SOUTHWEST AIRLINES 2008

Group I2 Problem Statement Southwest Airlines Company is an American airline situated in Dallas, Texas. It was incorporated by Herb Keller and Rollin King in 1971 and is considered as one of the largest airline in the Unites States which carries domestic passengers. The company had been consistently profitable for decades in comparison to its other competitors. But in 2008 the problems has been faced by the company due to unprecedented hike in fuel price and rise in operating expenses which in 2009 lead the company to cut growth in available seats to less than 3%. PESTL Analysis Political: Presence of a strong union to address employee issues. For example, the Air traffic controllers strike in 1981. Terrorist attacks (for example, the 9/11 attack) that affected the airline industry and raised a question about the safety standards in airlines. Economical: Economic recession that hit the U.S in the early 1980s. High fixed cost structure which brought down margins. Rising fuel prices, leading higher operating costs which lead to increased cost of travel. Highly competitive industry that led to highly competitive prices. No entry barriers that lead to more players entering the industry.

Social: Increase in service expectations of customers as most of the airlines came up with excellent quality services and set high standards.

Technological: Legal: Airline Deregulation Act that increased the number of players in the airline industry, thus increasing competition and forcing many airlines into bankruptcy. Deregulation also brought down the average pay of airline workers and adversely affected service to small and remote communities. Open Skies Agreement in 2007 that allowed greater access to US markets thus increasing competition. Customers preferring online booking of flight tickets due to its convenience.

SWOT Analysis Strengths Positively outrageous services- The services provided by the airlines were above the expectation of the customers. For example, a passenger from Austin who missed a connection to Houston for kidney transplantation was flown there by a private plane. Point-to-point services- Southwest airline was the first largest airline to provide point-to-point services without operating in the hub and spoke model. This enhanced customer convenience. Turnaround time-.Turnaround time was low in comparison to the industry average. The time taken to unload a waiting plane and it load for the next flight was about 15 minutes for southwest, compared with the industry average of 45 minutes Profit sharing- Southwest was the first airline to introduce employee profit sharing through the plan the employees owned 10% of company stock. Employee Selection and Training Southwests People Department conducted an employee screening process to identify enthusiastic and extroverted personalities well suited to the Southwest spirit. Advanced employee training on team building, leadership and cultural diversity was provided. Customer loyalty Southwest was the only major airline with a frequent flyer program based on the number of flights taken by a passenger and not the number of miles flown. Also, the company had never curtailed because of a union strike and no

passenger had ever died because of a safety incident. This earned customer loyalty for the company. Job security Employment at Southwest was highly desired. Once recruited, the job was fairly secure. The airline had not laid off an employee since 1971. Leadership by example Herb Kellehers leadership style was combined with flamboyance, fun, and a fresh, unique perspective. He would remember his employees' names and ask about their families. When he flew, he would help the ground crew unload bags and the flight crew serve drinks. This earned enormous respect and admiration for him in the minds of his employees and customers. Cooperative labour relations At Southwest, 87% of all employees were unionized. Southwest pilots belonged to an independent union and the management encouraged them to conduct employee surveys to research their most important issues.

Weakness Limited participation Southwest had only a limited participation in computerized reservation systems, preferring to have travel agents and customer book flights, through its reservation center. This traditional method of booking was rather inconvenient to its customers. Segmentation- Initially, southwest airlines did not offer segmentation according to the consumer segment. Both business class travelers and leisure travelers paid the same fares and received the same treatment. It was later in 2007 that segmentation was done to cater to different consumer needs. Image of a low cost carrier Southwest had positioned itself as a low cost carrier in the minds of its customers.

Opportunities Higher market demand in operating areas There was significant growth in air travel in areas covered by Southwest Airlines. In Texas, the traffic between Rio Grande valley and the Golden Triangle grew from 123000 to 325000. The Chicago Louisville market tripled in size 30 days after Southwest began flying that route. Thus, Southwest can increase flight frequencies in these routes and cater to the increasing demand.

Large potential market in the Northeast Southwest Airlines can enter into the more densely populated northeast region of the U.S and thus increase its overall market share.

International expansion-they can expand their network to other countries. Long-Haul flights Long Haul flights across various points can be introduced according to the demand of the customers.

Threats Threat from Imitators A number of new and existing airlines like Jetblue, CA lite etc. tried to replicate Southwests model of providing good quality service at low prices. Rising operating costs Though Southwests employee productivity stayed high, its operating costs were rising. The company paid the highest salaries for pilots of narrow body jets. Fluctuations in fuel price - As it leads to more operating expenses which is considered as of the major aspects for the companys growth. Competition Major carriers like Delta and Northwest had come out of bankruptcy protect with lower costs and more efficient operations. Challenges in the northeast Issues of airport congestion, air-traffic control delays could prevent efficient operations and lengthening turnaround times, wreaking havoc on the flight scheduling. Inclement weather conditions posed additional challenges for air service. FACTORS Southwest Airlines has achieved a great position in the airline industry by adopting six important strategies. First, using the minor league airports which have helped the company to reduce traffic delays and increase passenger convenience. Second, flying one kind of aircraft has helped it to achieve lower training cost. Third, reducing turn-around time by using point-to-point strategy, has avoided the use of complicated reservation process system. Fourth, branding the company with the Luv theme and emphasis on building good relationship between passengers and attendants has been a well valuable factor.

Fifth, adopting a frequent flyer program based on the number of flights taken by a passenger and not the number of miles flown has earned high customer loyalty. Lastly, the companys no frills approach of not offering assigned seating and preferential treatment, has led the company to have better ticket price and faster turnaround times.

Though the Southwest Airlines had a strong financial position, there were competitors who had come out of bankruptcy protection with lower costs and efficient operations. The Company has strong market shares, effective management and strong strategies. After a shift of focus (from corporate centric to customer centric), the aviation industry was clogged with many organizations. Few of the organizations were able to sustain themselves in the long run. One of them was Southwest airlines. With its simple and low cost approach, Southwest airlines bucked the airline industry trend by earning profits for thirty six consecutive years. Today, when the major airlines are back from bailouts to compete with Southwest airline, the environment of volatility in airline industry questions the sustenance of Southwest airline in long run.

CRITICAL FACTORS A. Southwest Spirit Both internal and external. Internal Spirit Employment at Southwest was highly desirable Employee initiative was supported for example, pilots looked for ways to conserve fuel during flights. No employees laid off since 1971 Number of applications received is almost 20 times the number of employees hired. Lowest employee turnover in the industry ; 7 %. New employee orientation and advanced employee training.

External Spirit Leadership by example The CEO, Herb Kelleher assisting the flight crew in serving drinks and unloading bags.

A gate agent volunteering to watch a dog for two weeks. A passenger from Austin needing a kidney transplant was flown by southwest pilot in their private plane. Flights were full of songs, jokes and humorous announcements which gave passengers a good experience.

B. First Airline to introduce point to point flights for customer convenience. Southwest does not use the traditional "hub and spoke" flight routing system of most other major airlines, preferring instead the "point to point" system.

POSSIBLE SOLUTION AND CONSTRAINTS: 1. In order to address the problem of low occupancy in flights, flight scheduling has to be done based on demand fluctuations. For example, during holiday season, more flights can be scheduled to fly across routes which are preferred holiday spots. When demand is slightly on the lower side, lesser number of flights can be scheduled. This will ensure that fixed costs generate adequate revenue at all times. Also, the pricing for various tickets can be raised for last minute bookings. However, one major constraint in implementing this solution is that wrongly predicted demand can lead to disappointment of customers, loss for the airline and hence deterioration of Southwests brand image.

2. In order to ensure steady flow of revenue, the airline can have tie-ups with various reliable travel companies and agents to attract corporate clients. In such a case, demand is relatively steady and revenue generated is greater as corporates choose to fly by Business Class. For this to be implemented, segmentation for Business Class is necessary with differentiated facilities like better seating, travel kits, 24*7 pantry services .etc. However, the initial investment and promotional costs for incorporating these facilities will be high.

3. Internationalize by expanding into foreign markets and introducing long distance overseas flights. However, considering the rise in operating costs and fuel prices, it is not a good option to enter into new markets with unsure demands. Also, Southwest is yet to create a brand image for itself in the international market. Hence, setting up terminals in new airports and increasing the fleet will only cause a rise in fixed costs which is not desired

in the current scenario. International regulations may also pose problems for Southwests expansion.

COURSE OF ACTION Southwest Airlines has earned the reputation of providing the best in class services at low fares. In an industry of fluctuating demand where downsizing is very common and employee turnover rates are high, Southwest has been able to maintain a very low employee turnover of 7%. Also, it has not laid off even a single employee since 1971. In order to retain its market position and brand image in the industry, this is what the company should do: 1. Sustain the image of Low cost High quality airline in the industry and keep up the Southwest spirit. Ensure that the quality of services offered is never compromised. 2. Conduct various competitions encouraging employees to come up with innovative and practical solutions to address the problems of fuel efficiency, airport congestion. Etc. These innovative ideas can be used to lower operating costs. 3. Set up dedicated Flight Scheduling Systems in high traffic airports and employ appropriate crew wherever required. Reduce airport congestion by coming up with efficient loading and unloading mechanisms and employ cameras and fast & effective screening procedures to ensure easy boarding of passengers onto their flights. 4. Tie up with reputed and promising travel companies and attract corporate clients. This would help in increasing revenue. 5. Launch point-to-point long haul air travel services suited to the convenience of customers. 6. Provide differentiated facilities and promote the spirit of Southwest in order to wade off competition from Imitators like Jetblue and CA lite. 7. Southwest has a low debt-to equity ratio. So, expansion and entry into the densely populated, high potential northeast market by borrowing funds is an option.