Background : - Founded in 1967 - Love Field in Dallas, TX - 35,000 Employees (started Flying in 1972) - Nation’s 4th largest airline (59+ cities and 65M Customers) - Only two fares: regular coach and off-peak Only airline to win the FAA’s “triple crown” 26 different months, three full years in a row best on-time record fewest lost bags fewest customer complaints (consistently the airline with lowest complains)
Results and Outcomes:
- Excellent customer service (rated the best for on-time performance, fewest lost bags; fewest customer complaints – 13 years in a row) - Safest airline in the world (never had a fatal accident) - Profitable every year (33 years in a row); only airline in the world
Fun facts (www.southwest.com) Southwest reviewed 284,827 resumes and hired 3,363 new employees in 2006 (11.8%). Southwest carried 96.3 million passengers in 2006. Southwest served 93.8 million bags of peanuts in 2006. Southwest moved 265 million pounds of cargo in 2006. Southwest used about 1.6 billion gallons of jet fuel in 2006. The shortest daily Southwest flight is between Ft. Myers and Orlando (133 miles). The longest daily Southwest flight is between Philadelphia and Oakland (2,508 miles). Southwest has approximately 1,133 married couples. In other words, approximately 2,266 Southwest Employees have spouses who also work for the Company.
Southwest’s Business Model Providing safe Reliable Short duration air service Lowest possible fair Quality service Point to Point
Low Cost Differentiation Use a single aircraft model (Boeing 737) Focus on customer satisfaction Use secondary airports High level of employee dedication Fly short routes No meals New flight services for business travelers (phones and faxes) S.W.A.’s Culture, Values, Philosophies & Principles 15 minute turnaround time No reserved seats No travel agent reservations Integrated Low Cost/Differentiation Strategy
The “Right” People or the “Right” Organization? A Values-Based Organization View of Strategy Fundamental Values or Beliefs
What are our basic Principles, Philosophies
and Core Values?
What do we believe in?
What policies and practices are consistent
with these Values and Philosophies? Design Management Practices That Reflect and Embody These Values
What can we do for the customer better
than our competitors? Use These to Build Core Capabilities
Given our capabilities, how can we deliver
value (EVA) to customers in a way our competitors cannot easily imitate? Invent a Strategy That is Consistent with the Values and Uses the Talents & Capabilities of People/ Organization to Compete in New and Unusual Ways
Senior management “manages” the values
and culture of the firm. Senior Management’s Role
SW:Anatomy of a 15-minute Turnaround 7:55 Ground crew chat around gate position 8:06:30 Baggage unloaded, refueling 8:03:30 Ground crew move to their vehicles 8:04 crew moves towards gate 8:15 Jet way retracts 8:08 Boarding call ,baggage loading, refueling complete 8:07 Passenger off plane 8:10 Boarding complete. ground crew leaves 8:15:30 Pushback from backs 8:18 Pushback disengages plane leaves for runway
How SW strategy is Implemented No baggage transfers No meals Limited Passenger service No connection with other airlines No site assignments Short hual,point to point travel Very low ticket prices Passenger related departure High aircraft utilization
Key operation parameters of sw
Passenger Load factor-
is the percentage of a plane filled with paying passengers.
Revenue passenger miles-
One paying passenger flown one line Source:www.southwest.com
Aircraft Utilization-in hours and minutes in a day a plane
SW’s Top Ten Airport-Daily Departure Southwest avoided congested airport. High employee productivity. Reliable on time performance.
Third-Degree Price Discrimination The firm identifies different consumer groups, in the market, each with a different demand curve. Southwest Airlines recognizes that any given flights has different types of travelers business travelers vs. vacation travelers To maximize profit, the firm sets a price for each group by equating marginal revenue and marginal cost. Equivalently, by using the inverse elasticity pricing rule (IEPR)
Conditions for price discrimination A firm must have some market power to price discriminate The demand curve the firm faces must be downward sloping Southwest knows that it can attract more customers at lower fare price The firm must have some information about the different amounts people will pay for its product. Southwest must know how reservation prices or elasticities of demand differ across consumers A firm must be able to prevent resale, or arbitrage. Customers need to present an identity card before boarding
Corporate Culture 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 - find their own seats on the plane 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
Looking Ahead Increase more non stop flights Enrich operation system Include daily non stop flights in busy air traffic route.
Conclusion Southwest Airlines uses third-degree price discrimination to fill the plane with travelers in the most profitable way Depending on the price of elasticity of demand for tickets Charge a higher price for business travelers who have relatively inelastic demands Charge a lower price for vacation travelers who have relatively elastic demands