Southwest airlines


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Southwest airlines

  1. 1. A Case Study by: Benjamin Sanders
  2. 2.  Southwest began scheduled service on June 18, 1971 as a low-fare, high frequency airline committed to exceptional customer service. They utilized a short-haul, point-to-point aviation system
  3. 3.  Southwest’s co-founder Herb Kelleher had this to say about the employees he wanted working for Southwest, “What we are looking for, first and foremost, is a sense of humor. Then we are looking for people who have to excel to satisfy themselves and who work well in a collegial environment… We can train people to do whatever they have to. We hire attitudes.”
  4. 4.  Prior to 1978, the U.S. airline industry was regulated by the federal government through the Civil Aeronautics Board (CAB) The CAB regulated airline fares, routes, and company mergers A change in routes or fares charged by a carrier had to be approved by the CAB Price competition was suppressed
  5. 5.  In 1978, the Airline Deregulation Act was passed This act allowed airlines to set their own fares and enter or exit routes without the approval of the CAB As far as jurisdiction for mergers was concerned, it was first passed to the U.S. Department of Transportation; then again transferred to the U.S. Justice Department in 1985
  6. 6.  The Civil Aeronautics Board was dissolved in 1985 Two Major Changes Occur
  7. 7.  Major carriers turned their attention to serving non-stop “long haul” routes, which had been very profitable during the Civil Aeronautics Board regulation era Consequently, major airline carriers reduced service on the “short haul” routes that were much less profitable (if not costly) during the time of aeronautic regulation
  8. 8.  This void created by major carriers was filled with smaller domestic carriers In 1978, America had 36 regional carriers By 1985, the number of regional carriers had grown to 100
  9. 9.  The manner in which carriers executed their routes was no longer regulated and quickly changed. Almost all the major carriers dropped their previously used point-to-point system, and adopted a hub-and-spoke system which featured “feeder flights” from outlying cities to a central hub city.
  10. 10.  The point-to-point system that was abandoned involved non-stop flights between city-pairs and would often shuttle flights back and forth between city-pairs The key to the hub-and-spoke system was to schedule numerous feeder flights into the large hub airports that coincided with the highly profitable long-haul flights, with each spoke adding more passengers to the aircraft flying the longer distances.
  11. 11.  The major carriers did not enjoy the success they had forecasted with their hub-and-spoke system. Potential increased revenue and some cost economies from flying more passengers longer distances were offset by increased costs resulting from reduced utilization of aircraft as they waited to collect passengers, the capital investment in hub facilities, and the need for a larger ground staff.
  12. 12.  Conversely, the small newly formed airlines along with previously existing regional carriers were experiencing company growth and profit. Since the industry was deregulated, these smaller carriers expanded both the number and the length of their routes. They did this by maintaining the point-to- point system that was more economical to operate than hubs.
  13. 13.  First, they did not bear the higher costs of operation present in the spoke-and-hub system. Also, the regional carriers had much lower debt than that which the major carriers had assumed during the regulation era. Subsequently, the newly formed airlines and regional carriers had an immediate cost advantage.
  14. 14.  This cost advantage allowed these carriers to offer lower fares on both long-haul and short-haul flights. This created price competition among all airlines, which were scrambling to fill their seats. This price competition also lowered the average fare paid on long-haul flights, which caused further damage to the major airline’s already dwindling profits, whose cost on the long-haul flights remained high.
  15. 15.  As the price war raged on, major carriers engaged in acquisitions of smaller carriers at a feverish pace. One of these acquisitions was Pacific Southwest Airlines being acquired by USAir. By the late 1980’s, 91 percent of U.S. traffic was controlled by eight major airlines.
  16. 16.  However, the financial condition of these eight major carriers was not stable due to a decade of marginal profitability. The 1990’s were a dismal decade for airline carriers due to recession, a doubling of fuel prices during the Gulf War, and excess capacity in the industry. But the floundering of these major carriers only made things easier for regional carriers and newly formed airlines…
  17. 17.  Due to rampant bankruptcy among major carriers, “low-fare, low-frill” carriers were successfully formed. The new carriers were drawing on a pool of cheap, grounded aircraft from major carriers, a wide availability of furloughed airline personnel, and the cost economy provided by point-point route systems. These “low-fare, low-frill” carriers jumped from combined revenues of $450 million in 1992, to $1.4 billion in 1994!
  18. 18.  From 1990 through 1994, Southwest had more than doubled its operating revenues and almost quadrupled its operating income. Southwest was so successful that the U.S. Department of Transportation took note, “…As Southwest continues to expand, other airlines will be forced to develop low-cost service in short-haul markets.”
  19. 19.  Many competitors started formulating operation practices very similar to Southwest, if not identical. The outcome of this effort was the airline-within-an- airline concept. The airline-within-an-airline concept involved operating a point-to-point, low-fare, short-haul, route system alongside a major carrier’s hub-and- spoke route system.
  20. 20.  In 1994, United Airlines was the world’s largest airline. They launched their own version of the airline- within-an-airline concept on October 1, 1994. United’s airline-within-an-airline was branded “Shuttle By United”.
  21. 21.  This initiative followed the employee buyout in the summer of 1994 when employee wage cuts and more flexible work rules made a point-to-point system alongside United’s hub-and-spoke system possible. “Shuttle By United” was designed to be a high frequency, low fare, minimal amenity, short-haul flight operation serving destinations in California and adjacent states.
  22. 22.  Beginning with eight routes, “Shuttle By United” had expanded to 14 routes by January of 1995, nine of these fourteen routes competed directly with Southwest.
  23. 23.  “Shuttle By United” is intending to discontinue some service and raise fares by $10. What, if anything, do we do in response?
  24. 24.  Southwest is a low-fare, high frequency airline committed to exceptional customer service. “We hire attitudes.” Our workers go above and beyond the call of duty. Customer service was so important to Southwest that they literally wrote the book on it. Southwest released an international publication titled The BOOK on Service: What Positively Outrageous Service Looks Like at Southwest Airlines
  25. 25.  In 1994 Southwest recorded a net income of $179.3 million, thus making 22 consecutive years of profitable operations. No other carrier matched that over the past two decades. 1994, Southwest won the annual “triple crown” of the airline industry by ranking first among major carriers in the areas of on-time performance, baggage handling, and overall customer satisfaction. It is worth noting that no other airline had ever won the “triple crown” for even a single month.
  26. 26.  Southwest Airlines also created a strong bond between the corporation and its workers. Kelleher referred to this bond as “a patina of spirituality”. Kelleher stated, “I feel that you have to be with your employees through all their difficulties, that you have to be interested in them personally… I want them to know Southwest will always be there for them.”
  27. 27.  No hub-and-spoke system (although considered by many to be a positive) No first class seating Not competitive on a national scale
  28. 28.  Electronic ticketing (ticketless travel system) United charges 5-10% higher than the average Southwest fare in the nine markets of direct competition in California United’s withdrawal from the Oakland-Ontario market (United previously had 32% market share in this market) United charging higher fares in non-direct competition markets
  29. 29.  “Shuttle by United” was launched on October 1, 1994 by United Airlines. By mid January of 1995, “Shuttle by United” was serving 14 routes in California and the surrounding area. Nine of these 14 routes were in direct competition with Southwest. United’s CEO was quoted as saying, “We’re going to match them (Southwest) on price and exceed them on service.”
  30. 30.  Very few changes need to be made. Market indicators seem to be in our favor. The system has already ousted “Continental Lite” from the competition. It is only natural that the world’s largest airline carrier (United) would be able to hang in the airline-within-an-airline race longer than Continental. Their withdrawal from the Oakland-Ontario market along with raised fares indicates they are already facing operating cost problems.
  31. 31.  Don’t rock the boat. One thing that has made Southwest stand out from its competition- consistency. Consistently low fares with consistently exceptional customer service are an integral part of what makes Southwest work so efficiently. Changing our prices to match United’s will erase our competitive advantage while driving overall fares down. The “patina of spirituality” within the company offers advantages that United does not possess.
  32. 32.  A public relations campaign may be helpful to remind both new and loyal customers that we (Southwest) have always been a leader in “low-fare, low-frills” flights. PR would utilize low cost print ads, as well as in-airport advertisements. Let it be known we’re not going to try and squeeze an extra buck out of them for shareholder profits. Implementation of electronic ticket technology would reduce airline expenses even further. If technology permits, I would also suggest a wide-spread social networking public relations campaign.
  33. 33.  Codenamed “U2”, “Shuttle By United” was dissolved by United Airlines in 2001 as it folded the shuttle flights back into the main fleet. United filed for bankruptcy in December 2002.