SOUTHWEST AIRLINES 2008

Group A1 Ashwani Rathore Krishna Sandhya Shubham Mitra Subhransu Sahoo Tripta Kaur Bath

Problem Statement
Shaping future business strategy while keeping competition at bay, charting new territories and maintaining highest level of customer service and employee satisfaction.

PESTL Analysis
Political Deregulation in airlines allowed many new firms to enter the market and the financial impact on both established and new airlines was enormous. Although deregulation fostered competition and the growth of new airlines, it also created a regional disparity in ticket prices and adversely affected service to small and remote communities. Airline labour unions were reeling in the face of wage reductions, pension cutbacks and job uncertainty. Airline Pilots Association was the single major union that represented more than 60,000 pilots. But Southwest pilots belonged to an independent union. Economic Fixed or semi-variable operating costs which are directly dependent on the distance travelled and not the number of passengers carried. Ultimate motive - Maximizing the Load factor Biggest worry - Rising fuel costs Maximizing the yield by adopting a flexible pricing practice. This helped them to manage the seat inventories and prices paid for those seats. Extremely high fixed costs of the Airlines industry Very low net profit margin as compared to other industries Hub-and-Spoke network adopted by the major airlines to expand services across a wide network Despite steady growth, airline industry is still in crisis with airlines filing for bankruptcy

Social Southwest airlines believed in maintaining strong customer relationship. The employees were motivated to go far beyond the industry norms to satisfy the customer. For example, a gate agent volunteered to watch a dog for two weeks for a passenger and there were many such incidences.

Southwests spirit surprised the customers. Flight attendants were encouraged to have fun, songs, jokes and be humorous. Intense company communication and camaraderie was highly valued and essential to maintaining the spirit of the firm. The employees had a very high job security and the employee turnover was the lowest in the industry i.e. 7%. Employees were given initial and advanced training to share and instil the Southwests unique culture.

Technological Sophisticated software tools to understand and analyze travel patterns of customers With the advent of Internet, Southwest was the first one to understand the need of consumers and provided them the facility of e-booking. Soon, all the major airlines followed and today it is a preferred medium of booking tickets across the world. Legal It is difficult entering a new market in the United States of America, especially if you are new entrant. This is because competing airlines try strangling new entrants via law suits. The government plays an important role in regulation and deregulation of the airline industry. For example, the U.S. commercial airline industry was permanently altered in October 1978 when President Carter signed the Airline Deregulation Act. Every new entrant in the U.S. had to be certified by the FAA before it could do business. Some competing airlines had agreements with local governments to use particular airports as their hubs and did not allow other airlines to operate from those hubs. For example, Northwests deal with the local government assured that it would be the only airline that would have a hub in Detroit. Southwest had to eventually exit Detroit.

SWOT Listing:
Strengths: 1. Two tier pricing structure for customers, understanding customers better. 2. Competitive pricing by Southwest. 3. Using the Point to Point service and not using the Hub and Spoke model. 4. Less turnaround time for Southwest compared to industry average of 45 minutes.

5. Cooperative Staff 6. Innovation in ticketing (Ticketless travel, introduced internet booking, Frequent Flier program) 7. Strong Leadership (Many analysts following Southwest credited the airlines success to Kellehers unorthodox personality and engaging management style. 8. Good choice of markets by Southwest. 9. Ability to adapt to changing business environment (Introduction of service changes in 2007) 10. Customer Service (Positively Outrageous Service, Southwest Spirit 11. Well structured training programs. 12. Great emphasis on maintaining cooperative labour relations. 13. Very young fleet size 14. Very low debt-to-equity ratio Weaknesses: 1. There may be an issue with a lack of unity in decision making. Southwest does not pay low-level employees well, which could be seen as negative in the lack of support for employees. However, that is offset by greater pay and benefits for long-term employees. 2. Convincing passengers that its low fares were not just introductory promotions but regular fares. 3. Even though point to point service provided maximum convenience for passengers who wanted to fly between two cities, insufficient demand could make such nonstop flights economically unfeasible. 4. Southwests, No Frills approach could be a weakness in terms of customer relations. 5. Rising operating costs. Opportunities: 1. Opportunities in the northeast market (New England had the potential to provide a valuable source of passengers to Florida; the northeast was a densely populated area.) 2. Internationalisation options (As of 2008, Southwest had not entered any markets outside the domestic United States). 3. Southwests strong financial position gave it the ability to exploit new market opportunities. 4. Opportunity to infuse new blood and energy in the organization through a younger management.

5. With its unique financial position, Southwest had the opportunity to acquire successful competing airlines which followed the same business strategy. Threats: 1. Southwest Imitators (Southwests strategy spawned numerous imitators). 2. Major airlines directly competing with Southwest with the same strategy. 3. Major airlines like Delta and Northwest coming out of bankruptcy protection with lower costs and more efficient operations. 4. Successful start-ups like JetBlue Airways. 5. Demand for air travel dropping sharply since 9/11. 6. Gas and Oil price fluctuations.

Factors
Strong Leadership Customer service Employee satisfaction Industry rivalry Bond of loyalty between employees and company Understanding the customers Innovative and customer friendly schemes Southwest spirit Efficient training programs for employees Intense company communication and camaraderie Rising operating cost High Standards of operational efficiency Expansion in domestic and foreign markets

Critical Factors
Critical factors are the factors which will affect the future strategy of the company. The critical factors are stated below 1. Strong Leadership: Kelleher had provided a very strong leadership foundation to Southwest. Many analysts credited the Southwests success to Kellehers unorthodox and engaging management style. In 2008, Kelleher resigned from the Board of Directors. Now, the future leaders have to build new strategies which maintain Kellehers legacy. This will be critical to keep the employees satisfied, to maintain the bond of loyalty and to keep alive the Southwest spirit. 2. Expansion in domestic and foreign markets: Southwest had expansion plans in

parts of U.S as well in the foreign markets. The northeast cities posed a number of operational challenges. This was critical as the operating costs were anyhow increasing and more operational problems meant more operational cost. 3. Rising operating cost: Southwest had established numerous new industry standards. Its costs were lowest as compared to its competitors. But the rising fuel prices as well as the other operating challenges in the new markets would cause higher operating costs. It was critical for the company to curb the operating cost to the maximum so that it can continue making profit. 4. Industry rivalry : With the changing government policies the European carriers were expected to increase competitive pressures. There were also a number of imitators of the Southwests strategy which further increased the competition. This was critical as the companys future strategy has to be made keeping in account its rivals. 5. Customer service: Southwest was known to go beyond the norms of industry to satisfy the customer. Customers were often surprised by Southwest Spirit. One of the key factors for the airlines success was its customer friendliness. This cannot be compromised in future and thus it is critical to sustain the customers. 6. Employee satisfaction : The Southeast Spirit was exhibited enthusiastically by its employees. For this it is critical to maintain high level of employee motivation. If the employee are not satisfied the customer relation can be in jeopardy.

Constraints:
1. 2. 3. 4. 5. Airport congestion and air traffic control delays preventing efficient operations. Lengthening turnaround time at airport gates. Weather conditions. Spiralling oil and gas prices. More than eighty percent of employees were unionized so independent negotiations with its employees were not possible. 6. Companys official policy of choosing new markets and not following an aggressive strategy. 7. Employees are by and large against the notion that Bigger is better.

Theoretical Linkage:
Kellehers leadership style combined flamboyance, fun, and a fresh, unique perspective. Although Kelleher was unconventional and a maverick in his field, he led his company to

consistently new standards for itself and for the industry. Sincerely committed to his employees, he generated intense loyalty to himself and the company. He was a perfect mix of both people-oriented and task-oriented leader. He placed himself in the 9-9 block (Team Management) of the Managerial Grid. He had both concern for people and production (Participative or Democratic Leadership style). He was a visionary who led by example.

The Hertzbergs two factor Theory states that if the hygiene factors are not fulfilled the employees are dissatisfied. The hygiene factors were fulfilled in case of the Southwest employees. Significant care was taken to fulfil the motivation factors which increased the job satisfaction of the employees. Employee initiative was supported and encouraged. Advanced employee training occurred regularly. Employment at Southwest was highly desirable. Efforts were made to share and instill Southwest Spirit.

Alternatives:
1. Southwest can look for new markets in order to expand its reach. It is time to give shape to its Corporate Level Strategy Merger & Acquisition in new and attractive markets so that it can leverage its strong financial position and customer loyalty while increasing its reach and network. 2. After its success of short haul flights, Southwest can start Long haul operations which will not affect its operational model. But, before proceeding, well have to look at the model carefully i.e. whether it is feasible for the company and doesnt create problems with its Point-to-Point model. 3. They should look at new domestic markets as well before their competitors capture them. This would give them a head start while competing in the industry. 4. Finally, a critical element in the long-term success of Southwest Airlines is its internal marketing philosophy. Make employees happy first and they will put in extra effort to make passengers happy. They understand this factor and should

continually work towards improving the employee working conditions and motivate them constantly.

Course of Action:
It is recommended that Southwest should proceed with its plan of Internationalization. As of now, it can tie-up with some local player of the foreign country in order to understand the market and the customers properly. Once, the airline gains a foothold in the foreign market, it can operate on its own. Also, it should continue its focus on Northeast market and challenge its competitors head on. Southwest has done this successfully in the past where the market size i.e. number of people flying increased considerably after Southwest started its operation.