Southwest airline case_study final version


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Southwest airline case_study final version

  1. 1. Case study MBA - C Team A 11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  2. 2. US Airline Industry <ul><li>Before 1978 derogation … </li></ul><ul><li>Civil Aeronautic Board regulated airline route </li></ul><ul><li>2-3 carriers provided the service in a given market </li></ul><ul><li>cost passed along to customers, no price competition </li></ul><ul><li>After derogation… </li></ul><ul><li>many new firms enter the market </li></ul><ul><li>Fuel crisis of 1979 </li></ul><ul><li>1981 air traffic control strike=more industry difficulties </li></ul><ul><li>More than 150 bankrupt carriers during the 1 st decade of deregulation </li></ul>11/14/09 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  3. 3. US Airline Industry <ul><li>1980s: financial debts increase due to expanded demand brought about by low fares </li></ul><ul><li>1990s: new aircraft orders lowered (not profitable market) to avoid debts </li></ul><ul><li>Mid-1990s: increase demand, from 200 million (1974) to 500 million(1995) </li></ul><ul><li>In 1999, global improvement of airline industry </li></ul><ul><li>September 11, 2001 attack= chaos in the market </li></ul>11/14/09 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  4. 4. New Pressures on Airline Industry <ul><li>Security : need to increase war risk insurance </li></ul><ul><li>Customer dissatisfaction: service problem, call for regulation </li></ul><ul><li>Labor costs: pressure expected to increase </li></ul><ul><li>Aircraft maintenance : higher maintenance/replacement costs, stricter government regulation for older planes </li></ul><ul><li>Debt servicing: airline industry debt load exceeded US industry averages </li></ul><ul><li>Fuel cost: big impact on the total cost was uncertain </li></ul><ul><li>Air traffic delays: due to higher travel, airport congestion=negative influence on profitability. </li></ul>11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  5. 5. Southwest Airlines Background <ul><li>1967: Herb Kelleher and Rollin King founded SW </li></ul><ul><li>1970: management team built </li></ul><ul><li>June 18,1971: 1 st fly in Texas-Houston, Dallas, San Antonio (“Golden Triangle) with 3 Boeing 737s aircrafts and 25 employees </li></ul><ul><li>Operation focus: short-distance flights (>500 miles), point-to-point flights, only 737 Boeing,high frequency flights, low fares, no international flights </li></ul><ul><li>1 st national carrier to sell seats online ($1 per booking) </li></ul><ul><li>1 st airline to use ticketless travel (January 31,1995) </li></ul><ul><li>2000: biggest aircraft order (94 737s Boeing) >>> 355 fleets in 2002 </li></ul><ul><li>2003: 4 th largest US airlines in terms of domestic passengers carried </li></ul>11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  6. 6. Southwest Performance <ul><li>Passenger load factor is the percentage filled with paying passengers. </li></ul><ul><li>Revenue passenger miles one paying passenger flown one line </li></ul>11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  7. 7. Analysis with Porter´s 5 Force Model 11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  8. 8. Power of Suppliers <ul><li>The market is dominated by a few large airplane suppliers </li></ul><ul><li>As for the catering, gift services and other indirect materials, there are many fragmented sources and therefore their power is of almost no significance </li></ul><ul><li>The cost (maintenance and training) of switching from Boeing 737 to Airbus A320 is very high </li></ul><ul><li>The suppliers' customers are fragmented, so their bargaining power is low </li></ul><ul><li>There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins </li></ul>11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  9. 9. Power of Customers <ul><li>Travel agents buy large volumes, there’s a concentration of buyers, therefore their switching to a different supplier might have larger impact on the profits </li></ul><ul><li>Individual buyers usually act as individuals and therefore have no strong bargaining power </li></ul><ul><li>Switching to an alternative product is relatively simple and is not related to high costs </li></ul><ul><li>Customers are either price-sensitive, or time-oriented </li></ul><ul><li>The product is not of strategic importance for the customer because there are many other short distance transportation means </li></ul><ul><li>There is the possibility for the customer (travel agent only) integrating backwards </li></ul>11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  10. 10. Threat of New Entrants <ul><li>Economies of scale: Southwest is # 7 in market share in 2000, thus has reached sufficient economies of scale </li></ul><ul><li>High initial investments and fixed costs: New entrants difficult to compete financially with profitable Southwest </li></ul><ul><li>Brand loyalty of customers: SW reputation makes it hard to win SW customers </li></ul><ul><li>Scarcity of important resources: (e.g. qualified expert staff) To train people for technical skills is possible, but to imitate SW culture is very difficult </li></ul><ul><li>Distribution channels: SW has no special control over distribution channels </li></ul><ul><li>Legislation and government action: Not so difficult to set up airline company in the US </li></ul><ul><li>Operational efficiency: many imitators failed to compete with SW‘s... </li></ul><ul><li>the highest passenger miles per employees ratio </li></ul><ul><li>lowest employees per aircraft ratio </li></ul><ul><li>debt-to-equity ratio is much lower than the industry average </li></ul>11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  11. 11. Treat of Substitutes <ul><li>Brand loyalty of customers…so customers are unlikely to switch to other transportation means, such as train </li></ul><ul><li>Southwest provides low price or time-optimized tickets </li></ul><ul><li>good service, care </li></ul><ul><li>fun to their customers </li></ul><ul><li>Switching costs for customers to train/car for the Southwest routes… </li></ul><ul><li>requires more travel times </li></ul><ul><li>cause a lot of inconvenience </li></ul><ul><li>Relative price for performance of substitutes… </li></ul><ul><li>Price for trains, or gasoline cost for self-driving are comparable to the price of Southwest ticket for the same route, not much cheaper. </li></ul>11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  12. 12. Rivalry in the industry <ul><li>There are many players of about the same size </li></ul><ul><li>Players have similar strategies </li></ul><ul><li>All players have their own customer intimacy program </li></ul><ul><li>Not much differentiation between players and their products, hence, there is much price competition </li></ul><ul><li>Only visible differentiation is in the scope of the service offering, age of airplanes, trainings of the staff, and heartiness of flight attendants where SW ranks very high </li></ul><ul><li>Low market growth rates (growth of a particular company is possible only at the expense of a competitor) </li></ul><ul><li>Barriers for exit are high (e.g. expensive and highly specialized equipment) </li></ul>11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  13. 13. 11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  14. 14. Business Strategies/Service Models <ul><li>Short –haul (less than 500 miles) </li></ul><ul><li>Point to point flight </li></ul><ul><li>Only Boeing 737 </li></ul><ul><li>High frequency flights </li></ul><ul><li>Low fare </li></ul><ul><li>No international flights </li></ul>11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  15. 15. Business Strategies/Service Models <ul><li>Two-tiered pricing structure ($13 or $26 w/ free bottle of liquor) </li></ul><ul><li>Consistent with their primary focus (531 miles average trip length of 1.35 hours, 2,800 flights/day to 58 cities, 8 flights/plane, 12 working hours/plane) </li></ul><ul><li>Operation without major hubs=customer convenience, time-saving </li></ul><ul><li>Uses “no frills” approach to services (first come first serve seating, color-coded passes) </li></ul><ul><li>Online booking (no need for travel agents) </li></ul>11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  16. 16. Human Resource Management Strategies <ul><li>“ Positively Outrageous Service” (customer service exceeds the norm) </li></ul><ul><li>Communication and camaraderie highly valued </li></ul><ul><li>Unique new employee orientation (Wheel of fortune game show, scavenger hunts, company videos) </li></ul><ul><li>Regular training for advanced employees </li></ul><ul><li>“ Leading with Integrity” classes for newly promoted managers/supervisors </li></ul><ul><li>“ Walk-a-Mile Day” program to promote respect for co-workers and increase company awareness </li></ul><ul><li>Mentoring program </li></ul>11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  17. 17. Human Resource Management Strategies <ul><li>Employee initiative supported by management </li></ul><ul><li>Emphasis on cooperative labor relations </li></ul><ul><li>Employee own 10% company stocks </li></ul><ul><li>Average age of Southwest employee was 34 years </li></ul><ul><li>SW among the highest paid employees in the industry and the company </li></ul><ul><li>Enjoyed low employee turnover relative to the airline industry </li></ul><ul><li>More than 1,000 married couples (2,000 employees) worked for the airline </li></ul>11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  18. 18. New Employees Hiring Strategies <ul><li>In 2001, Southwest reviewed 194,821 </li></ul><ul><li>resumes and hired 6,406 new employees </li></ul><ul><li>Unique: Peers screened candidates and </li></ul><ul><li>conducted interviews (e.g. pilots hired pilots, gate agents hired gate agents) </li></ul><ul><li>To better understand what the company sought in candidates, Southwest interviewed its top employees in each job function (e.g. pilots, gate agents, baggage handlers, ground crew) and identified their common strengths, then used these profiles to identify top candidates </li></ul>11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  19. 19. Southwest spirit employees first <ul><li>“ If they’re happy, satisfied, dedicated, and energetic, they’ll take real good care of the customers. When the customers are happy, they come back. </li></ul><ul><li>And that makes the shareholders happy.” </li></ul><ul><li>Herb Kelleher, Southwest CEO and Founder </li></ul>11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  20. 20. 11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  21. 21. 11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C <ul><li>By second half of 1994 many imitators </li></ul><ul><li>One third of the total industry capacity </li></ul><ul><li>Almost was start up airlines </li></ul><ul><li>Main Shuttle by United, Continental Line (CaLite) </li></ul><ul><li>Morris Air, first competition after “take over “ </li></ul>
  22. 22. 11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C <ul><li>increase productivity, frequency of flight </li></ul><ul><li>Reserved seating - Lower fare rate </li></ul><ul><li>Hub congestion - cost of delays </li></ul><ul><li>Fee travel agents - commission fee </li></ul>
  23. 23. 11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C
  24. 24. 11/14/2009 Annie, Luigi, Myra, Wichai, Yonggang MBA -C <ul><li>Interesting and unique position </li></ul><ul><li>Good financial status/stability </li></ul><ul><li>Increase operation in Northeast </li></ul><ul><li>Provide additional service (Wi-fi on all plane 2009) </li></ul>