Just Plane SmartHarvard Business School – Case Study Summary

Abhishek MehraBalaji P

Saruabh RanadiveSarang Bhutada

The setting

•It’s summer of 1993

•Southwest is expecting delivery of two uncommitted planes

•McGlade needs to find a way, to put 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

• 7th 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

The Southwest Model

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

“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”

Product:

Southwest’s product is travel

Competition - not just other airlines but any mode of transportation.

1.frequent, conveniently timed flights and low fares. 2.point-to-point route system as compared to hub-and-spoke3.direct nonstop

Target Market:

Market 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

Competitors and Competition 11 major carriers (2003): 1.Alaska Airlines2.Aloha Airline 3.America West 4.American Airlines 5.Continental Airlines6.Delta Airlines7.Northwest Airlines 8.TWA9.United Airlines10.U.S. Air11.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 Positioningonly low-fareshort-haulhigh-frequencypoint-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 seatsWeird Color Scheme

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 StrategiesSouthwest 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 LoyaltyWhat is the Southwest Effect? 1.Air fares go down 2.Tourist traffic increases 3.Economic mini-boom ensues

Marketing Blitz !!!!

- Smart Campaign

Pricing Strategies1.Charge the lowest possible fare 2.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 StrategiesSWA 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"

Promotion Strategies: Marketing Mix Southwest Airlines wants 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 AwardsRapid 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 discounters and airlines on the Web are not good buys.

Southwest attempts to do three things in their advertising: 1.intrigue 2.Entertain3.persuade

“We’d like to match their new fares but we’d have to raise ours!!"

Television Sports Advertising

1.Sports television programming 2.Reaching the corporate set via sports and other venues3.In 2000, Southwest renewed its multi-year sponsorship agreement with the National Football League (NFL).

Public Relations 1.Aims for “Free publicity” 2.Triple Crown Award for the fifth time in a row3.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."

OPERATIONS

Did all of its ticketing (not making seats available through computerized systems)

Did not operate in the hub-andspoke route system

Flew into uncongested airports of small cities, less congestedairports of large cities

Did not transfer baggage directly to other airlines

Only drinks and snacks oftenpeanuts 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

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.

COST CONTROL“Airlines don’t have revenue problems, they have cost problems”

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 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.

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.

South west

North west

Number of employees

Revenues per

employee

Revenue Vs. Employees ( DEA )

Wages as % of total expenses – 29.78% ( Industry average = 35.17%)

Lowest among Non-Chapter11 Airlines for the year 1992 . How was it possible ?

Em

ployee required per each additional trip

Number of departures from a city

Ground Crew Staffing Levels based on number of departures at an

Average Southwest city

Departures People

Marginal emp reqd per departure

10 35 3.520 45 1.530 60 1.560 120 2

Ground crew staffing efficiency

• Competitors runs with at least three times as much staff .• E.g., South-West effect on Burbank –Oakland market.

0

500

1000

1500

2000

2500

3000

3500

RPM peremployee(000)

ASM peremployee(000)

ASM+RPM

ASM: Average Seat Mile ; RPM : Revenue Passenger Mile

Employee productivity (1992)

South West Airlines built numbers on its culture where as most competitors let the culture to shape up by their focus on numbers

NUMBERS

CULTURE

SCHEDULING

STRATEGY

CULTURE

SCHEDULING

STRATEGY

NUMBERS

Other large AirlinesF

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CONCLUSION

FOCUS

Thank You