Opens. Introduces $20 flights
    • July, 1971 Braniff and TI reduce price to $20
    • July, 1972 SW raises basic fare from $20 to $26, but flights after 9:00 p.m discounted to $10.
    • July, 1972 Braniff and TI raise price to $26; Braniff adds a $10 flight to Houston after 7:30 p.m.
    • January 22, 1973 Announces a "60-Day Half-Price Sale"
    • on all flights between Dallas and San Antonio.
    • February 1, 1973 . Braniff announces 60 Day "Get
    • Acquainted Sale" between Dallas and Houston (H).
    • SWOT Analysis
  • External Opportunities and Threats
    • Opportunities
      • First airline on the web
      • Only in 58 cities – expansion to other cities
      • Lowest cost-preavailable-seat out of all airlines
      • Booked online 13.6% more than American Airlines
      • Top-ranked website in customer satisfaction among travel sites
    • Threats
      • Jet Blue
      • Competitors caught SW strategy
      • New Tax System
      • New Security measures
      • Aviation insurance costs
      • Terrorists Attacks
      • Severe decrease in customer air travel
  • Internal Strengths and Weaknesses
    • Strengths
      • Best low-fare carrier
      • Triple Crown for annual performance
      • Quickly seize a strategic opportunity when arises
      • “ Team Spirit” Employees come 1 st not customers
      • Made 20% of flights to one stop
      • Even though Unionized still negotiate flexible work hours
      • Marketing on the web, 50% revenue from online booking
    • Weaknesses
      • Conservative Growth Tactics
      • Cuts cost in customer service areas
      • Not subscribed to centralized reservation service
      • Other Co.’s now using same management strategies since found out about SW Airlines
      • Provides service in only 58 cities
  • SWOT Matrix
    • Creating a Blue Ocean
  • The Blue Ocean Way…
    • Made competition irrelevant
    • Looked across alternative industries
    • Looked beyond existing demand
    • Uncontested Market Space
  •  
    • The Eliminate-Reduce-Raise-Create Grid
    Eliminate Hub connectivity Seating class choices Raise Speed Friendly service Reduce Lounges Meals Prices Create Frequent point-to-point departures
  •  
    • Three characteristics of a good strategy
    • Focus
    • Divergence Compelling Tagline
    • Focus: friendly-service, speed, frequent point-to-point departure
    • Priced against car transportation
    • Divergence: point-to-point departure
    • Point-to point travel between midsize cities unlike traditional hub-and-spoke systems
    • Compelling tagline: “The speed of a plane at the price of the car- whenever you need it”
  • The Blue Ocean way…
    • Made competition irrelevant
    • Looked across alternative industries
    • Looked beyond existing demand
    • Uncontested Market Space
  •  
    • The Eliminate-Reduce-Raise-Create Grid
    Eliminate Hub connectivity Seating class choices Raise Speed Friendly service Reduce Lounges Meals Prices Create Frequent point-to-point departures
  •  
    • Three characteristics of a good strategy
    • Focus
    • Divergence Compelling Tagline
  • Southwest
    • Focus: friendly-service, speed, frequent point-to-point departure
    • Priced against car transportation
    • Divergence: point-to-point departure
    • Point-to point travel between midsize cities unlike traditional hub-and-spoke systems
    • Compelling tagline: “The speed of a plane at the price of the car- whenever you need it”
    • Financial Analysis
  •  
  •   Avg P/E Price/ Sales Price/ Book Net Profit Margin (%) 12/09 60.10 0.82 1.55 NA 12/08 52.40 0.58 1.29 1.6 12/07 17.60 0.95 1.29 6.5 12/06 27.20 1.39 1.86 5.5 12/05 24.70 1.75 1.97 6.4 12/04 55.80 2.00 2.31 3.3 12/03 30.00 2.23 2.52 7.4 12/02 54.60 2.04 2.44 4.4 12/01 28.80 2.68 3.53 9.2 12/00 19.10 3.15 4.90 11.1   Book Value/ Share Debt/ Equity Return on Equity (%) Return on Assets (%) Interest Coverage 12/09 $7.36 0.64 1.8 0.7 1.6 12/08 $6.69 0.74 3.6 1.3 4.3 12/07 $9.45 0.30 9.3 3.8 11.5 12/06 $8.23 0.26 7.7 3.7 12.1 12/05 $8.33 0.30 7.3 3.5 8.7 12/04 $7.04 0.33 3.9 1.9 8.2 12/03 $6.40 0.30 8.7 4.5 8.3 12/02 $5.69 0.38 5.4 2.7 4.7 12/01 $5.23 0.46 12.7 5.7 12.8 12/00 $4.56 0.25 18.1 9.4 24.1
  • Competitors Comparative Costs Stats
    • Food cost is 0.03 cent per average seat mile as compared to American Airlines with 0.41 cent.
    • Commissions is reduced to 0.10 cents as compared to 0.36 cents for North West Airlines.
    • Advertising costs has been higher during the last decade than its competitors for eg. 0.22 cent against 0.08 cent for America West Airlines.
    • But at the end total operating cost is as low as 7.36 cent as compared to 11.12 cent for American Airlines
    • Hedging Strategy
    • Purchasing fuel options years in advance
    • Advantage of the market condition, which proved to bean extremely profitable effort
    • Substantial risk with this strategy
    • Substantially increasing its hedging strategy
    • Hedging Price Trend
        • 2007 is 95% hedged at $50/barrel
        • 2008 is 65% hedged at $49/barrel
        • 2009 is over 50% hedged at $51/barrel
        • 2010 is over 25% hedged at $63/barrel
        • 2011 is over 15% hedged at $64/barrel
        • 2012 is 15% hedged at $63/barrel
    • Paid low prices resulted in low operating cost
    • 2004 - 82.8 cents/gallon
    • 2005 - 103.3 cents/gallon
    • 2006 - 153.0 cents/gallon
  • Issues
    • Southwest faces increased exposure to the raw oil market every year
    • speculating on energy prices rather than hedging
    • Southwest recorded its first loss in 17 years due to fuel hedging
    • Southwest’s People Management
  • Employees, not customers come first!!
    • Knowledge that company was concerned for them
    • Passion for job
    • Happy Employees => Happy Customers
  • Recruiting
    • Hire for attitude, train them for skills
    • Belief that customers are important
    • Fun loving and spirited
    • Ads designed to capture attention of like minded individuals
  • Screening
    • Looked for
        • people oriented
        • extrovert
        • having good sense of humour
        • caring
        • empathetic
        • team-spirited
        • passionate
  • Screening
    • Analyzed job category and determined specific knowledge, skills, motivations etc. For e.g. : -
        • Judgement for pilots & attendants
        • Teamwork for all
    • Prior experiences and behaviours were explored
    • Unselfishness, people friendliness etc were observed
  • Training
    • Various mandatory and business related trainings were given according to profile: -
        • Leadership
        • Customer Care
        • Safety
        • Stress Management
        • Corporate Culture
        • etc…
    • Culture values, loyalty etc were thoroughly ingrained in the employees
  • Promotion & Compensation
    • 80-90% positions were filled internally
    • Pay scales were at par with industry standards however work done was more
    • Profit sharing plan was introduced in the industry
  • Employee Relations
    • It was a highly unionized company
    • Yet, it never let that affect operations – no major strikes
    • No-Layoff Policy (10 year labour agreement)
    • Approachable, interactive management
    • Employee led initiatives were undertaken
    • Flat-structure
    • These are three basic values (“the culture”) or philosophical
    • pillars at Southwest Airlines:
    • Value 1: Work should be fun ...it can be play . . . Enjoy it.
    • Value 2: Work is important ...don’t spoil with seriousness.
    • Value 3: People are important...each one makes a different.
    • Beliefs :
      • Organizations are transparent
      • Family and “Hugs”
    Southwest’s Values, Philosophy and Spirit
  • Why Should I go by Southwest Airlines
    • Hire Attitude – Train Skills
    • Immerse Everyone in the Culture Immediately
    • Keep 'Em Learning
    • People Give as Good as They Get
    • Find the Kid in Everyone
    • Do More with Less
    • Luv 'Em in Tough Times
    • Do What's Right
    • Nurture the Corporate Family
    • Conclusions & Trends
  • Key Success Factors
    • Employee first
      • Created employee ownership
      • Post 9/11 SW kept all its employees on its payroll, and even went ahead with a $179.8 million profit-sharing payment
    • Low fares: For Price sensitive customers
    • More destination: 65 cities, 33 US states
    • Financial
      • Had $13.2 Billion Market cap in 2001. (larger than combination of all US airline)
  • Key Success Factors
    • Operational efficiency
      • Turn around time
      • Single model usage
      • Aircraft utilization
      • On-time performance: For time sensitive business travelers
    • Safety
    • Transition Plans
  • Strategic Competencies
    • Level 5 leadership
      • Blend of personal humility and professional will
    • Cost and service culture
      • Price sensitive and Time sensitive.
    • Team of talented people
      • In 2002 company received 243657 resumes and hired 5043 new employees.
  • Strategic Competencies
    • Operating efficiency
    • Technology for cost reduction
      • Online booking launched in 1996
      • SWABIZ, corporate booking tool introduced in 1998.
    • Management on human capital
      • No lay-off policy
  • Recent Trends
    • Southwest Airline was first
      • To have webite in 1995
      • To have online booking in 1996
      • To have corporate booking tool in 1998
      • Now again first to start corporate blog in Airline.
    • Presence in social networking websites like Facebook, Twitter, flickr, linkedIn and You tube.
  • Recent trends
    • Gary Kelly has decided to slow the airline’s growth as a response to energy price.
      • Has reduced planned capital spending by $1.4 Billion for 2010
    • Southwest Airline has modified its major fuel hedge counterparty agreements after series of loss due to ex tensive hedging.
    • Southwest announced plans to reduce staffing levels, via a voluntary early-out programme, to help mitigate cost pressures.
  • Recent Trends
    • Southwest has entered agreements to boost its liquidity. The airline ended 1Q09 with
      • USD2.1 billion in unrestricted cash and short-term investments
      • USD600 million unsecured revolving credit line.
    • Southwest will be launching service to primary airports, rather than its previous preference for secondary airports, this will put it into direct competition with major US operators
  • Losses ‘Disappointing’ but ‘Not Surprising’
    • According to CEO, Gary Kelly, “Although competitively strong and financially resilient, we are not immune to the challenges the worldwide recession is having on air travel".
  • Thank You !