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