Case: Southwest Airlines 1

Case: Southwest Airlines

Case: Southwest Airlines 2 Case recap Southwest Airlines executives were holding their regular Tuesday meeting when they received the news announcing that United Airlines would discontinue its Oakland Ontario route traffic and raise fare in its other routes in Northern California. This announce came as a surprise for its major competitors especially Southwest Airlines. In fact Oakland Ontario route is an important route for both airlines. United Airlines has ounce dominated this route until it lost the monopole of it against Southwest. Moreover, United with it Shuttle By United has been trying in vain to surpass Southwest on this route. Southwest Airlines executives were now changing their meeting agenda to figure out if United Airline decision is just tactical approach or a major modification in its strategy and evaluate if Southwest should follow with a $10 fare increase of its own or continue with its present low price strategy (Kerin & Peterson, 2010). Problem identification In the early 90s, major airlines and regional carriers have been intensely competing to enter the industry with new approaches. These carriers were able to offer lower fares on short and long haul routes. The entry of the lower fares carriers coupled with the recession in the 1990s cause a lot of the major airlines to file for bankruptcy. However most found themselves in a position where they were competing with each other and losing market share and money (Kerin
& Peterson, 2010).

Southwest low fare marketing has win over numerous routes also served by major airline companies such as United Airlines. United decisions to stop serving the Oakland-Ontario route and increase price on its other Northern California routes is forcing southwest to react. The

Case: Southwest Airlines 3 problem for Southwest executives team is to figure out what might be the implications from the United`s actions and how Southwest should react to these changes (Kerin & Peterson, 2010). Identifying the Root Problem Components Major events in the early 190s have forced US airlines to lose money and market share to leave the domestic traffic monopole to a few airlines that were now controlling more than 90 percent of the US air traffic. At the current price it was offering on the Northern California routes, United Airline was not making any profit either as expected. With a price increase of $10, the company would be able to start generating profit. This can explain the reason it was changing its pricing strategy (Kerin & Peterson, 2010). There are many Southwest`s competitors such as United Airlines, AA, Delta Airlines, and Northwest Airlines serving the Northern California routes. Because Southwest was focused on servicing these routes, these companies constituted a threat to its stronghold. Also there were risks for Southwest to lose customers in short trips destinations for ground personal vehicles and commercial buses if airlines ticket price is high. For Southwest to remain competitive, it had to come
up with alternatives to increase its brand awareness (Kerin & Peterson, 2010).

SWOT (four strengths, four weaknesses, four opportunities, four threats) Strengths:

Weaknesses:

Well established brand image and high customer preference The company has no baggage handling fee

Southwest only offer domestic flights Seating is not segmented Online booking agencies are not fully

Case: Southwest Airlines 4

Low maintenance cost for its planes The company has embraced ticketless technology that reduce costs Employee oriented culture within the company

utilized by Southwest Morning flights are usually unavailable or mostly expensive

Opportunities:

Threats:

Market expansion potential to more domestic and international cities Consumer willing to fly rather than drive More destination are being introduced Enhance the internet booking services

Public perception changing to consider low price as low quality. New regulations forcing Southwest to increase its tickets price Increase of oil and gas price Competition reducing its price

Evaluation of Alternatives Several factors have to be taken into consideration to determine how Southwest can respond to Shuttle By United initiative. The change in airline regulations has brought multiple airlines companies to surface with competitive ticket price. This situation has resulted in low airfare for consumers on short and long haul routes. Moreover, demand for flight, especially short trip can be very inconsistent because traveler may choose to use their cars or train if airline fare is high. So deciding to increase price to match United Airlines approach may result in lost of customers for Southwest Airlines. As Oakland had become the main base of Southwest operation in Northern California and was the fastest growing of California`s ten major airlines in term of air traffic, Southwest had been losing market share on this route since October 1994 because of the competition. With United Airline decision to discontinue servicing in Oakland-Ontario route, southwest could firmly hold on this route to increase market share. If southwest chose to increase its fare by $10

Case: Southwest Airlines 5 to match United, it is likely that it would lose market share to other competitors like Continental Airlines. If it holds on to its low pricing strategy, Southwest could capture more customers and increase market share on all routes. Alternatively, customers could prefer to pay a few more dollars for the comfort of flying rather than using the road. For that a price increase will not affect consumers habit in using the plane. Therefore it could also be profitable opportunity for Southwest to increase its price to match up with United Airlines changes. Recommendation Giving its stronghold and image of a low price airline carrier, Southwest should not match United Airlines price increase. The company should continue to emphasize on low fares and deliver exceptional customer experience. By doing so, it will capture more customers from United Airlines discontinued route and other competitive routes as well. Southwest should maintain its low price strategy in all California routes. As California is becoming a strategic market for the company with 56.4 percent share in the intra-California market, Southwest should definitively keep its current pricing and increase advertisement and promotion in California to maintain its presence. Southwest airlines have been successful at keeping its operating costs low while providing an excellent customer services. Southwest Airlines should stick to this strategy to avoid losing a large market share and affecting its image by trying to equal Shuttle By United strategy. In fact United approach might be a way to bring Southwest Airline to make a mistake in following its strategy and lower its price right after to drag Southwest Airline down.

Case: Southwest Airlines 6 Reference: Kerin, R. Peterson, R. (2011). Strategic marketing problems: cases and comments. New York: Prentice Hall.