Research Proposal on Airline Industry

Introduction The airline industry is a highly competitive business and its position in the business life cycle can be characterized as early maturity. Market size is given by revenues of $98,1 billion in 2000, and the average annual growth rate between 1995 and 2000 equals 6,6%. Southwest Airlines, Inc. (SWA) is a highly competitive and successful market player: it focuses on short-haul flights with an on average relatively short distance. It does away with meals, in-flight films, designated seats, multiple seating classes from first to economy, membership in an airline reservation system, central airports, and a huband-spoke route system - all previously assumed to be indispensable to success. In their place SWA created the concept of frequent point-to-point flights, with fares often 60% below competitors', plastic reusable boarding passes, airports in small cities or smaller, less-congested airports in larger cities and 15-minute gate turnarounds, (against 35 minutes for the average carrier). SWA understood that for short-haul destinations, surface transport, mostly the car, was a substitute for flying. By concentrating on the factors that lead people to choose one of these forms of transport over the other, and eliminating or reducing everything else, the imagination of SWA was born; as stated in the case Southwest Airlines main idea was to fly "the golden triangle" of San Antonio-Dallas-Houston. What kinds of people use low-price carriers? Of these people, whom does Southwest target as its customers? Fundamentally, there is only one factor that makes people choose flying over driving: speed. People fly to save time. Here we can mention the average business man who needs to attend a meeting in a distant city; he would most definitely prefer to fly first thing in the morning, get to the meeting and fly back home the same day, once the meeting is over. If flying means he can do this in a more efficient manner than driving the car, he will surely choose to fly. We can write a research proposal on Airline Industry for you! Accordingly, SWA created point-to-point flights to make short-haul travel even quicker and used secondary airports which cut an additional 15-25% off average flight time, (the result of reduced taxi time, fewer gate holds and less stacking in the air to land), as well be close to the city center. These people fly with an airline that is efficient and will take you to a destination in a punctual manner. Also, consider in this case having to drive 45 minutes to a nearby airport when the flight itself takes only 40 minutes! To understand the rest of the SWA formula we consider another reason: some people choose the car over the aircraft for short journeys because it is cheap and you can leave when you choose. Hence, the innovation of frequent flights throughout the day and tickets priced not against other airlines but dramatically lower against surface transport.

By focusing on the key discriminating factors of both flying and driving, and eliminating or reducing everything else, SWA has inserted itself creatively between airlines and surface transport, thereby creating a new and highly profitable market. Here we can mention the budget traveler, who is very price sensitive; he/she will fly Southwest even for long distances, regardless of the number of times they might have to change planes or the number of stop-over before reaching their final destination. The critical point is determining the key factors that make customers choose one airline over another, or look beyond the key factors airlines compete on within the airline industry, and focus instead on the broad discriminating factors that lead customers to move. Who are Southwest's main competitors and how does Southwest differentiate itself from competitors? When Southwest started business its main competitors were Braniff, Continental, Texas International (Trans Texas). These three airlines tried to avoid Southwest's market entry by constant proceeding. They couldn't stop Southwest, but it took four years from incorporation to the first flight. And when Southwest decided to provide out-of-state charter service competitors protested and federal court prohibited these flights. But in 1975 the company won the market share battle at Houston Hobby, Braniff and Texas International stopped their flights to this airport located close to downtown Houston. Nowadays Southwest is under the Top 10 U.S. Commercial Airlines (United, American, Delta, Northwest, Continental, US Airways, TWA, American West, Alaska). Under these competitors Continental is the only one left out of the three main competitors from the starting years. The Top 10 U.S. Commercial Airlines run a variety of different strategies. Prices vary from low (e.g. America West operates as a low-fare carrier) to medium and high, target customers can be categorized as different kinds of business and leisure travelers, geographic coverage reaches from regional to global and service level differs from no-frills to limited and full. Companies like United Airlines and Delta have separate operations offering low-fare short-distance flights, which overlap with SWA. Southwest runs a low-cost/low-price/no frills strategy. This low-cost provider strategy makes air travel affordable for a wide segment of the U.S. population. In 2001 Southwest is the only major short-hop, low-fare (providing 90% of the low-fare market), point-to-point carrier. The point-to-point system is one of Southwest's main advantages. It is more cost-efficient than the hub-and-spoke system used by rivals; it enables the airline to offer frequent departures and city center flights and thereby makes flying more convenient for its customers. But what makes Southwest really special is its corporate culture. The approach "employees come first" leads to employee satisfaction resulting in high motivation and high labor-productivity. And this is directly linked to their "spirit to customers", Southwest's key to competitive advantage. Flying with Southwest is "fun" and the atmosphere during traveling is very positive. As an overall result customer satisfaction is exceptionally high. Fares, airplanes and routes can be copied by competitors, but Southwest's culture and spirit to customer is a unique selling point.

How do full-service carriers compete? SWA primary competitive advantage is the low priced fares, reliable and frequent flights and simple self-served logistics. Secondly, this airline philosophy is based on short inter-connecting flights, typically operating with standard planes on small airfields close to the city center. Traditional full-service carriers on the other hand provide a vast superior service and offering efficient long distance direct flights through a suite of different fare levels. Hence, differentiating in-flight, during flight and post flight service, e.g. serving warm food, automated luggage transfer for interconnecting flight and operating airport lounges. Typically this provider relies heavily on planned business travel and offer company accounts, and an attractive frequent-flyer point scheme. Price differentiating, and timely but less frequent flights optimize airplane utilization. Typically these providers operate out of the larger airport, with the extended service of a range of (tax-free) shops and restaurants. Does Southwest need to monitor their competitive behavior? Yes, although this is a mature industry, SWA market entry has initially created additional demand in offering lower fares, efficient- and frequent city-to-city flights. Post terror effect has later adjusted this demand but their market position is frequently being challenged by competitors, and SWA is required to continuously emphasize on the value chain innovation. If for some reason a rival airline starts a price war on a competing route, SWA must respond maintaining their position as a focused low-cost provider. Hence, selling at prices under competitors and thus attracting price sensitive customers results in an increase in volume high enough to maintain total profits. This cross-company price competition is typical for such standard commodities as short-range domestic flights, and price cuts typically used to boost unit volume. Further rivalry is created by the fact that the cost for customers to switch supplier is low. Hence, SWA must closely monitor competitive offerings and competitive pressure from substitute products, in terms of improved- or extended service and special promotions. What are the most important capabilities for Southwest to develop or maintain? Like SWA internet has helped other carriers crack the lucrative e-ticket market, as more business travel managers use the Web to find low fares, to reduce travel costs during the bad economy. Hence, this could be further developed by building alliances and by the bundling of travel-packages. SWA moved aggressively into new, long haul, business-travel routes to capture more of this market, covering routes immediately after other airlines had just gone out that market. With the favorable cost structure vs. full-service carrier, SWA should continue by extending their network. The location of airports operated by SWA is relatively near major metropolitan areas and medium-sized cities, offering customers reduced travel time. Southwest was famous for its flight attendants humor during the carefree 1990s. But after September 11, 2001, the jokes might cease. The feeling would be that a more serious attitude would make passengers feel more at ease in the age of heightened security and fear of flying. Employees are one of SWA's biggest capabilities and therefore should be maintained, by good training and selection of new employees. The

focus on employees is the most important factor for the company contributes to satisfied customers. Southwests employees are more productive than its competitors employees in many ways. SWA pilots fly 85 hours per month compared to lesser hours for other companies, and watch costs carefully because they are paid partially by stock options. Flight attendants at Southwest clean the cabin between flights; competitors attendants do not. SWA mechanics change tires faster than other airlines mechanics do, and the overall efficiency of ground operations keeps Southwests 737s in the air 10.9 hours per day, more than any other major airline. A continuous search for value-chain improvements must be emphasized throughout the organization. Which changes in the competitive environment would be most harmful to Southwest and how can it prevent or respond? In general, alternative forms of transportation (e.g. high speed train connection), a more environmental concerned population, regulatory influences and government policy changes, external events (like September 11, 2001), changing customer preferences, new competitors entering the market, globalization of the industry, internet and e-commerce opportunities as well as changes in cost and efficiency can change the competitive environment. The creation of low-cost carriers that may display many of the traits seen in SWA is possible: one type of plane, point-to-point service instead of the hub-and-spoke model, and high reliance on online ticketing. This may give airlines many of the advantages that SWA enjoys: low maintenance and crew training costs, fast plane turnaround, and higher employee productivity. If smaller airports, located nearby city centers are to be closed down, as the tendency is; they will be forced to reconsider the way they operate to minimize the turnaround time at the gate. Emphasis should be on getting access to the "efficient" or best accessible gates, reducing time at gate for passengers as well as the plane itself. Open the U.S. skies to foreign airlines: Under present rules, foreign airlines cannot transport passengers between U.S. cities, and they cannot own more than 25 percent of a U.S. airline. But think how consumers might like to enjoy the service of highly renowned foreign airlines like Singapore Airlines, and KLM Royal Dutch Airlines. And opening the U.S. markets to them might result in Europe opening their markets to the U.S. Now that the airline industry is falling apart due to financial crisis, bankruptcy, Sept.11, etc, stronger airlines may buy out financially broken competitors, leading to a oligopoly or similarly build alliances where SWA is not included. With the possibility that the general bankruptcy in the industry will produce a slate of larger competitors that operate much leaner and economically Southwest Airlines is responding to the new times. It has a history of being aggressive during tough times. After the terrorist attacks of September 11, 2001, Southwest was repeating this behavior. Instead of cutting costs by reducing its flight schedule and laying-off workers, Southwest kept all its employees and flights. Management cut costs by delaying delivery of 11 new Boeing 737s and reducing travel-agent

commissions. And for sure SWA now makes profit from its strategy of gradual expansion; the company always first saturates the existing areas served. Therefore the crisis doesnt hurt them as much as their competitors. On the other hand the new security measures due to September 11, 2001 could hurt SWA more than its competitors. If passengers have to attend 30 to 60 minutes earlier at the airport compared to an average flight time of 45 minutes, customers could rethink to use the car instead. Growth always brings challenges to a business, and so it is with Southwest. Southwests size makes it hard to maintain the underdog status that kept employees finding big and small ways to cut costs, though those efforts may continue. Southwest can become the one being challenged by smaller airlines now than the one doing the challenging. Also, the airlines size makes management seem more distant from the workers than before. This is exemplified somewhat by Mr. Parker, the CEO who replaced Herb Kelleher. The former corporate lawyer for the airline, Mr. Parker has a more low-key personality than Kelleher. To maintain its success, which is build on the unique corporate culture, SWA has to avoid cracks in the close-knit family culture due to fast growth. So it is important to note that the airline industry was suffering months before the terrorist attacks in New York City and Washington, D.C. on September 11, 2001. Those attacks did worsen the industrys problems as many people feared to fly for some time thereafter, further decreasing passenger traffic. The job security, profit sharing, and expansionary future of SWA is at stake under the present market conditions.