Just Plane Smart Harvard Business School – Case Study Summary Abhishek Mehra Balaji P Saruabh Ranadive Sarang Bhutada

The setting It’s summer of 1993 Southwest is expecting delivery of two uncommitted planes McGlade needs to find a way, to put these planes in operation, keeping the organizational objectives are intact Final decision would have to preserve the Southwest culture and spirit About Southwest Started as a intra-state operator in Texas Budget airline philosophy, survived a severe price-war Operating out of Dallas’s Love Field airport, hence the ticker LUV 7 th largest in the country by April 1993 Expanded to become a national carrier, serving major cities Short-haul, high-frequency, low-cost strategy 12 time winner of the coveted triple crown award

The setting

It’s summer of 1993

Southwest is expecting delivery of two uncommitted planes

McGlade needs to find a way, to put these planes in operation, keeping the organizational objectives are intact

Final decision would have to preserve the Southwest culture and spirit

About Southwest

Started as a intra-state operator in Texas

Budget airline philosophy, survived a severe price-war

Operating out of Dallas’s Love Field airport, hence the ticker LUV

7 th largest in the country by April 1993

Expanded to become a national carrier, serving major cities

Short-haul, high-frequency, low-cost strategy

The Southwest Model

Hiring - Identify attitudes rather than skills Rigorous interviewing Peer hiring People skills of Southwest Structure Centered on team-building Cross-training encouraged Broad latitude offered 10% of stock held by employees Advancement Recognition, an important element Celebrations quite common Most promotions internal Compensation Varied with position At par with industry norm Pension through a profit-sharing plan Culture H A “Patina of Spirituality” ugs common across office Casual dress code Field visits Strong guidelines to everyone At par with industry norm Pension through a profit-sharing plan

Hiring

- Identify attitudes rather than skills

Rigorous interviewing

Peer hiring

Structure

Centered on team-building

Cross-training encouraged

Broad latitude offered

10% of stock held by employees

Advancement

Recognition, an important element

Celebrations quite common

Most promotions internal

Compensation

Varied with position

At par with industry norm

Pension through a profit-sharing

plan

Culture

H A “Patina of Spirituality”

ugs common across office

Casual dress code

Field visits

Strong guidelines to everyone

At par with industry norm

Pension through a profit-sharing

plan

“ After lengthy deliberation at the highest executive levels, and extensive consultation with our legal department, we have arrived at an official corporate response to Northwest Airlines Claim to be number one in Customer Satisfaction…… … Liar Liar. Pants on Fire”

Product: Southwest’s product is travel Competition - not just other airlines but any mode of transportation. frequent, conveniently timed flights and low fares. point-to-point route system as compared to hub-and-spoke direct nonstop Target Market: Market Segmentation cost- and value-conscious consumers. mostly male small business executives travel short distances prefer low cost fares frequent schedules The other half consists of value-conscious consumers (male, female, families, and senior citizens) best value for their dollars Senior citizens are a sub-segment that receives special attention than a loyal customer - customer evangelist

Product:

Southwest’s product is travel

Competition - not just other airlines but any mode of transportation.

frequent, conveniently timed flights and low fares.

point-to-point route system as compared to hub-and-spoke

direct nonstop

Target Market:

Market Segmentation

cost- and value-conscious consumers. mostly male

small business executives

travel short distances

prefer low cost fares

frequent schedules

The other half consists of

value-conscious consumers (male, female, families, and senior citizens)

best value for their dollars

Senior citizens are a sub-segment that receives special attention

than a loyal customer - customer evangelist

Competitors and Competition 11 major carriers (2003): Alaska Airlines Aloha Airline America West American Airlines Continental Airlines Delta Airlines Northwest Airlines TWA United Airlines U.S. Air Southwest Airlines Southwest’s brand exudes an element of fun: Obviously Fun Love Theme, Love Potions(on-board drinks) Love Machines( ticket writing machines) Product Positioning only low-fare short-haul high-frequency point-to-point carrier fun to fly Average cost of serving meals per passenger in the industry - $5 For Southwest’s - 20 cents Seemingly weird things- Not assigning seats Weird Color Scheme

Competitors and Competition

11 major carriers (2003):

Alaska Airlines

Aloha Airline

America West

American Airlines

Continental Airlines

Delta Airlines

Northwest Airlines

TWA

United Airlines

U.S. Air

Southwest Airlines

Southwest’s brand exudes an element of fun: Obviously Fun

Love Theme,

Love Potions(on-board drinks)

Love Machines( ticket writing machines)

Product Positioning

only low-fare

short-haul

high-frequency

point-to-point carrier

fun to fly

Average cost of serving meals per passenger in the industry - $5

For Southwest’s - 20 cents

Seemingly weird things-

Not assigning seats

Weird Color Scheme

Product Positioning Example of Southwest Airlines nuttiness - use of the word “love” One ad titled " How Do We Love You? " - flight schedule. Another ad titled " We're Spreading Love " - the rapid growth of the airline. Word " love “ - dedication to customer service Marketing Strategies Southwest offers a travel product that is built around flights targeted to specific demographics and ticket pricing that is simplified so that passengers know exactly what they are getting for what they pay. Building Brand Loyalty What is the Southwest Effect? Air fares go down Tourist traffic increases Economic mini-boom ensues Marketing Blitz !!!! - Smart Campaign

Marketing Strategies

Southwest offers a travel product that is built around flights targeted to specific demographics and ticket pricing that is simplified so that passengers know exactly what they are getting for what they pay.

Building Brand Loyalty

What is the Southwest Effect?

Air fares go down

Tourist traffic increases

Economic mini-boom ensues

Marketing Blitz !!!!

- Smart Campaign

Pricing Strategies Charge the lowest possible fare Compete with all other forms of transportation, including automobiles Instead of increasing fares when market gets busier and more people are flying, it simply increases the number of flights. Distribution and Promotion Product Distribution Strategies SWA does not rely on travel agents Travel bookings - direct marketing Does not interline or offer joint fares with other airlines Southwest's Internet ticketing saves it $50 million a year, or 1% of revenue "We're not competing with other airlines. We're competing with ground transportation"

Pricing Strategies

Charge the lowest possible fare

Compete with all other forms of transportation, including automobiles

Instead of increasing fares when market gets busier and more people are flying, it simply increases the number of flights.

Promotion Strategies: Marketing Mix Southwest Airlines wants to differentiate itself from other airlines as the airline that can get passengers to their destinations when they want to get there, on time, at the lowest possible fares – while having fun. Frequent Flyer Awards Rapid Rewards-based on number of trips taken Way of showing Southwest’s philosophy that every customer is equally important as the other and making ALL passengers feel special. Advertising “ Don’t believe the hype.” Fares offered by other discounters and airlines on the Web are not good buys. Southwest attempts to do three things in their advertising: intrigue Entertain persuade “ We’d like to match their new fares but we’d have to raise ours!!"

Advertising

“ Don’t believe the hype.”

Fares offered by other discounters and airlines on the Web are not good buys.

Southwest attempts to do three things in their advertising:

intrigue

Entertain

persuade

Television Sports Advertising Sports television programming Reaching the corporate set via sports and other venues In 2000, Southwest renewed its multi-year sponsorship agreement with the National Football League (NFL). Public Relations Aims for “Free publicity” Triple Crown Award for the fifth time in a row Named a plane Triple Crown One and painted 24,000 employee names on it Internal Marketing Core Business - Customer Service business—they just happen to provide airline transportation Southwest’s philosophy - “Service for Smiles and Profits” Encourages employees to treat customer service as the most important aspect of their job CEO Kelleher, " We want people who do things well, with laughter and grace. "

Television Sports Advertising

Sports television programming

Reaching the corporate set via sports and other venues

In 2000, Southwest renewed its multi-year sponsorship agreement with the National Football League (NFL).

Public Relations

Aims for “Free publicity”

Triple Crown Award for the fifth time in a row

Named a plane Triple Crown One and painted 24,000 employee names on it

OPERATIONS Did all of its ticketing (not making seats available through computerized systems) Did not operate in the hub-and spoke route system Flew into uncongested airports of small cities, less congested airports of large cities Did not transfer baggage directly to other airlines Only drinks and snacks often peanuts served on board Travel agents had to contact the airlines directly to book seats SWA passengers flew non-stop origin to destination. Did not promote connecting services Savings in reduced taxi time, fewer gate holds and less in-air waiting time It doesn’t coordinate its services with other airlines

Did all of its ticketing (not making seats available through computerized systems)

Did not operate in the hub-and

spoke route system

Flew into uncongested airports of small cities, less congested

airports of large cities

Did not transfer baggage directly to other airlines

Only drinks and snacks often

peanuts served on board

OPERATIONS Usually do not share the ground handling crew until unavoidable Other airlines flew variety of jet aircrafts, as many as 5 distinct ones including McDonnell Douglas, Airbus and Boeing 737’s had average life of 20 years US industry average was 55 mins. 84% unionized labor force but its labor relations were excellent Only flew Boeing 737 - Fleet of 150 and avg of 1500 trips per day. Average age of SWA was 7 years (lowest in the industry) Differentiation in terms of “turnaround” time , 2 out of 3 planes were turned-around in 15 mins.

84% unionized labor force but its labor relations were excellent

Only flew Boeing 737 - Fleet of 150 and avg of 1500 trips per day.

Average age of SWA was 7 years (lowest in the industry)

Differentiation in terms of “turnaround” time , 2 out of 3 planes were turned-around in 15 mins.

COST CONTROL “ Airlines don’t have revenue problems, they have cost problems”

GROWTH STRATEGY Conservative Growth Strategy : Expansion within the current route structure was the first priority (85% expansion was internal) External expansion was opportunity driven: After the collapse of Midwest Airlines in 1991, Southwest moved to Midway Airport in Chicago and anchored there. Scheduling department decides the appropriate market: They don’t do a lot of market research. Choose a market, negotiate for gates and look for controlled growth. Growth with consistency: When they enter a new city they want to make sure that they do the business which is consistent throughout the system.

Conservative Growth Strategy : Expansion within the current route structure was the first priority (85% expansion was internal)

External expansion was opportunity driven: After the collapse of Midwest Airlines in 1991, Southwest moved to Midway Airport in Chicago and anchored there.

Scheduling department decides the appropriate market: They don’t do a lot of market research. Choose a market, negotiate for gates and look for controlled growth.

Growth with consistency: When they enter a new city they want to make sure that they do the business which is consistent throughout the system.

MARKET ENTRY STRATEGY How the company prices its new routes? They look to grow in the market when they enter the city (quadruple and quintuple the number of passengers in a particular route) Pricing against the ground transportation as much as against existing air service (atleast 60% below competitive fares) Low operating costs They think slightly differently about load factors: Initially higher than average load factors Low price – expand market faster than they can add equipment Demand outpaces supply Competitors drop prices – that stimulates demand further Keep adding more service to balance out demand and supply Eventually leads to maturing of load factors On the Oakland-Burbank route, SWA quadrupled the passenger market within two years and drove out USAir and United in 3 years time.

How the company prices its new routes?

They look to grow in the market when they enter the city

(quadruple and quintuple the number of passengers in a particular route)

Pricing against the ground transportation as much as against existing air service (atleast 60% below competitive fares)

Low operating costs

They think slightly differently about load factors:

Initially higher than average load factors

Low price – expand market faster than they can add equipment

Demand outpaces supply

Competitors drop prices – that stimulates demand further

Keep adding more service to balance out demand and supply

Eventually leads to maturing of load factors

On the Oakland-Burbank route, SWA quadrupled the passenger market within two years and drove out USAir and United in 3 years time.

South west North west Number of employees Revenues per employee Revenue Vs. Employees ( DEA )

Wages as % of total expenses – 29.78% ( Industry average = 35.17%) Lowest among Non-Chapter11 Airlines for the year 1992 . How was it possible ? Employee required per each additional trip Number of departures from a city Ground crew staffing efficiency Competitors runs with at least three times as much staff . E.g., South-West effect on Burbank –Oakland market. Ground Crew Staffing Levels based on number of departures at an Average Southwest city Departures People Marginal emp reqd per departure 10 35 3.5 20 45 1.5 30 60 1.5 60 120 2

Competitors runs with at least three times as much staff .

E.g., South-West effect on Burbank –Oakland market.

ASM: Average Seat Mile ; RPM : Revenue Passenger Mile Employee productivity (1992)

South West Airlines built numbers on its culture where as most competitors let the culture to shape up by their focus on numbers Other large Airlines F O C U S CONCLUSION F O C U S NUMBERS CULTURE SCHEDULING STRATEGY CULTURE SCHEDULING STRATEGY NUMBERS

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