Southwest Airlines

Case is intended to be a part of instruction material developed for teaching at a Marketing class in Business Schools.
Case facts are taken from the Wikipedia article on the airline with some additional facts provided. Case facts are for discussion only
and are not intended to be a demonstrator of correct or incorrect handling of management situation.

Southwest Airlines Co. (NYSE: LUV), operating as Southwest Airlines, is the largest low-cost carrier in
the United States, and is headquartered in Dallas, Texas. The airline was established in 1967 adopting its
current name in 1971. It carries the most domestic passengers of any US airline as of June 5, 2011.

On March 16, 1995, Southwest became one of the first airlines to have a website. Originally called the
"Southwest Airlines Home Gate", passengers could view schedules, a route map, and company
information at Iflyswa.com. Southwest.com is the number one airline website for online revenue,
according to PhoCusWright. Nielsen/ Netratings also reports that Southwest.com is the largest airline site
in terms of unique visitors. In 2006, 70 percent of flight bookings and 73 percent of revenue was
generated from bookings on southwest.com. As of June 2007, 69 percent of Southwest passengers
checked in for their flights online or at a kiosk.

Even before the launch of the website in 1995, Southwest encouraged customers to call the airline
directly rather than go through travel agents. Figures from the time indicate that only 55% of
Southwests tickets were booked through travel agents as against an average of about 90% for most
other airlines. Travel Agents were connected to other airlines through Computerized Reservations
Systems (CRS) such as Amadeus, Apollo, Galileo and Sabre that charged about $2 per transaction.
Southwest did not make its seat inventory available on the CRSs and Travel Agents had to contact the
Airline directly to make a booking. Southwest paid travel agents the standard 10% commission.

Operations
Southwests competitive strategy combines high level of employee and aircraft productivity with low unit
costs by reducing aircraft turn-around time particularly at the gate 15 minutes average v/s the industry
average of 55 minutes.

Southwest does not use the more traditional "hub and spoke" flight routing system of most other major
airlines, preferring instead the "Point to Point" system across its short haul network with most flights
being 65 minutes on average. An average of 80 percent of Southwest passengers are direct passengers,
meaning only 20 percent of all passengers are connecting passengers. This is significantly higher than
most airlines, where passengers often connect in hub cities.

As part of its effort to control costs, Southwest sometimes uses secondary airports in cities which
generally have high costs. Secondary airports generally have lower costs (average of $ 2.50 per
passenger instead of the $6-$8 at major airports) and may be more convenient to travelers than major
airports to the same destinations. For example, Southwest flies to Chicago-Midway instead of Chicago-
O'Hare and the Love Field in Dallas instead of the bigger DFW (Dallas Fort-Worth) airport. Southwest
saves an average of 20% on flight time due to reduced taxi time and less time spent in holding patterns,
allowing Southwest better utilization of their gates with at least 20 departures per day.
With other airlines preferring the bigger airports, it made it difficult for passengers to transfer from
Southwest to other airlines and vice versa. Southwest also chose not to offer connections or transfer
baggage to other airlines.

Southwest usually entered a new sector with extremely aggressive fares; often 50% below the
competitions price point. Following southwests entry into a sector, the overall number of seats sold went
up by 4 - 8 times as some customers chose to fly instead of taking surface transport.

Southwest offers free in-flight non-alcoholic beverages with alcoholic beverages available as well for a
small price. Southwest has complimentary peanuts or pretzels on all flights, and most flights have
free Nabisco snacks. Southwest is known for colorful boarding announcements and crews that burst out
in song. The singing is quite popular among passengers.

Southwest maintains excellent customer satisfaction ratings; for many years, according to the Department
of Transportation Southwest ranked number one (lowest number of complaints) of all U.S. airlines for
customer complaints. Southwest Airlines has consistently received the fewest ratio of complaints per
passengers boarded of all major U.S. carriers that have been reporting statistics to the Department of
Transportation (DOT) since September 1987, which is when the DOT began tracking Customer
Satisfaction statistics and publishing its Air Travel Consumer Report.

Southwest does not have assigned seating and it does not use boarding cards. Passengers are given a
plastic tag with a letter (A, B or C) and a number, passengers line up in number order within each letter
group. Each letter group boards 60 passengers at a time handing their plastic tag back to the attendant at
the gate.

Evaluate the strategic positioning of Southwest Airlines and estimate the financial
impact of its strategic decisions.
Data on US Airline Industry 1995

America Conti-
North-
Southwest American United Delta West nental
west
(Ch.11) (Ch.11)

Revenue
1,685 13,581 12,890 11,579 7,694 1,295 5,403
($Mn)

Operating
1,502 13,658 13,428 12,401 8,273 1,369 5,559
Expenses ($Mn)

Operating Profit
183 -77 -538 -822 -309 -74 -156
($Mn)

Operating Margin
10.84% -0.57% -4.17% -7.10% -3.88% -5.72% -2.89%
(%)

Labor Costs
502 4,690 4,562 4,706 2,746 324 1,310
($Mn)

Labor as % of
29.8% 34.3% 34.0% 37.9% 33.2% 23.7% 23.6%
Revenue

Fuel
244 1,862 1,679 1,581 1,237 186 830
($Mn)

Fuel as % of
14.9% 13.6% 12.5% 12.7% 14.9% 13.6% 14.9%
Revenue

Cost per Available

7.03 8.93 9.60 9.44 9.09 8.90 8.39
Seat Mile (cents)

Number of
11,400 102,400 83,900 74,600 47,300 10,200 38,300
Employees

Fleet
150 672 536 555 373 86 319
Size

Passengers
28 86 67 83 43 15 38
(Mn)

Flights per Day 1500 3800 3000 3000 2400 600 2000