1.

0 INTRODUCTION

1.1 Company Background

Southwest Airlines (formerly known as Air Southwest) was co-founded by Rollin King and

Herb Kelleher on 15th March 1967. Back then, Rollin King was a small commuter air service

entrepreneur whilst Herb Kelleher was a lawyer by background and owned a small law firm.

Some of the existing airlines during that time found this venture as a threat and thus tried all

means by precipitating contentious legal and regulatory proceedings. Herb Kelleher led

Southwest Airlines through the four-year legal battle and finally in June 1971, Texas Supreme

Court granted the company to service Dallas, Houston and San Antonio.

1.2 Milestones

1971: Lamar Muse appointed as CEO, initiated its 1st flight to serve the Golden Triangle.

1983: Purchased 3 additional Boeing 737, flies more than 9.5 mill passengers.

1988: 1st U.S. airline to win the Triple Crown Award.

1990: 1 bill revenue, the only U.S. airline to achieve both operating profit and net profit.

1994: Introduced ticketless system in 4 cities, grew customer base within 1 year.

1998: Named by Fortune as the best company to work for in America.

2005: 2nd largest airline flies more than 96.3 mill passengers.

2007: Largest U.S. airline in terms of passengers carried, 35 years of profitability.

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1.3 Mission Statement

Southwest Airlines aims to provide low-cost, low-price, no-frills, reliable, friendly service

with ‘more value for less money’ mode of transportation for consumers travelling short

distances for business and/or leisure. They are dedicated to achieve the highest quality of

customer service delivered with a sense of warmth, friendliness, individual pride, and

company spirit.

Internally, Southwest Airlines is committed to provide their employees a stable work

environment with equal opportunity for learning and personal growth. Creativity and

innovation are encouraged for improving the effectiveness of Southwest Airlines. Employees

are treated with the same concern, respect, and caring attitude within the organization that

they are expected to share externally with every customers.

1.4 Business Model

Southwest Airlines is an overall low-cost leader and they relentless try to instill the sense of

‘freedom to fly’ in their customers through ultra-attractive fare structure which is low,

unrestricted, unlimited, everyday low coach fares and occasional limited discounted low

fares. Even with the fuel price hike in 2008, Southwest Airlines still maintain all inclusive fare

prices by setting the ceiling price for its longest haul and offering discount for short-to-mid

haul service routes.

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Typically, other airlines would practice hub-and-spoke travel model where passengers are

brought to a central location on smaller planes and transferred to larger planes for major

routes. However, Southwest operates on a point-to-point (pairing) system where more

flights are direct and does not call major airports in most cities which led to lower gate costs,

less congestion, and quicker turn-around times.

Tickets are sold online via company’s website eliminating intermediary cost for reservation.

Southwest build strong customers base by introducing membership reward program for

business and economy travelers. Its ‘Business Select Fare’ attracts economy-minded business

travelers by offering rapid rewards for frequent flyers and providing early boarding and free

cocktails onboard.

Through this generic model, Southwest managed to achieve more than 35 consecutive years

of profitability and continuously set foot in the U.S. domestic airline industry. It is an

exemplary model for others to replicate and adapt in their individual business model.

1.5 Problem Statement

Like any other company, Southwest Airlines also faced its own ups and downs. It was

struggling in its early days where approximately less than 250 passengers only boarded 18 of

their daily flights. Through innovative ideas and strategic plan execution, Southwest Airlines

found its primary flywheel and managed to resurface and gained a market foothold in the

airline industry. It is now the leading low cost national air carrier in the U.S. and their unique

business model has led to 35 consecutive years of success and profitability.

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However with intense competition in airline industry it has led other competitors to try and

duplicate some of Southwest's success. This in turn has led to a decline in revenue for

Southwest Airlines from the losses attained by competitors such as Shuttle by United whom

replicated the Southwest business model in these areas. Southwest needs to decide how

they are going to respond to this new competition.

This paper is intended to uncover unique characteristics of Southwest Airlines including its

strengths, weaknesses, opportunities and threats by evaluating the internal and external

forces and strategies undertaken to maintain their success in airline industry. At the end of

this paper, recommendations will be made to improvise their current strategies and

distinguished key differentiating competitive advantages over other rivals in the same

industry.

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 2.0 SITUATIONAL ANALYSIS

2.1 SWOT Analysis

STRENGTHS WEAKNESSES
 The best low-cost leader and largest  No international flights, only focus on
domestic airline in U.S. with more than domestic market in U.S.
30 consecutive years of profitability.  No segmented seating, passengers are
 Introduced online ticketing system to given color-coded card during check-in
eliminate intermediaries cost for and seats are segregated in 3 main
reservation and simplified boarding gate groups on first come first serve basis.
processes to reduce long queue and  Impose restriction to carry only small
workload for ground crew. amount of cargo in order to maximize
 Have own training academy and savings on fuel consumption.
collaborated with several local  Possibility of rivals to replicate
universities to ensure high competency southwest’s low-cost business model.
candidates and long-life educational
improvement amongst employees.
OPPORTUNITIES THREATS
 Potential growth in business and leisure  Oil price fluctuation could cause
travelers in U.S. domestic market. instability in overall operating cost for
 Increased popularity for internet Southwest Airlines.
advertising could help to boost up  Stricter government intervention and
online ticketing sales. regulation could impact the way
 Intense R&D constitutes better Southwest Airlines conduct their
opportunity for human resource business.
development and aerospace technology  Increasing annual airlines security cost
advancement. may indirectly caused internal non-
operational sensitive functions to lose
budgets (R&D).
Table 1: SWOT Analysis of Southwest Airlines
2.2 Porter’s Five Forces

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 Figure 1: Porter’s Five Forces of Southwest Airlines

New Market Entrants – There is high restriction to enter the airline industry as legislated by

the government and compliancy to safety requirements by international aviation

association. In addition, huge initial capital investment is needed to start up an airline to

acquire and manage own fleet by which not many companies can afford. Southwest Airlines

has competitive advantage over rivals due to its effective and efficient low-cost strategy.

Buyer Power – Customers varies across geographical locations. Some of the rivals are

replicating the low-cost strategy by Southwest Airlines, causing intense competition to lower

prices. Due to this, customers have higher bargaining power and become more price-

sensitive and opportunist. They have high mobility and low switching cost to other airlines.

Supplier Power – Southwest Airlines only uses 1 type of aircraft from the same supplier. As

of 2008, they had purchased about 527 units of Boeing 737 with various seating capacity

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and average age per fleet is kept below than 9 years. It helps to reduce the inventory cost for

acquiring and storing different types of spare parts and easier to maintain. They also have

derivative contracts with fuel suppliers to have leverage savings whilst reducing the impact

of price fluctuation on their fleet operation.

Substitutes – Low substitutes exist for air transportation because normally people would

rather fly than using other mode of transportation i.e. land, sea due to distance and time

concerns. Southwest Airlines managed to retain customers through their ultra-low-price fare

structure coupled with high values delivered by their employees. Customers’ satisfaction is

Southwest’s highest priority and members are rewarded accordingly to their membership

plan.

Competitive Rivalry – Intense competition exists amongst players in the airline industry.

Southwest has to optimize on economy of scale and leverage the profit on number of seats

sold against the operating cost. The pricing strategy can be easily replicated by competitors

who led to price wars and not healthy for Southwest’s marginal profit. They need to

streamline some processes and invest on system automation to help obtain further savings

on the operating cost.

2.3 Financial Analysis

Total Operating Expenses

Airlines 1995 2000 2005 2006 2007 Average
American Airlines $14.25 $14.48 $15.18 $15.55 $15.98 $15.09
Continental Air Lines $12.87 $13.70 $16.38 $16.51 $16.56 $15.20
Delta Air Lines $13.53 $12.85 $16.68 $17.50 $17.63 $15.64
Northwest Airlines $12.77 $12.99 $17.40 $16.20 $15.90 $15.05
Southwest Airlines $10.91 $10.91 $11.21 $12.03 $12.53 $11.52
United Air Lines $12.58 $14.65 $15.35 $16.07 $16.27 $14.98
US Airways $17.73 $19.68 $18.49 $20.03 $20.14 $19.21
Table 2: Costs Incurred Per Passenger Revenue Mile, 1995 – 2007.

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Costs per passenger revenue mile represent the costs per ticketed passenger per mile flown.

It is derived by dividing the company’s total expenses in each of the cost categories by the

total number of miles flown by all passengers. From above table, there is an increasing

pattern of costs incurred for all major airlines. Nevertheless, Southwest Airlines still manage

to out beat other rivals by streamlining some of its processes that reduces their operating

cost and help customers to have savings on the fare rate.

Costs Per Available Seat Mile

Expense Category 1995 2000 2005 2006 2007 Average
Salaries, wages, bonuses and benefits $2.40 $2.81 $3.27 $3.29 $3.22 $3.00
Fuel and oil $1.01 $1.34 $1.58 $2.31 $2.55 $1.76
Maintenance materials and repairs $0.60 $0.63 $0.52 $0.51 $0.62 $0.58
Aircraft rentals $0.47 $0.33 $0.19 $0.17 $0.16 $0.26
Landing fees and other rentals $0.44 $0.44 $0.53 $0.53 $0.56 $0.50
Depreciation $0.43 $0.47 $0.55 $0.56 $0.56 $0.51
Other expenses $1.72 $1.71 $1.41 $1.43 $1.43 $1.54
Total $7.07 $7.73 $8.05 $8.80 $9.10 $8.15
Table 3: Costs Per Available Seat Mile, 1995 – 2007.
Above Table 3 represent the internal cost structure of Southwest Airlines (the figure might

differ from Table 2 as it is calculated regardless whether the seat is occupied or not). The

highest average cost incurred is for employees’ salaries, wages, bonuses and benefits. This

indicates that company treasures its employees the most and ensures they are

comparatively paid based on the type of work being assigned.

Southwest puts continuous efforts in developing and retaining talents to obtain sufficient

and competence workforce to eliminate non-profitable activities in the value chain.

Although the recorded operating revenues for past few years as indicated in Table 4 were

not so impressive compare to other airlines, Southwest is the only airline in U.S. that

recorded both operating profit and net profit and continuously to be profitable for 35

consecutive years.

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 Revenue Collected in $US Billions
Airlines 2003 2004 2005 2006 2007 Average
American Airlines 17.4 18.6 20.6 22.5 22.9 20.4
Continental Air Lines 7.3 9.9 11.1 13.1 14.2 11.1
Delta Air Lines 14.3 15.2 16.5 17.5 19.2 16.5
Northwest Airlines 10.1 11.3 12.3 12.6 12.5 11.8
Southwest Airlines 5.9 6.5 7.6 9.1 9.9 7.8
United Air Lines 13.4 15.7 17.3 19.3 20.1 17.2
US Airways 6.8 7.1 7.2 11.6 11.7 8.9
Table 4: Operating Revenues of Selected U.S. Airlines, 2003 – 2007.

2.4 Competitive Strategies

Competitive advantage exists when a firm’s strategy gives it an edge in attracting customers

and defending against competitive forces. At Southwest, the management believes by

implementing ‘Overall Low-Cost Provider Strategy’ they can target a broad cross-section of

customers. They engage lower-cost edge to under-price competitors and attract price-

sensitive customers in enough numbers to increase total profits. In order to achieve this

objective, Southwest Airlines has revamped the overall value chain to bypass cost-producing

activities that add little value from the customer’s perspective as below:

 Use direct-to-end user sales / marketing methods eliminating intermediaries cost.

 Make greater use of online technology for easy reservation anytime anywhere.

 Relocate facilities closer to customers, avoid congestion at main city.

 Offer basic, no-frills and limited product / service at reasonably low price.

 Streamline operations by eliminating low-value-added or unnecessary work steps.

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Approaches that may deem viable for the success of Southwest Airlines are as follows:

Figure 2: Competitive Approaches of Southwest Airlines

Fleet:

1. Only 1 type of aircraft (Boeing) are used to reduce inventory cost for acquiring and

storing different type of spare part, easy maintenance technical-know-how and

purchase from single supplier in bulk quantity to allow higher capacity for price

negotiation.

2. Intensive R&D to enhance the performance and fuel consumption by engaging a 3 rd

party aviation consultant to install customizable winglets on all of its airplanes.

3. Crafting derivative contracts with fuel suppliers to allow Southwest Airlines have

leverage savings on the price fluctuation and lock the price deal in advance

regardless of the increase in the future market price.

Service:

1. Only offer basic no-frills in-flight service, no 1 st class coach in all its airplanes.

Implement all-inclusive fare including free soft drinks and snacks onboard. No meal

provided allowing fast replenishment during transit and reduces turnaround time.

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 2. Convert all cloth-type seats with leather which is more durable and easier to clean.

Flight attendants are responsible to clean for deplaning passengers eliminating the

need to have own cleaning crews.

3. No luggage transfer fee for connecting flights as passengers are required to collect

their own luggage to the second carrier. It helps to reduce complaints on missing

luggage and cost to manage the luggage.

4. Economize amount of time for boarding and reservation. Uses color-coded printed

zone on the boarding pass to indicate staggered time for boarding and free seating

according to color group.

Route:

1. Limited calls to major airports which are normally situated further from housing area

and thus focus on less congested airports which are nearer to the customers with

more parking availability. Indirectly they are able to avoid higher landing cost and

terminal gate charges.

2. Implement point-to-point (410 pairing cities) direct short-to-mid haul flights instead

of hub and spoke model that normally practiced by other airlines. Concentrate

intercity flights between 150 to 700 miles apart.

3. Initiate service only if viable to have more than 8 flights daily. Amplifies on higher

number of trips feasible to fly more passengers between pairing cities to reduce

connection, delay and total trip time.

System:

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 1. Online ticketing system eliminates intermediary cost and allows Southwest Airlines to

reach wider span of customers through more effective marketing method. As of

2007, 95% of tickets are sold online and generated 74% of its total revenue.

2. Invest in system automation for crew scheduling, human resource, payroll, and

procurement. Increase efficiency in terms of people and fleet management, reduces

slack time and scheduling errors, ensuring periodical preventive maintenance are

conducted for all the fleets.

3.0 RECOMMENDATION

Southwest’s greatest opportunity is its greatest strength as a low-cost leader in the airline

industry. Post September 11 incident saw declining pattern in the number of air travelers

where people are skeptical to use air transportation as their preferred mode of transport.

Thus, Southwest Airlines needs to continuously maintain their current cost structure,

periodically offer even further discounted price and enhance its security system to entice

people to fly and gain trust from frequent flyers.

They need to study more on the needs and requirements that could develop demand in the

corporate world as most of their passengers are from business class who travels daily or

weekly between short-to-mid haul intercity to attend meetings, managing projects or

entertaining clients. However, the current rapid reward system only entitles members to

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collect points based on the number of trips travelled and ancillary services used such as car

rental or hotel partners.

Demographically, most of the customers under this group are either married with or without

children or just started their careers and would need to replenish their household amenities

on weekly or monthly basis due to their busy schedule. Southwest could look into having

strategic collaboration with other membership club wholesalers like Costco or Wal-Mart to

target these customers by introducing smart reward points to shop at their participating

outlets.

Southwest Airlines need to continuously streamlining its processes and induce computerize

system automation to replace the conventional ways of doing things. For instance, they have

expanded their ticketing counters and security checkpoints through online reservation and

registration. The conventional plastic boarding card has been replaced with auto-printed

zoning on the boarding pass. Additionally, they could also consider developing a system to

facilitate for vertical integration backward with their suppliers to ensure efficient inventory

management and procurement.

Internally, Southwest needs to encourage their employees to be innovative, to communicate

openly, to be understanding, and care for other individuals. These characteristics if

converted into actions towards the customers will help to attain strong foothold in the

airline industry. After all, business is not just an entity but its people. They need to see

learning as never-ending process and individual employees become ‘intentional learners’

through everyday experiences rather than occasional classes. Nevertheless, Southwest

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Airlines can continuously develop and retain talents through collaborations with higher

institutions as platform for formal education to build strong employees foundation.

Looking at the promising market growth, the time is perfect for Southwest Airlines to expand

geographically to major cities. Expansion does not necessarily means higher operating cost,

they could consider collaboration through strategic alliances with other domestic airlines

that already have strong presence in the market. They could purchase seats from the

alliance in bulk quantity to the sectors that Southwest Airlines has week presence and

negotiate for the best rates before re-offering these seats to the customers.

REFERENCES

1. Brenda P. S. (1995), How Fun Flies at Southwest Airlines, Personnel Journal, pp. 70.

2. Garrison and Keller (2004). Moving You Forward, Southwest Airlines Case Study.

3. James C. Q. (1992). Crafting an Organizational Structure: Herb’s Hand at Southwest

Airlines, Organizational Dynamics, Volume 2, pp. 51.

4. Joan M. (2002). What Management Is: How It Works and Why It’s Everyone’s

Business, The Free Press, pp. 199.

5. Kevin and Jackie F. (1996). NUTS! Southwest Airlines’ Crazy Recipe for Business and

Personal Success, pp. 15.

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 6. Kim W. C. and Renee M. (1999). Creating New Market Space: Blue Ocean Strategy,

Harvard Business Review.

7. Melanie T. (2001). Amid Crippled Rivals, Southwest Tries to Spread Its Wings, Wall

Street Journal, pp. 10.

8. Roger H. (1996). Southwest Airlines: A Case Study Linking Employee Needs

Satisfaction and Organizational Capabilities to Competitive Advantage, Human

Resource Management, Volume 4, pp. 517.

9. Salvatore P. and Lisa S. (2002). Leveraging Knowledge Management Across Strategic

Alliance, Ivey Business Journal, Volume 4, pp. 42.

10. Stalk G., Evans P., Schulman L. E. (1992). Competing on Capabilities: The New Rules of

Corporate Strategy, Harvard Business Review, Volume 2, pp. 57 – 69.

11. Terry M. (September 8, 2008). Southwest Airlines Begins Contract Talks with Ground

Workers, Dallas Morning News.

12. Thompson A. A., Strickland A. J., and Gamble J. E. (2010). The Quest for Competitive

Advantage: Concepts and Cases, Crafting and Executing Strategy, 17 th Edition, pp.

C401 – 431.

13. William F. A. (2002). Southwest Airlines Corporation, Center for Global Leadership.

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