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Southwest Airlines : Case Study

by Sarang Bhutada on Aug 26, 2009

• 42,521views

A classroom presentation of the legendary Harvard Business case study on Southwest Airlines.

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Southwest Airlines : Case Study — Presentation Transcript

• 1. Just Plane Smart Harvard Business School – Case Study

Summary Abhishek Mehra Balaji P Saruabh Ranadive Sarang Bhutada

• 2. The setting It’s summer of 1993 Southwest is expecting

delivery of two uncommitted planes McGlade needs to find a way, toput these planes in operation, keeping the organizational objectives

are intact Final decision would have to preserve the Southwest culture

and spirit About Southwest Started as a intra-state operator in Texas

Budget airline philosophy, survived a severe price-war Operating out

of Dallas’s Love Field airport, hence the ticker LUV 7 th largest in the

country by April 1993 Expanded to become a national carrier, serving

major cities Short-haul, high-frequency, low-cost strategy 12 time

winner of the coveted triple crown award

• 3. The Southwest Model

• 4. Hiring - Identify attitudes rather than skills Rigorous

interviewing Peer hiring People skills of Southwest Structure Centered

on team-building Cross-training encouraged Broad latitude offered

10% of stock held by employees Advancement Recognition, an

important element Celebrations quite common Most promotions

internal Compensation Varied with position At par with industry norm

Pension through a profit-sharing plan Culture H A “Patina of 

Spirituality” ugs common across office Casual dress code Field visits

Strong guidelines to everyone At par with industry norm Pension

through a profit-sharing plan

•

5. “ After lengthy deliberation at the highest executive levels,and extensive consultation with our legal department, we have arrived

at an official corporate response to Northwest Airlines Claim to be

number one in Customer Satisfaction…… … Liar Liar. Pants on Fire”

• 6. Product: Southwest’s product is travel Competition - not

 just other airlines but any mode of transportation. frequent,

conveniently timed flights and low fares. point-to-point route system

as compared to hub-and-spoke direct nonstop Target Market: Market

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Segmentation cost- and value-conscious consumers. mostly male

small business executives travel short distances prefer low cost fares

frequent schedules The other half consists of value-conscious

consumers (male, female, families, and senior citizens) best value for

their dollars Senior citizens are a sub-segment that receives special

attention than a loyal customer - customer evangelist

• 7. Competitors and Competition 11 major carriers (2003):

Alaska Airlines Aloha Airline America West American Airlines

Continental Airlines Delta Airlines Northwest Airlines TWA United

Airlines U.S. Air Southwest Airlines Southwest’s brand exudes an

element of fun: Obviously Fun Love Theme, Love Potions(on-board

drinks) Love Machines( ticket writing machines) Product Positioning

only low-fare short-haul high-frequency point-to-point carrier fun to fly

Average cost of serving meals per passenger in the industry - $5 For

Southwest’s - 20 cents Seemingly weird things- Not assigning seats

Weird Color Scheme

• 8. Product Positioning Example of Southwest Airlines

nuttiness - use of the word “love” One ad titled " How Do We

Love You? " - flight schedule. Another ad titled " We're

Spreading Love " - the rapid growth of the airline. Word "

love “ - dedication to customer service Marketing Strategies

Southwest offers a travel product that is built around flights targeted

to specific demographics and ticket pricing that is simplified so that

passengers know exactly what they are getting for what they pay.

Building Brand Loyalty What is the Southwest Effect? Air fares go

down Tourist traffic increases Economic mini-boom ensues Marketing

Blitz !!!! - Smart Campaign

• 9. Pricing Strategies Charge the lowest possible fare Compete

with all other forms of transportation, including automobiles Instead of 

increasing fares when market gets busier and more people are flying,

it simply increases the number of flights. Distribution and Promotion

Product Distribution Strategies SWA does not rely on travel agents

 Travel bookings - direct marketing Does not interline or offer joint

fares with other airlines Southwest's Internet ticketing saves it $50

million a year, or 1% of revenue "We're not competing with

other airlines. We're competing with ground transportation"

• 10. Promotion Strategies: Marketing Mix Southwest Airlineswants to differentiate itself from other airlines as the airline that can

get passengers to their destinations when they want to get there, on

time, at the lowest possible fares – while having fun. Frequent Flyer

Awards Rapid Rewards-based on number of trips taken Way of 

showing Southwest’s philosophy that every customer is equally

important as the other and making ALL passengers feel special.

Advertising “ Don’t believe the hype.” Fares offered by other

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discounters and airlines on the Web are not good buys. Southwest

attempts to do three things in their advertising: intrigue Entertain

persuade “ We’d like to match their new fares but we’d have to raise

ours!!"

• 11. Television Sports Advertising Sports television

programming Reaching the corporate set via sports and other venues

In 2000, Southwest renewed its multi-year sponsorship agreement

with the National Football League (NFL). Public Relations Aims for

“Free publicity” Triple Crown Award for the fifth time in a row Named

a plane Triple Crown One and painted 24,000 employee names on it

Internal Marketing Core Business - Customer Service business—they

 just happen to provide airline transportation Southwest’s philosophy -

“Service for Smiles and Profits” Encourages employees to treat

customer service as the most important aspect of their job CEO

Kelleher, " We want people who do things well, with laughter

and grace. "

• 12. OPERATIONS Did all of its ticketing (not making seats

available through computerized systems) Did not operate in the hub-

and spoke route system Flew into uncongested airports of small cities,

less congested airports of large cities Did not transfer baggage

directly to other airlines Only drinks and snacks often peanuts served

on board Travel agents had to contact the airlines directly to book

seats SWA passengers flew non-stop origin to destination. Did not

promote connecting services Savings in reduced taxi time, fewer gate

holds and less in-air waiting time It doesn’t coordinate its services

with other airlines

• 13. OPERATIONS Usually do not share the ground handling

crew until unavoidable Other airlines flew variety of jet aircrafts, as

many as 5 distinct ones including McDonnell Douglas, Airbus and

Boeing 737’s had average life of 20 years US industry average was 55

mins. 84% unionized labor force but its labor relations were excellent

Only flew Boeing 737 - Fleet of 150 and avg of 1500 trips per day.

Average age of SWA was 7 years (lowest in the industry)

Differentiation in terms of “turnaround” time , 2 out of 3 planes were

turned-around in 15 mins.

• 14. COST CONTROL “ Airlines don’t have revenue problems,

they have cost problems”

• 15. GROWTH STRATEGY Conservative Growth Strategy :

Expansion within the current route structure was the first priority (85%

expansion was internal) External expansion was opportunity driven:

After the collapse of Midwest Airlines in 1991, Southwest moved to

Midway Airport in Chicago and anchored there. Scheduling

department decides the appropriate market: They don’t do a lot of 

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market research. Choose a market, negotiate for gates and look for

controlled growth. Growth with consistency: When they enter a new

city they want to make sure that they do the business which is

consistent throughout the system.

• 16. MARKET ENTRY STRATEGY How the company prices its

new routes? They look to grow in the market when they enter the city

(quadruple and quintuple the number of passengers in a particular

route) Pricing against the ground transportation as much as against

existing air service (atleast 60% below competitive fares) Low

operating costs They think slightly differently about load factors:

Initially higher than average load factors Low price – expand market

faster than they can add equipment Demand outpaces supply

Competitors drop prices – that stimulates demand further Keep adding

more service to balance out demand and supply Eventually leads to

maturing of load factors On the Oakland-Burbank route, SWA

quadrupled the passenger market within two years and drove out

USAir and United in 3 years time.

• 17. South west North west Number of employees Revenues

per employee Revenue Vs. Employees ( DEA )

• 18. Wages as % of total expenses – 29.78% ( Industry

average = 35.17%) Lowest among Non-Chapter11 Airlines for the year

1992 . How was it possible ? Employee required per each additional

trip Number of departures from a city Ground crew staffing efficiency

Competitors runs with at least three times as much staff . E.g., South-

West effect on Burbank –Oakland market. Ground Crew Staffing Levels

based on number of departures at an Average Southwest city

Departures People Marginal emp reqd per departure 10 35 3.5 20 45

1.5 30 60 1.5 60 120 2

• 19. ASM: Average Seat Mile ; RPM : Revenue Passenger Mile

Employee productivity (1992)

• 20. South West Airlines built numbers on its culture where as

most competitors let the culture to shape up by their focus on

numbers Other large Airlines F O C U S CONCLUSION F O C U S

NUMBERS CULTURE SCHEDULING STRATEGY CULTURE SCHEDULING

STRATEGY NUMBERS

• 21. Thank You

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