Case Study: Southwest Airlines

SSMBABrand Management

Southwest Airlines:Company with Great Reputation

America’s Top 10 Most Admired Companies (Fortune 2007) World’s 5 Best-Marketed Companies (Forbes 2002) “Is Herb Kelleher America’s Best CEO?” (Fortune 1994) America’s 5 Best Companies to Work for (Fortune 1997~2000) 100 Best Corporate Citizens (Business Ethics Magazine 2002-7)

Most Profitable Airline Company in U.S.Exhibit 8: 1992 Net Profit (before FASB 106)1. Southwest: $91 MM2. Alaska: -$76MM3. American: -$274MM4. Northwest: -$275MM

Why is the industry so unprofitable?deregulation (p.2) threat of entry, competition, buyer bargaining power (The 5 Competitive Forces)

Why is SWA the only profitable company?CLEAR STRATEGIC FOCUS

Strategic Focus of SWASouthwest Other Airlines

No Meals YesNo Pre-assigned Seats YesNo Membership YesNo Hub & Spoke YesSWA only Baggage Transfer YesShort Haul only Routes Short, Long, International

737s only Fleet Multiple modelssmall airports Airport major airports

Low Cost Differentiation

Broad ??????Narrow SWA

Burbank-Oakland Example(Exhibit 11: # of passengers)

Quarter Alaska United US Air SWA TOTAL1990.1 3220 170 44150 0 478601990.2 17390 34140 80600 141590 2739301990.3 5860 60080 84780 117610 2688901990.4 4570 49300 67560 87450 2090901991.1 6200 67510 41700 107640 2234101991.2 5370 67570 11150 114570 1988901991.3 4640 70140 BYE!! 119890 1952601991.4 5860 60580 127630 1945301992.1 3130 46280 140790 1909001992.2 3710 52590 159990 2166301992.3 BYE!! 3960 181250 1853601992.4 1080 172830 173940

Market Entry Decision Basically a target market decision Evaluate attractiveness of each market First Determine Evaluative Criteria

Size Growth (p.1) Competition / Profitability Fit with SWA strategic focus (airport, fun, weather,

distance, no meals) Midway commitment Cannibalization Risk Long Term Expansion

Analysis: Size, Growth, Sales ForecastOption Det - Pho Dayton - Chi BWI - Chi

Currently

Daily Traffic (ex. 13) 762 238 680 / 3600

Growth (ex. 13) 5% -10% 6.5%

Typical Fare (ex. 13) $166 $160 $170

Distance 1700 miles 226 miles 611 miles

IF SWA enters

SWA Fare $100 (p.13) $64 (60% cheaper) $68

Market Size 1000? 620 (+150%) 2040

SWA Traffic 534(.65*137*6)

372 (60% share) 1020 (50% share)

SWA revenue $53,400 $23,808 $69,360

Analysis: Cost and ProfitabilityOption Det - Pho Dayton - Chi BWI - Chi

# of Flights 6 10 10

Cost of Flights($0.07* 137 * miles * flights)

$78,354(20% fuel saving)

$21,673 $58.595

Landing Fees $1,602($3X534) $744 $2550

Daily Profit (Rev.-Costs) -$26,556 $1,391 $8,215comment New investment

neededNew investment

needed

Other Criteria

Fun / Distance / ? / ? /

Weather / Airport ok ? / ? /

Midway Commitment

Cannibalization /L-T Expansion

/ /

Southwest Airlines: Postscript Chose to enter Baltimore

market size, S-T & L-T growth potential, profitability, uncongested airport

200% market growth for Bal–Chi in 6 mos. Bal-Chi: 137th before SWA, 23rd after SWA Was-Chi: 27th before SWA, 63rd after SWA

Southwest Airlines: Key Lessons Clear competitive strategy vs. Stuck in the Middle Strategy = Trade-off ≠ Max Customer Satisfaction Select the target market you can OWN Implement clear strategy to OWN the market How to own the market?

KINGSFORD = differentiationSouthwest = cost leadershipAny other strategic options?

Service vs. Physical Good