SOUTHWESTAIRLINESIN2010

Culture,Values,andOperatingPractices

StrategicManagement[2602650]
FacultyofCommerceandAccountancy,
ChulalongkornUniversity

MBAEnglishProgramBatch8
Semester2,AcademicYear2015
 Members

MBAEnglishProgramBatch8

1.)Ms.Kamonthat Rochanakij 5682343726

2.)Ms.Kongkaew Siriwatthano 5682346626

3.)Mr.Burin Yenthanakorn 5682356926

4.)Ms.Pailin Kladpetch 5682362626

5.)Ms.Patrin Ithikumjorn 5682364926

6.)Ms.Siree Limkhuntham 5682373526

7.)Mr.Sutthaporn Homcharoen 5682375826

8.)Mr.Alongkot Manorungrueangrat 5682382126

9.)Ms.Angkana Teeraluk 5682383826

10.)Mr.Ekapot Sangkeo 5682385026

Contents
1.Describeandsummarizethehistory,development,andgrowthofthecompanyovertime.
(Includingbestsellinggoodsorservices,salesrevenue,marketshareandsoforth.)..........................6
2.)Companysbusinessmodel..............................................................................................................22
a.)Identifyalltheactivitiesassociatedwithsellingsomething(suchasfindingandreaching
customers,transactingasale,distributingtheproductordeliveringtheserviceandsoon).Are
thereanyinnovationcanyoureveal?..............................................................................................22
b)Identifyalltheactivitiesassociatedwithmakingsomething(suchasdesigningit,purchasing
rawmaterials,manufacturing,andsoon).Arethereanyinnovationcanyoureveal?...................24
3.)Reviewthecorporatestrategicdirection(Vision,Mission,Objective,andPhilosophy).How
coherentarethey?................................................................................................................................28
4.)Functionallevelstrategy..................................................................................................................33
a)DescribeallactivitiesofthecompanybyusingPortersValuechain.Comparethecompanys
valuechainwithothercompetitorsvaluechain.Drawthepicturetoseethedifferencesand
summarizeyourfindings...................................................................................................................34
b)IdentifyFunctionalLevelStrategiesthatthecompanyisemploying.HowcanthoseFunctional
LevelStrategiesimprovetheeffectivenessofacompanysoperationsandthusitsabilitytoattain
superiorEfficiency(E),Quality(QR:QE),Innovation(PDI:PCI),andCustomerResponsiveness(CR)?
..........................................................................................................................................................46
5.BusinessLevelStrategies..................................................................................................................55
a)DescribeBusinesslevelstrategiesthatallowacompanytoattractcustomersawayfromits
competitorsintheindustryfromthepastuntilpresent..................................................................55
b)Howwelldothestrategicmanagersadoptforusingfunctionallevelstrategiestocreatea
competitiveadvantageoveritsrivals...............................................................................................57
c)Drawthevaluecreationfrontiertoexplorethepositionofcompanybusinessstrategyand
summarizeyourfindings...................................................................................................................57
d)Howwelldothebusinessandfunctionallevelstrategieshelpthecompanytoaccomplishits
strategicdirection?...........................................................................................................................58
6.)CorporateLevelStrategy.................................................................................................................65
a)WhatkindofCorporateLevelStrategiesthatthecompanyhavebeenpursuingfromthepast
untilpresent?CanyounoticetheevolutionofCorporateLevelStrategy?.....................................65
b)DrawtheWebofCorporateLevelStrategytoconcludethefindings..........................................69
c.)HowdideachCorporateLevelStrategyhelpcompanyincreaserevenuesandprofitsfromthe
pastuntilpresent?Willeachcorporatelevelstrategymaximizinglongrunprofitabilityofthe
company?DrawthestraightlinegraphincludingRevenue,Profit,ReturnonSalesandROIConthe
samepicturetosupportyourfindings..............................................................................................70
7.)Whatarethecompanysstrategyimplementationprocesses?HowdoOrganizationalStructure,
Culture,andLeadershiphelpcompanysstrategyimplementation?Analyzingthroughthefollowing
steps......................................................................................................................................................73

 a.)OrganizationalStructure..............................................................................................................73
b.)OrganizationalCulture.................................................................................................................75
c.)OrganizationalLeadership...........................................................................................................78
8.)Whatarethecompanysstrategyevaluationandcontrol?Howwellthestrategyevaluationand
controlmatchitsstrategy?...................................................................................................................81
a.)StrategicEvaluationSystemAnalysis...........................................................................................81
b.)StrategicControlSystemAnalysis...............................................................................................84
9.)Howistheeffectivenessofthecompanysstrategies?..................................................................85
a.)Drawingthestraightlinegraphtocomparesalesrevenue,profit,profitability(ROIC)andprofit
growthofallcompaniesforthelastfivetotenyearsandsummarizeyourfindings......................85
b.)ROICComparison.........................................................................................................................88
c.)PrepareBCGGrowthshareMatrixtoshowthecompetitivepositionofallcompaniesforthe
lastfivetotenyears..........................................................................................................................93
10.)Whatissuesdoesthecompanyneedtoaddress?........................................................................95
11.)Whatproblemsisthecompanyfacing?......................................................................................100
12.)Assesstheimpactofgeneralenvironmentalfactorsoftheindustry.Whataretheimplicationsof
thesefactorsforthesuccessofthecompany?Anyopportunityandthreatcanyoureveal?...........103
a.)EconomicSegment.....................................................................................................................103
b.)SocioculturalSegment...............................................................................................................105
c.)DemographicSegment...............................................................................................................107
d.)TechnologySegment.................................................................................................................110
e.)PoliticalandLegal......................................................................................................................113
f.)GlobalSegment..........................................................................................................................115
13.)Analyzingtheeffectsofindustryevolutionbyusingindustrylifecyclemodel.Whatdoesthe
modeltellyouaboutthechangingindustryconditions?Arethereanyopportunityandthreat?....117
14.)Howistheindustrychanging?Whataretheunderlyingdriversofchangeandhowmightthose
drivingforcesindividuallyorcollectivelychangecompetitionintheindustry?Canyoufindany
opportunityandthreat?.....................................................................................................................119
15.)Whatdoesyourstrategicgroupmapofalternativeairlineindustry(allsegments)looklike?
Whatareyourstrategicdimensions?Arethereanymobilitybarriersforeachstrategicgroup?
Explainthereasontosupportyouranswers......................................................................................124
16.)Whatkeyfactorsdeterminethecompetitivesuccessforthecompany?Explainthereasonand
givetheweightforeachfactor...........................................................................................................128
17.)Carryoutanindustrymatrixtoseehowwellthecompanyandcompetitorsarerespondingto
keysuccessfactorsintheindustryenvironment?Explainthereasonforgivingthescoreforthe
companyandeachcompetitor.Canyouidentifyanyopportunityandthreat?................................131

18.)DiscusscompetitionintheindustrybyusingPortersFiveForcesModel.Explainthereasonfor
givingtheweightandscoreforeachforce.........................................................................................140
a.)ThreatofNewEntrants..............................................................................................................140
b.)BargainingPowerofSuppliers...................................................................................................143
c.)BargainingPowerofBuyers.......................................................................................................148
d.)ThreatofSubstituteProductsorServices.................................................................................150
e.)RivalryamongExistingCompetitors..........................................................................................152
f.)Drawthegraphforyourassessmentofoverallindustryattractivenew.WhatistheIndustrial
ReturnonSales?Summarizeyourfindings.Anyopportunityandthreatcanyoureveal?............155
19.)Conductacompetitiveintelligenceingatheringinformationanddataoncompetitorsforbetter
understand..........................................................................................................................................157
20.)Whatdoesthemarketanalysisrevealyouabouttheindustryscustomer?Canyouidentifyany
opportunityandthreat?.....................................................................................................................218
a.)TargetMarket............................................................................................................................218
b.)DegreeofPenetration...............................................................................................................218
c.)CustomersCurrentNeeds.........................................................................................................221
d.)CustomersFutureNeeds..........................................................................................................221
e.)DistributionChannels................................................................................................................223
f.)ChannelMarkups........................................................................................................................224
g.)PriceSensitivity..........................................................................................................................225
h.)CurrentTrends...........................................................................................................................226
21.)Carryouttheinternalenvironmentanalysistodiscoverthestrengthsandweaknesses...........227
a.)Resources...................................................................................................................................227
b.)Capabilitiesandc.)Corecompetency.......................................................................................229
d.)DistinctiveCompetency.............................................................................................................231
e.)CompanyAnalysis(CorporateValueChainAnalysis)................................................................232
f.)FinancialAnalysis........................................................................................................................236
22.)StrategicFactorsAnalysis............................................................................................................242
a.)DetermineandSummarizeStrategicFactorsforStrategyFormulation....................................242
b.)PerformExternalFactorAnalysisSummary(EFAS)toseehowwellthecompanysstrategies
effectivelytakeadvantageofexistingopportunitiesandminimizethepotentialadverseeffectsof
externalthreats...............................................................................................................................247
c.)PerformInternalFactorAnalysisSummary(IFAS)toseehowwellthecompanyisrespondingto
currentandexpectedfactorsinitsinternalenvironment..............................................................250
d.)ComparethepositioninIEMatrixandBCGGrowthShareMatrix.Whatwouldbethestrategic
guidelineforthecompanyinformulatingcorporatestrategy?.....................................................254

23.)GeneratingstrategiesalternativesbyemployingaTOWSMatrix..............................................256
24.)Recommendstrategiesandoperationplanforcompany...........................................................260
a.)ShortTermStrategy(within1year)..........................................................................................260
b.)MediumTermStrategy..............................................................................................................265
c.)LongTermStrategy....................................................................................................................274

1. Describe and summarize the history, development, and growth

of the company over time. (Including best selling goods or
services, sales revenue, market share and so forth.)

Figure1.1:SouthwestAirlinesLogos
Theideaofstartinglowcostairlinewasgeneratedsince1966byRollinKingwhoowned
asmallcommuterairserviceinSanAntonio.KinghadheardmanyTexasbusinesspeoplecomplain
about the length of time that it took to drive between the three cities (San Antonio, Dallas and
Houston) and the expense of flying the airlines currently serving these cities. So he marched into
HerbKelleherslawofficewithaplan tostartalowcost/lowfareairline.Hisbusinessconceptfor
theairlinewassimple:
Attractpassengersbyflyingconvenientschedules
Getpassengerstotheirdestinationontime
Makesuretheyhaveagoodexperience
Chargefarescompetitivewithtravelbyautomobile

Figure1.2:TriangleDestinationofSouthwestAirlinesStarted
Kelleher,skepticalthatKingsbusinessideawasviable,dugintothepossibilitiesduring
the next few weeks and concluded that a new airline was feasible; he agreed to handle the
necessarylegalworkandalsotoinvest$10,000ofhisownfundsintheventure.
March16,1967,Kellerherfiledpaperstoincorporatethenewairlineandsubmittedan
application to the Texas Aeronautics Commission for the new company to begin serving Dallas,

Houston,andSanAntonio.ButrivalairlinesinTexaspulledeverystringtheycouldtoblockthenew
airline from commencing operations, precipitating a contentious fouryears parade of legal and
regulatoryproceedings.HerbKelleherledthefightonthecompanysbehalf,eventuallyprevailingin
June1971.

Figure1.3:SouthwestAirlinesCoFounder:RollinKingandHerbKelleher
19711980

InJanuary1971,LamarMusewasbroughtinasSouthwestsCEOtogetoperationsunderway.
Musewasanaggressive,selfconfidentairlineveteranwhoknewthebusinesswellandwhohad
the entrepreneurial skills to tackle the challenges of building the airline from scratch and then
competingheadonwiththemajorcarriers.Musewasabletorecruitatalentedseniorstaffthat
includedanumberofveteranexecutivesfromothercarriers.Hewantedhisexecutivelearntobe
willingtothinkmavericksandnotbelulledintoinstitutingpracticesatSouthwestthatimitated
whatwasdoneatotherairlines.
On March 29, 1971, Air Southwest Co. was changed to Southwest Airline Co. and established
theirheadofficeatDallas.
Through private investors and an initial public of stock in June 1971, Muse raised $7 million in
newcapitaltopurchaseplanesandequipmentandprovidecashforstartup.Boeingagreedto
supplythreenew737sfromitsinventory,discountingitspricefrom$5millionto$4millionand
financing90percentofthe$12milliondeal.
On June 18, 1971, Southwest initiated its first flights with a schedule that soon included of 6
roundtripsbetweenDallasandSanAntonioand12roundtripsbetweenHoustonandDallas.But
theintroductory$20onewayfarestoflytheGoldenTriangle,wellbelowthe$27and$28fares
charged by rivals, attracted disappointingly small number of passengers. Southwests financial
resources were stretched so thin that the company bought fuel for several months on Lamar
Musespersonalcreditcard.

 Totrytogainmarketvisibilityanddrumupmorepassengers,Southwestdecidedithadtodo
morethanrunadsinthemediapublicizingitslowfares:
o Southwest decided to have its flight hostesses dress in colorful hot pants and white
kneehighbootswithhighheels.Morethan30ofSouthwestsfirstgraduatingclassof
40flightattendantsconsistedofyoungwomenwhowerecheerleadersandmajorettes
inhighschool

Figure1.4:SouthwestAirlinesFlightAttendants
o Givingfreealcoholicbeveragesduringdaytimeflights.Mostpassengersontheseflights
werebusinesstravelers.Managementsthinkingwasthatmanypassengersdidnotdrink
duringthedaytimeandthatwithmostflightsbeinglessthatanhoursdurationitwould
becheapertosimplygivethedrinksawayratherthancollectthemoney.

o Taking a cue from being based at Dallas Love Field, Southwest started the Love
campaign,whichsetthetoneforSouthwestsapproachtoitscustomersandcompany
effortstomakeflyingSouthwestanenjoyable,fun,anddifferentiatingexperience.

SouthwestbeganusingthetaglineNowTheresSomebodyElseUpThereWho
LovesYou.
The routes between Houston, Dallas, and San Antonio became known as the
LoveTriangle
SouthwestsplaneswerereferredtoasLoveBirds,drinksbecameLovePotions,
peanuts were called Love Bites, drink coupons were Love Stamps, and tickets
wereprintedonLoveMachines.
Whenthecompanywentpublic,itchooseLUVasitsstocktradingsymbol

 Southwests planes would be push away from the gate in 10 minutes and became one of the
signaturesduringthe1970sand1980sfor6065passengers(Inlateryears,theturnaroundtime
graduallyexpandedto25minutesfor125passengerswhichwasshorterthanthe3050minutes
turnaroundtimetypicalattheothermajorairlinesduringthe20002009period).
InlateNovember1971,LamarMusecameupwiththeideaofofferinga$10faretopassengers
ontheFridaynightHoustonDallasflight.Withno advertising,the112seatflightsoldout.This
ledMusetorealizethatSouthwestwasservingtwoquitedistincttypesoftravelersintheGolden
Triangle market: (1) business travelers who were more timesensitive than pricesensitive and
wanted weekend flights at time suitable for conducting business and (2) pricesensitive leisure
travelerswhowantedlowerfaresandhadmoreflexibilityaboutwhentofly.Hecameupwitha
twotieronpeak/offpeakpricingstructure:
o OnPeak:Allseatsonweekdayflightsdepartingbefore7p.m.werepricedat$26
o OffPeak:Allseatsonotherflightswerepricedat$13
In 1972, the company decided to move its flights in Houston from the newly opened Houston
Intercontinental Airport to the abandoned Houston Hobby Airport located much closer to
downtown Houston. Despite being the only carrierto fly into Houston Hobby, the results were
spectacular. Business travelers who flew to Houston frequently from Dallas and San Antonio
found the Houston Hobby location far more convenient, and passenger traffic doubled almost
immediately.
In1973,tocompetewithSouthwestsmajorrivalatthattime,BraniffInternational,Southwest
cutitsregular$26fareto$13forallseats,alldays,andalltimestomatchBraniffs$13fare.And
also give passengers the choice of buying a regularpriced ticket for $26 and receiving as
complimentary fifth of Chivas Regal scotch, Crown Royal Canadian whiskey, or Smirnoff vodka
(or,fornondrinkers,aleathericebucket).Morethan75percentofSouthwestsDallasHouston
passengersoptedforthe$26fare.TheresultinggainsinpassengertrafficenabledSouthwestto
reportitsfirsteverannualprofitin1973.
In1974,Southwestprovidedservicesto1millionpassengersandrenovatedterminalatHouston
HobbyAirport.TheygotanauthorizationtoflytoRioGrandeValleythroughHarlingen.
In1977,Southwestprovidedservicesto5millionpassengersandwentpublicinNewYorkStock
marketalsochoseLUVasitsstocktradingsymbol.
InJuly1978,LamarMuseresigned.SouthwestsboardappointedHowardPutnam,agroupvice
presidentofmarketingservicesatUnitedAirlines,asSouthwestspresidentandCEOinJuly1978.
AndHerbKelleheragreedtobecomechairmanoftheboard.


Figure1.5:SouthwestAirlinesStockTradingSymbol
19811990

Putnam announced his resignation in the fall of 1981. Southwests board succeeded in
persuadingKellehertotakeontheadditionaldutiesofCEOandpresident.
Since Kelleher took over in 1981, he made a point of visiting with maintenance personnel to
checkonhowwelltheplaneswererunningandoftakingwiththeflightattendants.Kelleherdid
notmuchmanagingfromhisoffice,preferringinsteadtobeoutamongthetroopsasmuchashe
could.Hisstylewastolistenandobserveandtoofferencouragement.Kelleherattendedmost
graduation ceremonies of flight attendant classes, and he often helped load bags on Black
Wednesday, the busy travel day before Thanksgiving. He was held in the highest regard by
Southwest employees and knew thousands of their names. When he attended a Southwest
employeefunction,hewasswarmedlikeacelebrity.
In1981,Southwestwassuccessfullysuedforitsthenexistingpolicyofhiringonlyfemaleflight
attendantsandticketagents.
On November 30, 1984, Southwest took delivery of their first Boeing 737300. Southwest was
thelaunchcustomerandasofMay2012isthelargestoperatoroftheaircrafttype.Thefirst737
300wasdubbed"KittyHawk."

Figure1.6:Thefirst737300KittyHawk

10

 SouthwestpaidUS$60.5millioninstockandcashforMuseAirwhenMusewasonthevergeof
collapsein1985.Aftercompletingtheacquisition,SouthwestrenamedMuseAirTranStarAirlines.
TranStar became a wholly owned subsidiary of Southwest and operated as an independent
airline. Unwilling to compete in a fare war against Frank Lorenzo's Texas Air, Southwest
eventuallysoldTranStar'sassetstoLorenzoinAugust1987.
In1988,SouthwestAirlineswasawardedthenumberoneairlinesinTheU.S.andgottheTriple
crownawardformostpunctualairlineandleastcomplainedairline.
In 1990, the airline registered their aircraft in Houston so they could pay aircraft taxes in
Houston, even though the actual corporate headquarters were in Dallas. Southwest was not
physicallyrelocatinganyassets,butTexasstatelawallowedtheairlinetochooseeitherDallasor
Houstonasthecityofregistryoftheiraircraft.

19912000

In1992,SouthwestacquiredMorrisAir,acompetingairlinebasedinSaltLakeCity,Utah,paying
US$134million in stock. After completing the purchase, Southwest absorbed the capital and
routesofMorrisAirintoSouthwest'sinventoryandservice,includingMorris'PacificNorthwest
destinations not previously served by Southwest.One founder of Morris Air, David Neeleman,
worked with Southwest for a short period before leaving to found WestJet and then JetBlue
Airways,acompetingairline.
OnMarch16,1995,Southwestbecameoneofthefirstairlinestohaveawebsiteandusedthe
ticketless system. Originally called the "Southwest Airlines Home Gate," passengers could view
schedules,aroutemapandcompanyinformationatIflyswa.com.

20012009

In June 2001, responding to anxious investor concerns about the companys leadership
successionplans,SouthwestAirlinesbegananorderlytransferofpowerandresponsibilitiesfrom
HerbKellehertotwoofhismosttrustedprotgs:JamesF.Parkers,Southwestsgeneralcounsel,
succeeded Kelleher as Southwests CEO, and Colleen Barrett, Southwests executive vice
presidentcustomers and selfdescribed keeper of Southwests peprally corporate culture,
becamepresidentandchiefoperatingofficer.
In 2002, Southwest Airlines ranks second in America's Most Admired Companies and the #1
Airlinefor2001,accordingtoFortuneMagazine.
SouthwestteamswithIBMtoofferthefirstofmorethan250airportselfservicecheckinkiosks
thatwillbeavailablenationwide.

11


Figure1.7:JamesF.Parkers Figure1.8:ColleenBarrett

In 2003, Air Transport World selects Southwest Airlines the Airline of the Year for 2003. The
editors praised Southwest for being profitable for 30 consecutive years, while providing
affordable fares for millions of passengers. Southwest ranks second on TravelQuality.com
Aviation Awards 2003 by travelquality.com. AMFA (Aircraft Mechanics Fraternal Association) is
thenewunionrepresentingSouthwest'sMechanics.
ParkerretiredunexpectedlyinJuly2004.HewassucceededbyGaryC.Kelly.Duringhistenureas
CEO,KellyandothertoplevelSouthwestexecutiveshadsharpenedandfineturnedSouthwests
strategy in a number of areas, continued to expand operations (adding both more flights and
initiating service to new airports), and worked to maintain the companys lowcost advantage
overitsdomesticrivals.
KellysawfourfactorsaskeystoSouthwestsrecipeforsuccess:
1. Hiregreatpeople,treatemlikefamily.
2. CareforourCustomerswarmlyandpersonally,liketheyreguestsinourhome.
3. Keep fares and operating costs lower than anybody else by being safe, efficient,
andoperationallyexcellent.
4. Staypreparedforbadtimeswithastrongbalancesheet,lotsofcash,andastout
fuelhedge.

Figure1.9:GaryC.Kelly

12

 TohelpSouthwestbeastandoutperformeronthesefourkeyssuccessfactors,Kellyhas
establishedfivestrategicobjectivesforSouthwest:
1. Bethebestplacetowork.
2. Bethesafest,mostefficient,andmostreliableairlineintheworld.
3. Offer customers a convenient flight schedule with lots of flights to lots of places
theywanttogo.
4. Offercustomersthebestoveralltravelexperience.
5. Doallofthesethingsinawaythatmaintainsalowcoststructureandtheabilityto
offerlowfares.
In2004,Customersgettheabilitytoobtainbothoriginandtransferboardingpassesatthestart
oftheirtripeitherattheairportoronlineatsouthwest.com.Andalsobookingcalendarbecomes
availableonsouthwest.com.
InNovember2007,SouthwestintroducedanewBusinessSelectfaretoattracteconomyminded
businesstravelers;BusinessSelectcustomershadearlyboardingprivileges,receivedextraRapid
Rewards(frequentflyercredits),andfreecocktail.
During2009,SouthwestrananadcampaigncalledBagsFlyFreetopublicizethecostsavingsof
flyingSouthwestratherthanpayingthe$20to$50feesthatrivalairlineschargedforafirstor
secondcheckedbag. The combinedeffectofSouthwestsBagsFlyFreeadsandperiodicfare
salesresultedincompanyrecordloadfactorsforeverymonthfromJulythroughDecember2009
(Aloadfactorwasthepercentageofallavailableseatsonallflightsthatwereoccupiedbyfare
payingpassengers)
SouthwesttendedtoadvertisefarmoreheavilythanotherU.S.carrier.AccordingtoThe
Nielsen Company, during the first six months of 2009, Southwest boosted its ad spending by 20
percent, to $112.6 million, to hammer home its Bags Fly Free message. Passenger traffic at
Southwest subsequently rose, while passenger volumes went in the opposite direction at
SouthwestsfivelargestcompetitorsDelta,American,United,Continental,andUSAirways,allof
which had recently introduced or increased fees for checked baggage. Passenger travel on
Southwestsdomesticflightsrosebymorethan28millionpassengersannuallyfrom2000through
2009,whereaspassengervolumeondomesticflightswasdownby88millionpassengersannuallyat
Delta,American,United,Continental,andUSAirwaysduringthissameperiod.

Source:http://swamedia.com/channels/OurHistory/pages/ourhistorysortby
Source:SouthwestAirlinesin2010:Culture,Values,andOperatingPractices;Case13

13

 Figure1.10:TrendofSouthwestAirlinesbyRevenuePassengerMiles(millionUS$)

Table1.1:SummaryofDomesticRevenuePassengerMilesofSouthwestAirlinesandMarket
ShareintheU.S.between2003and2010
Unit:millionUS$
SouthwestAirlines
Year AllU.S.carriers DomesticRevenue
Marketshare
Passengermiles
(%)
(MillionUS$)
2003 492,733 47,948 9.73%
2004 542,817 53,424 9.84%
2005 569,236 60,229 10.58%
2006 574,519 67,698 11.78%
2007 592,328 72,325 12.21%
2008 568,247 73,498 12.93%
2009 538,982 74,462 13.82%
IfconsideringSouthwestAirlinesperformancesduring20032010alone,itcanbeseen
thatbothDomesticRevenuePassengermilesandmarketshareofSouthwestAirlineshadconstantly
beenonanupwardtrendthroughouttheperiod.Asaresult,itcanbeconsideredthatthedegreeof
penetrationforlowcostcarriermarketandSouthwestAirlinesitselfareathighlevel
Figure1.11:MarketShare,Year2009
US Airways
8% American Airlines
3%
Delta Air Lines
10%

JetBlue Airways
Others
4%
50%
United Air
Lines
11%
Southwest
Airlines
14%

Source:http://www.transtats.bts.gov/Data_Elements_Financial.aspx?Data=7

14

SouthwestAirlinesProductsandServices
Routes
Southwest Airlines serves many routes that the customer can check on website by
SouthwestAirlinesInteractiveRouteMap.

Figure1.12:SouthwestAirlinesInteractiveRouteMap
CitiesandAirportsareservedbySouthwestAirlines,May2010
Southwest's Top 10 Airports
Daily Departures Number of Gates Nonstop Cities Served
Chicaco Midway 224 29 51
Las Vegas 223 19 57
Baltimore/Washingtom 181 20 44
Phonix 177 24 44
Houston (Hobby) 135 17 30
Dallas (Love Field) 131 15 15
Denver 129 14 42
Los Angeles (LAX) 116 11 20
Oakland 114 13 20
Orlando 104 12 33
Other Airports Served by Southwest Airlines
Albany Fort Myers/Naples Minneapolis/St.Paul Reno/Tahoe
Albuquerque Harlingen/South Padre Nashville Sacramento
Amarillo Island New Orleans St.Louis
Austin Hartford/Springfield New York (LaGuardia) Salt Lake City
Birmingham Indianapolis Norfolk San Antonio
Boise Long Island (MacArthur) Oklahoma City San Francisco
Boston Logan Jackson, MS Omaha San Jose
Buffalo Jacksonville Ontario, CA Seattle/Tacoma
Burbank, CA Kansas City Orange Country, CA Spokane
Cleveland Little Rock Panama City, FL Tampa
Columbus, OH Louisville Philadelphia Tucson
Corpus Christi, TX Lubbock Pittsburgh Tulsa
Detroit Metro Manchester, NH Portland, OR Washington, DC (Dulles)
El Paso Midland/Odessa, TX Providence West Palm Beach
Fort Lauderdale Milwaukee RaleighDurham
Source:SouthwestAirlinesin2010:Culture,Values,andOperatingPractices;Case13

15

 BookaFlight
Online bookingserviceis availableonwww.southwest.com byselectingdepartureand
destinationroutes,date,andamountofpassenger.

Book # Flight $ Hotel % Car & Vacations

' CHECK IN
( FLIGHT STATUS
) CHANGE FLIGHT

Round trip One-way Baggage and optional fees Dollars Points

DEPART ARRIVE DEPART DATE RETURN DATE ADULTS SENIORS

10/08 , 10/11 , 1 ! 0 !

Thu, Oct 8 2015 Sun, Oct 11 2015

PROMO CODE

* Where we fly + Map search , Flexible dates Advanced Search Search

View/ShareItinerary
Passengerscanviewanupcomingitinerary,checkinonline,andprint boardingpasses
byenteringtheirtripdetails.

FlightSchedule
FlightSchedulesarealsoavailableonthewebsitefor8monthsahead.

16

 SouthwestAirlinesInteractiveRouteMap
Byhoveryourmouseoveroneofthecitiesonthemap,youwillseetheentire
destinationthatyoucangofromthatcity.

TraveloutsideU.S.
NowSouthwestAirlinesisservinginternationalflighttoMexicoandtheCaribbean.

LowFareCalendar
Lowfareflightsareavailablefor6monthsaheadsearching

17

 BookaHotelandcarrental
Fortravelfulfillment,SouthwestAirlinesprovideshotelsandcarsbookingserviceson
thewebsite.

Toachievecustomersatisfactions,SouthwestAirlinesprovidesamenitiesthatmake
customerstravelextraordinarywhichareasfollows:
EarlyBirdCheckIn
A lowcost option giving you the convenience of automatic checkin before our
traditional 24hour checkin.You will have the benefit of an early assigned boarding position,
allowingyoutoboardearlier.AsanEarlyBirdCheckInCustomer,youwillhaveabetteropportunity
to select your preferred seat and haveearlier access to overhead bin storage for your carryon
luggage.Thisaffordableoptionautomaticallyreservesforyouthenextbestboardingpositionthen
available.

Add EarlyBird
Check-In
*Required
*Confirmation Number
Lookup Confirmation #

*Passenger First Name

What do I get?
*Passenger Last Name

AUTOMATIC CHECK-IN
Whether you choose to print your boarding pass the day
before or just hours before the flight, your confirmed boarding
position will be ready and waiting for you. Now you can print Continue to retrieve flight reservation
your boarding pass as your schedule allows. and select EarlyBird Check-In options
Continue
BETTER BOARDING POSITION
We'll automatically check you in and assign your boarding
position within 36 hours of your flight's departure - that's 12
hours before general boarding positions become available.
While EarlyBird Check-In doesn't guarantee an A boarding
position, it improves your seat selection options to help you
get your favorite seat. Don't know how boarding works?
Learn more at Boarding School!
EARLIER ACCESS TO OVERHEAD BINS
Got bags? We've got room. By boarding earlier you'll get your
pick of available overhead bin space.

BusinessSelect
Passengerswillberewardedwhenupgradetheirflight:
PriorityBoarding:BeoneofthefirsttoboardwithaguaranteedA115
boardingposition.Picktheseatyouwantandhaveroomforyourcarryonbags.

18

 FlyBy:Breezethroughticketcounterandsecuritycheckpointlinesfaster
withFlyBylaneaccess.RapidRewardsAListandAListPreferredMembersalsogetaccessto
FlyByPriorityLanes.
PremiumDrink:Enjoyapremiumdrinkonboardyourflightwithacoupon
validforuseondayoftravel
ExtraRapidRewardsPoints:Rewardyourselfwithdoublepointsperdollar
comparedtoWannaGetAwayfares.

Upgrade Your Flight Upgrade to Business Select & Get Great

Perks
*Required

*Confirmation Number Priority Boarding

Lookup Confirmation #
Be one of the first to board with a guaranteed A1-15 boarding position.
Pick the seat you want and have room for your carryon bags.
Confirmation Numbers use letters O and I
instead of numbers 0 (zero) and 1 (one).

*Passenger First Name

Fly By
Breeze through ticket counter and security checkpoint lines faster with
*Passenger Last Name Fly By lane access*. Rapid Rewards A-List and A-List Preferred
Members also get access to Fly By Priority Lanes.

*participating locations

Continue

Premium Drink
Enjoy a premium drink onboard your flight with a coupon valid for use
on day of travel.

Extra Rapid Rewards Points

Reward yourself with double points per dollar compared to Wanna Get
Away fares. Become a Rapid Rewards Member so you can start earning
extra Rapid Rewards Points.

SouthwestGiftCard
Thegiftcardisforcustomerswhobuyticketinanyamountfrom$10to$1,000.
Thecustomerscanselectmorethan85destinationswithoutexpiration.

Southwest gift card

Buy a Southwest gift card Check Your Balance Corporate & Volume Sales

Fly to 85+ destinations.

Choose any amount from $10 to $1,000.
No fees. No expiration. Ever.
Fast delivery: E-mail or overnight it.
Easy to redeem online, by phone, or at the airport.

19

 WifiandInFlightEntertainment
ByaccessingtheSouthwestWiFihotspotonboard,youcanmaketimeflyonyourown
personalelectronicdevice.Internetaccessfor$8adayperdeviceonWiFienabledaircraft

SouthwestVacations
HotelbookingandcarrentingareavailableonSouthwestAirlineswebsitewith
competitiveprices.

BusinessTravel&Group
Corporate Travel: Corporate Sales Team will work with you, the travel
decisionmaker,toidentifyyourgoalsandneedsandtoseekoutwaysinwhichSouthwestcan
helpyouobtainsolutionsforyourtravelrelatedgoals.
EmergingBusiness:AddSouthwestAirlinestoyourbusinesstravelsolutions.
Our travel products and services can help you get where you need to go efficiently and
economically.
Group Travel: If you're traveling with a group of ten or more people, our
GroupTravelProgramisforyou!Theprogramprovidesextraflexibilityanddiscountedairfareto
helpmakeyourtravelexperienceaffordable,easy,andfun.
Charters: Enjoy Southwest Airlines awardwinning Customer Service on
your next private charter. Our charter service allows you to avoid airport delays, select your
departure time, and choose origin and destination cities anywhere in the contiguous United
StatesandpartsoftheCaribbean.

20

 Business Travel & Groups

Related Information Corporate

Southwest Airlines Corporate Travel can help your
Southwest Experience
Travel company's bottom line. Our Corporate Sales Team will work
with you, the travel decision maker, to identify your goals
and needs and to seek out ways in which Southwest can
In the Airport
help you obtain solutions for your travel-related goals.
Emerging
In the Air Learn more about our Corporate Travel program.
Business

Need Help?
Were a click away. Group Travel
Contact Us

Charters

CharterService
We can take your group to hundreds of destinations across the country on your
schedule.Ifyourcompanyorschoolistravelingwithenoughpeopletofillanentireaircraft(143175
passengers),oryouhavespecificschedulingneedsthatcannotbemetwithourregularlyscheduled
service,thenSouthwestAirlinesCharterscouldbetheoptionforyou.Customerscantravelontheir
ownscheduletoanydestinationintheContinentalUSthatcansupportacommercial737operation
and youll receive the same Legendary Customer Service from Southwest Airlines Employees that
youvebecomeaccustomedtosinceouroperationsbeganin1971.Whetheryoureafootballteam
traveling to a game, corporate employees gathering for a meeting, or enjoying incentivetravel,
SouthwestAirlinesistheretohandleyourtravelneeds.

Charter Service on Southwest Airlines

Why Charter Why Charter

We can take your group to hundreds of destinations across

the country on your schedule.
How it Works
If your company or school is traveling with enough people to
fill an entire aircraft (143-175 passengers), or you have
specific scheduling needs that cannot be met with our
Pricing regularly scheduled service, then Southwest Airlines Charters
could be the option for you. Customers can travel on their
own schedule to any destination in the Continental US that
can support a commercial 737 operation and youll receive the
same Legendary Customer Service from Southwest Airlines
Benefits Employees that youve become accustomed to since our
operations began in 1971. Whether youre a football team
traveling to a game, corporate employees gathering for a
meeting, or enjoying incentive travel, Southwest Airlines is
Get a Quote there to handle your travel needs.

Source:https://www.southwest.com/html/air/products/index.html

21

2.)Companysbusinessmodel
a.)Identifyalltheactivitiesassociatedwithsellingsomething(suchasfindingand
reachingcustomers,transactingasale,distributingtheproductordeliveringthe
serviceandsoon).Arethereanyinnovationcanyoureveal?
1.Twotierfarestructure(Onpeak/Offpeak)
Thepricingstructureservedtwoquitedistincttypesoftravelersasfollow:
Business travelers who are more timesensitive than pricesensitive and
wantedweekdayflightsattimessuitableforconductingbusinesswhichcalledonpeakperiod
Pricesensitive leisure travelers who wanted lower fares and had more
flexibilityaboutwhentoflywhichcalledoffpeakperiod
InlateNovember1971,LamarMusecameupwithatwotieronpeak/offpeakpricing
structureinwhichallseatsonweekdayflightdepartingbefore7:00p.m.werepricedat$26andall
seatsonotherflightswerepricedat$13.Passengertrafficincreasedsignificantlyandsystemwide
onpeak/offpeakpricingsoonbecamestandardacrossthewholeairlineindustry.
2.TicketlessSystem
Southwest becoming the first major airline to offer electronic, or ticketless, travel on
everyflightsystemwide.ItssomethingSouthwesthasallbecomeaccustomedtotoday,butitwasa
revolutionarychangeinthewaytheydobusiness.Travelerscanbookandbuyticketsdirectlyviathe
websitewithoutanyagentinvolvedwhichhelptoreduceamountofagencycost

Figure2.1:LUVMachine
The ability to issue ticketless itineraries came about following the departure from the
majorreservationssystemownedbycompetinglegacyairlinesandadaptationofBasicSABRE.Prior
to the change, customers would need to produce their paper ticket at the gate in exchange for a
boardingpass.Atonepoint,theticketwasassimpleasabasiccashregisterreceipt,issuedatthe
ticketcounterfromoneoftheSouthwestAirlinesclassicLUVMachines.

22

 The ticketless travel program was initially rolled out in several Texas markets in the
summerof1994,followedbyall321oftheirdailyintraCaliforniaflightslaterthatfall.Usingacredit
cardtomaketheirreservation,thesixcharacteralphanumericconfirmationnumberandaphotoID
were the only items required for travel, and could be purchased as little as one hour before
departure.

Figure2.2:Ticketlesstraveladvertisement
After only a few months of offering a ticketless option on all 1,800 daily flights, more
than 35% of customers were already using the new service. It was also a gateway to another
SouthwestfirstdirectonlineticketingviatheirHomeGateatiflyswa.com.
Source:http://www.blogsouthwest.com/flashbackfridaysticketlessfor20years/

23

b) Identify all the activities associated with making something (such as designing
it, purchasing raw materials, manufacturing, and so on). Are there any innovation
can you reveal?
1.OnePlaneFitsAll
Unlikethenetworkcarriersandtheircommutersurrogates,whichoperateallmannerof
regional jets, turboprops, and narrowbody and widebody aircraft, Southwest flies just one plane
type, the Boeing 737 series. That saves Southwest millions in maintenance costsspareparts
inventories,mechanictrainingandothernutsandboltsairlineissues.Italsogivestheairlineunique
flexibility to move its 527 aircraft throughout the route network without costly disruptions and
reconfigurations.
2.SimpleInFlightService
Businesstravelershaven'talwayslovedSouthwest'sbersimpleservice,butit'slooking
betterandbetterascompetitorscut back. Thereisjustoneclassofservice,adecentcoachcabin
thatisslightlymorespaciousthanthoseofSouthwest'scompetitors.Therearenoassignedseats.
There have never been meals, just beverages and snacks. Keeping it basic allows Southwest to
unloadaflight,cleanandrestocktheplane,andboardanotherflightfullofpassengersinaslittleas
20minutescomparedwithasmuchas90minutesonanetworkairline.Airlineefficiencyexpertssay
that the savings allow each Southwest jet to fly an extra flight per day. Extra flights mean extra
revenue.
3.PointtoPointFlying
Networkcarriersrelyonahubandspokesystem,whichlaboriouslycollectspassengers
from "spoke" cities, flies them to a central "hub" airport, and then redistributes them to other
spokes.NotSouthwest.Mostofitsflyingisnonstopbetweentwopoints.Thatminimizesthetime
that planes sit on the ground at crowded, delayprone hubs and allows the average Southwest
aircrafttobeintheairformorethananhourlongereachdaythanasimilarlysizedjetflownbya
network carrier. Southwest's avoidthehubs strategy also pays dividends in ontime operations.
According to FlightStats, Southwest's 78 percent ontime performance in June is eight percentage
pointshigherthantheindustryaverageandhigherthanthatofanyofitsmajorcompetitors.
4.NoFrills,NoFees
As other carriers have rushed to remove perks and pile on fees and restrictions,
Southwesthaskeptitscustomerpropositionstreamlinedandtransparent.Theairlineonlysellsone
way fares and only in a few price "buckets." That not only keeps costs downcomplex fare
structuresareexpensivetomanageitconvincesfliersthattheyaregettingvalueformoney.Prices
are allinclusive too. Southwest doesn't have fuel surcharges, doesn't charge for standby travel or
ticket changes, and continues to permit travelers to check two pieces of luggage free. And since

24

everyseatoneveryflightisvirtuallyidentical,travelersknowexactlywhattheywillgetwhenthey
makeapurchase.
5.StrongManagement
The public face of Southwest Airlines for a generation, harddrinking, chainsmoking,
alwaysleave'em laughing Herb Kelleher, finally stepped away from the carrier earlier this year.
Kelleher'sbonhomiemaskedthedisciplinethatSouthwesthashadthroughoutitshistory.Theairline
hasalwaysavoidedfadsandeschewedanythingthatincreasedcostsorcomplicatedthebasictravel
proposition. When it has changedlast year it ended its infamous cattlecall boarding process to
favoritsmostfrequentfliersandhighestfarecustomersithasdonesowithoutslowingdownthe
movement of aircraft. Management ranks are lean, but well compensated and, most importantly,
productive.IoncecalculatedthatthetopexecutivesofSouthwestgenerated10timesmorerevenue
perdollarofcompensationthandidtheCsuitetypesatsomeofthenetworkcarriers.
6.ARelativelyHappyWorkforce
Networkcarriershaverailedfordecadesaboutthepoweroftheiremployeeunions.But
guesswho'sthemostunionizedcarrierinthenation?Southwest,ofcourse.Theairlinesaysthat87
percent of its employees belong to a union. Southwest has never had a strike, and now that the
networkcarriershavewhackedawayatsalariesandbenefits,Southweststaffersaregenerallythe
highestpaidintheindustry.ButsinceSouthwesthasabout30percentfeweremployeesperaircraft
thanitsnetworkcompetitors,ithasthelowestnonfuelC.A.S.M.(costperavailableseatmile)ofany
ofthemajorcarriers.
7.AggressiveFuelHedging(Rawmaterialsearching)
Rampaging fuel prices now represent around 40 percent of an airline's costs, but, as
usual, Southwest Airlines has been ahead of the curve. Since 1999, the airline's aggressive fuel
hedging program has saved it an estimated $3.5 billion. In the first quarter, for example, it paid
$1.98 a gallon for fuel, approximately a dollar less than its network competitors. And Southwest's
futurepositionisadmirable:Itis70percenthedgedat$51abarrelthroughtheendoftheyearand
55percenthedgedatthesamepricenextyear.
In a world of $140abarrel oil, suggesting that any airline is a guaranteed winner is
beyond hubris. But this much can be said: Southwest Airlines is sitting on a pile of cash and fuel
hedgesandhasaprovenandeasilyadaptableservicemodel.AndhistoryshowsthatSouthwesthas
comfortablysurvivedeveryairlineindustrydownturn,thengrownrapidlyandprofitedhugelywhen
thebusinesscycleturns.
Source:http://archive.wired.com/cars/futuretransport/news/2008/07/portfolio_0708

25

 From above business models influenced Southwest Airlines to make a lot of profit as
followingreasons:
1.Selectitscustomers
Southwestclearlydefinetheirtargetgroupstotwomaingroupsasfollows:
Business Travelers travel for business matters who concern about flight
schedulemorethanprice(Timesensitive)
LeisureTravelerssuchasstudents,travelers,andotherpeoplewhoconsider
pricebeforeflightschedule.(Pricesensitive)
2.Defineanddifferentiateitsproductoffering
Due to Southwest stepped into the business after many airlines, they tried to provide
theirservicesdifferentiatefromthecompetitorsbythefollowingmodels:
Priceleadershipwhileprovidingthesameserviceleveltootherairlines
Southwestisencouragedtohavefunandisgivenconsiderablediscretionin
makingeachflightanenjoyableexperienceoftheircustomers.
Providingflexibleflightscheduleandmanyflightsavailabletoselect
3.Createvalueforitscustomers
PunctualityisthefirstpriorityinSouthwestAirlineandsureinthebusiness
Manyavailableandflexibleflightschedules
Create good customer experiences to make them impress in Southwest
services
Makethecustomerfeelworthywhencomparingpricewithservices
4.Acquireandkeepcustomers
Fromselectingitscustomersthatisdividedintotwogroups,Southwesthasmethodto
keepandacquirecustomersasfollows:
Forkeepingcustomers,
Provideservicesthatcancreatecustomerssatisfactionandmemorable
ServicewithPunctualityandfastresponsiveness
Foracquiringcustomers,
Uselowpricestrategytoattractnewcustomers
Expanding new routes and offering various flight schedules to support
customersneeds

26

5.Producegoodsandservices
Southwest administrated a very good cost management by cutting some of not
necessary activities from flight; such as food on board, movies, and using the ticketless system.
Moreover,theyunderlinedexcellentservicestocreategoodexperiencetoitscustomers.
6.Deliverthosegoodsandservicestothemarket
Southwestdelivergoodsandservicestothemarketbytwomainchannelswhicharethe
ticketlessthroughSouthwestwebsiteandthroughtheagencies.
7.Organizeactivitieswithinthecompany
Southwestmanagedbyusingcostcontrolineverydepartmentincludingwithdeveloped
human resource since the starting of recruiting, screening and hiring process. They seek for
employees who have good attitude with service minded and perform well within teamwork
environment. They also implant Work with FUN in organizational culture to create a good
relationshipfrominside.
8.Configureitsresourcesandcapabilities
Human resource is an important resource of the company so Southwest emphasizes
employeerecruitment,training,andprovinggoodcompensationandbenefits.Southwestalsohasa
capability in labor productivity management; such as the head of Southwests ground operations
cameupwithaplanforgroundcrewstooffloadpassengersandbaggage,refueltheplane,clean
thecabinandrestockthegalley,onloadpassengersandbaggage,dothenecessarypreflightchecks
and paperwork, and push away from the gate within 25 minutes that shorter than the 30 to 50
minuteturnaroundtimestypicalatothermajorairlines.
9.Achieveandsustainahighlevelofprofitability
SouthwestAirlineshasimprovinganddevelopingprogramsallthetimebybringingup
newtechnologiestohelpabetterbusiness;suchasusingWingletssystemthathelptocontrolthe
cost and deliver good experiences to its customers to make them impress and comeback for
excellentservicesagain.
10.Growthebusinessovertime
SouthwestAirlineswasneverlosethemoneysince1973becausetheyhaveaverygood
managementincostcontrolling,employeesproductivityincludingcreatecustomersatisfactionand
never forget about employees life like one of familys member. These are main factors for
organizational sustainability that supports Southwest Airlines to make a profit and while others
makealoss.

27

3.) Review the corporate strategic direction (Vision, Mission,

Objective, and Philosophy). How coherent are they?

ThePurposeandVisionofSouthwestAirlines
OurPurpose:Connectpeopletowhatsimportantintheirlivesthroughfriendly,reliable,lowcost
airtravel.
OurVision:TobecometheWorld'sMostLoved,MostFlown,andMostProfitableAirline.
Source:https://www.southwest.com/html/aboutsouthwest/careers/culture.html

TheMissionofSouthwestAirlines
The mission of Southwest Airlines is dedication to the highest quality of Customer
Servicedeliveredwithasenseofwarmth,friendliness,individualpride,andCompanySpirit.
Southwest Airlines Mission also conform to their vision that wanted to become the Worlds Most
Lovedasfollows:
DedicationtothehighestqualityofCustomerService
Deliveredwithasenseofwarmth
Deliveredwithasenseoffriendliness
Deliveredwithasenseofindividualpride
DeliveredwithasenseofCompanySpirit

ToOurEmployees
Weare committed to provide our Employees a stable work environment with equal
opportunity for learning and personal growth. Creativity and innovation are encouraged for
improvingtheeffectivenessofSouthwestAirlines.Aboveall,Employeeswillbeprovidedthesame
concern, respect, and caring attitude within the organization that they are expected to share
externallywitheverySouthwestCustomer.

28

ToOurCommunities
Ourgoalistobethehometownairlineofeverycommunityweserve,andbecause
thosecommunitiessustainandnurtureuswiththeirsupportandloyalty,itisvitalthatwe,as
individualsandingroups,embraceeachcommunitywiththeSOUTHWESTSPIRITofinvolvement,
service,andcaringtomakethosecommunitiesbetterplacestoliveandwork.
ToOurPlanet
We strive to be a good environmental steward across our system in all of our
hometowns, and one component of our stewardship is efficiency, which, by its very nature,
translatestoeliminatingwasteandconservingresources.Usingcosteffectiveandenvironmentally
beneficialoperatingprocedures(includingfacilitiesandequipment)allowsustoreducetheamount
ofmaterials weuseand, when combinedwithourability toreuseandrecycle material, preserves
theseenvironmentalresources.
ToOurStakeholders
SouthwestAirlinesvisionforasustainablefutureisonewheretherewillbeabalance
in our business model between Employees and community, the environment, and our financial
viability.Inordertoprotectourworldforfuturegenerationsandupholdourcommitmentstoour
Employees, Customers, and other Stakeholders, we will strive to lead our industry in innovative
efficiencythatconservesnaturalresources,maintainsacreativeandinnovativeworkforce,andgives
backtothecommunitiesinwhichweliveandwork.
Source:https://www.southwest.com/html/aboutsouthwest/

Objectives
1.Bethebestplacetowork.

2.Bethesafest,mostefficient,andthemostreliableairlineintheworld.

3.Offercustomeraconvenientflightschedulewithlotsofflightstolotsofplacestheywanttogo.

4.Offercustomersthebestoveralltravelexperience.

5. Do all of these things in a ways that maintains a low cost structure and the ability to offer low
fares.

SouthwestAirlinesPhilosophyandValue
Southwest Airlines created the philosophy and value for their employees to operate
withaWarriorSpirit,aServantsHeart,aFunLUVingAttitude,andtheSouthwestWay

29


WarriorSpirit FunLUVingAttitude
WorkHard HaveFUN
Desiretobethebest Don'ttakeyourselftooseriously
Becourageous Maintainperspective
Displayurgency Celebratesuccesses
Persevere Enjoyyourwork
Innovate BeapassionateTeamplayer
ServantsHeart WorktheSouthwestWay
FollowTheGoldenRule SafetyandReliability
AdheretothePrinciples FriendlyCustomerService
Treatotherswithrespect LowCost
Putothersfirst
Beegalitarian
DemonstrateproactiveCustomer
Service
EmbracetheSWAFamily

Source:https://www.southwest.com/html/aboutsouthwest/careers/culture.html

VisionandMissionCoherent
Vision Mission
BecometheWorldsMostLovedAirline Deliveredwithasenseofwarmth
Deliveredwithasenseoffriendly
Deliveredwithasenseofindividualpride
DeliveredwithasenseofCompanySpirit
ToOurEmployees
ToOurCommunities
ToOurPlanet
ToOurStakeholders
BecometheWorldsMostFlownAirline Dedicationtothehighestqualityof
CustomerService
Deliveredwithasenseofwarmth
Deliveredwithasenseoffriendly
Deliveredwithasenseofindividualpride
DeliveredwithasenseofCompanySpirit
ToOurCommunities
Become the Worlds Most Profitable Dedicationtothehighestqualityof
Airline CustomerService
ToOurEmployees
ToOurPlanet

30

 MissionandObjectiveCoherent

Objective Mission
Bethebestplacetowork DeliveredwithasenseofCompanySpirit
Be the safest, most efficient, and the most DedicationtothehighestqualityofCustomer
reliableairline Service
Offercustomeraconvenientflightschedule DedicationtothehighestqualityofCustomer
withlotsofflightstolotsofplacesthewant Service
togo
Offer customers the best overall travel o Dedication to the highest quality of
experience CustomerService
o Deliveredwithasenseofwarmth
o Deliveredwithasenseoffriendly
o Deliveredwithasenseofindividualpride
Do all of these things in a ways that DeliveredwithasenseofCompanySpirit
maintainsalowcoststructureandtheability
toofferlowfares

MissionandPhilosophy(Value)Coherent

Philosophy(Value) Mission
1.WarriorSpirit o Dedication to the highest quality of
CustomerService
o DeliveredwithasenseofCompanySpirit
2.ServantsHeart o Dedication to the highest quality of
CustomerService
3.FunLUVingAttitude
o Deliveredwithasenseofwarmth
o Deliveredwithasenseoffriendly
o Deliveredwithasenseofindividualpride
o DeliveredwithasenseofCompanySpirit
4.WorktheSouthwestWay o Dedication to the highest quality of
CustomerService
We can see that Southwest Airlines Vision, Mission, Objective and Philosophy are
coherent and encourage to each other systemically. And these are very important to Southwest
Airlinesstrategicmanagementprogress.

31

Conclusion

Vision Mission Objective CoreValue

Become the Worlds Most Loved 1. Dedication to the highest quality of 1.Bethebestplacetowork 1.WarriorSpiritWorkHard
Airline CustomerService 2. Be the safest, most efficient, and the
2. Servants Heart Service mind
2. Deliveredwithasenseofwarmth mostreliableairline
3. Deliveredwithasenseoffriendly 3.Offercustomersthebestoveralltravel attitude with proactive strategy to
4. Delivered with a sense of individual experience
satisfycustomerneed
pride
5. Delivered with a sense of Company 3.FunLUVingAttitudeWorkingin
Spirit
relaxing environment and enjoy on
what they do including admire each
othertosupportteamwork
4.WorktheSouthwestWay
Become the Worlds Most Flown 1. Offer customer a convenient flight
Airline schedule with lots of flights to lots of
placesthewanttogo
Become the Worlds Most 1. Do all of these things in a ways that
ProfitableAirline maintains a low cost structure and the
abilitytoofferlowfares
2.Achieve15%ROICbeforetax
3.Hedgingoilpricefor40%ofoveralloil
usage

32

4.) Functional level strategy

a)DescribeallactivitiesofthecompanybyusingPortersValuechain.Comparethecompanysvalue
chainwithothercompetitorsvaluechain.Drawthepicturetoseethedifferencesandsummarize
yourfindings.

b)IdentifyFunctionalLevelStrategiesthatthecompanyisemploying.HowcanthoseFunctional
LevelStrategiesimprovetheeffectivenessofacompanysoperationsandthusitsabilitytoattain
superiorEfficiency(E),Quality(QR:QE),Innovation(PDI:PCI),andCustomerResponsiveness(CR)?

b1)Inboundlogisticsstrategy
b2)Operationstrategy
b3)Outboundlogisticsstrategy
b4)Marketingandsalesstrategy
b4.1)Productstrategy
b4.2)Pricingstrategy
b4.3)Placestrategy
b4.4)Promotionstrategy
b4.5)Peoplestrategy
b4.6)Processstrategy
b4.7)Physicalevidencestrategy
b5)Servicesstrategy
b6)FirmInfrastructure
b6.1)Informationtechnologystrategy
b6.2)Accountingstrategy
b6.3)Financestrategy
b6.4)Strategicplanningstrategy
b7)Humanresourcemanagementstrategy
b7.1)Recruitmentandselectionstrategy
b7.2)Traininganddevelopmentstrategy
b7.3)Compensatingandretainingstrategy
b8)Technologydevelopmentstrategy
b9)Procurementstrategy

c)Drawatabletosummarizeallfunctionallevelstrategiesthatthecompanydependson.Which
effectivenessthatthecompanyputsmostemphasison.

33

a) Describe all activities of the company by using Porters Value chain. Compare
the companys value chain with other competitors value chain. Draw the picture
to see the differences and summarize your findings.

Table4.1Portersvaluechaincomparisonofairlines

Inboundlogistic
Southwestairlines Jetblueairways Conventionalairlines
Singletypeofaircraft Singletypeofaircraft Multipletypeofaircraft
Southwestairlinesonlyuse Jetblueairwaysonlyusesingle Mostairlinesusemanytypeof
singletypeofaircrafttobenefit typeofaircrafttobenefitfrom aircraftduetoitsneedtofulfill
fromeconomyofscale,simplify economyofscale,simplifyits differentcustomersneed.
itsoperationandmaximizethe operationandmaximizethe
useoftraining.Thechoiceof useoftraining.Thechoiceof
aircraftisBoeing737. aircraftisAirbus320,whichhas
moreseatcapacitythanBoeing
737.

Wingletinstallment Conventionalaircraft Conventionalaircraft
Southwestairlinesisamongthe Lowerefficiencyaircraft.This Lowerefficiencyaircraft.This
firstairlinetoinstallwingleton willbecomemoreproblem willbecomemoreproblem
itsaircraftinordertoreduce whenthefuelpricerise whenthefuelpricerise
thecostandbringupefficiency. becauselowerefficiencymean becauselowerefficiencymean
usingmorefuel.However, usingmorefuel.
JetblueairwayssAirbus320
hasmoreseatsthanSouthwest
airlinessBoeing737sothis
wouldfulfillsomeofthe
benefitthatwingletfulfill.

Unionizestaff Recruitstaffdirectly Unionizestaff
Southwestairlinesrecruittheir Jetblueairwaysbelievethatif Mostoftheairlinesrecruittheir
employeefromlaborunion.It theyneeduniontorepresent employeefromlaborunionbut
hasaverygoodrelationship theiremployee,itmeansthat theydonotarrangethelabor
withunion,makingtheir theydidnotunderstandand unionbenefittothecompany
operationrunsmoothly takecareoftheiremployee benefit.Thismakeslaborunion
becausethecompanysgoal goodenough.Thereshouldbe becometheproblemforthem.
andtheunionsgoalis noneedforlaborunionifthe
correlatedinthesame companyunderstandswhat
direction. theiremployeesneed.

Fuelhedging Nofuelhedging Nofuelhedging
Southwestairlineshedgetheir Ifnofuelhedgingwhenfuel Ifnofuelhedgingwhenfuel
fuelcostwhenthetrendis pricerise,theairlinehasto pricerise,theairlinehasto
rising.ThismakeSouthwest increasetheairfaretostay increasetheairfaretostay
airlinescapableofprovide profitablebutitwould profitablebutitwould
customerwithlowairfareeven decreasethecompetitiveness decreasethecompetitiveness
whenthefuelpriceisrising. ofthecompanyiftheother ofthecompanyiftheother
airlineshastheirfuelhedgeand airlineshastheirfuelhedgeand
didnotincreasethepriceof didnotincreasethepriceof

34


SOUTHWESTAIRLINES
Servetheunderservemarket
Usingitslowcoststructureto
increasethenumberof
travellerinunderserveroute.
Whentheroutehaslow
demandandbecome
unprofitable,other
conventionalairlinewill
abandontheroute.Thiscreate
hugeopportunityforlowcost
airlinetooccupytherouteand
stimulatethedemandfrom
thosewhotravelbycars,busto
changetoairtravelinsteadby
matchingitslowcostairfareto
thecostofcarsorbus.
Baseonsecondaryairport
Southwestairlinesisbasedon
secondaryairporttoensure
smoothoperationthatbenefit
fromlesstrafficandlower
overallcost.Theaircraftwillbe
ensuringtoalwayshaveaslot
forlanding.
Pointtopoint
Southwestairlinesoperate
mainlyonpointtopointbasis.
Thisreducesthetimetodo
complexairportprocedure,
lowerdelaytime,totaltriptime
andincreaseaircraftutilization.
Onlinebooking
Customercanalwayschoose
theirflightandbookairticket
online24/7.Thisreducesthe
waitingtimeofcustomerand
helpthecompanyeffectively
managetheoperation.
Allinclusiveairfare
Southwestairlinesincludefree
baggageloadundertheaircraft
forthecustomers.Thismake
customereasiertocompare
airfare.
OPERATION
JETBLUEAIRWAYS
Servetheunderservemarket
Usingitslowcoststructureto
increasethenumberof
travellerinunderserveroute.
Whentheroutehaslow
demandandbecome
unprofitable,other
conventionalairlinewill
abandontheroute.Thiscreate
hugeopportunityforlowcost
airlinetooccupytherouteand
stimulatethedemandfrom
thosewhotravelbycars,busto
changetoairtravelinsteadby
matchingitslowcostairfareto
thecostofcarsorbus.
Baseonhub/mainairport
Jetblueairwaysbaseonthe
mainairporttogetthehigh
demandbenefitofhuband
spoke.
Pointtopoint
Southwestairlinesoperate
mainlyonpointtopointbasis.
Thisreducesthetimetodo
complexairportprocedure,
lowerdelaytime,totaltriptime
andincreaseaircraftutilization.
Onlinebooking
Customercanalwayschoose
theirflightandbookairticket
online24/7.Thisreducesthe
waitingtimeofcustomerand
helpthecompanyeffectively
managetheoperation.
Allinclusiveairfare
Jetblueairwaysincludefree
baggageloadundertheaircraft
forthecustomers.Thismake
customereasiertocompare
airfare.
CONVENTIONALAIRLINE
Servewheredemandishigh
Onlyservewheredemandis
highenoughtofulfillthesupply
oftheairline.Mostofthe
conventionaloperatefromhub
andspokebasetosecurehigh
demand.
Baseonhub/mainairport
Jetblueairwaysbaseonthe
mainairporttogetthehigh
demandbenefitofhuband
spoke.
Hubandspoke
Mostconventionalairlines
flyingonhubandspokebasis
toensurehighoccupancyof
theaircraftthatresultfrom
highdemandbenefitfromhub
andspokeairport.
Overthecounterbooking
Customerhastotraveltopoint
ofpurchasetopurchaseticket
fromagencyormachine,which
aretimeconsuming,costlyand
inconvenient.
Airfarewithoptionalamenities
Customersarerequiredtopay
toloadtheirbagunderthe
aircraft.
35

priceanddontneedtopay
extraforbags.
Thisreducetheproblemof
exceedno.ofbagsonboardand
maketheboardingoperation
faster.
Ticketlesssystem
Theuseofetickethelpsreduce Theuseofetickethelpsreduce
thecostandlowerthetotal
flighttimeforcustomer
becausetheydonthaveto
waitinlineatthecounter.
Southwestairlinesisfamousfor
helpingcustomers,sometime
thestaffusetheirown
judgmenttojudgewhetherto
allowcustomerwithoutticket
togoonboardiftheyhasother
waytoshowtheiridentities.
Singletypeofseat
Thereisonlyonetypeofseat Thereisonlyonetypeofseat
onboard.Thismakesthe
boardingprocessmuchfaster
andeasiertocabincrewto
manage.
Noseatreservation
Noseatreservationhelp
boardingcustomereasierto
manageandfastertooperate.
Highdensityseat
Singletypeseatandlessspace
betweenseatrowsallowfor
moreseatcapacity,whichcan
bringmorecustomers,lower
thecostandimproveefficiency.
Shorthaulflight
Higherturnaroundtimebenefit
moreinshorthaulflight.This
willmakethecompany
competebettertootherairline.
Highaircraftutilization
Bringdowntheoverallcost,
lesstotaltraveltimeandfewer
flightdelays.
priceanddontneedtopay
extraforbags.Thisreducethe
problemofexceedno.ofbags
onboardandmakethe
boardingoperationfaster.
Eticketsystem Conventionalticketsystem
Useoftraditionalpaperticket
thecostandlowerthetotal increasethetimeatthe
flighttimeforcustomer counterandboardingaswellas
becausetheydonthaveto increasetheoveralloperation
waitinlineatthecounter. cost.
Singletypeofseat Multipletypeofseat
Havingmultipletypeofseatis
onboard.Thismakesthe difficulttomanageandtime
boardingprocessmuchfaster consumingwhenboardingeach
andeasiertocabincrewto differenttypeofcustomers.
manage.
Provideseatreservation
Noseatreservation Timeconsuminganddifficultto
Noseatreservationhelp manage
boardingcustomereasierto
manageandfastertooperate.
Highdensityseat Lowdensityseat
Singletypeseatandlessspace Multipletypeofseatneed
betweenseatrowsallowfor morespacebetweenrowsand
moreseatcapacity,whichcan makelessseatcapacity,which
bringmorecustomers,lower willbringupthecostandlower
thecostandimproveefficiency. efficiency.
Shorthaulflight Shortandlonghaulflight
Higherturnaroundtimebenefit Cannotfullybenefitfromthe
moreinshorthaulflight.This highturnoveroperation.
willmakethecompany
competebettertootherairline.
Highaircraftutilization Lowaircraftutilization
Bringdowntheoverallcost, Highercostandmoretravel
lesstotaltraveltimeandfewer time.
flightdelays.
36

Consistentlyextendrouteand Consistentlyextendrouteand Closingrouteandcuttingno.of

no.offlight no.offlight unprofitableflight
Makemoreroutesavailablefor Makemoreroutesavailablefor Loweraircraftutilization,asset
customers,whichwillallowfor customers,whichwillallowfor turnover,economyofscaleand
moreaircraftutilization,better moreaircraftutilization,better lowerbrandawareness.
economyofscaleandbetter economyofscaleandbetter
brandawareness. brandawareness.

FUNLUVingservice JetblueairwaysExperience Conventionalservice
Anentertainingcustomer Focusonmakingleisureflight Industrystandardincluding
servicetomaketheflighta throughtechnologysuchas magazineandsharedTV
pleasureflight. personalscreen,LIVETvand system.
FlyFi.


Outboundlogistic
Southwestairlines Jetblueairways Conventionalairlines
Noconnectionflightservice Noconnectionflightservice. Provideconnectionflight
Moretimeandworkforceto Moretimeandworkforceto service.
focusonthecompanyscore focusonthecompanyscore Provideinterconnectflight
services. services. servicewithotherairlinessuch
asbaggagehandling.

Marketingandsales
Southwestairlines Jetblueairways Conventionalairlines
ProductFocusonqualityof ProductFocusonqualityof ProductBasicflightwithpaid
coreservice(Lowcostno coreserviceandinflightleisure optionalservice
frills) (Valueairline) Industryaverageflightservice
Safe,reliable,ontimeandlow Safe,reliable,ontimeandlow withadditionalpaidamenities.
priceflightwithoutnon priceflightwithpersonal
necessaryamenitiessuchas entertainment.Jetblueairways
meal. hasaguaranteeserviceofno
delay,nocancelflightcalled
JetblueairwaysCustomerBill
ofrightsthatgivemoneyto
customerseachtimeaflight
delayorcancel.

PriceLowcost,allinclusive PriceLowcost,allinclusive PriceAveragecostwith
Stimulatedemandbyproviding Stimulatedemandbyproviding payableamenities
lowcostairfare,whichinclude lowcostairfare,whichinclude Pricingonlyairfarewithout
allthenecessaryamenities allthenecessaryamenities includingfeeforloadbag,
suchasairporttax,loadbag,on suchasairporttax,loadbag,on airporttaxandotherfees.
boardsnack. boardsnack.

PriceOnpeakoffpeakprice PriceRegularpricing PriceRegularpricing
Chargingdifferentcustomer Chargingairfarebaseonroute Chargingairfarebaseonroute
groupwithdifferentpricesto andseason. andseason.
ensurethatcompanyalways
hasthelowestcostinthe
industry.

37


PlaceDirectselltocustomer PlaceDirectselltocustomer
Companysellsairplanetickets
directtocustomerviawebsite
toensurelowercostand
reduceunnecessarycostfrom
agency.
PromotionAggressivePR
CompanyuseaggressivePR
campaignonlowcostonbelief
thatlowcostsellitself.
PromotionNo.ofTripflown PromotionValueoftripflown
basedloyaltyprogram
Acustomizedloyaltyprogram
forSouthwestairlinessmajor
customerandthosewhofly
oftenregardlessofvalueof
distance.Itgiverewardsuchas
freeflightorpriorityboarding
calledAList
PeopleBeyondexpectation
service
Unregulatedemployeedriven
servicesthatalwaysWOWthe
customers.
ProcessSouthwestairlines
Way
Aprocessguidebycompanyto
treatcustomerusingwarriors
spirit,servantsheartandFun
LUVingattitude.
PhysicalevidenceAwards&
customertestimonial
Lowestcustomercomplaintin
theindustry,Triplecrown
award,Famousinflight
activities
ServiceNoaftersalesservice
Supportingactivities
Southwestairlines
Sharedgoal,sharedknowledge, Sharedcorporatevalue
PlaceSellviaagency
Companysellsairplanetickets Sellairplaneticketsviaagency
directtocustomerviawebsite anddistributor,addmorecost
toensurelowercostand andmaketicketpricehigher.
reduceunnecessarycostfrom
agency.
PromotionAggressivePR PromotionLessaggressivePR
CompanyuseaggressivePR Companyusemarketing
campaignonlowcostonbelief campaignforthepurposeof
thatlowcostsellitself. promotingqualityofservice
andbuildingbrandimage
basedloyaltyprogram PromotionDistanceoftrip
Aloyaltyprogramthatgive flownbasedonloyaltyprogram
rewardbaseonthevalue Aloyaltyprogramthatgive
customerpayforaticket. rewardbaseonthedistance
flown.
PeopleInflightpersonal PeopleFriendlyservice
entertainment Industryaverageservice
Keepcustomerhappyvia
inflightpersonalentertainment
servicesuchasLIVETv,FlyFi.
ProcessJetblueairways ProcessVarietyofprocess
Experience Itsownprocess
Aprocessguidebycompanyto
provideHumanityonair
travelusinguptodate
technologytokeepcustomer
entertain.
PhysicalevidenceTheairlines PhysicalevidenceBrand
property Brand&History
Newaircraft,leatherseat,
largerandwiderseatspan,
stateofartinflight
entertainmentsystem
ServiceNoaftersalesservice ServiceNoaftersalesservice
Firminfrastructure
Jetblueairways Conventionalairlines
Individualgoalandvalue
38

mutualrespect
Southwestairliness
relationshipfocus,its
commitmentandpassionfor
sharedgoals,shared
knowledge,andmutual
respect,joinswithfrequent,
timely,problemsolving
communicationtoforma
powerfulforcecalledrelational
coordination.
Highrelationalcoordination
Southwestairlinessfocuson
highrelationalcoordination
allowsthecompanytofully
utilizeitsworkforceandenable
themtoworktogetherand
corporatetoeachother.The
companynotonlyutilizesthis
withtheiremployeebutalso
withpartnersuchasairport
andsuppliers.
Crossfunctional/Flexible
operationpractice
Eachoftheemployeesatthe
companyareencouragetobe
expertattheirownexpertise
plusotherrelatedfieldofwork
whichallowthemtobeableto
helpfulfilltheoperationat
timelybasis.Decisioncanbe
makeaccordinglyusingthe
employeesownjudgment
basedoncompanysguideline.
Unifiedcorporateculture
Abilitytosustainthesame
corporatecultureforallareaof
employeesandlocationthat
companyoperate.Thesemake
iteasyforemployeeand
managementtomovearound
towheretheirexpertiseis
needed.
Conservativefinancialposition
Thecompanysconservative
financialpositionallowsthe
companytosurviveinbad
Takingadvantageofnew Eachofthemanagementand
company.Thecorporatevalue employeeworktomaximize
issharedamongallemployees thevalueandreachgoalof
atalllevelastheyoperateat eachindividualwithoutcaring
thesamegoalandvaluethe aboutcorporategoalandvalue.
sameprinciple. Everymanforhimself.
Highrelationalcoordinationvia Lowrelationalcoordinationvia
technology technology
Jetblueairwaysusetechnology Jetblueairwaysusetechnology
tohelpimprovetheiroperation tohelpimprovetheiroperation
relationalcoordination. relationalcoordination.
Crossfunctional/Flexible
operationpractice Individualfunction/practice
Eachoftheemployeesatthe Theemployeesareencouraged
companyareencouragetobe todotheirownjobonly.
expertattheirownexpertise
plusotherrelatedfieldofwork
whichallowthemtobeableto
helpfulfilltheoperationat
timelybasis.Decisioncanbe
makeaccordinglyusingthe
employeesownjudgment
basedoncompanysguideline.
Unifiedcorporateculture
Abilitytosustainthesame
corporatecultureforallareaof
employeesandlocationthat Diversecorporateculture
companyoperate.Thismakesit Culturearedifferentdependon
easyforemployeeand thelocationoftheoperation.
managementtomovearound
towheretheirexpertiseis
needed.
Conservativefinancialposition
Thecompanysconservative
financialpositionallowsthe
companytosurviveinbad Aggressivefinancialposition
economywithouthavingtolay Mostoftheairlinesusually
39

economywithouthavingtolay offemployeesandkeeping leveragetheircompanyto

offemployeesandkeeping
themfeelsecuredtoperform
theirbest.
Stimulatedemandin
underservedmarkets
Thestrategyforlowcostairline
istoleverageitslowcost
structureintheunderserved
market,stimulatecustomersto
flybringinghighgrowthin
demandofairtravelinshort
periodoftimeaspeoplecalled
itSouthwestEffect
Simplifyworkpractice
Thecompanysimplifies
everythingfromuseof
secondaryairport,singletype
ofaircraft,pointtopointand
simpleproductandservice.
Thesemakeoperatetheairline
oneoftheeasiestamongall
typeofairline,mostefficient
andlowestcost.
Flatstructureorganization
Moreflexibilityonoperation
activities.
Lesscentralizedstructure
Employeesareallowedtomake
operationaldecisionontheir
ownbasedoncompanys
guideline.
themfeelsecuredtoperform
theirbest.
Stimulatedemandin
underservedmarkets
Thestrategyforlowcostairline
istoleverageitslowcost Operateinwellservedhigh
structureintheunderserved
market,stimulatecustomersto
flybringinghighgrowthin
demandofairtravelinshort
periodoftime.
Simplifyworkpractice
Thecompanysimplifies
everythingfromuseof
secondaryairport,singletype
ofaircraft,pointtopointand practiceisrequired.Thiskindof
simpleproductandservice.
Thesemakeoperatetheairline
oneoftheeasiestamongall
typeofairline,mostefficient
andlowestcost.
Flatstructureorganization
Moreflexibilityonoperation
activities.
Centralizedstructure
Employeesarestrictly
controlledviamanagements
maximizetheirreturnwithout
thinkingaboutdownsiderisk.
Theresultarehugelayoff
wheneconomiccrasheswhich
maketheemployeefeel
unsecureandcannotperform
theirbest.
demandmarkets
Conventionalairlinesarewell
performunderwellservedhigh
demandmarketinordertostay
profitable.
Variousworkpractice
Tofulfilltheneedofall
customersandoperatevarious
typeofservice.Variouswork
practiceneedsalotoftraining
andinvestment.
Tallstructureorganization
Lessflexibilityonoperation
activities.
Centralizedstructure
Employeesarestrictly
controlledviamanagements

Humanresource
Southwestairlines Jetblueairways Conventionalairlines
Hireandtrainforrelational Hireandtrainforrelational Hiringforfunctionalexpertise
competenceandculturalfit competenceandculturalfit Focusrecruitmentbasedon
Thecompanyhiresandtrain Thecompanyhiresandtrain employeesexpertise.
employeesbasedonrelational employeesbasedonrelational
competenceorhowemployees competenceorhowemployees
canworktogethercross canworktogethercross
functionallywithotherpeople functionallywithotherpeople
inthedifferentdepartment. inthedifferentdepartment.
Employeewhowasoncehired Employeewhowasoncehired
butfoundthemselvesunfitto butfoundthemselvesunfitto

40

thecorporatecultureis
encouragetoleave.
Highsupervisory
Supervisionisoneofthemost
importantelementsinthe
company.Thesupervisorwork
closelyonthefieldwiththeir
frontlinesubordinateto
effectivelysuperviseandcreate
strongrelationshipand
fosteredhighquality
communication.AtSouthwest
airlineasupervisoris
responsiblefor10to12
frontlineworkers,thehighest
supervisortoemployeeratioin
theindustry.Conflictsare
solvedatthemanagement
levelascalledCometoJesus
meeting.
Unionizeworkforce
Southwestairlinetake
relationshipwiththelabor
unionveryseriouslyandthey
taketimetoalignthegoalof regulationfromlaborunion.
thelaboruniontothegoalof
thecompany.Thisallow
Southwestairlinetobeoneof
themostsuccessfulcompanyin
theworldtoworkwithlabor
union.
Aboveaveragewage
EmployeesatSouthwestairline
gainaboveaveragewage,
whichencouragetheemployee
todomoreforthecompany
andoperateefficiently.
Employeearealsocompensate
forbeyondexpectation
performanceascalled
Operationkicktail
Lifetimeemployment
Lifetimeemploymentmake
peoplefeelsecureabouttheir
lifeandcanperformtheirjob
withouthavingtoworryabout
survival.
thecorporatecultureis
encouragetoleave.
Highsupervisoryviatechnology Highcontrolling
Supervisionisoneofthemost Atconventionalairlines,one
importantelementsinthe supervisorresponsibleformore
company.Thesupervisorworks than40frontlineworkers.It
closelywiththeaidof turnoutthatsupervisor
technologywiththeirfrontline becomethecontrollerbecause
subordinatetoeffectively ofnotenoughtimetosupport
superviseandfosteredhigh thefrontlineemployeeswhich
qualitycommunication. laterresultinpoor
performance.
Nonunionizeworkforce Unionizeworkforce
Jetblueairwaysbelievethat Mostoftheconventional
theycantakecareoftheir airlineshavebadrelationship
employeewithoutthe withthelaborunionbecauseof
lesscommunicationand
differentgoal.
Averagewage Belowaveragewage
Jetblueairwaystendtorely Becauseofthevolatilityof
mostoftheworktotechnology airlinesoperation.Thewageis
aidoperation,thismake beingunderindustryaverage
Jetblueairwaysrelylessonthe becausetheythinkof
skillofitspeoplesotheygive employeesascostbutnot
theirpeopleaveragewage. profitcenter.Mostofthe
employeesattheseairlinesare
notfullyutilizedandless
efficient.
Shorttermflightattendant Employmentbasedon
employment economic
Jetblueairwaysbelievethat Airlineslayoffoccasionallydue
someoccupationshouldbe todownturnineconomyor
shorttermbecausethereare crisis.
noexperienceadvantage.At
41


Internallycareerpromotion
Careeradvancementfrom
internalemployeeonlybecause
theywillhaveagood
understandingoftheir
operationandthecompanys
culture.Thismakesthe
efficiencyofthecompany
sustainable.
PeopleDepartment
Aspecialdepartmentto
promoteandtrainemployee
forrelationalcompetenceand
crossfunctionaloperation.It
calleditselfUniversityfor
people.
Catastrophicassistantcharity
Aspecialcharitydesignedin
Southwestairlinetohelpaid
theemployeewithlife
difficultiessituations.
Southwestairlines
Wingletinstallation
Southwestairlineisamongthe
firstairlinetoinstallwingleton
itsaircraftinordertoreduce
thecostandbringupefficiency.
Southwestairlines
Companyoperatenoncore
service
Southwestairlinesoperate
mostofitsnoncoreservice,
someofthemareoperateby
partnerwithveryclose
supervisionfromSouthwest
airlines.
Figure4.1:Southwestairlinessvaluechain
Figure4.2:Jetblueairwayssvaluechain
Jetblueairways,flight
attendantswageisnot
compensatingaccordingto
seniorityandtheyare
encouragedtobeemployfor3
5yearsonly.
Internally/Externalcareer
promotion
Externalcareerpromotionmay
causeconflictwithinthe
organization.
Generalhumanresource
department
Generallycontrolandutilize
thehumanresourceofthe
organization.
Assistantbasedonlaw
Helpemployeebaseon
requirementfromnationallaw
andsocialsecurity.
Technologydevelopment
Jetblueairways
Technologydrivenoperation
Jetblueairwaysbasedits
operationoninformationand
technologyatalllevel.
Procurement
Jetblueairways
Subcontractedsomeof
maintenanceactivities
Jetblueairwayssubcontracted
activitythatoutofitsexpertise servicetobringthecostdown.
suchasaircraftmaintenance.
43
Internally/Externalcareer
promotion
Externalcareerpromotionmay
causeconflictwithinthe
organization.
Generalhumanresource
department
Generallycontrolandutilize
thehumanresourceofthe
organization.
Assistantbasedonlaw
Helpemployeebaseon
requirementfromnationallaw
andsocialsecurity.
Conventionalairlines
Traditionalpractice
Usingconventionalaviation
technology.
Conventionalairlines
Subcontractmostofnoncore
service
Subcontractmostofnoncore
42


Figure4.3:Conventionalairlinessvaluechain

Summarize of Porters Value chain Southwest airlines, Jetblue airways and other conventional
airlines

Wefirstcategorizeairlineintothreetypes:

1)Southwestairline
2)OtherLowcostairline(JetBlueairway)
3)Conventionalairlines

Allofthemoperateairline,butthereareseveraloperationalfactorsthatmakeeachoneof
themdistinctivelyunique.SouthwestairlineandJetBlueairlinecanbecategorizedaslowcostairline
whileotherairlinesintheindustrycanbecategorizedasconventionalairline.

Themaindifferentofconventionalairlineandlowcostairlineinportersvaluechainareasfollows:
1. Inbound Logistic Low cost airlines tend to use only single type of aircraft in order to
keep the cost low. Conventional airline use multiple type of aircraft to fulfill the need of
differenttypeofcustomer.
2. OperationLowcostairlinespenetrateintothemarketbyusingitslowcoststructureto
stimulate demand from new customer where the route is underserve and it can be in a
bettercompetitivepositionwhereconventionalairlinesarelesscompetitive.Theshorthaul
flight where flight turnover is more important make low cost airlines dominates the
conventionalairline.
3. Outbound Logistic Low cost airline do not provide any connecting flight service in
order to keep it operation simple and the cost low. Conventional airline tends to provide
connectingflightservicetomakethecustomermoreconvenient.

44

 4. Marketing and sales Low cost airline only provide flight service with minimum
amenities, they rely on its own direct marketing channel while conventional airline relied
mainlyonagency.
5. Service Conventional airlines provide after sales service such as car rental and hotel
whilelowcostairlineonlyfocusonitscoreoperation,whichisairtravel.
6. Supporting activities Low cost airlines tend to rely its success on maximization of its
assetsuchasaircraft,terminalslotanditsemployeeswhileconventionalairlinesreliedon
itsbranding,marketingandproductcustomization.

Lowcostairlinesaremuchdifferentfromconventionalairlinesbuttheyarenotallthesame.
SouthwestairlineandJetBlueairlinearebeingcategorized,aslowcostairlinesbuttherearesome
differentinhowitoperatesanditsstrategythatmakethembothexcellentintheirownway.
Southwest airline focus solely on air travel and maximize of its asset utilization without
muchconcernofinflightexperience.JetBlueontheotherhandcalledthemselfValueairline,they
distinctive themselves as low cost airline with excellent flight experience. Southwest airline rely
mainlyonitspeoplewhileJetBluetrytoutilizetheuseoftechnologytoaccompanieditsservice.

45

b) Identify Functional Level Strategies that the company is employing. How can
those Functional Level Strategies improve the effectiveness of a companys
operations and thus its ability to attain superior Efficiency (E), Quality (QR:QE),
Innovation (PDI:PCI), and Customer Responsiveness (CR)?
Primaryactivities

b1)InboundLogisticsstrategy

SinglemodelaircraftBoeing737(E1)
Singletypeofaircraftallowthecompanytooperateeasierbecauseallaircraftsarethesame
which easier to train the staffs and perform better operation because of fast and quick
learning curve. This create competitive over other airlines because most of them use
multipletypeofaircraft.
Wingletinstallment(E2,PDI1)
SouthwestairlinesisamongtheveryfirstairlinetoinstallWingletontheirairplane.Winglet
helpbringthecostoffueldownandmaketheaircraftmorefuelefficient.

Figure4.4Blendwingletanditsability

Fuelhedging(E3)
FuelhedgingprovidesSouthwestairlineswithstablefuelpricewhichmaketheairlineable
tokeeptheircostlow.

b2)Operationstrategy

Servetheunderservemarket(QE1,PCI1,CR1)
Usingitslowcoststructuretoincreasethenumberoftravellerinunderserveroute.When
theroutehaslowdemandandbecomeunprofitable,otherconventionalairlinewillabandon
the route. This create huge opportunity for low cost airline to occupy the route and
stimulatethedemandfromthosewhotravelbycars,bustochangetoairtravelinsteadby
matchingitslowcostairfaretothecostofcarsorbus.

46


Figure4.5TrafficstimulatebySouthwestairlines
Source:http://www.slideshare.net/markdiamondgtv6/evolutionoflowcostairlines

Baseonsecondaryairport(E4,QR1)
Southwest airline is based on secondary airport to ensure smooth operation that benefit
fromlesstrafficandloweroverallcost.Theaircraftwillbeensuringtoalwayshaveaslotfor
landing.
PointtoPointflight(E5)
Thecompanyoperateonpointtopointbasis,whichusuallylesscrowdedandmakeiteasier
andfasterforSouthwesttooperate,dominatetherouteandlowerthecost.
Onlinebookingviacompanywebsite(E6,QE2)
The company directly sell most of its ticket via website, so they can decrease the cost of
ticketfurthermore.

Figure4.6Sourceofpassengerrevenues
Source:http://www.southwestonereport.com/2010/performance_cp_rev.php

Allinclusiveairfare(QE3,CR2)
Southwestairlineincludefreebaggageloadundertheaircraftforthecustomers.Thismake
customer easier to compare price and dont need to pay extra for bags. This reduce the
problemofexceedno.ofbagsonboardandmaketheboardingoperationfaster.
Ticketlesssystem(E7,QR3,PDI2)
The use of eticket helps reduce the cost and lower the total flight time for customer
because they dont have to wait in line at the counter. Southwest airline is famous for
helping customers, sometime the staff use their own judgment to judge whether to allow
customerwithouttickettogoonboardiftheyhasotherwaytoshowtheiridentities.
Singletypeofseat(E8)
Thereisonlyonetypeofseatonboard.Thismakestheboardingprocessmuchfasterand
easiertocabincrewtomanage.Thecostofpurchasingtheaircraftwillalsobemuchlower.

47

 Noseatreservation(E9)
Noseatreservationhelpboardingcustomereasiertomanageandfastertooperate.
Highdensityseat(E10)
Singletypeseatandlessspacebetweenseatrowsallowformoreseatcapacity,whichcan
bringmorecustomers,lowerthecostandimproveefficiency.
Shorthaulflight(E11)
Higher turnaround time benefit more in shorthaul flight. This will make the company
competebettertootherairline.
Highaircraftutilization(E12)
Bringdowntheoverallcost,lesstotaltraveltimeandfewerflightdelays.

Figure4.7Aircraftutilization,Pointtopointvs.hubandspoke
Source:http://marketrealist.com/2014/07/aircraftturntimesinfluenceaircraftutilization

Consistentlyextendrouteandno.offlight(QE4,CR3)
Makemoreroutesavailableforcustomers,whichwillallowformoreaircraftutilization,
bettereconomyofscaleandbetterbrandawareness.
FUNLUVingservice(QE5,CR4)
Anentertainingcustomerservicetomaketheflightapleasureflight.

b3)Outboundlogisticstrategy
Noconnectionflightservice(E13)
Moretimeandworkforcetofocusonthecompanyscoreservices.Thecompanycanalso
reducethecostbynotprovidingconnectionflightservice.

b4)Marketingandsalesstrategy

b4.1)Productstrategy
Focusonqualityofcoreservice(Lowcostnofrills)(QR4,CR5)
Safe,reliable,ontimeandlowpriceflightwithoutnonnecessaryamenitiessuchasmeal.

48

 b4.2)Pricingstrategy
Lowcost,allinclusive(E14)
Stimulate demand by providing low cost airfare, which include all the necessary
amenitiessuchasairporttax,loadbag,onboardsnack.
Onpeakoffpeakprice(E15)
Chargingdifferentcustomergroupwithdifferentpricestoensurethatcompanyalwayshas
thelowestcostintheindustry.

b4.3)Placestrategy
Directselltocustomer(E16)
Company sells airplane tickets direct to customer via website to ensure lower cost and
reduceunnecessarycostfromagency.

b4.4)Promotionstrategy
AggressivePR(CR6)
CompanyuseaggressivePRcampaignonlowcostonbeliefthatlowcostsellitself.
No.ofTripflownbasedloyaltyprogram(QE6,CR7)
A customized loyalty program for Southwest airlines major customer and those who fly
oftenregardlessofvalueofdistance.Itgiverewardsuchasfreeflightorpriorityboarding
calledAList

b4.5)Peoplestrategy
Beyondexpectationservice(QE7)
UnregulatedemployeedrivenservicesthatalwaysWOWthecustomers

b4.6)Processstrategy
SouthwestWay(QR5,QE8)
A process guide by company to treat customer using warriors spirit, servants heart and
FunLUVingattitude.

b4.7)Physicalevidencestrategy
Awards&customertestimonial(CR8)
The company achieve several award such as lowest customer complaint in the industry,
Triplecrownaward,Famousinflightactivities.

b5)Servicestrategy
Noaftersalesservice(E17)

Supportingactivities

b6)Firminfrastructure
Sharedgoal,sharedknowledge,mutualrespect(E18,QR6)
Southwests relationship focus, its commitment and passion for shared goals, shared
knowledge,andmutualrespect,joinswithfrequent,timely,problemsolvingcommunication
toformapowerfulforcecalledrelationalcoordination.
Highrelationalcoordination(E19,QR7)
Southwests focus on high relational coordination allows the company to fully utilize its
workforceandenablethemtoworktogetherandcorporatetoeachother.Thecompanynot
onlyutilizesthiswiththeiremployeebutalsowithpartnersuchasairportandsuppliers.

49



Figure4.8Relationalcoordination/crossfunctionaloperation
Source:http://rcrc.brandeis.edu/downloads/Relational_Coordination_Guidelines_82511.pdf

Crossfunctional/Flexibleoperationpractice(E20,QR8)
Each of the employees at the company are encourage to be expert at their own expertise
plusotherrelatedfieldofworkwhichallowthemtobeabletohelpfulfilltheoperationat
timely basis. Decision can be make accordingly using the employees own judgment based
oncompanysguideline.
Unifiedcorporateculture(E21)
Ability to sustain the same corporate culture for all area of employees and location that
company operate. These make it easy for employee and management to move around to
wheretheirexpertiseisneeded.
Conservativefinancialposition(QR9)
The companys conservative financial position allows the company to survive in bad
economy without having to layoff employees and keeping them feel secured to perform
theirbest.Italsolowerthecostoffundofthecompanybyacquirehighercreditrating.

Figure4.9Creditratingofairlines
Source:http://centreforaviation.com/analysis/deltaairchasesinvestmentgraderankingwithacontrarianstrategythatisnotwithout
itsrisks144304

50

 Stimulatedemandinunderservedmarkets(QE1,PCI1,CR1)
The strategy for low cost airline is to leverage its low cost structure in the underserved
market, stimulate customers to fly bringing high growth in demand of air travel in short
periodoftimeaspeoplecalleditSouthwestEffect
Simplifyworkpractice(E22)
The company simplifies everything from use of secondary airport, single type of aircraft,
pointtopoint and simple product and service. These make operate the airline one of the
easiestamongalltypeofairline,mostefficientandlowestcost.
Flatstructureorganization(E23)
Moreflexibilityonoperationactivities.
Lesscentralizedstructure(E24)
Employees are allowed to make operational decision on their own based on companys
guideline.

b7)Humanresource
Hireandtrainforrelationalcompetenceandculturalfit(E25,QR10)
Thecompanyhiresandtrainemployeesbasedonrelationalcompetenceorhowemployees
can work together crossfunctionally with other people in the different department.
Employee who was once hired but found themselves unfit to the corporate culture is
encouragetoleave.
Highsupervisory(E26)
Supervision is one of the most important elements in the company. The supervisor work
closelyonthefieldwiththeirfrontlinesubordinatetoeffectivelysuperviseandcreatestrong
relationship and fostered highquality communication. At Southwest airline a supervisor is
responsiblefor10to12frontlineworkers,thehighestsupervisortoemployeeratiointhe
industry.ConflictsaresolvedatthemanagementlevelascalledCometoJesusmeeting.
Unionizeworkforce(E27)
Southwestairlinetakerelationshipwiththelaborunionveryseriouslyandtheytaketimeto
alignthegoalofthelaboruniontothegoalofthecompany.ThisallowSouthwestairlineto
be one of the most successful company in the world to work with labor union as well as
moreefficientinoperation.
Aboveaveragewage(QR11)
EmployeesatSouthwestairlinegainaboveaveragewage,whichencouragetheemployeeto
domoreforthecompanyandoperateefficiently.Employeearealsocompensateforbeyond
expectationperformanceascalledOperationkicktail

Figure4.10Compensationinairlinesindustry(2007)
Source:http://swelblog.squarespace.com/articles/alookatusairlineceocompensationthroughadifferentle.html

51


Lifetimeemployment(QR12)
Lifetime employment make people feel secure about their life and can perform their job
withouthavingtoworryaboutsurvival.
Internallycareerpromotion(E28)
Career advancement from internal employee only because they will have a good
understandingoftheiroperationandthecompanysculture.Thismakestheefficiencyofthe
companysustainable.
PeopleDepartment(QR13)
Aspecialdepartmenttopromoteandtrainemployeeforrelationalcompetenceandcross
functionaloperation.ItcalleditselfUniversityforpeople.
Catastrophicassistantcharity(QR14)
AspecialcharitydesignedinSouthwestairlinetohelpaidtheemployeewithlifedifficulties
situations.

b8)Technologydevelopment
Wingletinstallation(E2,PDI1)
Southwestairlineisamongthefirstairlinetoinstallwingletonitsaircraftinordertoreduce
thecostandbringupefficiency.

b9)Procurement
Companyoperatenoncoreservice(E29,QR15)
Southwestairlineoperatemostofitsnoncoreservice,someofthemareoperatebypartner
withveryclosesupervisionfromSouthwestairline.

52

d)Drawatabletosummarizeallfunctionallevelstrategiesthatthecompanydependson.Which
effectivenessthatthecompanyputsmostemphasison.

Table4.2Summarizationofallfunctionallevelstrategies

Quality Innovation Customer

Primaryactivities Efficiency
responsiveness
Reliability Excellence Product Process
Inboundlogisticsstrategy
Singlemodelaircraft E1
Wingletinstallment E2 PDI1
Fuelhedging E3
Operationstrategy
Servetheunderservedmarket QE1 PCI1 CR1
Baseonsecondaryairport E4 QR1
Pointtopointflight E5
Onlinebooking E6 QE2
Allinclusiveairfare QE3 CR2
Ticketlesssystem E7 QR3 PDI2
Singletypeofseat E8
Noseatreservation E9
Highdensityseat E10
Shorthaulflight E11
Highaircraftutilization E12
Consistentlyextendnumberof
routeandflight QE4 CR3
FunLUVingservice QE5 CR4
Outboundlogisticstrategy
Noconnectionflightservice E13
Marketingandsalesstrategy
Productstrategy
Focusonqualityofcoreservice QR4 CR5
Pricestrategy
Lowcost,allinclusive E14
Onpeakoffpeakpricing E15
Placestrategy
Directselltocustomer E16
Promotionstrategy
AggressivePR CR6
Tripflownbasedloyalty
program QE6 CR7
Peoplestrategy
Beyondexpectationservice QE7
Processstrategy
Southwestway QR5 QE8
Physicalevidencestrategy

53

 Awardandcustomer
testimonial CR8
Servicestrategy
Noaftersalesservice E17
Quality Innovation Customer
Supportingactivities Efficiency
responsiveness
Reliability Excellence Product Process
Firminfrastructure
Sharedgoal,sharedknowledge
,mutualrespect E18 QR6
Highrelationalcoordination E19 QR7
Crossfunctionaloperation E20 QR8
Unifiedcorporateculture E21
Conservativefinancialposition QR9
Stimulatedemandin
underservedmarkets QE1 PCI1 CR1
Simplifyworkpractice E22
Flatstructureorganization E23
Lesscentralizedstructure E24
Humanresource
Hireandtrainforrelational
competenceandculturalfit E25 QR10
Highsupervisory E26
Unionizeworkforce E27
Aboveaveragewage QR11
Lifetimeemployment QR12
Internallycareerpromotion E28
Peopledepartment QR13
Catastrophicassistantcharity QR14
Technologydevelopment
Wingletinstallment E2 PDI1
Procurement
Companyoperatenoncore
service E29 QR15
Totalstrategiesused 29 15 8 2 1 8

ForsummaryitisconcludethatSouthwestairlinesusetheirstrategytomainlyenhancetheir
efficiencyandensurethequalityreliance.Thesuccessofitsstrategiesisbundlingoftheseefficiency
andqualityreliancestrategies.

OtherSources: TheSouthwestAirlinesWaybyJodyHofferGittell(2003)
LeadingwithLUV:ADifferentwaytocreaterealsuccessbyKenBlanchardandColleenBarrett(2010)
SouthwestAirlinesin2010:Culture,Values,andoperatingpracticesbyArthurA.ThompsonandJohnE.Gamble.Allrightsreserved.
SouthwestAirlinesOperationsAStrategicPerspective(2014)
http://airlineindustry.malq.net/southwestairlinesoperationsastrategicperspective

54

5. Business Level Strategies

a)DescribeBusinesslevelstrategiesthatallowacompanytoattractcustomersawayfromits
competitorsintheindustryfromthepastuntilpresent.

b)Howwelldothestrategicmanagersadoptforusingfunctionallevelstrategiestocreatea
competitiveadvantageoveritsrivals.

c)Drawthevaluecreationfrontiertoexplorethepositionofcompanybusinessstrategyand
summarizeyourfindings.

d)Howwelldothebusinessandfunctionallevelstrategieshelpthecompanytoaccomplishits
strategicdirection?

a) Describe Business level strategies that allow a company to attract customers

away from its competitors in the industry from the past until present.
Southwestairlinefirstfocusonthecustomerwho traveloftenfromtowntotowntodo business.
Theircustomerwantsthecosttobelow,safeandreliableflight.Thereareseveralkeyissuesthat
needtobeconcerninordertoidentifySouthwestairlinesbusinesslevelstrategies.

ThekeyissuesinSouthwestairlinesbusinessstrategyare:
1. Customerneeds
Travellerswanttoflyconvenientschedules,ontimeflightwithcompetitivefaretotravelby
automobile.

2. Customergroupsandmarketsegmentation
ThetargetcustomerofSouthwestairlinecanbecategorizedintotwogroups.
1.Businesstravelerswhoweremoretimesensitivethanpricesensitiveandwanted
weekdayflightsattimessuitableforconductingbusiness.
2.Pricesensitiveleisuretravelerswhowantedlowerfaresandhadmoreflexibility
aboutwhentofly.
Company offers service only to two groups of customers so it is a focused market
segmentation.

3. Distinctivecompetencies
Southwest airline operate as low cost airline, which charge lower than industry average
airfare by using bundling of strategies to increase the efficiency and bring down the cost.
The low cost airline does not provide any unnecessary amenities, however loaded bag
serviceisincludedintheairfareprice.Theflyingexperiencewillbefriendly,safe,convenient
andreliable.

55

Figure5.1TypeofstrategyusedbySouthwestairlinesfrom1971present

SincetheSouthwestairlinessmaincompetenciesrevolvearoundcostandefficiencyimprovement
suchastheuseofsecondaryairport,pointtopointoperation,nofrillsandhighturnoverofaircraft.
In19711978,theairlineoperateinsmallareainTexaswhichareHouston,DallasandSanAntonio
which later on refer to as Love Triangle. Its appropriate strategy should be Focused Cost
leadershipbecauseofitsnarrowtargetandusingcostassourceofcompetitiveadvantage.While
from 1979 onward, Southwest has been expanding new routes and fly nationwide, this expand it
target market much more broader and because of its reputation more people start to fly with
Southwestairlines.ThismakeSouthwestairlinecapableofobtainingmorecustomersadditiontoits
targetcustomer.

56

b) How well do the strategic managers adopt for using functional level strategies
to create a competitive advantage over its rivals.
As the core strategy of the business is focus cost leadership and cost leadership. The
functionallevelstrategiesthatenhancewithmanystrategiesforefficiencyandqualityreliabilityare
wellsuittocreatecompetitiveadvantageoveritscompetitors.Manyofthestrategiesthatenhance
efficiencyandqualityreliabilityarebundlingandwellsupportbythefirmssupportingactivities.The
bundlingofitpeople,aircraftandfacilitystrategiesareverydifficulttoimitatebyitscompetitors.

Figure5.2Assetbeingutilizedtocreatelowcostleadershipcompetitiveadvantage

c) Draw the valuecreation frontier to explore the position of company business

strategy and summarize your findings.

Figure5.3Southwestairlinessvaluecreationfrontier

57


According to question 4, there are 29 efficiency strategies, 15 quality to reliability
strategies,8qualityasexcellence,3innovationstrategiesand8customerresponsivenessstrategies.
Southwest airlines value is being created mainly from its efficiency strategies and quality to
reliabilitystrategies.Thesevaluestrategiesenhancethebusinesslevelstrategiesofcostleadership,
whichresultinhighestROICcomparingtocompetitors.ThepositionofSouthwestairlineshouldbe
onthevaluecreationfrontier.

Figure5.4ROICofairlines

d) How well do the business and functional level strategies help the company to
accomplish its strategic direction?

Todeterminewhetherthefunctionallevelstrategieshelpthecompanytoaccomplishits
strategicdirectionornot,firstwehavetoreviewthecompanyspurpose,mission,vision,strategic
objective,philosophyandvalue.

OurPurpose: Connectpeople to whatsimportant intheir lives throughfriendly, reliable, lowcost

airtravel.
OurVision:TobecometheWorld'sMostLoved,MostFlown,andMostProfitableAirline.

TheMissionofSouthwestAirlines
The mission of Southwest Airlines is dedication to the highest quality of Customer
Servicedeliveredwithasenseofwarmth,friendliness,individualpride,andCompanySpirit.
Southwest Airlines Mission also conform to their vision that wanted to become the Worlds Most
Lovedasfollows:
1. DedicationtothehighestqualityofCustomerService
2. Deliveredwithasenseofwarmth

58

 3. Deliveredwithasenseoffriendliness
4. Deliveredwithasenseofindividualpride
5. DeliveredwithasenseofCompanySpirit

ToOurEmployees
Weare committed to provide our Employees a stable work environment with equal
opportunity for learning and personal growth. Creativity and innovation are encouraged for
improvingtheeffectivenessofSouthwestAirlines.Aboveall,Employeeswillbeprovidedthesame
concern, respect, and caring attitude within the organization that they are expected to share
externallywitheverySouthwestCustomer.
ToOurCommunities
Our goal is to be the hometown airline of every community we serve, and because
those communities sustain and nurture us with their support and loyalty, it is vital that we, as
individuals and in groups, embrace each community with the SOUTHWEST SPIRIT of involvement,
service,andcaringtomakethosecommunitiesbetterplacestoliveandwork.
ToOurPlanet
We strive to be a good environmental steward across our system in all of our
hometowns, and one component of our stewardship is efficiency, which, by its very nature,
translatestoeliminatingwasteandconservingresources.Usingcosteffectiveandenvironmentally
beneficialoperatingprocedures(includingfacilitiesandequipment)allowsustoreducetheamount
ofmaterials we use and, when combined withour ability to reuse and recycle material, preserves
theseenvironmentalresources.
ToOurStakeholders
SouthwestAirlinesvisionforasustainablefutureisonewheretherewillbeabalance
in our business model between Employees and community, the environment, and our financial
viability.Inordertoprotectourworldforfuturegenerationsandupholdourcommitmentstoour
Employees, Customers, and other Stakeholders, we will strive to lead our industry in innovative
efficiencythatconservesnaturalresources,maintainsacreativeandinnovativeworkforce,andgives
backtothecommunitiesinwhichweliveandwork.

Southwestsstrategicobjectives
1.Bethebestplacetowork.

2.Bethesafest,mostefficient,andthemostreliableairlineintheworld

3.Offercustomeraconvenientflightschedulewithlotsofflightstolotsofplacestheywanttogo.

59

4.Offercustomersthebestoveralltravelexperience.

5.Doallofthesethingsinawaysthatmaintainsalowcoststructureandtheabilitytoofferlow
fares.

SouthwestAirlinesPhilosophyandValue

SouthwestAirlinescreatedthephilosophyandvaluefortheiremployeestooperatewithaWarrior
Spirit,aServantsHeart,aFunLUVingAttitude,andtheSouthwestWay.

60

 Efficiency Quality Innovation

Customer Purpose Strategic Core
Strategies Mission
Reliability Excellence Product Process responsiveness &vision Objective Value
Businesslevelstrategies
Focuscostleadership
Costleadership
FunctionallevelstrategiesPrimaryactivities
Inboundlogisticsstrategy
Singlemodelaircraft E1
Wingletinstallment E2 PDI1
Fuelhedging E3
Operationstrategy
Servetheunderservedmarket QE1 PCI1 CR1
Baseonsecondaryairport E4 QR1
Pointtopointflight E5
Onlinebooking E6 QE2
Allinclusiveairfare QE3 CR2
Ticketlesssystem E7 QR3 PDI2
Singletypeofseat E8
Noseatreservation E9
Highdensityseat E10
Shorthaulflight E11
Highaircraftutilization E12
Consistentlyextend

routeandflight QE4 CR3

61

 FunLUVingservice QE5 CR4

Outboundlogisticstrategy
Noconnectionflightservice E13
Marketingandsalesstrategy
Productstrategy
Focusonqualityofcoreservice QR4 CR5
Pricestrategy
Lowcost,allinclusive E14
Onpeakoffpeakpricing E15
Placestrategy
Directselltocustomer E16
Promotionstrategy
AggressivePR CR6
Tripflownbasedloyalty

program QE6 CR7
Peoplestrategy
Beyondexpectationservice QE7
Processstrategy
Southwestway QR5 QE8
Physicalevidencestrategy
Awardandcustomer

testimonial CR8
Servicestrategy
Noaftersalesservice E17

62

 Supportingactivities
Firminfrastructure
Sharedgoal,sharedknowledge

,mutualrespect E18 QR6
Highrelationalcoordination E19 QR7
Crossfunctionaloperation E20 QR8
Unifiedcorporateculture E21
Conservativefinancialposition QR9
Stimulatedemandin

underservedmarkets QE1 PCI1 CR1
Simplifyworkpractice E22
Flatstructureorganization E23
Lesscentralizedorganization E24
Humanresource
Hireandtrainforrelational

competenceandculturalfit E25 QR10
Highsupervisory E26
Unionizeworkforce E27
Aboveaveragewage QR11
Lifetimeemployment QR12
Internallycareerpromotion E28
Peopledepartment QR13
Catastrophicassistantcharity QR14
Technologydevelopment
Wingletinstallment E2 PDI1

63

 Procurement
Companyoperate

noncoreservice E29 QR15

Table5.1Relationofbusinesslevelstrategies,functionallevelstrategiesandcompanysstrategicobjectiveandcorevalues.

Accordingtotable5.1,mostofthebusinesslevelstrategiesandfunctionallevelstrategiesarestronglycorrelatedtocompanysstrategicobjectiveandcore
values.

Sources: TheSouthwestAirlinesWaybyJodyHofferGittell(2003)
LeadingwithLUV:ADifferentwaytocreaterealsuccessbyKenBlanchardandColleenBarrett(2010)
SouthwestAirlinesin2010:Culture,Values,andoperatingpracticesbyArthurA.ThompsonandJohnE.Gamble.Allrightsreserved.(2010)
SouthwestAirlinesOperationsAStrategicPerspective(2014)
http://airlineindustry.malq.net/southwestairlinesoperationsastrategicperspective/
SouthwestAirlinesOnereport2009
http://www.southwest.com
JetBlueairwaysannualreport2009
http://www.jetblue.com

64

6.) Corporate Level Strategy

a) What kind of Corporate Level Strategies that the company have been
pursuing from the past until present? Can you notice the evolution of Corporate
Level Strategy?

Period1:Year19671970Establishment

Strategy:IntensiveGrowthProductProliferationStrategy

RolingKingandHerbKellyhadaplantostartthefirstlowcostairlinethatwouldshuttlepassengers
betweenthreecities:SanAntonio,Dallas,andHouston.Atthetime,therewasnoothercompetitor
offering cheap tickers on these routes. Their target market was businesspeople that had to drive
betweenthesethreecities.Also,ittookalengthoftimetodrivebetweenthesethreecities.During
thisperiod,SouthwestAirlinesbusinessconceptwassimpleasthefollowing:

Attractpassengersbyflyingconvenientschedules
Getpassengerstotheirdestinationontime
Makesuretheyhaveagoodexperience
Chargefarescompetitivewithtravelbyautomobile
Source:CaseStudyP.401403

Period2:Year1971

Strategy:IntensiveGrowthMarketPenetrationStrategy

Southwest Airlines used promotion strategy by offering cheaper ticket than its rivals. Southwest
Airlinesalsohavetheflighthostessesdressincolorfulhotpantsandwhitekneehighbootswithhigh
heels to get attention from customers. Another attentiongetting is
that Southwest Airlines offered passengers free alcoholic beverages
during daytime flights. Southwest Airlines also used locations to do
marketing strategy by introducing Love Campaign for the routes
between Houston, Dallas, and San Antonio, a.k.a Love Triangle, to
approach to customers and create good perceptions towards the
company that by using our service, customers would have an
enjoyable, fun, and experience flight. Southwest Airlines created its signature of the 10minute
turn to push away from the gate. Therefore, Southwest Airlines could add more flights without
havingtobuynewplanes.

Source:CaseStudyP.403404

65

Period3:Year1972

Strategy:IntensiveGrowthMarketDevelopmentStrategy

Southwest Airlines decided to move its Houston flights from Houston Intercontinental Airport that
wasnewlyopenedwhereittook45minutestogettodowntowntoHoustonHobbyAirportwhereit
locatedmuchclosertodowntownHouston.Asaresult,thebusinesstravelerswhofrequentlyflewto
Houston found the Houston Hobby Airport more convenient. Therefore, this doubled up the
passengersimmediately.

Source:CaseStudyP.404

Period4:Year1973

Strategy:IntensiveGrowthMarketPenetrationStrategy

AsSouthwestAirlineswanted tofilluptheempty seatsonthe SanAntonioDallasflights,they did

thepromotionbycuttingitregular$26fareto$13forallseats,alldays,andalltimestoattractmore
passengers. However, Braniff Internation, Southwest Airliness major rival at that time, also
announcedthe$13fareaswelltocompetewithSouthwestAirlines.Therefore,SouthwestAirlines
retaliatedbygivingthepassengerstochoicebetweenbuyingticketsat$13fareorbuyingticketsat
regularpriced of $26 and receiving a complimentary fifth of Chivas Regal scotch, Crown Royal
Canadian whiskey, or Smirnoff vodka. For nondrinkers, Southwest Airlines offered them with a
beautifulleathericebucket.Astheresult,morethan75%ofpassengerschosetobuyticketat$26
fare,whichmadeSouthwestAirlinesreportitsfirsteverannualprofitin1973.

Source:CaseStudyP.404405

Period5:Year19751985

Strategy:IntensiveGrowthMarketDevelopmentStrategy

Southwest Airlines expanded its flights to many routes and airports. They first expanded to Rio
Grande Valley for the new market. They also opened new routes to St. Louis Airport and Chicago
MidwayAirport.Therefore,SouthwestAirlinescouldserviceto13millionspassengers.

Source:SouthwestAirlinesAnnualReport

Period6:Year1987

Strategy:IntensiveGrowthMarketPenetrationStrategy

SouthwestAirlinesusedmarketingstrategybyofferingfrequentflyerprogramcalledRapidReward,
whichbasedontripflyratherthanmileage.Customersreceivedonecreditforeachonewaytripor
66

two credits for roundtrip fly with Southwest Airlines. Rapid Rewards member will get one free
roundtripaftertheaccumulationof16creditswithin24months.Astheresult,thememberofRapid
Reward will always choose to fly with Southwest Airlines to collect credits and this increased
customerloyalty.

Source:CaseStudyP.413414

Period7:Year1993

Strategy:HorizontalGrowth

SouthwestAirlinesacquiredMorrisAir,oneofthelowcostairlinesthatbasedatSaltLakeCity,Utah.
ThismakeSouthwestAirlinesexpandeditsbusinesstoWesternofUnitedStares.MorrisAiralsoused
Boeing737sameasSouthwestAirlinessoitwascompatibleandeasiertomanage.Thisexpansionof
routesresultedintheincreaseincustomersindifferentregions.

Source:SouthwestAirlinesAnnualReport

Period8:Year1995

Strategy:IntensiveGrowthProductDevelopmentStrategy

Southwest Airlines launched the firstever ticketless system to issue tickets for passengers. This
strategyhelpedtolowerthecostofadministrationandmadeitmoreconvenienceforcustomers.

Source:SouthwestAirlinesAnnualReport

Period9:Year1996

Strategy:VerticalGrowthForwardIntegrationStrategy

Southwest Airlines launched ticket booking online via website (http://www.iflySouthwest

Airlines.com).ThisstrategyhelpedSouthwestAirlinestolowerthecostofsellingexpense.Customers
cangetcheaperticketsbecausetheycanbuyticketdirectlyfromwebsiteratherthanbuyingwiththe
ticketsagencythatmarkuptheprice.

Source:SouthwestAirlinesAnnualReport

67

Period10:Year2007

Strategy:IntensiveGrowthProductProliferationStrategy

Southwest Airlines introduced a new Business Select fare to attract economyminded business
travelers. The Business Select customers will have early boarding privileges, received extra Rapid
Rewards,andafreecocktail.Thisstrategyresultsintheincreaseinmarketsegment.

Source:CaseStudyP.412

Period11:Year20092010

Strategy:IntensiveGrowthMarketPenetrationStrategy

SouthwestAirlineslaunchedacampaigncalledBagsFlyFreetooffercostsavingtopassengersthat
theydonothavetopayextrasforthebags,unliketherivalsairlinesthatcharged$20$50feesfor
the first or second checked bags. This Bags Fly Free campaign resulted in companyrecord load
factors for every month from JulyDecember 2009. (Load factor is the percentage of all available
seatsonallflightsthatwereoccupiedbyfarepayingpassengers).

Source:CaseStudyP.412

68

b.) Draw the Web of Corporate Level Strategy to conclude the findings.

IntensiveGrowth
Product
Proliferation
eg.startafirstlow
costairline

IntensiveGrowth
VerticalGrowth
Forward Product
Integration eg. Development
SellticketOnline eg.Ticketless
system

Core
Industry
Airlines
IntensiveGrowth
MarketPenetration
HorizontalGrowth eg.TheRapid
eg.BuyMorrisAir Reward,50%
discountforregular
fare
IntensiveGrowth
Market
Development
eg.HoustonHobby
Airport,Expand
routestomore
destination/cities

69

c.) How did each Corporate Level Strategy help company increase revenues and
profits from the past until present? Will each corporatelevel strategy maximizing
longrun profitability of the company? Draw the straightline graph including
Revenue, Profit, Return on Sales and ROIC on the same picture to support your
findings.
Fromthepastuntilpresent,SouthwestAirlinesfocusesonGrowthStrategybyusingstrategysuchas
product proliferation, market penetration, market development, product development, horizontal
growth,andforwardintegration.Thefollowingtableshownrevenue,profit,andROICofSouthwest
Airlinesfromtheyear19712013(unit:$USmillion)

70

SouthwestAirlinesFinancial
12000 40.0%

20.0%
10000

0.0%
8000

20.0%
6000

40.0%

4000
60.0%

2000
80.0%

0
100.0%

2000 120.0%

NetSales ProfitbeforeTax ROIC ReturnonSale

Figure6.1:SouthwestAirlinesFinancial

71

The figure 6.1 shows that Southwest Airlines used different strategies for each period of time to
adapt to market situation in each period, which result in the growth of the company with the
increase in net sales every year. Southwest Airlines gains profit every year since 1973 and ROIC is
positiveeveryyearsince1973aswell.ThiscanbeconcludedthatSouthwestAirlineshastheefficient
toimplementcorporatestrategysuccessfully.

72

7.) What are the companys strategy implementation processes?

How do Organizational Structure, Culture, and Leadership help
companys strategy implementation? Analyzing through the
following steps

a.) Organizational Structure

FromtheirorganizationchartasshowninFigure7.1wecantellthatSouthwestAirlines
Co. is a Functional organizational structure. In a functional structure, all of the decisionmaking
occursatthetoplevelsofmanagement.Thisensuresthatuppermanagementhascompletecontrol
over the organization. It also provides a clear career trajectory and function for employees, from
juniorlevel positions, up to the top decisionmaking positions. A functional structure provides
stabilityandefficiency,especiallyinlargeandcomplexorganizations,becauseeveryoneusessimilar
processes.Thisalsoallowslargebusinessestotakeadvantageofeconomiesofscale.However,this
type of structure can also lead to poor communication between departments, situations where
departments do not work together and interdepartmental conflict. Customers may also become
frustratedbylackofcooperationiftheyhavetoworkwithmorethanonedepartment.Also,ittakes
quitealongtimefortopmanagementtomakedecisions.Thefunctionalorganizationcanbedivided
intothreemainlevels,whichareTopmanagement,Middlemanagement,andLowermanagement.
TheorganizationchartofSouthwestAirlinesareshownasthefollowing:

73

Figure7.1:SouthwestAirlinesOrganizationalChart

(Source:http://swamedia.com/media_storage/Leadership_Org_1_18_13.pdf)

74

LevelofResponsibility

1. Top Management including CEO, CFO, COO, and Vice President. They are responsible for
strategic planning, decisionmaking, and developing goals and directions for the whole
organization.
2. Middle Management including Director, Vice President, and senior manager. They are
responsible for managerial, analytical thinking, and motivating subordinates. Ensuring that
everythinggoesintherightdirectionsfortheorganization.
3. LowerManagementincludingManager,Supervisor,andTeamleader.Theyareresponsiblefor
daytodayoperationsofthebusinessandsolvingdailyproblems.

Management Processes, Roles, and Skills at Southwest Airlines

Level of Processes Roles Skills
Management
Top Planning and CEO, CFO, COO, Decisional creative and time
Strategy Senior VP management
Middle Organizational Director, Vice Managerial, Critical thinking,
and Analytical President, Senior and Computer related
Manager
Lower Assignment of Manager, Managerial, Technical, and
work, Leading, Supervisor, Team Interpersonal
Controlling and leader
Evaluation
performance

b.) Organizational Culture

At Southwest Airlines, employees are the greatest assets. Unlike many companies that
customers always come first, but at Southwest Airlines, employees always come first and customers
comesecond.SouthwestAirlinesisobsessedwithputtingitspeoplefirst.Theybelievethattheonlyway
75

to consistently deliver remarkable service on the front line is if your people are being treated in a
mannerthatreflectshowyouwantthemtotreattheexternalcustomer.Keepemployeeshappy,then
theywillkeepcustomershappy.SouthwestAirlinesconsidersitsemployeesasinternalcustomersand
theirwellbeingisvaluedequallyorevenmorethantheexternalcustomer.SouthwestAirlineshasvery
strongandadaptiveorganizationalcultures.Examplesofstrongandadaptiveorganizationalculturesare
shownasthefollowing:

Recruiting,Screening,andHiring
SouthwestAirlineshiresemployeesforattitudeandtrainsforskills.Theypreferredanunskilled
person with good attitude rather than a highly skilled person with a bad attitude. They hire
people to live the Southwest Way which mean that employees must possess a Warrior Spirit,
leadwithaServantsHeart,andhaveaFunLUVingattitude.LivingtheSouthwestWaycanbe
summarizedinthefollowingtable:

Living the Southwest Way

Warrior Spirit Servants Heart FunLUVing Attitude

Working hard Follow the Golden Rule Have FUN

Desire to be the best Adhere to the Basic Dont take yourself too seriously
Principles
Be courageous Treat others with respect Maintain perspective (balance)

Display a sense of Put others first Celebrate successes

urgency
Persevere Be egalitarian Enjoy your work
Innovate Demonstrate proactive Be a passionate team player
Customer Service
Embrace the SWA Family

(Source: Southwest Airlines, www.southwest.com, accessed September 24, 2015.)

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Training
The training activities at Southwest Airlines are designed and conducted by Southwests
University for People. There are variety of courses in Southwests University for People to
maintainthepersonnelandoffertheemployeestomeetthetrainingandsafetyrequirements
oftheFederalAviationAdministration,theU.S.DepartmentofTransportation,theOccupational
SafetyandHealthAdministration,andothergovernmentagencies.Also,therearecoursesoffer
for employees to improve their particular skills such as written communications, public
speaking, stress management, career development, performance appraisal, decisionmaking,
leadership,customerservice,corporateculture,andemployeesrelations.
Promotion
Current employees in Southwest Airlines can apply for being supervisor positions or be
recommended by their present supervisors. Approximately 80 to 90 percent of Southwests
supervisorypositionsarefilledinternally.Thenewappointeesforsupervisor,teamleader,and
manager will have to attend a threeday class called Leading with Integrity which aim for
developing leadership and communication skills. Employees who being considered for
managerialpositionswillreceive trainingin everydepartmentofthecompanyoversixmonth
period which they continued to perform their current job. At the end, candidates will be
provided with 360degree feedback from department heads, peers, subordinates and will be
selectedasanewsupervisor.
Compensation
Southwestsaveragepayforpilotsanditsallemployeeaveragecompensationarethehighestof
allthemajorU.S.airlinesbecausetheyoffercompanymatchingcontributions,aprofitsharing
planandstockpurchaseplanforallemployees.
TheNoLayoffPolicy
Sincethecompanybeganin1971,SouthwestAirlineshadneverlayofforfurloughedanyofits
employees. The NoLayoff Policy has shown how the company treats its employees and
managementeffortstosustainandnurturetheculture.
Toconclude,SouthwestAirlineshasaverystrongandadaptiveorganizationalculture.

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c.) Organizational Leadership

Leadership of the organization plays a very important role to make the organization has
growthwiththemostefficientandmaximizetheprofitability.Leaderoftheorganizationhavetousethe
right strategy at the right situation to achieve the target and goal of the organization. At Southwest
Airlines,executivesareveryapproachable,insistingonbeingcalledbytheirfirstnames.Managersand
executives had an opendoor policy, which they actively listen to employee concerns, opinions, and
suggestionsformanythingssuchasreducingcostsandimprovingefficiency.SouthwestAirlineshasfour
CEOthatplayedimportantrolesfortheorganization,whichmakeSouthwestAirlinesbecomeoneofthe
mostsuccessfullowcostairlineintheworld.

Year19711978:LamarMuse

SouthwestAirlinesstartedthefirstoperationinJanuary1971andassignedLamarMuseasthefirstCEO.
Muse was an aggressive, selfconfident that had experience in airline industry. He knew about this
business very well and he also had the entrepreneurial skills to tackle the challenges of building the
airline from scratch and to be able to compete with other competitors. Muse was able to recruit a
talentedseniorstaffthathadexperienceintheairlineindustryfromotherairlines.Museintroducedthe
Southwestsfirstflightwith$20onewayfare,whichwaslowerthattherivalsthatcharged$27fares.
Therefore,thishelpedSouthwestAirlinesgainedmoremarketshareandbecamewellknown.Tobeable
to had price competitive, Muse applied the cost saving strategy for the company to operate with the
lower cost. As the result, with a good vision of Muse, Southwest Airlines became the first lowcost
airlinewiththelowoperatingcost.

Year19812001:HerbKelleher

HerbKelleherwasasuccessfullawyerandthecofounderofSouthwestAirline.HebecametheCEOof
SouthwestAirlinesin1981.Kelleherdidnotdomuchmanagingfromhisoffice,instead,hepreferredto
beoutintheoperationsasmuchashecould.Helikedtovisitedthemaintenancepersonneltocheckon
howwelltheplaneswererunningandoftalkingwiththeflightattendants.Hisstylewastolistenand
observe and to offer encouragement. He paid attention to his staffs and attended most graduation
ceremoniesofflightattendantclasses.HealsohelpedtoloadbagsonBlackWednesday,thebusytravel
daybeforeThanksgiving.HewasheldinthehighestregardbySouthwestAirlinesemployeesandknew
thousandsoftheirnames.Kelleherwasastrongbelieverintheprinciplethatemployeescamefirst,not

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customer.Hesaidthatwhenyoutreatyouremployeesright,thentheywilltreatyouroutsidecustomers
right.KelleherplayedaleadroleinSouthwestsstrategyandhadmuchcontributiontotheorganization.

Year20012004:JamesParker

BeforesteppingupasaCEO,JamesParkerwasSouthwestsvicepresidentandchieflabornegotiator.
He was the reason of Southwests good relations with employee unions. Parker had a good sense of
humorandwasseenasanhonest,straightarrowkindofpersonwhohadastronggraspofSouthwests
culture. He could be nice or tough, depending on the situations. His outstanding role was
negotiator/arbitratorandpolicyenforcer.

Year2004Present:GaryKelly

BeforesteppingupasaCEOinJuly2004,Kellywasexecutivevicepresidentandchieffinancialofficer
(CFO).HejoinedSouthwestAirlinessince1986asacontroller.DuringhistenureasCEO,Kellyandother
toplevelSouthwestexecutiveshadsharpenedandfinetunedSouthwestsstrategyinnumberofareas,
continuedtoexpandoperationsbyaddingmoreflightsandinitiatingservicetonewairports.Heworked
tomaintainthe companyslowcostadvantageto compete withotherrivals. Kellyhadfour factorsas
keystoSouthwestssuccessasthefollowing:

Hiregreatpeopleandtreatthemlikefamily
Careforourcustomerswarmlyandpersonally,liketheyareguestsinourhome
Keep fares and operating costs lower than anybody else by being safe, efficient, and
operationallyexcellent
Staypreparedforbadtimeswithastrongbalancesheet,lotsofcash,andastoutfuelhedge

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Figure 7.2: Southwest Airlines Senior Level Executives

(Source: http://www.danielihliu.com/blog/2012/05/07/organizationalstructureanalysisfor
southwestairlinesco)

ThefollowingTable7.1summarizeshoworganizationalstructure,culture,andleadershiphelpthe
companysstrategyimplementation.

Table 7.1: Summary of how organizational structure, culture, and leadership help the companys
strategy implementation
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8.) What are the companys strategy evaluation and control? How
well the strategy evaluation and control match its strategy?
a.) Strategic Evaluation System Analysis
SouthwestAirlinesisaleaderindomesticairtravelintheUnitedStates.Itisrenownedforthelowfares
service, beinga cost leaderfollowingthepursuit oflowoperatingcost. Itis imperativefor Southwest
Airlines to develop the strategy that align with its service using Strategy Map and Balance Scorecard,
whichcompriseofthe4prominentaspectsasfollows:
1. LearningandGrowth
SouthwestAirlinesmanagementsecondstheideathatexceptionalcustomerexperiencestarts
withthenurturingoforganisationsemployees.Whenemployeesaresatisfiedandhavepositive
attitudetowardstheirjobs,suchpositivitycouldbetranslatedintothesuperiorservicetowards
customers. As this is particularly critical especially when the airlines service predominantly
relies on employees attitude, Southwest Airlines would pay additional attention on the
screening process at the initial recruitment until training. Once recruited, every employee of
SouthwestAirlinesisrequiredtocompleteeverycourseonsecurityandsafetytrainingswithin5
years.
Additionally,theITsystemhasbeendevelopedtosupporttheoperationthoroughlyontopof
the establishment of the corporate news dissemination programme to facility employees and
underpinknowledgedissemination.Thecompanysschemeonhavingitsemployeeinvestingin
the company helps create the sense of ownership that boost employees morale. By enabling
the employees to effectively operate at their full potential, the internal process can
consequentlybeenhanced.
2. InternalProcess
Employeeseffectualoperationcandirectlypromoteprocessefficiencythroughloweroperation
costandlowerticketprice,whichcanbetranslatedintothecompetitiveadvantageoflowfare
airlines. Besides, by offering flights to various destinations and appropriate flight schedules,
Southwest Airlines is able to attain economies of scale. More importantly, the companys
management takes employees feedback seriously. All the responses have been reviewed and
consideredinordertoreducetheoperationcostanderadicateunnecessaryprocess,whichwas
evidencedbythesignificantreductionofgroundturnaroundtime,flightdelayrateandbaggage
mishandlingrate.Customersatisfactioncouldbeseenontheriseasaconsequence.

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 3. Customers
SatisfactorycustomerexperienceisanultimatepriorityforSouthwestAirlines.Thatiswhythe
airlines greatly emphasises on nurturing positive, fun, and friendly atmosphere with its
passengers.Thecompanythrivestobenumber1forcustomerrankingandFAAontimearrival
rating, whilst constantly rolling out new promotions with the aim of retaining 70% of existing
passengersand attracting 12% of newpassengers annually. Southwest Airlinesrevenue could
beseenrisingasthenumberofpassengercontinuestorise.
4. Financial
The increase in customers satisfaction would inevitably leads to the higher service level and
revenue.DespiteSouthwestAirlinesfinancialevaluation,thecompanywouldassessthemarket
sharebycomparingwiththetargetedgrowthrateof30%perannum,revenuegrowthof20%
perannum,andbeingnumber1inoperationcostscontrollingthroughmaximisingtheefficiency
ofassetusage.
Usingthe4aforementioned,thestrategymapcanbedevelopedasfollows:

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Using the information presented, besides adopting the balanced scorecard to evaluate
employees performance, Southwest Airlines has employed the Strategy Reward System, which
comprisesofbothmonetaryandnonmonetaryincentives,toimproveemployeesmoraletowork.
Monetary incentive consists of profit sharing plan and stock options to allow profit sharing with
employees. The company also offers its employees the right to acquire Southwest Airlines stock at a
specialprice.Thepurposeofthiswastomotivateemployeestoconstantlydeliverexceptionalservices.
The20052009statisticsindicatethatthecompanyhaspaidoutoverUS$1.3billionworthofdividends
toitsemployees.
For nonmonetary incentives, Southwest Airlines has employed Operation KickTail Strategy, which
worksbyhavingthemanagementpraisingandmotivatingemployeesbasedontheirdeterminationand
meansofoperatinginsteadoftheoutcome,andNoLayoffpolicyeversincetheairlineswasfoundedto
createemployeesconfidenceforworking.

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b.) Strategic Control System Analysis

Usingtheanalysisonthealignmentofstrategyandobjectives,SouthwestAirlineshasimposedstrategic
control through the use of action plan to ensure the correlation of the operation and the airlines
objectives and the effectiveness of performance evaluation. The 4 prominent aspects of strategic
controlarelearningandgrowth,internalprocess,customer,andfinancial.
LearningandGrowth:Theactionplanhasbeenutilisedincorrelationwiththevisionandobjectiveof
SouthwestAirlinesToBecometheWorldsMostLovedandTheHighestQualityofCustomerService.
Theairlinesparticularlyemphasisesonthedevelopmentofitsassets,themostimportantofwhichisits
people, by ensuring that every employee completes all the training courses on safety and services,
which stems from the idea that the good treatment towards its employee can be translated into a
superiorservicetowardsitscustomersintandemwithadoptionofESOPsystemtoimproveemployees
morale, working experience, and working environment as a whole. These concepts constitute the
superiorexperienceforbothSouthwestAirlinesemployeesandpassengers.
Internal Process: Emphasising on the correlation between with internal process and companys
objective of Be the safest, most efficient, and the most reliable airlines in the world, Southwest
Airlineshasemployedcycletimeoptimisationtoreducetheaircraftstimeonthegroundandmaximise
operational performance through the enhancement of the punctuality of the service time, baggage
management process, and the minimisation of the incident where the number of tickets sold surpass
thenumberofseats.
Customer: Southwest Airlines seeks to create protracted satisfaction and positive impression for its
passengers through reinforcing the quality control, to ensure the conformity with the FAA ontime
arrival rating, and the loyalty programme the Rapid Reward Programme to foster a sustainable
relationshipwithitspassengerinaccordancewiththecompanysvisionofTooffercustomersthebest
overalltravelexperience.
Financial:Likeotherbusinesses,SouthwestAirlinesthrivetowardscreatingthehighestreturnpossible
foritsshareholders.The airline emphasiseson the continuousexpansion of theexistingmarket share
andthemaximisationofrevenuewhilstminimisingtheoperationalcostthiscoincideswiththevision
ofTobecometheworldsmostprofitable.

84

9.) How is the effectiveness of the companys strategies?

a.) Drawing the straight line graph to compare sales revenue, profit, profitability
(ROIC) and profit growth of all companies for the last five to ten years and
summarize your findings.

SalesRevenueComparison
Table9.1:20052009USAirlinesRevenueData
AirlinesRevenue 2005 2006 2007 2008 2009 Cumulative
(InmillionsUS$)
AmericanAirlines 20,712 22,563 22,935 23,766 19,917 109,893
ContinentalAirlines 11,208 13,128 14,232 15,241 12,586 66,395
DeltaAirlines 16,480 17,532 19,154 22,697 28,063 103,926
JetBlueAirways 1,701 2,363 2,842 3,392 3,292 13,590
SouthwestAirlines 7,584 9,086 9,861 11,023 10,350 47,904
UnitedAirlines 17,379 19,340 20,143 20,194 16,335 93,391
USAirways 5,069 11,557 11,700 12,118 10,458 50,902
AverageRevenue 11,448 13,653 14,410 15,490 14,429

Figure9.1:20052009USAirlinesRevenueIllustration

USAirlinesRevenue AmericanAirlines
30000 ContinentalAirlines
25000
MillionUS$

DeltaAirlines
20000
15000 JetBlueAirways
10000 SouthwestAirlines
5000
UnitedAirlines
0
2005 2006 2007 2008 2009 USAirways
Year AverageRevenue

Using the presented figures regarding the revenue of every airlines in the US Airlines
industryfortheperiodof20052009,thefactthatSouthwestAirlineshadearnedlowerrevenuethan
average industry every year and being ranked 5th in terms of the cumulative revenue for the 5year

85

periodcanbeelucidatedbyitsrelativelysmallerbusinesssize.Furthermore,albeittheslightdeclinein
2009 from the 2008 economic downturn, the trend of consistent growth in annual revenue was
presented.

86

Table9.2:20052009USAirlinesProfitBeforeTaxData
USAirlinesProfitBefore 2005 2006 2007 2008 2009
Tax(InmillionsUS$)
AmericanAirlines (857) 231 456 (2,118) (1,752)
ContinentalAirlines (68) 361 556 (695) (439)
DeltaAirlines (3,859) (6,968) 1,819 (9,041) (1,581)
JetBlueAirways (24) 9 31 (89) 104
SouthwestAirlines 779 790 1,058 278 164
UnitedAirlines (579) (45) 657 (5,421) (668)
USAirways (335) 404 430 (2,215) (243)
AverageProfitBeforeTax (706) (745) 715 (2,757) (631)
Source:http://www.last10k.com

Figure9.2:20052009USAirlinesProfitBeforeTaxIllustration

USAirlinesProfitBeforeTax
4000
2000 AmericanAirlines

0 ContinentalAirlines
MillionUS$

2005 2006 2007 2008 2009 DeltaAirlines

2000
JetBlueAirways
4000
SouthwestAirlines
6000 UnitedAirlines

8000 USAirways
AverageProfitBeforeTax
10000
Year

In accordance with the illustration,despite having earned lower revenue than most competitors,
Southwest Airlines had managed to earn the most consistent profit before tax, which was also above
crosscompanies average profit before tax, every year from 2005 until 2009 whilst some competitors
suffered significant drastic movement during the same period, especially Delta Airlines and United
Airways.

87

b.) ROIC Comparison

CalculationofROIC ROIC

Returnoninvestedcapitalisausefulmeasurementtojustifyhoweffectiveandefficientcanacompany
generatereturnsusingthecapitalinvestedinthecompanyandcomparetherelativeprofitability
betweencompaniesaftertakingintoconsiderationtheinvestedcapital.
ProfitbeforeTaxwasderivedfromtheincomestatementfortheperiod2005to2009.
InvestedCapitalwascomputedfromthesumoftotalinterestbearingdebtsbothshorttermandlong
termandshareholdersequityfortheperiodof2005to2009.

Table9.3:20052009USAirlinesROICData
USAirlinesROIC 2005 2006 2007 2008 2009
AmericanAirlines 6.50% 1.80% 3.30% 26.40% 21.30%
ContinentalAirlines 1.20% 6.20% 8.50% 11.60% 6.40%
DeltaAirlines 9.50% 51.80% 9.10%
JetBlueAirways 0.70% 0.20% 0.80% 2.00% 2.10%
SouthwestAirlines 9.00% 9.70% 11.70% 3.20% 1.80%
UnitedAirlines 6.00% 95.40% 11.70%
USAirways 17.80% 10.20% 9.40% 63.40% 5.80%
AverageROIC 3.44% 5.62% 7.03% 35.34% 7.20%

Source:http://www.last10k.com

Note:2005and2006ROICforbothDeltaAirlinesandUnitedAirlinescannotbecalculatedgiventheirnegativeprofitbeforetaxandstockholdersequity:
ForDeltaAirlines,thecomprehensivelosswaspredominantlyfromthereportednetlossandthechangesinadditionalminimumpensionliability,
deferredtaxassetvaluationallowancerelatedtotheadditionalminimumpensionliability,andtheeffectiveportionoftheopenfuelhedge
contractswhichqualifyforhedgeaccountingForm10k
ForUnitedAirlines,thedeficitsweretheresultofthecompanysrecentemergencefromChapter11proceedingsfrom2002bankruptcy
declarationwhichresultedinanewreportingentitywithnoretainedearningsoraccumulateddeficit.Thecompanyhadadoptedfreshstart
reportinginaccordancewithSOP907Form10k

88

 Figure9.3:20052009USAirlinesROICIllustration

USAirlinesROIC
1.5
AmericanAirlines

1 ContinentalAirlines

0.5 DeltaAirlines
MillionUS$

JetBlueAirways
0
2005 2006 2007 2008 2009 SouthwestAirlines
0.5
UnitedAirlines

1 USAirways

1.5 AverageROIC
Year

Southwest Airlines had always achieved higher ROIC than the industry average during 2005 to 2009,
particularly in 2008 when every other airlines ROIC was in deficit. This epitomised the superior
competency of Southwest Airlines to consistently and sustainably make profit, in accordance with its
strategy,comparedwiththerivaloperators.

89

ProfitGrowthComparison
CalculationofProfitGrowthRateandCumulativeAnnualGrowthRate

1

| 1|

1

| |
1
| |

Table9.4:20052009USAirlinesChangeinProfitBeforeTaxData
USAirlinesChangein 2006 2007 2008 2009 CAGR
ProfitBeforeTax
AmericanAirlines 127% 97% 565% 17% 16.37%
DeltaAirlines 81% 126% 597% 83% 12.30%
JetBlueAirways 138% 244% 387% 217% 126.08%*
SouthwestAirlines 1% 34% 74% 41% 32.26%
UnitedAirlines 92% 1,560% 925% 88% 3.51%
USAirways 221% 6% 615% 89% 6.25%
AverageUSInflationRate 3.20% 2.80% 3.80% 0.40%
Source:http://www.last10k.com

*JetBlueAirwaysprofitbeforetaxrosefromUS$9milliontoUS$104millionduringtheperiodfrom20062009(CAGRof126.08%).Thisexcludesthe
initial2005year,whentheairlinelostUS$24million.

90

 Figure9.4:20052009USAirlinesChangeinProfitBeforeTaxIllustration

USAirlinesChangeinProfitBeforeTax
4
AmericanAirlines
2
0
AverageUSInflationRate
2 2006 2007 2008 2009
4 DeltaAirlines
Percentage

6
JetBlueAirways
8
10
SouthwestAirlines
12
14 UnitedAirlines
16
18 USAirways
Year

Based on the presented information, Southwest Airlines change in profit before tax was
comparativelythemoststablethroughoutthe5yearperiod.AmidtheeconomiccrisisintheUSduring
20072008thatcausedthedrasticplungeofeveryairlinesprofitbeforetax,SouthwestAirlinesprofit
beforetaxwasimpactedtheleastamerereductionof73.7%from2007aswasamongthefastestto
recover after 2008. This is inarguably the result of effective strategic execution of Southwest Airlines,
especially during the crisis time. Southwest Airlines 2005 2009 profit before tax appeared to be
thoroughly approximate with the average US inflation rate, which coincides with the decline in
corporateprofitfromtheriseinbothconsumerpriceandcorporateprice,despitethe2008crisis.This
provesthattheinflationcouldhardlyimpedeSouthwestAirlinesbusinessoperation.
The companys revenue continued to rise consistently as it was the only airline to be
profitable and made positive ROIC throughout the 5year period. Despite facing a slight decline in
revenueandprofitbeforetaxin2008fromtheimpactofglobaleconomicturmoil,SouthwestAirlines
sufferedtheleastcomparedwithotherUSairlines,whichwasevidentbytheleastprofitgrowthrate.
The conclusion that can be drawn is Southwest Airlines had always been effective in executing its
strategyinordertocreatethesustainablecompetitiveadvantage.

91

 Table9.5:20052009USAirlinesMarketAnalysisData
USAirlinesMarket Average CAGR
Analysis ROIC (ProfitBeforeTax)
AmericanAirlines 9.82% 16.37%
DeltaAirlines 17.13% 12.30%
JetBlueAirways 0.08% 126.08%
SouthwestAirlines 7.08% 32.26%
UnitedAirlines 33.70% 3.51%
USAirways 13.48% 6.25%
IndustryAverageROIC
6.67%
(20052009)
AverageInflation
2.35%
(20052009)

Figure9.5:20052009USAirlinesMarketAnalysisIllustration

IndustryAverageROIC
(20052009)
AverageInflation
(20052009)

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 Only three airlines were able to achieved positive average ROIC for the period of 2005
2009,thetimewhentheaverageROICfortheindustrywasnegative.SouthwestAirlineshadthehighest
averageROICof7.2%whichwas12.18%higherthantheindustryaverage,JetBlueAirwaysat0.63%.
ThisclearlyportraysSouthwestAirlinessuperiorcapabilitytomakeprofitcomparedwiththerestinthe
sameindustry.

As evidenced by the Profit Growth Rate which was computed based on the compound
annualgrowthratefortheperiodof20052009SouthwestAirlineshadthelowestCompoundAnnual
GrowthRate(CAGR)amongtheUSairlinesduetothedeclineinprofitbeforetaxfromtheresonated
effectof2008crisisin2009.Nonetheless,usingtheinformationonProfitbeforeTax,SouthwestAirlines
wastheonlyairlinethatwasabletoearnpositiveprofitbeforetaxconsistently.Theairlinewasalsothe
topearnerintermsofprofitbeforetaxforthe5yearperiod,exceptfor2007.Despitethefinancialcrisis
in2008,theyearwhenallotherUSairlinesweresufferingfrompoorperformance,SouthwestAirlines
wastheonlyoperatortoremainprofitable.

c.) Prepare BCG Growthshare Matrix to show the competitive position of all
companies for the last five to ten years.
The BCG GrowthShare Matrix has to take into consideration the Relative Competitive
Position(RCP)andbusinessgrowthrate,whichiscalculatedbasedontheaccumulatedrevenueofevery
USairlinesandtheaveragerevenuefortheairlinesindustryduring2005and2009.
The Relative Competitive Position (RCP) is computed based on the proportioning of the accumulated
revenue during 2005 to 2009 of each airline against the highest accumulated revenue for the same
period.
Table9.6:20052009USAirlinesGrowthShareData
AirlinesRevenue 2005 2006 2007 2008 2009 Cum. RCP CAGR
(US$Million)
AmericanAirlines 20,712 22,563 22,935 23,766 19,917 109,893 0.12 0%
DeltaAirlines 16,480 17,532 19,154 22,697 28,063 103,926 0.44 14%
JetBlueAirways 1,701 2,363 2,842 3,392 3,292 13,590 0.85 18%
SouthwestAirlines 7,584 9,086 9,861 11,023 10,350 47,904 0.46 8%
UnitedAirlines 17,379 19,340 20,143 20,194 16,335 93,391 0.00 0%
USAirways 5,069 11,557 11,700 12,118 10,458 50,902 0.00 20%

93

 Figure9.12:20052009USAirlinesBCGMatrix

BasedontheanalysisusingBCGMatrix,SouthwestAirlineswasidentifiablytobeintheDog
quadrant the position of mediocre market growth and relatively low market share. However, the
companyhasapotentialtomoveuptotheQuestionMarksquadrantshoulditbeabletocontinueto
grow at the same rate of 8.08% or more and leverage on its proven expertise evidenced by the
superior profit before tax compared to other competitors during 2005 and 2009. Furthermore, the
acquisitionofAirTranswouldpromptSouthwestAirlinesadditionalaccesstomoreroutesandhence
actasasteppingstoneforthemovetoQuestionMarksquadrant,orevenStarshouldUnitedStatesof
Americaseconomycontinuestherecovery.

94

10.) What issues does the company need to address?

a.)ThestrugglingU.S.economyafterfinancialcrisis

The U.S. financial crisis began in the mid of 2007 and continued to peak around 2008.
SometimesitsalsoknownasHamburgercrisisduetoitwasoriginatedfromU.S.A.andspreadallover
theworld.WhilesomepeoplecalleditasaSubprimecrisisbecauseitcamefromlowqualitysubprime
mortgage.

ThecrisiscausedtheU.S.enteringtoadeeprecessionwithalmost9millionjobslostduring
20082009.Itissaidthattheestimatedlossoutputfromthiscrisisisatleast40%of2007GDP.TheU.S.
governmentexecutedstimuluspackageshopingfortheeconomicrecovery.

Figure10.1:ModestGrowthExpectedDuringRecovery

Source:http://www.lao.ca.gov/reports/2010/bud/fiscal_outlook/fiscal_outlook_2010.aspx

As shown in the graph above, the U.S. GDP rate was plunged in 2009 but expected to be
recoveredintheyearafter.Anyway,ifwelookattheunemploymentrateinfigure10.2,wecanseethat
people would continue losing their jobs in 2010 and so on because it took sometimes until the

95

governmentsstimulusprogramspayoff.Sopeopletendtospendlessandsavemorewhichcanaffect
thewholeeconomyincludingairlineindustry.

Figure10.2:ProjectedU.S.unemploymentrate

Source:http://keithhennessey.com/2010/02/11/employmentprojections/

b.)Theintensecompetitioninanairlineindustry

Betweendecades20002009,therewererapidgrowthofLCCsorLowCostCarriersinThe
United States that has significantly increase competition within airline industry. As seen in the figure
10.3 below, the market share of low cost airlines has been increasing each year. Between 2000 and
2003, the budget airlines such as JetBlue, AirTran and also Southwest Airlines, expanded capacity by
44%andtheyallfollowthesamebasisthattheyuseonlyonetypeofplaneandcrosstrainemployees
which can give them a 3050% cost advantage over other traditional airlines. Due to the intense
competitioninairlinesindustry,theonlywaythatairlinescanbecomeprofitableistoreduceoperating
cost.SoSouthwestAirlinesshouldnoticethisandfindwaytocontrolcostfurtherthantheirrivals.

Source:StrategicManagementCases:AnIntegratedApproachByCharlesHill,GarethJone,pagec393

96

Figure10.3:ThegrowthinmarketshareofLCCs

Source:https://www.iata.org/whatwedo/Documents/economics/airline_cost_performance.pdf

c.)Merger&Acquisitioninairlinesindustry

ThereweresomemergersandacquisitionsbetweenairlinesinTheUnitedStates.ByM&A,
the company can gain many benefits such as economy of scales, more bargaining power, competitive
advantages and increase operating routes. On the other hand, there will be less competitor in the
market.HerearethelistsofSouthwestAirlinescompetitorsthathadperformedmergerandacquisition
intheindustrysince2000.

In2001AmericanAirlinesacquiredTransWorldAirlines(TWA)
In2005USAirwaysmergedwithAmericaWestAirlines,keptUSAirwaysname
In2008DeltaAirLinesmergedwithNorthwestAirlines,keptDeltaname
In2010ContinentalAirlinesmergedwithUnitedAirlines,keptUnitedname

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Figure10.4:Airlinemergerssince2000
Source:https://www.washingtonpost.com/apps/g/page/business/airlinemergerssince2000/398/

d.)Thefluctuationoffuelprice
Theoilpricemovementhasasignificantimpactonoverallindustryespeciallytransportation
sector like Airlines industry. In the year 2000, WTI or West Texas Intermediate which is used as a
benchmarking in oil pricing, was only around 35 USD per Barrel. And it was continuously hike to the
peakat133USDperBarrelin2008beforeitwassharplydroptheyearafterduetotherecession.

Figure10.5:WTIoilprices
Source:https://www.nrcan.gc.ca/energy/publications/markets/6523

98

 TheriseofoilpricecausedanincreaseinCostperAvailableSeatMileastheexpenseonfuel
andoilroseasseenintheExhibit10fromthecase.Itcanhaveanimmenseeffectonthebusinessplan
and create the difficult task for budgeting the future fuel expenditures. Then, the company may face
somelossesiffuelcostsarenotactivelymanaged.

AlthoughusingderivativecontractscanhelpsavingSouthwestAirlinesoperatingcostfor4
MillionUSDduring19982008,butduringtherecessionitfacedsomelossesonfuelhedging.Sotheoil
pricefluctuationcausethedifficultyforselectingthemostappropriatehedgingstrategy.

Figure10.6:SouthwestAirlinesOperatingExpensesperAvailableSeatMile

Source:CaseStudySouthwestAirlinesin2010:Culture,Values,andOperatingPractices

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11.) What problems is the company facing?

a.)ThemergerbetweenSouthwestAirlines&AirTranAirways

In September 2010, Southwest Airlines has been merged with AirTran Airways hoping for
thecompetitiveadvantageintermsofincreasingnumberofpassengers,enteringtoAtlantarouteand
allotherbenefits.Unfortunately,themergeroftencausedsomeproblemsaslistedbelow.

Different in business model: These two lowcost airlines have very different business
models,makingtheircombinationcomplexandhardtomanage.AirTranpassengershave
beenfrustratedastheirpreferredairline,withitsbusinessclassandassignedseating,has
beenfoldedintotheallcoach,noassignedseatsSouthwest.Moreover,AirTranwillbring
innewtypeofaircraftintoSouthwestFleetmakingitabithardforSouthwestAirlinesto
operateduetoitsbusinessmodelwaskeepingoperationsimpleandcostsdownbyusing
onlyonetypeofaircraft.
Different in organization culture: The two airlines have different organizational culture.
Southwest Airline is known for its distinctive corporate culture, LUV and FUN. While
AirTrancanbecharacterizedasatraditionalairlineculture.Sorightafterthemergerhas
done,SouthwestAirlineshastocultivateitscultureamongAirTranAirwaysemployees.
But Southwest Airlines spent almost 40 years building these culture, so it is a big
challengeforthecompanytochangenearly8,000employeesinashorttime.
b.)Failureinusingderivative

Thesharpriseinoilandjetfuelpricesince2003hadmadesomeairlinessufferingfromloss.
Andin2008,fuelcostsrepresentedaround32.3%ofthetotaloperatingexpensesforallU.S.domestic
airlines.Andairlinescannotincreasetheairfarestooffsetthelossfromoilprice.

Southwest Airlines was the first mover among major U.S. airlines in applying fuel hedging
andderivativecontractstohedgeagainsttherisingfuelprice.HedgingallowsSouthwestAirlinestofix
pricesinadvance,whilereducingtheriskofvolatilepricesinthefuture.Butthishedgingmethodwillbe
successfulonlywhenbasedonthescenariothatfuelpricewillcontinuetoriseinthefuture.

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 Thefallin oilpriceandtheresultingdrop inthejet fuelcostin2009wasagoodnewsto

most of the airlines and business travelers hoping to cut costs. But it was a bad news for Southwest
Airlines, who was using fuel hedging strategy. The company had already hedged based on higher oil
prices and found themselves facing higherthanusual hedging cost. So finally, the company reported
lossesof408MillionUSDonthefuelhedgingcontractsthattheyplacedin2009.

Figure11.1:WTISpotOilPrice

Source:http://www.altenergystocks.com/archives/2010/01/plugin_vehicles_waist_deep_in_the_big_muddy_1.html

c.)Failuretoconductrequiredinspection

In 2008, there was a report that Southwest Airlines were failed to conduct required
inspections for early detection of fuselage fatigue cracking on 46 of its Boeing 737300 aircrafts. The
companycontinuedtoflyforeightmoredaysafternotifiedtotheFederalAviationAdministration(FAA)
about the problem. The tiny cracks in the bodies of six planes were revealed from the belated
inspections with the largest measuring four inches. After the media reported this failure, Southwest
Airlines canceled 4 percent of its flights and grounded 44 of its Boeing 737300s until the inspections
haddone.ThismadetheFAAfineSouthwestAirlinesfor$10.2million.

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 ThisincidentcausedasuddendecreaseinSouthwestAirlinesreputationandalsoimpaired
customer confidence on airlines safety. Southwest Airlines needed to publicly apologize for the
wrongdoingandhurriedlyrestorecustomerconfidence.

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12.) Assess the impact of general environmental factors of the

industry. What are the implications of these factors for the success
of the company? Any opportunity and threat can you reveal?

a.) Economic Segment

One of the factors of the economic environment that has had an impact on Southwest
Airlinesiseconomicgrowth.Inyear2008,TheUnitedStatesofAmericafacedahugeeconomiccrisisas
knownasSubprimeorHamburgerCrisis.ItcausedtherealgrossdomesticproductorGDPoftheU.S.
to drop at an annual rate of approximately 6% in the fourth quarter of 2008 and the first quarter of
2009.

Moreover, the U.S. unemployment rate increased to more than 10% by October 2009 as
seenfromthefigure12.1below,whichisthehighestratesince1983.Theaveragehoursperweekalso
declinedto33hourswhichisthelowestratesince1964.Theinflationratealsodeclinedsharplyin2009
(recessionperiod).

Figure12.1:U.S.UnemploymentVSinflation

Source:http://www.economicshelp.org/blog/571/unemployment/tradeoffbetweenunemploymentandinflation/

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 Afterthecrisis,FEDorU.S.centralbankusedmanytoolstotrytosolvethesituationsuch
asQuantitativeEasing.Fortunately,manyanalysesexpectedthatthestimulusprogramsbyFEDwould
helpstimulatetheU.S.economy.Asseeninfigure12.2below,intheyear2010andafter,U.S.GDPwas
projectedtoincreasefromthebottompointwhichwillbetheopportunityforairlinesindustry(o1).And
thestimulusprogramwouldlowertheinterest,asseeninFigure12.3,whichthiscouldhelpboostingthe
consumptioninU.S.(o2)

Figure:12.2:ModestGrowthExpectedDuringRecovery
Source:http://www.lao.ca.gov/reports/2010/bud/fiscal_outlook/fiscal_outlook_2010.aspx

Figure:12.3:FedFundsRate
Source:http://themortgagereports.com/13285/usmortgageratesdroppingafterthefedspledgetokeepqe3inplace
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 Moreover, there is an evidence that airline performance is related to economic growth.

Economicindicatortrendscanbematchedwithairlinepassengerandfreightvolumes.Asyoucansee
from the figure 12.4 below, Revenue Passenger Kilometers or RPK is used to measure the volume of
passengerscarriedbyanairline.ItmovesinthesametrendwithIndustrialproductiongrowth.Soifthe
U.S. economy is projected to grow in the near future, we can assume that the RPK would grow
accordingly.

Figure12.4:GlobalindustrialproductionandRevenuePassengerKilometers(RPK)

Source:http://marketrealist.com/2014/09/whyeconomicfactorssupportairlineindustrygrowth/

b.) Sociocultural Segment

The sociocultural environment also has an impact on Southwest Airlines.American people
are moving away from their original place to work or to living in other places. So they tend to travel
acrossthecountrytovisittheirrelativesandfriendswholiveinanotherareas.Fromthefigure12.5and
12.6below, young adults aged between 1834 years old had higher migration rate than the total
population.Consequently,itisgood forairlinebusinessasthenumberofpassengerswillincrease.So
thiscanbeanopportunitytotheAirlinesIndustry(o3).

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Figure12.5:AgeSpecificMigrationRates

Source:http://www.census.gov/content/dam/Census/library/publications/2015/acs/acs31.pdf

Figure12.6:Agecompositionofthetotalpopulationandmovers

Source:http://www.census.gov/content/dam/Census/library/publications/2015/acs/acs31.pdf

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c.) Demographic Segment

Demographic factors play an important role in forecasting demand and future travel
preferences. The U.S. population are growing steadily every year as seen in figure 12.7 and the U.S.
Census Bureau projects a U.S. population of 440 million by 2050. So this can be an opportunity for
AirlinesIndustry(o4).

Figure12.7:UnitedStatesPopulation

Source:http://www.immigrationeis.org/aboutieis/usimmigrationhistory

Moreover,between1965and1990,therewereanimmigrationaveragedonemillionpeople
annually mostly from Mexico and the rest of Latin America. And since 1990, the immigration has
increasedevenmore,toaround1.5millionpeopleannually.Sotheseincreasingnumberofimmigrants
willbeanopportunityforanAirlinesIndustry(o5).

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Figure12.8:ImmigrationintotheUnitedStates

Source:http://www.immigrationeis.org/aboutieis/usimmigrationhistory

Inaddition,wecancategorizeU.S.demographicaccordingtoyearofbirthtoprovideinsight
tothechangingtrendinthetravelandairlineindustryasfollowed:

BabyboomgenerationBornbetween19461964
GenerationXBornbetween19651979
GenerationYorMillennialgenerationBornbetween19801999
GenerationZBornafter2000

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Figure12.9:Millennialspendingonbusinessflights

Source:http://marketrealist.com/2014/09/whysocialanddemographicfactorsinfluenceairtraveldemand/

Asseenfromthegraphabove,theU.S.futuretravelwillbedefinedbythegrowthofGenY
or Millennial generation. In the next few years the GenY will enter their peak earning, spending and
traveling.Theirbusinessspendingisexpectedtoincreaseby50%ofthetotalby2020.Whilecurrently
BabyBoomersarethemajorityofairlinescustomer.Buttheirspendingonbusinessflights tendto be
decreasedto16%by2020and11%by2025.

According to the report of the Market Realist, millennials spend 13% more than non
millennialsperairlineticket.Theyarealsowillingtopayanextrafortheseatsupgrade.Theyaremore
interestedindiscountsandlowcostcarrier.SothisisahugeopportunityforanAirlinesIndustrytodoa
marketingandfocusonthesemillennialcustomers(o6).Iftheycansatisfythisgroupofcustomer,they
willgeneratealotofprofitinreturn.

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 d.) Technology Segment

One of the main factor for improving airlines operational efficiency is technological
advancement. Airlines can reduce their costs and improve operations by using advanced aircraft
technology. The technology has created better connectivity and enhanced passengers travel
experience.

Figure12.10:Improvedefficiencyofnewgenerationjetairplanes

Source:http://marketrealist.com/2014/09/mustknowtheroleoftechnologyintheairlineindustry/

As stated in the case, Winglets is a technology to help enhance the performance and
efficiencyofaircraftfleet.SouthwestAirlineshasalreadyadoptedWingletstechnologytotheiraircraft.
Thesewingletsprovidemanybenefitstoairlineindustryasbelow:

Environmentallyfriendly:lowernoisearound6.5%
Improvecruiseperformance:aircraftcanreachhigherflightslevelsfaster
Reducemaintenancecostandfuelconsumption
Good looks: winglets give aircraft a modern look which can improve customers
perceptiontotheairline.

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Figure12.11:Winglettechnology

Source:http://www.b737.org.uk/winglets.htm

Moreover,thereareanothertechnologytohelpincreaseaircraftefficiencyandreducefuel
costasstatedbelow:

Hybrid Wing Body (HWB): It is a mix between the traditional tubeandwing and a
flying wing. The HWB seeks to obtain increased fuel efficiencies through the
eliminationofthetailsectionandincreasedstructuralefficiency.Itcouldusehalfas
muchfuelasconventionalaircraft.

Figure12.12:RemotecontrolledprototypeofHBWdesign
Source:http://www.technologyreview.com/news/509916/hybridwinguseshalfthefuelofastandardairplane/

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 Required Navigation Performance (RNP): This technology allows aircraft to fly

preciselyalongapredefinedrouteusingonboardnavigationsystemsandtheGPS.Itis
resulting in improved efficiency, capacity and environmental performance for the
globalairtransportationsystem.TheRNPalsoallowsacontinuousdescentwithless
distanceforitsapproach,meaninglessfuelisconsumedandemissionsarereduced.

Figure12.13:TypicalFlightPathV.S.RNPFlightPath
Source:http://www.intelligentaerospace.com/articles/2011/01/highendrnpflying.html

Asstatedabove,thelatesttechnologycanhelpAirlinesCompanytooperatemoreefficiently.Soitisan
opportunityforanAirlinesIndustrytobringthesetechnologytohelpimprovetheirserviceandoperation
(o7).

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 e.) Political and Legal

1.Terroristattack

Theairlineindustryalsoimpactedbyissueslikewar,terrorism,andthepoliticalthings.The
terrorist attack in 2001 caused revenue of the whole airline industry to drop dramatically due to
passenger lacked of trust as seen from the figure below. Moreover, the employment rate of U.S.
passengersairlinesweredecreased14.7%in2003(from520,600to444,700workers)andcontinuedto
declineeachyearthrough2010.Thisisanunpredictableanduncontrollablesituation.Sothisisathreat
toAirlinesIndustry(t1).

Table12.14:Financialimpactafterterrorattack

Source:IATA

2.DeregulationintheU.S.airlineindustry

TheAirlineDeregulationActof1978eliminatedallregulationsgoverningtheairlineroutes,
airfares, entry, and exit of commercial airlines. Airfares and all other factors would be determined by
demandandsupplyinthemarket.Theoverallticketpriceshavedecreasedduetomorecompetitionin
themarket.Consumersbecamemorepricesensitiveandgravitatedtowardthelowercostcarriers.The
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entry of significant new capacity on many routes has also helped to generate new traffic. So this
deregulationisanopportunityforLowcostAirlinesBusiness(o8).

3.Lawsandregulationspreventinganticompetitiveenvironment

TherecentconsolidationintheU.S.airlineindustryhadalreadyreducedthenumberoftop
players.Thecompetitionalsoreduced,airfaresincreased,andpassengersbargainingpowerdecreased.

However, the U.S. Department of Transportation (or DOT) has kept a close watch on the competitive
landscape in the airline industry. The government wants to protect consumer interest and prevent
monopolyinairlinesindustry.SothiscanbeathreattotheAirlinesIndustry(t2).

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f.) Global Segment

Globalairtravelisprojectedtogrowatmorethan4%ayearasseeninfigurebelow.

Figure12.15:GlobalProjectionofairtravel

Source:https://blog.dashburst.com/passengerairtravelcentennialinteractiveguideguardian/

Moreover, the figure 12.16 below shows that RPKs or Revenue Passenger Kilometers are
projectedtoincreaseby6factorsby2029.TheincreasingfactorsmostlycomesfromChinawhichisthe
emergingmarket.AndthecriticalfactorforanticipatinggrowthindemandforairtravelisGDPgrowth.
Boeing, the aircraft producer company, said that the growth in air travel, measured in RPK, has
outpacedeconomicgrowthwhichisrepresentedbyGDPbyapproximately1.5to2percent.Sothiscan
beimpliedthatiftheworldGDPcontinuestogrowasseeninfigure12.17below,airlineindustrywill
grow accordingly.So this can be an opportunity (o9)for domestic airlines to expand route to other
contries such as neighbour countries or expand operation into longhaul flightaccording to the
increasingglobaldemand.

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Figure12.16:ProjectedRevenuePessengerKilometersbyBoeing

Source:http://rogerpielkejr.blogspot.com/2010/07/boeingseyepopping2030airtravel.html

Figure12.17:WorldGDPbyregion

Source:http://rainforests.mongabay.com/energy/gdp.html

116

13.) Analyzing the effects of industry evolution by using industry life

cycle model. What does the model tell you about the changing
industry conditions? Are there any opportunity and threat?

There are five stages of Industry life cycle which are Embryonic, Growth Stage, Industry
Shakeout,MatureStageandIndustryDecline.Toknowwhichstagedoesairlineindustryin,wehaveto
usepercentagegrowthofpassengerswhotravelingbyairplanesinTheUnitedStatestoplotgraph.

0.15 13.92%

%Growth %Growth
Domestic International
0.1 7.97%
7.20%
5.69%
4.37% 4.28% 4.40% 4.80%
0.05 3.00%
1.14%
0.17% 3.16%
0.96% 1.60%
0
2002 2003 2004 2005 2006 2007 2008 2009 F2010 F2011
4.04% 2.80%
5.29%
0.05
5.16%

0.1

Figure13.1:Percentagegrowthofpassengers(DomesticvsInternational)

Domestic %Growth International %Growth

Year
(millionunits) Domestic (millionunits) International
2002 551,899,643 118,704,850
2003 583,293,762 5.69% 117,569,855 0.96%
2004 629,768,486 7.97% 133,940,075 13.92%
2005 657,261,487 4.37% 143,588,422 7.20%
2006 658,362,617 0.17% 149,740,591 4.28%
2007 679,168,758 3.16% 156,328,088 4.40%
2008 651,709,940 4.04% 158,107,197 1.14%
2009 618,052,278 5.16% 149,749,333 5.29%
F2010 1.60% 2.80%
F2011 3.00% 4.80%
Source:Actual20022009fromhttp://www.transtats.bts.gov/Data_Elements.aspx?Data=1
Forecast20102011fromhttps://www.faa.gov/data_research/aviation/aerospace_forecasts/20102030/media/2010%20Forecast%20Doc.pdf

117

 Asseenfromthegraphabove,thenumberofpassengersintheU.S.from2006to2011have
beengrowingslowly.Andinbetween2008to2010,itshowsthatpercentgrowthofairlinespassengers
wasdroppeddramaticallyduetorecessioncausingdemandintravelingtodecline.Moreover,thereare
manyairlinesthatmergetogethertogaineconomyofscalesandsomeairlinesweregonebankruptedat
thisstage.Evenitwasprojectedthatthedemandwouldrecoverafterthecrisisbutitwouldnotasgood
asbefore.Thiscanbeimpliedthatairlineindustryisnowinthelateindustryshakeoutstageandalmost
reachmaturestage.

Figure13.2:Stagesintheindustrylifecycle

Source:http://annettestephenmarketingjournal.blogspot.com/2013/09/productlifecycle.html

Sofromtheanalysis,industryshakeoutstagecanbeseenasathreat(t3)duetosupplyare
currentlymorethandemandwhichcausesairlinesoperatorstocompeteintenselyagainsteachother.
Andtotalincometendstogrowataverylowrate.

Ontheotherhand,thiscanbeopportunity(o10)ifSouthwestairlines,whichisconsidered
successfulinlowcostairlineindustry,canbeafirstmovertoacquirethe assetsoffirm thatexits the
industrytoconsolidatethepower.

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14.) How is the industry changing? What are the underlying drivers
of change and how might those driving forces individually or
collectively change competition in the industry? Can you find any
opportunity and threat?
The driving forces are the major causes of changing industry and competitive conditions.
And it will influence the company to reshape and change the competitive conditions. There are three
maindrivingforcesforSouthwestAirlinesasfollow.

1.Increasingnumberofsmartphoneusers

Thegrowingnumberofmobileandinternetusersisnotonlyimportantfordigitalmarketingingeneral
butalsoforthetravelindustrylikeairlinesindustry.Thedrivingforcecomesfromtheemergingnew
internetcapabilitiesandapplications.Thisshiftinconsumerbehaviorrepresentsabiggertrendthatall
businessownersmust beaware. The smartphone users in theU.S. areprojectedto reach almost 200
millionusersin2016asseeninfigure14.1below.

Figure14.1:U.S.smartphoneuserforecast

Source:http://www.statista.com/chart/210/smartphonesaretakingover/

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 Thegrowingofsmartphonepopulationwilldefinitelyimpacttoonlineshopping.According
to figure 14.2 below, mobile devices will account for 40% of ecommerce traffic by September 2013
whilePCdevicestrafficwillbeeventuallydropped.Moreover,fromtheinfographicresearch,itpredicted
thatbuyingbehaviorfortravelserviceswillhavechangedby2015.Itappearsthat89%ofairlineswill
sell tickets via mobile applications in smartphone by 2015 and 70% of airline executives believe that
mobileapplicationswillbeanequallydominantsaleschannel.

Figure14.2:TrafficprojectionsforMobiledevicesandPCs

Source:http://www.rickwhittington.com/blog/mobilecommercestatisticstrends/

Wecanevaluatetheimpactofthisdrivingforceinbelowtable.

AssessImpact
Analysis

Arethedrivingforcesmakingthebargainingpowerof
otherindustryparticipantshigherorlower?
Aredrivingforcesactingtocausemarketdemandfor
producttoincreaseordecrease?
Aredrivingforcesactingtomakecompetitionmoreor
lessintense?
Willdrivingforcesleadtohigherorlowerindustry
profitability?
Lower:Technologycanhelpthecompanyto
gainmorebargainingpowerthanrivals.
Increase:Thedemandwillincreasedueto
customercaneasilyreachthesaleschannel.
Moreintense:Eachcompanywillcompete
moreintensely.
Higher:Moresaleschannelleadstohigher
profit.

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 From the above analysis, we can imply that this driving force in technology is a huge
opportunity (o11)for the airlines industry to develop userfriendly mobile application to satisfy the
customersneeds.

2.Fluctuationinoilprice

Thisdriving forcecomes fromthechangesin costandefficiency.Thefuelcostisone of

the main operating cost for airlines industry.The fluctuation in fuel prices caused the problem for the
airlines industry to control and plan their operating cost. As seen in figure 14.3, the oil price was
continuouslyhiketothepeakat133USDperBarrelin2008beforesharplydroppedtheyearafterto
lowerthan50USDperbarrel.

Figure14.3:Crudeoilprices20052010
Source:http://ourworld.unu.edu/en/oilpricerisesasairlinefails

Wecanevaluatetheimpactofthisdrivingforceinbelowtable.

AssessImpact Analysis
Arethedrivingforcesmakingthebargainingpowerof Higher:Thefluctuationinfuelcostreducethe
otherindustryparticipantshigherorlower? bargainingpowerofairlinescompany.
Aredrivingforcesactingtocausemarketdemandfor Decrease:Theriseoffuelpricewillcauseticket
producttoincreaseordecrease? pricetoincrease.Sothedemandwillbelower.
Aredrivingforcesactingtomakecompetitionmoreor Moreintense:Eachcompanywillcompete
lessintense? moreintenselytokeepthemarketshare.
Willdrivingforcesleadtohigherorlowerindustry Lower:Theriseinoperatingcostleadstolower
profitability? profit.
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 Fromtheaboveanalysis,wecanimplythatthisdrivingforceinfuelpricesfluctuationisa
threat(t4)fortheairlinesindustryasitwillleadtolowerprofit.

3.QuantitativeEasingPolicyforU.S.economy

ThisdrivingforcecomesfromRegulatoryinfluencesandgovernmentpolicychanges.After
theU.S.financialcrisis,theFederalReserveorFEDannouncedtheQuantitativeEasing1orQE1withthe
objectivetohelpboostingtheeconomy.StartingfromDecember2008,FEDpurchasedupto$600billion
inagencymortgagebacksecuritiestoinjectmoneyintothemarket.QE1becamethemaintoolforthe
governmenttostimulatetheeconomy.Consequently,theU.S.economyappearedtohavestrengthened
fromsupportedcreditmarketsandliquidityprovidedtotheprivatesector.Asseeninfigure14.4,U.S.
consumerspendingandincomehasbeenincreasingin2010.Althoughitwasnotasgoodasbeforethe
crisis,butitisasignofimprovement.

Figure14.4:U.S.personalspendingandincome

Source:http://thebasispoint.com/2012/03/30/goodconsumerspendingnews/

Moreover,withthestimulusplan,theunemploymentwasprojectedtobeonly7%on2010
comparingwith8.8%withoutstimulusplanasseeninfigure14.5below.

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Figure14.5:Projectedunemploymentrate

Source:http://globaleconomicanalysis.blogspot.com/2011/10/hypotheticalemploymentand.html

Wecanevaluatetheimpactofthisdrivingforceinbelowtable.

AssessImpact
Arethedrivingforcesmakingthebargainingpowerof
otherindustryparticipantshigherorlower?
Aredrivingforcesactingtocausemarketdemandfor
producttoincreaseordecrease?
Aredrivingforcesactingtomakecompetitionmoreor
lessintense?
Willdrivingforcesleadtohigherorlowerindustry
profitability?
Analysis
Higher:Theairlinescompanyhasmore
bargainingpoweroverthecustomers.
Increase:Thedemandwillincreaseduetothe
riseinconsumptionandpersonalincome.
Moreintense:Eachcompanywillcompete
moreintenselyduetotheincreaseindemand.
Higher:Theincreaseindemandleadstomore
profit.

Fromtheaboveanalysis,wecanimplythatthisQEdrivingforceisanopportunity(o12)for
theairlinesindustryasitwillhelpstimulatetheU.S.economyandincreaseconsumerdemand.

123

15.) What does your strategic group map of alternative airline

industry (all segments) look like? What are your strategic
dimensions? Are there any mobility barriers for each strategic
group? Explain the reason to support your answers.

Servic
e
AmericanAirlines
Limite
DeltaAirlines
d Continental
Servic Airlines
e UnitedAirways
USAirways

Full
Servic
e

Southwest
JetBlue

Domestic International
Geographical

StrategicGroupMapofU.S.AirlineIndustry
StrategicDimensions
Therearetwomainstrategicdimensionsandsevenmajorairlinesbeingusedinformingthe
strategicgroupmapofU.S.airlineindustry.
1.ServiceDimension
1.1 FullService(PremiumAirlines,TraditionalAirlines)

AmericanAirlines
DeltaAirlines
ContinentalAirlines
UnitedAirways
USAirways
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 Full service airlines are the traditional airlines which provide full service as allinclusive in
ticketprice.Theyofferfullrangeoftravelclassesforeverytasteandbudget.Theyalsooffersignificant
amenitiesbeyondbasicflightservicesuchasfullluggageallowance,anallocatedseat,amealorsnack
included inflight entertainment and some beverages. Traditional Airlines pioneers the hub and spoke
systemwhichprovideconnectionforpassengersfrommanyoriginatingcitiestomanydestinationcities.
Theyarelikelytoinvestheavilyinthedevelopmentofexpansivedomesticandinternationaloperations
tobeabletoexpandtheircustomerbaseglobally.MostofmajorairlinesintheUnitedStatessuchas
American Airlines, Delta Airlines, Continental Airlines, United Airlines and US Airways still keep their
traditionalairlineoperation.Theseairlinesprovidesfullservicetopassengershavehighoperationcosts,
theyaregenerallypursuingdifferentiationbasedonservicequalityandtheyusuallypresentthemselves
ascarriersthatcanbringpassengerseverywhere.

1.2 LimitedService(LowCostAirlines)

SouthwestAirline
JetBlueAirways
LimitedServiceairlinesarethelowcostairlineswhichoffergenerallylowfaresinexchange
ofeliminatingmanypassengerservicessuchascomplimentarydrinksorfooditemstobeabletopursue
significantlowerprice.Mostlowcostairlines,SouthwestAirlineandJetBlue,operatesapointtopoint
network. The pointtopoint network is in contrast to a hubandspoke network, the point to point
network is designed to provide frequent nonstop and direct service between cities. The system is
suitabletolowcostairlinesastheyfacilitateshorthaulflightsandtargetsonlythedomesticbusiness.
For example, Southwest Airlines has concentrated its route structure in the Southwest part of the
UnitedStates.Manylowcostairlinesfocusondomesticmarketbecauseoftheirlimitationbuttheycan
achievetheirbestbyconcentrationwithintheborderoftheUnitedStates.

2.GeographicDimension

Geographical dimension divides U.S. airline industry into two group, airlines that focus on
domesticmarketandairlinesthatfocusonglobalservices.ItisclearlythatSouthwestAirlineshasbeen
focusingonaspecificgeographicalfromthebeginningasithasconcentrateditsroutestructureinthe
SouthwestpartoftheUnitedStates.SouthwestistheonlycurrentmajorairlineintheUnitedStatesthat
focuses on domestic market and it has achieved its best by concentration within the border of the

125

UnitedStates.JetBlueAirwaysstartedtheiroperationin1998byfocusingondomesticbutfinallygoes
on expanding the business in global market in 2004. While another major airlines such as American
Airlines,DeltaAirlines,ContinentalAirlines,UnitedAirlinesandUSAirwayscanbegroupedtogetheras
theyhavebeenpresentingthemselvesascarriersthatcanbringpassengerseverywhere.Theseairlines
haveinvestedheavilyinthedevelopmenttoexpandtheirdomesticandinternationaloperationstoput
themselvesasacarrierbrandthatcanbringpassengerseverywhere.

Basedonthestrategicgroupmapofairlineindustryitisobviousthatmostofmajorairlines
in the United States arethe traditional airlines and they are paying high attention to quality services.
American Airlines, Delta Airlines, Continental Airlines, United Airlines and US Airways are pursuing
differentiationbasedonservicequalityastheyhavehighercostduetotheiroperationsystem. These
airlines are grouped together according to their business model and geographical market. While
Southwest and JetBlue are in the same group as they are pursuing a classic low cost position. Both
airlines use LowCost business model and describe themselves as cheaper alternatives for their
customers.Eventhoughfrom2004JetBlueAirwayshasbegunitsoperationabroadbutthenumberof
internationalflightsduringyear20042009arestillverylowcomparetoitstotalflights.

3.MobilityBarriers

Both of the above strategic groups have mobility barriers which prevent airlines from
moving from one strategic group to another strategic group. The full service airlines group will face
somedifficultiesiftheywanttomovetojointhecompetitioninthelowcostgroup.Eventhoughthey
haveallthetoolsandemployeestocompetewithlowcostgroupbuttheyhavetoconcentratemoreon
costmanagement.Thebusinessmodeloftraditionalairlinegroupcouldnotallowthemtodramatically
reduce cost as they need to deliver great quality services to keep their own identity. The other main
problemismanagingtwobusinessconceptswithinoneairlinemightcreatecustomerconfusionwhich
will affect the brand in the long run. However, they might be able to pull it off if they succeed in
boosting efficiency and productivity while trying to reduce unnecessary costs along with increasing
communicationwithcustomers.Theycanalsostarttocompeteinlowcostmarketbyloweringpriceson
routes that they are competing with lowcost group while remaining higher fares for noncompeting
routes.

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 On the other hand, the lowcost group also has mobility barriers if they want to move to
anotherstrategicgroupastheyneedtokeeptheiroperationcostaslowaspossibletobeabletooffer
lowfaretoattractcustomers.Whileanotherstrategicgroupemphasizesonqualityandhighcustomer
satisfactionwhichwilldefinitelycausehigheroperationcost.Moreover,itseemsbeextremelydifficult
forlowcostgroupwhenconsideringaboutsystemandaircraftsavailabilityasmostoftheiraircraftsare
operatingforshorthaulroutes.Theywillneedtoinvestheavilyinpurchasingnewaircraftsforlonghaul
routes,establishingnewsystemsalongwithhighspendingonstafftrainingtobeabletooperateafull
serviceairline.

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16.) What key factors determine the competitive success for the
company? Explain the reason and give the weight for each factor.

1.Employees

Southwest Airlines has been paying genuinely great attention to their employees. People
can be identified as the most valuable resource for Southwest Airlines. The company generally hires
employeesforattitudeanddedicationastheybelievethateveryonecanbetrainedforskills.Theright
attitude is crucial as the company needs to find employees that will thrive in the Southwest culture.
Theyalsobelievethathavinggoodattitudeemployeesreflectdirectlyongreatperformance.Southwest
Airlines has never had a strike which refer that Southwest Airlines is a happy workplace. Their
employees also have the highest paid in the airline industry. Moreover, they emphasize greatly on
teamwork as everyone in the airline has to work as a team for the best result of the company. The
importanceofpeopleforSouthwestisveryhigh.

Weight=0.2

2.CustomerServices

Although Southwest Airlines is not a full service airline, everyone in the airlines always
dedicatethemselvestoprovidethehighestqualityofcustomerservice.Employeesareencouragedto
deliver services with a sense of warmth and friendliness to touch the heart of customers. The jobs
flexible at boundaries allow employees to be creative and innovative to impress customers. Herb
Kelleher,thefounderofSouthwestAirlines,saidthatWeareinthecustomerservicebusiness,wejust
happentoprovideairlinetransportation.Healsohasbeenknownforhelpingbaggagehandlersdoing
theirjobduringThanksgivingperiods.BothmanagementandoperationlevelsinSouthwestAirlineshave
beendedicatingthemselvestopursuethebest customer service.It isobviousthatSouthwest Airlines
believesthat customer service isa vitalfactor that hasbeenkeepingthe companyinthetop ofmind
brandfordecades.

Weight=0.15

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3.Lowerandhasslefreeprice

Southwest Airlines is a low cost airline and offering lower fares is definitely one of the
competitive successes for the company. Southwest has changed the product from a bundle of basic
transportation service combined with many other facilities to the product which has only the basic
transportation service. They have Bags Fly Free, No Frills, No Fees and many other campaigns to
ensurecustomersthattheywillpayhasslefreeprice(noextracharges)whentheyflywithSouthwest
Airlines. Many airlines have tried to imitate Southwest Airlines pricing strategy, but they have been
unsuccessful.SouthwestAirlinescanexecutepricingstrategyverywellastheyknowthattheonlyway
tokeepthissuccessfuladvantageiskeepingcostsevenlower.Itistheprimarygoalofthecompanyand
theyhavebeendoingreallywell.

Weight=0.15

4.Lowoperationalcostsandhighefficiency

Laborcostswhichaccountalmost40%ofthetotaloperationalcost.Southwesthasachieved
significantly higher labor productivity by using crossutilization. Southwest workforce generates more
output per employees comparing to another major airlines. Their employees also contribute a lot to
help the company lower the operational costs as the cooperation culture drive them work their best
everydayforthecompany.
PointtopointFlyingissignificanttoSouthwestAirlineswhilemostofmajorairlinesarestill
using hub and spoke system. The pointtoPoint system helps to minimize the time planes sit on the
groundandalsohelpstomaximizeitsoperationalefficiency.Thecompanycanreducealotofcostsby
usingPointtoPointsystem.
Fuel cost is very important as it is one of the highest operational costs of most airlines.
Southwest Airlines has the most fuel hedging of any airline as it has a very aggressive fuel hedging
programandithassavedbillionsdollarsforthecompanysince1999.
TicketlesshelpsSouthwestAirlinestolowerthedistributioncosts.Itisthefirstmajorairline
tooffertheticketlesstravelsystem.Theyalsoofferonlinebookingtoprovideconveniencetocustomers
whileeliminatingagencycostsatthesametime.
One aircraft type helps Southwest Airlines to achieve their success in lower operational
costs. Using only Boeing 737 jets can simplify flight maintenance and flight scheduling operation. The

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trainingcostsaredramaticallylowerthanothersbecauseemployeeshaveonlyonetypeofaircraftto
train.
SecondaryairportshavelowerairportandlandingfeeswhichhelpSouthwestAirlinestoreachtheircost
controlsuccess.UsingsecondaryairportsalsohelpsSouthwestAirlinestoavoidflightdelays,sotheyare
abletoprovideexcellentservicestocustomers.

Southwest has been successful in keeping their operation cost lower than others. So the
operationalcostsandefficiencyisextremelyvitalforSouthwestAirlines.

Weight=0.25

5.RouteSystem

RoutesystemisanothercompetitivesuccessofSouthwestAirlines.Theyalwaysanalyzethe
densityandcustomerpotentialbeforestartingoperatinganewrouteandsettingtheflightfrequency.
Theairlinealwaystargetsroutewithhighcustomerdemandastheyknowthattheyhavetheabilityto
quickly turnaround aircraft and be able to keep their plane in the air more hour per day than their
competitors. Moreover, using the PointtoPoint system allows Southwest Airlines to pick the most
profitableroutestofly.

Weight=0.1

6.FinancialManagement

ItisobviousthatSouthwestAirlineshasgreatfinancialmanagement.SouthwestAirlinesis
inaverystrongfinancialpositionasithasbeenrecordedits36consecutiveprofitableyearin2009.The
managementoftheairlinehasalwaysavoidedanythingthatwillincreasecostsorcomplicatedthebasic
travelpropositionandhastakeneverythingtokeeptheircostadvantageswhiletryingtomakethemost
profitpossibleevenintheharshtime.ThecostadvantageshavehelpedSouthwestAirlinestobeableto
maintain its very strong financial position after the September 11 in 2001. While most airline have
financialstruggledaftertheincidentformanyyears.

Weight=0.15

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17.) Carry out an industry matrix to see how well the company and
competitors are responding to key success factors in the industry
environment? Explain the reason for giving the score for the
company and each competitor. Can you identify any opportunity and
threat?
Keysuccessfactorsaffecttheoverallcompetitivenessofallcompaniesintheindustryand
determine companys ability to achieve companys goal successfully. Airline, unlike many service
businesses, requires expensive equipment and facilities such as aircraft, flight simulator and
maintenancehangars.Sinceairlineindustryiscapitalintensive,highoperatingexpenseandthinmargin,
thereare6keysuccessfactorsleadingtoefficientoperationforairlineindustry.
1.People(20%)
Employee is important in airline industry in order to provide services including flight
attendants, pilots, baggage handler, reservation agents, gate agents, security, mechanics, etc. Despite
that technology helps airline to complete many tasks, airlines are service business where customers
require personal attention. Besides, airlines also invest a lot on human resource to develop skills,
practicesandexperiences.Plus,theyneedtocontactcustomer,toprovideservicesandsafety,tosolve
problemsforcustomers,andsatisfycustomer.
2.Customersatisfaction(20%)
Airlineisinserviceindustryinvolvingtheprocessfromcustomerbookaticket,travelfrom
one point to another. The service provided includes ticket booking, checkin, inflight service, inflight
entertainment,baggagereclaimandsafetransportationtodestination.
3.Price(10%)
Therearemanyairlinesintheindustryprovidingsimilarservicewhichisairtransportation.
Ataservicelevel,customerstendtoselectlowerprice(ifpricedifferentissignificant).Hence,pricingis
an important strategy to attract customers. Some airline customers who are fairly flexible on flight
schedule such as leisure travelers tend to be quite price sensitive. Some customers who are not time
flexiblesuchasbusinesstravelerareresistibletopricefluctuation.

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 4.RoutesandDestinations(10%)
Airline customers demand transportation from one point to another. Hence, routes,
destination and flight frequency are important. They should be organized to match with customer
needs.Suitableflightdestinationsandschedulescouldattractcustomers.
5.Aircraftutilization(25%)
Airlines need to maximize revenue from their large capital investment made in their
aircrafts. In order achieve efficient aircraft utilization, it requires synchronization of fleet planning,
schedulesplanning,passengerreservations,flightoperations,groundoperations,aircraftmaintenance
system,airtrafficcontrollersandairportauthorities.
Source:http://www.boeing.com/commercial/aeromagazine/articles/qtr_4_08/pdfs/AERO_Q408_article03.pdf

6.Costcontrolandfinancialmanagement(15%)
There are lots of operating expenses in airline business such as flying operations,
maintenance, passenger handling, aircraft ground services, baggage handling, inflight services,
marketing sales and promotion, fuel and labor cost. Thus, cost control is significantly important.
Furthermore, airline requires good working capital management as well as financial leverage
management to create trust and reliability to investors and operate smoothly during uncertainty or
crisis.
Source:http://www.avjobs.com/history/airlineeconomics.asp

These 6 key success factors ofairlineindustryisidentifiedand demonstrated in the Table

below
Table17.1Keysuccessfactors

Keysuccessfactors Weight

1 People 0.20
2 Customersatisfaction 0.20
3 Price 0.10
4 RoutesandDestinations 0.10
5 Aircraftutilization 0.25
6 Costcontrolandfinancialmanagement 0.15
Total 1.00

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 Toanalyzecompanyandcompetitorsarerespondingtokeysuccessfactorsintheindustry,
eachcompanyisratedforeachkeysuccessfactor.
1. People
People play important part in service industry. According to MIT Global Airline Industry
Program,employeeproductivitycanbemeasuredbyavailableseatmilesproducedperemployee.
Table17.2RatingofairlinesonAvailableSeatMilesproducedperemployee(2009)
Millions
ASMsproducedperemployee(2009) Rating
SouthwestAirlines 2.82 4
JetBlueAirways 3.01 4
AmericanAirlines 2.28 1
DeltaAirLines 2.64 3
UnitedAirlines 2.63 2
USAirways 2.26 1
25thpercentile 2.37
50thpercentile 2.64
75thpercentile 2.78
Source:http://web.mit.edu/airlinedata/www/Employees&Productivity.html

Accordingtoavailableseatmilesproducedperemployeein2009,eachairlinesratingbased
onpercentileofitsproductivity.
SouthwestAirlinesproductivityisabove75thpercentile. Rating=4
JetBlueAirwaysproductivityisthehighestamongcompetitors. Rating=4
AmericanAirlinesproductivityislowerthan25thpercentile. Rating=1
DeltaAirproductivityisthelowestamongcompetitors. Rating=3
UnitedAirlinesproductivityisbetween25th50thpercentiles. Rating=2
USAirwaysproductivityisthelowestamongcompetitors. Rating=1

2. CustomerSatisfaction
Customersatisfactionreflectsabilitytoprovideservicetomeetcustomerexpectation.High
customersatisfactioncontributestocustomerloyaltyandleadtoprofitsustainability.AccordingtoAir
Travel Consumer Report (Department of Transportation, 2009), regardless of ticket price, there are
manyfactorsaffectingcustomersatisfactionofairlineservicesresultingincomplaints,flightdelays,and
mishandledbaggage.

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 Table17.3RatingofairlinesonCustomercomplaintsper100,000enplanedcustomers(2009)
ConsumerComplaints(October2009)
Complaintsper100,000enplanements
Airline Rating
SouthwestAirlines 0.27 4
JetBlueAirways 0.70 3
AmericanAirlines 0.88 3
DeltaAirLines 1.70 1
UnitedAirlines 1.18 3
USAirways 1.21 1
25thpercentile 0.75
50thpercentile 1.03
75thpercentile 1.20
Source:AirTravelConsumerReport(December2009)

The fewer complaints indicate the higher level of service provided met customer
expectation.
SouthwestAirlinescomplaintsarethelowestamongcompetitors.Rating=4
JetBlueAirwayscomplaintsarelowerthan25thpercentile. Rating=3
AmericanAirlinescomplaintsarelowerthan25thpercentile. Rating=3
DeltaAircomplaintsarethehighestamongcompetitors Rating=1
UnitedAirlinescomplaintsarelowerthan25thpercentile. Rating=3
USAirwaysarehigherthan75thpercentile. Rating=1

3. Price
Priceisimportantfactoraffectingcustomerbuyingdecision.TheTablebelowdemonstrates
thecomparisonofairlineroundtriptickettravellingonmidweekfromMilwaukeetoDenverincluding
baseticketpriceandextrafeesforcheckedluggage,meals/snacks,headset,seatselection,etc.Details
ofairlineticketpriceandadditionalfeesMilwaukeetoDenverofeachairlinearelistedbelow.

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 Table17.4BasepriceandadditionalfeesofticketfromMilwaukeetoDenverin2011
Airline Base PricewithFees
TicketPrice

American $338 Checkedluggage(1stbag):$25 Headset$2

Airlines Callcenterbooking:$25 Preferredseating:$39
Mealsandsnacks$7 Group1boarding$9
Alcoholicbeverageonboard:$6.50 Feetotal:$126.45
WiFithroughGogo:$12.95 Totalticket:$464.45
Delta $279.07 Checkedluggage(1stbag):$25 WiFithroughGogo:$12.95
Callcenterbooking:$20 Headset$2
Mealsandsnacks$5 Feetotal:$70.95
Alcoholicbeverageonboard:$6, Totalticket:$350.02
JetBlue** $435.80 Checkedluggage(1stbag):Free Headset$2
Callcenterbooking:$15 Movies$5.99
Mealsandsnacks$5.99 Pillow/blanketkit$6.99
Alcoholicbeverageonboard:$5.99 Feetotal:$79.46
Preferredseating:$37.50, Totalticket:$515.26
Southwest $338 Checkedluggage(1stbag):Free, Alcoholicbeverageonboard:$5
Earlybirdcheckin$10, Feetotal:$20
WiFi$5, Totalticket:$358
United $300 Checkedluggage(1stbag):$25 WiFithroughGogo:$12.95
Callcenterbooking:$25 Feetotal:$75.77
Mealsandsnacks$5.32 Totalticket:$375.77
Alcoholicbeverageonboard:$7.50,
USAirways $537 Checkedluggage(1stbag):$25 WiFithroughGogo:$12.95,
Callcenterbooking:$25 Headset$5
Mealsandsnacks$7 Feetotal:$81.95
Alcoholicbeverageonboard:$7, Totalticket:$618.95

**JetBluedoesnotofferaMilwaukeeDenverroute.Thispriceisforamidweekroundtrip
ticketonJetBluefromChicagotoSaltLakeCity.
Source:http://www.farecompare.com/traveladvice/airlinefeesbestandworstcasescenarios/#/

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 Figure17.1AirlineticketpricefromMilwaukeetoDenverin2011

Table17.5Ratingofairlinesonpriceoffering
Airline BaseTicket Fee Totalticket Rating
Price price
SouthwestAirlines $338.00 $20.00 $358.00 4
JetBlueAirways $435.80 $79.46 $515.26 1
AmericanAirlines $338.00 $126.45 $464.45 2
DeltaAirLines $279.07 $70.95 $350.02 4
UnitedAirlines $300.00 $75.77 $375.77 3
USAirways $537.00 $81.95 $618.95 1
25thpercentile $362.44
50thpercentile $420.11
75thpercentile $502.56

Eachairlinesratingbasedonpercentileofitsprice.
SouthwestAirlinespriceislowerthan25thpercentile. Rating=4
JetBlueAirwayspriceisabove75thpercentile. Rating=1
AmericanAirlinespriceisbetween50th75thpercentiles. Rating=2
DeltaAirLinesisthelowestamongcompetitors. Rating=4
UnitedAirlinespriceisbetween25th50thpercentiles. Rating=3
USAirwayspriceisthehighestamongcompetitors. Rating=1

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4. Routesanddestinations
According to annual report 2009 of each airline, number of destinations served by each
carrierislistedintheTablebelow.Inordertorate,numberofdestinationisdividedintoquatiles.1st
quatiles will be rated at 1 because that airline has few destinations to provide serivce for customer
comparingtootherairlines.
Table17.6Ratingofairlinesonnumnerofdestinationsoffering
Airline No.ofDestination Rating
SouthwestAirlines 68 1
JetBlueAirways 60 1
AmericanAirlines 250 4
DeltaAirLines 360 4
UnitedAirlines 230 3
USAirways 194 2
25thpercentile 99.50
50thpercentile 212.00
75thpercentile 245.00
Source:annualreport2009ofeachairline.

5. Aircraftutilization
Assetutilizationisoneofkeysuccessfactorsinairlineindustry.MITGlobalAirlineIndustry
Program(2015)suggeststhataircraftblockhoursperdaycanbeusedtomeasureaircraftproductivity.
Aircraftblockhoursrepresenttimethataircraftsareinused.
Eachairlineisratedbyaircraftblockhoursperday.Qualtilesarecalculated.1stquatileswill
beratedat1becauseanairlinehaslowaircraftblockhoursperdaysuggestinglowaircraftutilization.
Source:http://web.mit.edu/airlinedata/www/Aircraft&Related.html

Table17.7Ratingofairlinesonaircraftblockhoursperday(2009)
AircraftBlockHoursperDay(2009)
Airline Rating
SouthwestAirlines 10.26 2
JetBlueAirways 11.28 4
AmericanAirlines 9.71 1
DeltaAirLines 10.40 3
UnitedAirlines 10.79 4
USAirways 9.47 1
25thpercentile 9.85
50thpercentile 10.33
75thpercentile 10.70
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6. Costcontrolandfinancialmanagement
Inorder to measurehoweffectiveeachairlinecanoperateandcontrolits operatingcost,
cost per available seat mile (CASM) is used. Generally, the lower the CASM, the more profitable and
financiallyefficienttheairline.
Source:http://www.investopedia.com/terms/c/casm.asp

Torate,CASMofairlinefallsin1stquatileisratedat4,2ndquatileisratedat3,3rdquatileis
ratedat2,and4thquatileisratedat1.
Table17.8RatingofairlinesonCASM
Costperavailableseatmile(2009)
CentsperASM
Airline Rating
SouthwestAirlines 10.26 4
JetBlueAirways 9.35 4
AmericanAirlines 12.45 1
DeltaAirLines 11.59 1
UnitedAirlines 10.55 3
USAirways 11.06 2
25thpercentile 10.33
50thpercentile 10.81
75thpercentile 11.46
Source:http://web.mit.edu/airlinedata/www/Expenses&Related.html

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 Table17.9industymatrix
Southwest JetBlue American Delta United U.S
Keysuccessfactors Weight
Rating W.Score Rating W.Score Rating W.Score Rating W.Score Rating W.Score Rating W.Score
1 People 0.20 4 0.80 4 0.8 1 0.2 3 0.6 2 0.4 1 0.2
2 Customersatisfaction 0.20 4 0.80 3 0.6 3 0.6 1 0.2 3 0.6 1 0.2
3 Price 0.10 4 0.40 1 0.1 2 0.2 4 0.4 3 0.3 1 0.1
4 RoutesandDestinations 0.10 1 0.10 1 0.1 4 0.4 4 0.4 3 0.3 2 0.2
5 Aircraftutilization 0.25 2 0.50 4 1.0 1 0.25 3 0.75 4 1 1 0.25
6 Costcontrolandfinancialmanagement 0.15 4 0.60 4 0.6 1 0.15 1 0.15 3 0.45 2 0.3
Total 1.00 3.20 3.20 1.80 2.50 3.05 1.25
Fromtheindustrymatrix,competitorshavedifferentratingineachkeysuccessfactorsforairlineindustry.SouthwestandJetBlue
havethehighestscore.Southwesthasmajorstrengthonproductivepeople,highcustomerservice,lowpriceofferingandgoodcostcontrol.
Fromtheindustrymatrix,thereareopportunityandthreatsaccordingly.
o13Expandroutesanddestinationtocovermoreservicearea.
Unlikeotherairlines,SouthwestandJetBlueprovideonlydomestictransportation.Southwestshouldexpanditsnetworktocover
moreprofitablecities.
t5LCCcompetitorsprovideinflightservicesandentertainment.
Airlinestrytoincreasecustomersatisfactionbyaddingaugmentedservices.Inflightservicesandentertainment,forexample,has
beenaddedtomanyairlinessuchasJetBlue.Thismightincreaselevelofexpectationofairlinecustomer.

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18.) Discuss competition in the industry by using Porters Five

Forces Model. Explain the reason for giving the weight and score
for each force.

ThreatofNew
Entrants

RivalryAmong
BargaingingPower BargainingPowerof
Existing
ofSuppliers Buyers
Competitors

ThreatofSubstitute
ProductsorService

Figure18.1PortersFiveForcesModel

a.) Threat of New Entrants

ThreatofNewEntrantsintheindustryislowastherearebarrierstoentryasfollowing.
1. EconomyofScale
Economy of Scale is a significant factor in airline industry in terms of operating
routes,numberofemployees,numberofpassengersandsizeoffleets.Therefore,itisdifficulttofor
newentrantstooffercompetitivepricewithoutachievingeconomyofscale.
Weight=0.30
Existingplayersinairlineindustryhadachievedsuchlevelofeconomyofscaleand
implemented merge and acquisition strategy to gain advantages from higher level of economy of
scale. Merging and acquisition creates the benefits of synergy management, cost consolidation,
synergy workforce, sharing knowledge and expertise. For example, United airlines merged with
Capital Airlines, Delta made acquisitions with Northeast Airlines and Western Airlines, American
AirlinespurchasedTransCaribbeanAirways,AirCalifornia,RenoAirandTransWorldAirlines.Thus,
itenhancestheefficiencyofmanagement,increasemarketshareaswellasbroadensthenetwork
coverage.
Rating=1

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 2. Productdifferentiation
In the airline service industry, service offering is in low level of differentiation.
Hence,eachairlinetriestocreatedifferentiationintermsofbrandingratherthanproductitself.
Weight=0.10
Brand building and reputation of airline industry contribute to reliability and
customer loyalty. When the ticket price is indifferent, customers tend to fly with familiar airline
ratherthanunfamiliarone.
Rating=2
3. CapitalRequirements
Airline business requires huge capital to invest in aircrafts, human resources, IT
system,hubandterminalaswellasexpensesinaircraftmaintenance,branding,salepromotionand
marketing activities in order to increase competitiveness. Not only it requires high monthly
expenditures but also require working capital to keep the business running until it starts to make
profit.Therefore,highcapitalrequirementbecomesanimportantfactorpreventingnewentrants.
Weight=0.25
Sincetheinitialinvestmentishighandthebreakevenpointofairlinebusinessis
highcomparingtootherindustry.Therefore,airlineindustryhaslowriskofnewentrants.
Rating=1
4. SwitchingCosts
Onetimecostscustomersincurwhentheybuyfromadifferentairlines.
Weight=0.2
Switchingtodifferentairline,customersmaylooseanopportunitytoearnrewards
frommembershipprogramorfrequentflyerprogram.
Rating=4
5. AccesstoDistributionChannels
Eachairlineareabletouseandaccesstovariousticketsellingchannels.Thus,this
factordoesnotcontributehighbarriertonewentrants.
Weight=0.05
New entrant might not face troblle reaching distributor but they might find some
difficultytoorganizethemselvesinairportsexpeciallywhenairlinehubexisted.
Rating=5

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 6. GovernmentPolicy
TheU.S.hasstrictlawsandregulationsrelatingtheaviationandairlineindustry.For
some routes, these laws and regulations prevent new entrants, for instance, international airlines
areprohibitedtoentertoservedomesticroutes.Everyairlineisaffectedbythisfactor.
Weight=0.10
Even though government policy allows new player to enter to airline industry,
however,therearesomeregulationpreventinginternationalairlinetoprovideserviceindomestic
routesintheU.S.
Rating=4
Table18.1ThreatofNeworPotentialEntrants
ThreatofNeworPotentialEntrants Weight Rating
EconomisofScale 0.30 1
ProductDifferentiation 0.10 2
CapitalRequirements 0.25 1
SwitchingCost 0.20 4
AccesstoDistributionChannels 0.05 5
Governmentpolicy 0.10 4
1.00 2.20

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b.) Bargaining Power of Suppliers

For airline industry, aircrafts, fuel and human resources are essential to the business.
Importantsuppliersareaircraftproducers,fuelsupplier,andemployees.Othersuppliersrelatingto
catering,airlinesouvenirsarenotessentialbecausetheyarenotcriticalitems.
1.Aircraftproducer
1.1SubstituteProducts
Aircraftisessentialinairlineindustryanditcannotbesubstituted.Thusthisisavery
importantfactor.
Weight=0.60
Thereareonly2aircraftproducersincludingAirbusandBoeing.Thus,itisoligopoly
market where suppliers have higher bargaining power in producing and pricing aircrafts in the
market.
Rating=5
1.2Importanceofindustrytosupplier
There are lots of airlines while there are only 2 aircraft producers. Each individual
airlineisnotspeciallyimportanttoaircraftsupplier.
Weight=0.15
Since there are only Airbus and Boeing, each particular airline is not important to
aircraftproducers.Hence,aircraftproducerscansetthesellingpricequiefreelyandhavepowerof
bargainingoverairlines.
Ratint=4
1.3SwitchingCost
Changingsuppliersoraircraftmodels createshighcosttoairlines includingcostof
aircraft,trainingcost,sparepartandmaintenancecost.
Weight=0.15
Sincethereareonlyafewaircraftproducers,airlinesdonothavestrongpowerof
bargaining. Thus, switching to a different aircraft supplier or model creates high switching cost to
airlines.
Rating=4
1.4Supplierenteringtheindustry
Airline business and aircraft producer are significantly different. Even if they enter
theindustry,therewillbeonly2newairlines.Hencethisfactorhaslowimpact.
Weight=0.05

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 It is possible that aircraft producers will enter to airline industry especially with
forward integration. However, potential to enter the industry is low regarding the limitation, laws
andregulationsasexplainedinBarriertoentry.Thus,thisfactorhasloweffect.
Rating=1
1.5Buyerenteringthesuppliersindustry
Airline business and aircraft producer are significantly different. Hence this factor
haslowinfluence.
Weight=0.05
Thereislowpotentialthatairlineswillentertoaircraftproducerbusinessbecauseit
requiresnotonlyhugeinvestmentcostbutalsohighstandardofsafety,expertiseandtechnologyof
aviationandaircraftmanufacturing.Airlinecannotthreatentoproduceaircraftitself.
Rating=1
Table18.2BargainingPowerofSuppliers(AircraftProducer)

BargainingPowerofSuppliers(Aircraftproducer) Weight Rating

Substituteproducts 0.60 5
Theimportanceofindustrytosupplier 0.15 4
Switchingcost 0.15 4
Supplierenteringtheindustry 0.05 1
Buyerenteringthesuppliersindustry 0.05 1
1.00 4.30
2.AviationFuelProducer
2.1SubstituteProducts
Aviation fuel is essential to power aircraft. Fuel expense amounted in over 20% of
operatingcost.
Weight=0.65
Aviationfuelisessentialandspecializedforaircraft.Itisnotsubstitutablebecause
aircraftenginesystemrequireshighqualityofaviationfuelforsafetyandperformanceofaircraft.
Rating=5
2.2Theimportanceofindustrytosupplier
Therearelotsofairlinesandeveryairlineneedsaviationfuel.Thus,theimportantor
anairlinetoaviationfuelproducerissmall.
Weight=0.10
Aviationfuelcanbeusedinaircraftonly.Inaddition,aviationfuelpriceiscorrelated
tocrudeoilpriceandjetfuelpriceindex.
Rating=2

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 2.3SwitchingCost
Since aviation fuel is a commodity product, the price fluctuates upon the market
mechanism.Additionally,aviationfuelfromeachsupplierisindifferent.
Weight=0.15
Changingaviationfuelsupplierdoesnotcreateadditionalcosttoanairlinesimilarto
consumerchangesgasstationsbutfillsthesametypeofgas.
Rating=3
2.4Supplierenteringtheindustry
Thereisverylowpotentialthatfuelsupplierwillentertoairlineindustry.Theimpact
offorwardintegrationislow.
Weight=0.05
Fuel producer and airline are significantly different. It is very low possibility that
aviation fuel supplier will enter to airline industry because of the lack of knowledge, expertise,
technology, product/market knowledge. Furthermore, airline industry has lower growth rate than
otherindustryandhighbarriertoenter.
Rating=1
2.5Buyerenteringthesuppliersindustry
The event that airline will enter to aviation fuel producer is not unlikely. Fuel
producerrequiresknowledgeandexpertiseinfueldrilling,equipmentand

Weight=0.05
It is unlikely that airline will enter to aviation fuel production business because of
thelackofexpertiseandhighinvestment.
Rating=1
Table18.3BargainingPowerofSuppliers(Aviationfuelproducer)
BargainingPowerofSuppliers(Aviationfuelproducer) Weight Rating
Substituteproducts 0.65 5
Theimportanceofindustrytosupplier 0.10 2
Switchingcost 0.15 3
Supplierenteringtheindustry 0.05 1
Buyerenteringthesuppliersindustry 0.05 1
1.00 4.00

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 3.Labor
3.1SubstituteProducts
Laborisoneofessentialresourcesrequiredinserviceprovidinginairlinebusiness.
Each airline employs flight attendants, mechanics, baggage handlers, reservation agents, gate
agents,etc.
Weight=0.50
In airline business, most of labor is skilled and educated. Some positions require
hours of training and practices. They cannot be easily replaced. Additionally, labor unions play a
criticalrolintheU.S.airlineindustry.Thus,bargainingpoweroverairlineishigh.
Source:https://www.iata.org/whatwedo/Documents/economics/Hirsch_Unions_Wages.pdf

Rating=5
3.2Theimportanceofindustrytosupplier
TherearelotsofairlinesintheU.S.Everyairlinerequireslabortoprovideserviceto
itscustomers.Therefore,eachindividualairlineisindifferentlyimportancetolabor.
Weight=0.10
Peoplecanworkinairlineindustryorchoosetoworkinotherserviceindustries.
Rating=1
3.3SwitchingCost
Airlinesinvestsalotineachemployeeespeciallyhighlyskilledlaborsuchaspilots.
Weight=0.40
Notonlyinvestmentintermofmoney,thanacompanyneedstoinvestinhuman
resources is for instance training, education, and practices. Also, it takes time to educate a new
employee,adoptandlearncompanyvaluesandcultures.
Rating=4
3.4Supplierenteringtheindustry
Ifemployeeenterairlineindustrytocompetedirectly,itwillincreasecompetitionin
airlineindustry.
Weight=0.05
It is very low possibility that an employee will startup an airline. Labor cannot
threatentocompetedirectlywithairlines.
Rating=0
3.5Buyerenteringthesuppliersindustry
Thiseventisunlikelytooccur.
Weight=0.00

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 Table18.4BargainingPowerofSuppliers(Labor)
BargainingPowerofSuppliers(Labor) Weight Rating
Substituteproducts 0.50 5
Theimportanceofindustrytosupplier 0.10 1
Switchingcost 0.35 4
Supplierenteringtheindustry 0.05 0
Buyerenteringthesuppliersindustry 0.00 0
1.00 4.00

Eachsupplierisequallyweighted.TheweightedscoreofBargainingPowerofSuppliers
isintheTablebelow.
Table18.5BargainingPowerofSuppliers
BargainingPowerofSuppliers Weight Score
BargainingPowerofSuppliers(AircraftProducer) 1/3 4.30
BargainingPowerofSupplier(Aviationfuelproducer) 1/3 4.00
BargainingPowerofSupplier(Labor) 1/3 4.00
1.00 4.10

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c.) Bargaining Power of Buyers

1. NumberofAirlines
NumberofairlinesintheU.S.ismuchlessthannumberofairpassengers.Buyerscould
demandhigherqualityandbetterservice.
Weight=0.25
ThereareplentyofairlinesprovidingairtransportationserviceintheU.S.Customercan
comparethepriceandflightscheduleviaagencyswebsiteorairlineswebsite.
Rating=3
2. PurchaseQuantities
Ingeneral,buyersdonotpurchaseatbigquantityoftickets.Thisfactorisnotsignificant.
Weight=0.10
Individual travelers tend to purchase in small quantity but travel agancies tend to
purchaseinbigquantity.
Rating=3
3. SwitchingCost
Costofswitchingtodifferentairlinesisimportant.Itleadstohoweasycustomerscan
switch to other airlines. If the cost of switching is low, customers tend to switch to other airlines
easily.
Weight=0.20
Nonmembership traveler can easily switch to use other airline. Unlike membership
traveler or frequent flyers, they tend to use same airline frequently in order to earn miles of that
airline.Milescanberedeemedtorewardssuchasairticket,hotelvoucher,etc.
Rating=4
4. PriceSensitivity
Pircing is an important strategy of airlines. Increasing price can increase profit margin
butitwoulddrivethosepriceseisitivecustomersaway.
Weight=0.40
Leisuretravelerstendtohaveflexibleschedule.Theyarequitesensitivetoprice.Thus,
price becomes an important factor affecting purchasing decision. Customers can easily compare
ticket price of flights among different flight time and airlines via website of agency or airlines.
However,Businesstravelertendtobelesspricesensitivecomparingtotheleisuretravelersbecause
theyarelessflexibletoflightscheduleandmoreconcernabouttravelingperiodandflightreliability.
Rating=3

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5. Buyersproducingproductthemselves
Travelersconsiderflyingbythemselves.Itwouldreducedemandofairtransportationin
airlineindustry.Thiscouldslightlyincreasebargainingpowerofbuyers.
Weight=0.05
Due to high cost of private aircraft, travelling distance, maintenance cost, knowledge,
lawsandregulation,thereareonlyafewtravelersprovideairtransportationthemselves.
Rating=1
Table18.6BargainingPowerofBuyers
BargainingPowerofBuyers Weight Rating
NumberofAirlines 0.25 3
PurchaseQuantities 0.10 3
SwitchingCost 0.20 4
PriceSensitivity 0.40 3
Buyersproducingproductthemselves 0.05 1
1.00 3.10

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d.) Threat of Substitute Products or Services

In the U.S., substitute services are generally interstate transportation comparable in
costsuchastrains,carsandbuses.
1. TypeandNumberofSubstituteProductsorServices
In 2009, infrastructure of land transportation in the U.S. is well developed. There are
over500stationsofAmtrakin46statesandover4millionmilesofhighway.Thus,train,busesand
carsarealternativesforinterstatetransportation.Moreover,airlineindustryalsoencounterswith
strategic substitutes which providing the same functions in a different form. Communication
technologysuchasNetMeetingandvideoconferencing,etc.facilitatesvirtualcommunicationfrom
distance.
Source:http://www.rita.dot.gov/bts/sites/rita.dot.gov.bts/files/publications/national_transportation_statistics/index.html

Weight=0.20
Airtravelhastimebenefitoverothermodesoftransportation.Therefore,trains,buses
andcarsarelessthreateninginthecaseoflongerdistancetrip.Additionally,virtualcommunication
technologies are cost saving, more timely and productive. Therefore, these advancements could
becomerealthreattoairlineindustry.
Rating=5
2. PriceofSubstituteProductsorServices
Fortransportation,travelingtimeandcostareveryimportantfactorsinbuyingdecision.
Thus,priceofsubstituteproducts(orservices)isveryimportant.
Weight=0.40
In order to compare prices charged by substitutes, inquires for a oneway trip from
ChicagotoBoston(about984miles)wasrequested5daysbeforedeparturetime.Thepriceandtrip
durationcomparisonamongairline,train,busandcarisdisplayedintheTablebelow.
Table18.7Comparisionofsubstituteservicespriceandtravellingtime
Substituteservice Price Duration(oneway)
1
AirDeltaAirlines $141.60 3h47m
2
TrainAmtrak $109.00 16h20m
3
BusGreyhound $146.50 24h55m
4
Car $91.73 15h9m
1http://www.delta.com/
2http://tickets.amtrak.com/itd/amtrak
3https://www.greyhound.com/farefinder/step1.aspx
4https://www.fueleconomy.gov/

Accordingtothecomparison,busiscomparabletoairlineintermsofpricebutittakes
muchlongertime.Hence,busisunlikelytobeasubstituteforlongdistancetrip.Trainandcarare
cheaperthanairlinebuttheyarealsoincomparableduetolongtraveltime.Thus,theyareunlikely

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tobeasubstituteforlongdistancetrip.Duringlowcostofgas,drivingacarischeaperthananair
ticket.Inaddition,airticketpricetendstobemorefluctuated,forexample,highticketpriceduring
holidays.Hence,customersmaychoosetrainorcarinsteadofairline.Therefore,itcouldcontribute
negativeeffectonairlineindustry.
Rating=4
3. SwitchingCost
Switching cost is a significant factor affecting the switching decision to substitutes
comparingtobenefitstogain.
Weight=0.30
Many airlines, trains and buses have membership program or frequent flyer program,
reward redemption and onboard services to induce customer loyalty. Unfortunately, they are
frequently to be imitated by competitors. Thus, customer could fine similar benefits with other
substitutes.
Rating=4
Table18.8ThreatofSubstituteProductorServices
ThreatofSubstituteProductorServices Weight Rating
TypeandNumberofSubstituteProductsorServices 0.30 5
PriceofSubstituteProductsorServices 0.40 4
SwitchingCost 0.30 4
1.00 4.30

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e.) Rivalry among Existing Competitors

In the U.S., the competition of domestic airline is intensive due to the industry is
consolidate industry. There are many airlines as well as many mergers and acquisition in order to
expand service network coverage and increase competitiveness. In 2009, airline industry includes
premium airline providing both domestic and international routes and low cost airline serving
domesticroutesonly.Therefore,airlinescompeteonpriceinordertoimprovetheirpositionsinthe
industry.

Figure18.2Airlinemarketsharebynumberofenplanedpassengers(2009)
Source:http://web.mit.edu/airlinedata/www/Traffic&Capacity.html

Accordingtodatain2009,thereare5majorairlinesintheU.S.includingDeltaAirlines,
American Airlines, United Airlines, US Airways and Southwest Airlines. These 5 airlines represent
morethan60%ofmarketshare.
1. IndustryGrowth
Industrygrowthdirectlyaffectstheintensityofrivalryamongexistingcompetitors
Weight=0.40

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Figure18.3AnnualtotalofU.S.AirlinePassengerEnplanements
Source:http://web.mit.edu/airlinedata/www/Traffic&Capacity.html

According to data of Annual U.S. Airline Passenger Enplanements (2000 2009), the
number of passengers after 2007 has been declined. Perhaps, the U.S. economy has negative
influenceonairlineindustry.Hence,theintensityofrivalryamongexistingcompetitorshasbecome
greaterinordertoincreasemarketshare,squeezemoremoneyfromthesmallermarketsize.
Rating=5
2. ProductDifferentiation
Comparing among airlines, function value of service provided by each airline is
indifferent. Each airline offers air transportation from one place to another with safety.
Consequently, airlines try to differentiate by offering emotional value in the aspect of perceived
valueandpositionedbranding.However,serviceofferingofeachairlineissimilar.Thus,thisfactoris
slightlyimportant.
Weight=0.20

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Figure18.4Consumercomplaintper100,000passengersin2009
Source:https://www.transportation.gov/airconsumer/airtravelconsumerreports2009

Eachairlinetriestoprovidedifferentservicestosatisfytheircustomers.Consequently,it
leadstoimproveofcompetitivenessandbetterfinancialperformance.
Rating=3
3. ExitBarriers
Airlineindustryfaceshugebarriertoentryandexitduetoenormouscapitalinvestment
requirements.
Weight=0.40
Assets of airlines are specialized and hard to be sold. A new aircraft is expensive. For
instance, Boeing 737 was $5060 millions in 2010. Thus, airlines need to endure to stay in the
industry.Thisresultsinintensiverivalryamongexistingairlines.
Source:http://www.topspeed.com/aviation/aviationreviews/boeing/19982010boeing737700ar85339.html

Rating=5

Table18.9RivalryAmongExistingCompetitors
RivalryAmongExistingCompetitors Weight Rating
IndustryGrowth 0.40 5
ProductDifferentiation 0.20 3
ExistBarriers 0.40 5
RivalryAmongExistingCompetitors 1.00 4.60

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f.) Draw the graph for your assessment of overall industry attractive new. What is
the Industrial Return on Sales? Summarize your findings. Any opportunity and
threat can you reveal?

Figure18.5Assessmentofoverallindustryattractiveness
Inairlineindustry,there areopportunitiestomakeprofitsforexistingairlinesbecause
threatofnewentrantsislow.However,industrylifecycleisinmaturestageresultinginaggressive
competitionexistingairlinestoincreasemarketshare.Customerstendtohavefairlylowbargaining
powerduetosmallpurchasingquantityandlowthreatofbackwardintegration.Suppliershavehigh
bargaining power which could become threat to sustain industry profits. Since substitutes are
availableatlowercost,thereisarealthreatofsubstitutetotheairlineindustry.Thesignificantlevel
of threat of substitutes also depends on the economy. During bad economy, customers tend to
spend less for their comfort and convenience on air travel. Hence, it creates negative impact on
airlineindustryrevenues.
For new entrants, airline industry seems not to be attractive considering sustainable
profitsinthelongterm.Inaddition,airlineindustryhashighbarriertoentry,intensiverivalryamong
competitors and substitutes and slow growth rate of industry. Therefore, airline has low profit
potential.
Indutrialreturnonsales(ROS)iscalculatedby

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 Table18.10Industrialreturnonsalesfrom2005to2009
2005 2006 2007 2008 2009
NetIncome(BeforeInterestandTax) (27,592) 14,736 7,659 (25,892) (3,990)
Revenue $ 151,254.68 $ 164,623.10 $ 173,108.07 $ 185,676.46 $ 154,719.24
ROS 18% 9% 4% 14% 3%
Source:http://web.mit.edu/airlinedata/www/Revenue&Related.html

FromtheTableabove,theoperationalefficiencyofairlineindustryisbad.In2008and
2009, Industrial Return on Sales are negative. This indicates that airline industry is in financial
trouble.
Threatsofairlineindustryare:
t6Availabilityanddevelopmentoflessexpensivesubstitutes
The development of less expensive substitutes such as high speed train threatens the
airlineindustryespeciallyduringbadeconomy.
t7Intensivecompetitionamongexistingcompetitors
Competition among airlines could lead to heavily sale promotion and price war.
Ultimately,itcouldcreateriskofunprofitability.
t8Highbargainingpowerofsuppliers
Sincethereareonly2suppliers,suppliershavehighbargainingpower.Thereisariskof
nondiversifiedsuppleirs.Forexample,iftheirproductionlinesaredistrupted,itcreateshugeimpact
on airline industry. Furthermore, the fluctuation of feul price directly impact on operating cost or
aitlinebusiness.

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19.) Conduct a competitive intelligence in gathering information

and data on competitors for better understand

a) Whatarethehistory,development,andgrowthofeachcompetitor?(Includingbestselling
goodsorservices,salesrevenue,marketshareandsoforth)
b) What is each competitors direction? (Future objectives) (Including strategic direction and
soforth)
c) Whateachcompetitorbelievesabouttheindustry?(Itsassumption)
d) Whateachcompetitorisdoingandcando?(CurrentStrategies)
e) What each competitors capabilities are? (Its strengths and weaknesses) (Including
resources,capabilitiesandcorecompetencies)
f) Whatwillourcompetitorsresponseinthefuture?
g) PrepareBCGGrowthShareMatrixtoshowthecompetitivepositionofthecompanyversus
competitorsforthepresentyear.
h) Drawatabletocomparefutureobjectives,assumptions,currentstrategies,capabilitiesand
futureresponsesforeachcompetitor.Canyouobserveanyopportunityandthreat?

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Source:Icasestudywebsite

a) History,development,andgrowth
JetBlue Airways Corporation was created by Utah entrepreneur David Neeleman to
"bringthehumanitybacktoairtravel."Itwasalsoagoodwaytoaddanotherchaptertoasuccessful
careerinbudgetairtravel.JetBluewaslaunchedwithahugeamountcapital,brandnewplanes,and
expertpersonnelinkeypositions.Itgrewrapidlyascustomersflockedtoittoescapethesteepfares
andfrequentdelaysofthemajorairlines.
Origins
Manysmallstartupairlinestriedthelowfareformulainthe1990s.Most,likeKiwiAir
LinesandPeopleExpress,failedinthefaceofdirectcompetitionfromthemajors,whichwereable
towithstandfarewars.(Infact,87airlinesfailedbetweenderegulationin1978andtheendofthe
century.) Insufficient capital and insufficient management talent were other factors that grounded
manyofthefledglings.
DavidNeelemangrewupinSaltLakeCitywithsevensiblings.AccordingtoTime,ared
airplane on his second birthday cake first attracted him to aviation. As a young man, he served in
BrazilasaLatterDaySaintsmissionary,andthenstudiedaccountingattheUniversityofUtah.But
hedroppedoutofschoolbeforegraduatinginfavorofentrepreneurialpursuits.
Beforelong,NeelemanwasrunningMorrisAir,aninnovative,successfullowfarecarrier
thatwasthefirsttoofferticketlessreservations.Hereportedlyearned$20millionwhenhesoldit
toSouthwest Airlinesin 1993. He was just 33 years old at the time. Bound by a fiveyear non
competition agreement, in 1995 he went left the U.S. to help launch Canadian startup WestJet
Airlines.
NeelemantoldSalesandMarketingManagementthatittook30monthsofplanningto
get his next project, dubbed "New Air," in the skies. It also took quite a bit of money. Neeleman
raised $130.2 million in startup capital, an unprecedented amount for a startup airline, from
backers that includedChase Capital Partners($20 million); two George Soros funds and Quantum
and Soros Fund Management ($40 million combined); and San Francisco venture capital firm
WesternPresidio($30million).BancBostonVentures,MassachusettsMutualLife,andNationsbank
Montgomery Securities also invested $10 million each. A group leads by Neeleman invested $10.2
million.

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 Talentedexecutiveswereluredfromotherairlines.Presidentandchiefoperatingofficer
DavidBargerhadheadedContinentalAirlines'operationsatNewarkInternationalAirport.Other
executiveswererecruitedfromSouthwest.ChieffinancialofficerJohnOwenhadbeentreasurer
therewhenSouthwestwasbuyingMorrisAir.
ThecompanycopiedlargechunksofSouthwest'splaybook.Itscabinswouldhaveonly
oneclassofseats.Itdid,however,orderAirbusA320narrowbodyjetsinsteadofthesimilarBoeing
737susedbySouthwest,andreportedlygotahugediscountfromtheEuropeansinthebargain.Its
ambitiousfirstorderwasfor25brandnewjetswithoptionsonanother50.Onmanyroutesthese
jetswouldcompetewithturbopropdrivenplanes,deemedlesscomfortableandperceivedasless
safebypassengers.
CompanyBecomesJetBluein1999
InmidJuly1999,anewnamefor"NewAir"wasunveiledatapressconference:JetBlue
Airways."We'regoingtobringhumanitybacktoairtravel,"wasNeeleman'sboldrallyingcry.Asif
thatwerenotenough,JetBlueaimedtoundercutotherairlines'faresbyanaverageof65percent.
JetBlueclaimedtobeprimarilyaimingtostimulateairtrafficlikeSouthwest,ratherthanstealing
existingpassengersfromtheestablishedairlines.
Foritsbase,JetBluechoseJohnF.KennedyInternationalAirport(JFK),whichwasfurther
from Manhattan than LaGuardia but still busier than the outofthe way airports favored by
Southwest.InSeptember1999,theDepartmentofTransportationawardedJetBlue75takeoffand
landingslotsatJFK.Thecarrierreceivedanexemptionallowingitoperatetherebetweenthepeak
hours of 3 p.m. and 8 p.m. (Neeleman observed that the nonpeak hours were quite suitable for
quickturnarounds.)
Senator Charles Schumer (DN.Y.), who had pledged to press for better air service to
upstate New York in his election campaign, helped JetBlue finagle the slots. "In New York,"
NeelemanwasquotedinAirfinanceJournal,"peoplehavebeenrippedofflikecrazy.Thereisnolow
fare interstate market." Remembering advice from Southwest Airlines chairman Herb Kelleher,
NeelemanquicklyestablishedalobbyingteamfortheairlineinWashington,D.C.
JetBlueleasedgatesformerlyusedbyTWAfromUnitedAirlines.JFKwasundergoinga
$10billionbuildingprogramthatpromisedtogiveJetBluepartownershipinaterminalcontingent
on obtaining financing for it. JetBlue would rely on electronic reservations and ticketing to keep
costsdown.NeelemanhadbeenCEOoftheOpenSkiesreservationsystemforfouryearsbeforeit
wassoldtoHewlettPackardCo.ThissystemallowedpassengerstomakereservationsviaInternetor
touchtone phone and could be operated with a tiny information technology (IT) staff, noted

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Computerworld.Withinacoupleofmonthsofitslaunch,JetBluewouldachievethesecondlargest
numberofInternetbookingsintheU.S.,afterSouthwestAirlines.
Thecompanywastoutedasthefirstairlinelaunchedfromscratchinthecomputerage.
Pilotsreceivedlaptopcomputers,notmanuals,notedAirTransportWorld.A"telemedicine"service
fromMedAireallowedinflightconsultationwithphysicians.(Neelemanalsomaintainedahighlevel
of technology at home, where instead of watching television he kept himself and a family of nine
childrenentertainedwithfournetworkedPCs.)
The inflight entertainment system boasted 24 channels of live satellite television
broadcasts(includingA&E,AnimalPlanet,CNBC,ESPN,theFoodNetwork,Home&Garden,andthe
Weather Channel, but none of the four major broadcast networks) at every seat, a first among
airlines, which usually aired taped shows. LiveTV, a joint venture between the Harris Corporation
andSextantInFlightSystems,providedtheservice.
Theairlinewouldservenomealsbutdidoffergourmetbluepotatochipsandsoda.All
leather seats, more legroom, and larger overhead bins were some of JetBlue's other attractive
amenities.Theseandthecompany'smarketingsavvybroughtitintocomparisonwithVirginAtlantic
Airways, from which the company had in fact obtained some key personnel. One perk JetBlue did
lackwasafrequentflyerprogram,sotemptingtohighmileagebusinesstravelers.
Wheelingin2000
JetBluebeganflyinginearly2000withjusttwonewlyleasedAirbusA320s.Itlaunched
itsfirstroute,NewYorktoFortLauderdale,Florida,onFebruary11.Advancesale,onewayfarewas
$79.Sixdayslater,thecompanybeganservicetoBuffalofor$49eachway.
Business grew rapidly in JetBlue's first year in the sky. The company's 300 call center
employees in Salt Lake City, who had the option of working at home and saving the company
overhead, were receiving 12,000 calls a day. Still, the company was booking 40 percent of its
businessovertheWeb,accordingtoInformationweek.
In December 2000, Neeleman announced JetBlue's millionth customer and third
profitablemonthanamazingachievementinsoshortatimefortheairlinebusiness.(Bycontrast,
rising fuel prices forced startup National Airlines into bankruptcy in 2000.) It reported about $100
million in revenues but no annual profit yet. By this time, the company was flying to ten
destinations.InFebruary2001,JetBluefilledahigherpercentageofitsseats(79.9percent)thanany
otherU.S.carrier.Further,the"JetBlue"effectwascreditedwithlowerfaresandincreasingservice
atotherairlinesoperatinginNewYork.
Flushwithinitialsuccess,thecompanyaimedevenhigher.Itplannedtoacquireanew
planeeveryfiveweeksuntil2008.ByJune2001,itwasoperatingafleetoffourteenplaneswith76

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flightsadaythroughJFK.Mostwereleased,sinceAirbuswasunabletodeliverenoughnewplanesin
time.AttheParisAirShowinJune2001,JetBlueannouncedplanstobuyasmanyas48planesforas
much as $2.5 billion. At the time, the company had another 68 planes already on order and 15 in
service.
The company preferred to increase flight frequency on existing routes rather than
quicklyexpandingthenumberofmarketsserved.Itonlyplannedtoaddhalfadozendestinationsin
2001totheelevenitstartedinitsfirstyear.
A slowdown developing in the general economy worried some analysts; Neeleman
countered that low end of the air travel market would be a good position in which to weather a
recession. Holly Hegeman, chief executive of PlaneBusiness .com, agreed. "These hard economic
timesarenirvanaforJetBlue,"shetoldtheSeattleTimes."Nothingmakespeoplehappierthanflying
onanairlinethatmakesthemfeelliketheyaregettingagreatdealfortheirmoney."Neelemanwas
planningtotakethecompanypublicwithintwoyears,reportedTime.
InJuly2001,anewfiveyear,$60millionleasewiththePortAuthorityofNewYorkand
NewJerseygaveJetBluecontrolofitsownterminalatJFK.(Theairlinewouldthenleaseafewgates
to United.) JetBlue had feared it would soon run out of gate space at JFK by the end of the year,
promptingittoopenasecondbaseatCalifornia'sunderutilizedLongBeachAirportinAugust2001.
Itstillhadnotdaredtotakeonthemajorsontheirownhomebasesforfearofapriceandcapacity
war.
JetBlue believe has established a new airline category a value airline based on
service,style,andcost.KnownforitsawardwinningcustomerserviceandfreeTVasmuchasforits
competitivefares,JetBluebelievesitoffersitscustomersthebestcoachproductinmarketsitserves
withastrongcoreproductandreasonablypricedoptionalupgrades.
Intheshortspanoftenyears,JetBluehasgrowntoserve23millioncustomersannually,
operate151aircraft,serve60citiesandachievedannualrevenuesof$3.3billionin2009.AsJetBlue
entercompanyseconddecade,companyfirmlybelievesJetBluehasanimpressivearrayofgrowth
opportunities. In contrast to prior growth, company believes future growth should be funded
primarilythroughcashinternallygeneratedfromoperations.Hence,JetBluehavefocusedonfree
cash flow, which captures our ability to generate cash from operations and manage capital
expenditures.JetBluearecommittedtosustainablegrowth,whichisbasedonearningsandasset
efficiency. As part of this focus, JetBlue have carefully managed fleet and significantly reduced
aircraft capital expenditures from previous years. During 2009, JetBlue took delivery of nine net
aircraftandmodifiedaircraftorderbookbydeferringdeliveryofbothAirbusandEmbraeraircraft.

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 JetBlue operates primarily on pointtopoint routes with its fleet of 110 Airbus A320
aircraftand41EMBRAER190aircrafttheyoungestandmostfuelefficientfleetofanymajorU.S.
airline.JetBluecontinuedtoleveragepresenceinNewYork,Boston,FloridaandontheWestCoast.
JetBlue launched new service from Boston to Baltimore, 32nd destination served from Boston.
Bostonsuccesshasdrivensignificantgrowthoverthepastsixyears;thecompanynowservesmore
destinations andoffersmoreseatsoutofBostonsLoganAirportthananycarrier,andJetBlueare
the official airline of the Boston Red Sox. In addition, JetBlue began new service to Los Angeles
International Airport (LAX) from our Boston and New York focus cities, expanding our presence in
the L.A. Basin. During 2009, we launched our codeshare partnership with Deutsche Lufthansa AG,
Europes largest airline and JetBlue largest shareholder. This partnership provides customers with
convenient connections at 12 of domestic locations to Lufthansas network of over 400 locations
worldwide. JetBlue also continued to benefit from partnerships with Aer Lingus and Cape Air. The
newterminalatJFKandourgrowingpresenceinBostonprovideauniquefoundationfortheseand
otherpartnerships,asevidencedbyrecentlyannouncedagreementwithAmericanAirlinesinBoston
andJFK.
AsofDecember31,2009,JetBlueserved60destinationsin20states,PuertoRico,and
elevencountriesintheCaribbeanandLatinAmerica.Mostoftheflightshaveasanoriginor
destinationoneofourfocuscities:Boston,FortLauderdale,LosAngeles/LongBeach,NewYork/JFK,
orOrlando.Bytheendof2009,JetBlueoperatedonaverage600dailyflights.Fortheyearended
December31,2009JetBluewasthe7thlargestpassengercarrierintheUnitedStatesbasedon
revenuepassengermilesasreportedbythoseairlines.
Source:
http://www.referenceforbusiness.com/history2/38/JetBlueAirwaysCorporation.html#ixzz3nBobimLQ
JetBlueAnnualReport2009

Table19.1JetBlueAirwaysthreeyearshighlightdata

YE2009 YE2008 YE2007

Domesticrevenuepassengermiles(RPM)(MilUSD)1/ 22,833 24,149 24,620
Domesticpassengers(000) 20,008 20,479 20,528
Domesticmarketshare2/(%) 4.24 4.25 4.16
Source:
The office of the assistant secretary for research and technology (ostr). (2015). US Department of Transportations Bureau of Transportation Statistics
(BTS).Retrieved30September,2015,fromhttp://www.transtats.bts.gov/carriers.asp?pn=1
Remark:
1/RevenuePassengerMiles
2/Marketsharebasedonrevenuepassengermiles

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Table19.2JetBlueAirwaystopdomesticmarkets*

YE2009 YE2008 YE2007

Market Passengers Market Passengers Market Passengers Market
(Mil) Share** (Mil) Share** (Mil) Share**
NewYork,NY 5.36 23.81% 5.88 24.95% 6.51 26.48%
Boston,MA 1.86 17.25% 1.84 16.67% 1.75 14.80%
Orlando,FL 1.42 16.20% 1.57 9.83% 1.34 8.14%
FortLauderdale,FL 1.42 16.20% 1.39 14.70% 1.33 13.83%
LongBeach,CA 1.09 78.32% 1.08 77.03% 1.11 78.92%
Other 8.60 1.54% 8.71 1.48% 8.48 1.38%
Remark
*Basedontotalenplanedpassengersatallairportsinacity.
**Thetableshowsthecarrier'sshareineachofthemarkets.

b) Futureobjectives
FromJetBlueAirwaysannualreportyear2009;
Vision:ToBeginseconddecadeofoperationsin2010,JetBluevisionisTobecomeAmericas
Favorite Airline for our employees (whom JetBlue refer to as Crew members), customers,
andshareholders.
Mission: In year 2009, companys mission is to bring humanity back to air travel. As begin
second decade of operations in 2010. Achieving vision is dependent upon continuing to
providesuperiorcustomerserviceanddeliveringtheJetBlueExperience,whilemaintaining
financialstrength.JetBluedothisbyofferingwhatJetBluebelievetobethebestdomestic
coachproductandprovidingcustomersmorevaluefortheirpurchase.
Objectives
Therearefourobjectivestofitcompanysneedsandcapabilities;
o High Quality Service and Product. Onboard JetBlue customers enjoy a distinctive flying
experiencerefertoastheJetBlueExperience.
o LowOperatingCosts.JetBluecoststructurehasallowedustoofferfareslowerthanmany
of competitors including; High aircraft utilization, Low distribution costs, Productive
workforce,andNewandefficientaircraft.
o BrandStrength.JetBluecreatedawidelyrecognizedbrandthatdifferentiatesusfromour
competitorsandidentifiesusasasafe,reliable,valueaddedairlinefocusedoncustomer
serviceandwhichprovidesahighqualitytravelexperience.
o StrengthofOurPeople.JetBluebelievetohavedevelopedastrongandvibrantservice
orientedcompanyculturebuiltaroundfivekeyvalues:Safety,Caring,Integrity,Funand

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 Passion. Company success depends on JetBlue ability to continue hiring, retaining, and
developingpeoplewhoarefriendly,helpful,teamorientedandcommittedtodelivering
theJetBlueExperiencetocustomers.
Source:JetBlueAnnualReport2009

c) JetBlueAirwaysbelieveabouttheindustry(Assumptions)
JetBlue Airways believe that the passenger airline industry in the United States has
traditionallybeendominatedbythemajorU.S.airlines,thelargestofwhichareDelta/NorthwestAir
Lines, American Airlines, United Air Lines, Continental Airlines, Southwest Airlines and US Airways.
These airlines offer scheduled flights to most large cities within the United States and abroad and
also serve numerous smaller cities. Seven of the largest major U.S. airlines have adopted the
traditional hub and spoke network route system, or traditional network. This type of system
concentratesmostofanairlinesoperationsatalimitednumberofhubcities,servingthemajorityof
other destinations in the system by providing onestop or connecting service through one of its
hubs.
Lowcost airlines largely developed in the wake of deregulation of the U.S. airline
industryin1978,whichpermittedcompetitiononmanyroutesforthefirsttime.SouthwestAirlines
pioneered the lowcost model, which enabled it to offer fares that were significantly lower than
thosechargedbytraditionalnetworkairlines.ExcludingJetBlue,therearecurrentlythreelowcost
majorU.S.airlines.
Lower fares and increased lowcost airline capacity created an unprofitable operating
environment for the traditional network airlines. While JetBlue costs remain lower than those of
largestcompetitors,thedifferenceinthecoststructuresandthecompetitiveadvantagepreviously
enjoyedbylowcostairlineshasdiminished.
Source:JetBlueAnnualReport2009

d) JetBlueAirwayscurrentstrategies
Functionallevelstrategy
JetBlueformulatecompanyfunctionallevelstrategytoachievesuperiorresponsiveness
tocustomers,qualityandefficiency;
Onboard JetBlue customers enjoy a distinctive flying experience, that includes friendly,
awardwinning, customer service oriented employees, new aircraft, roomy leather seats
withlotsoflegroom,36channelsoffreeDirecTV,100channelsoffreeXMsatelliteradioand
premium movie channel offerings from JetBlue Features, source of first run films from
multiple major movie studios and other entertainment features available for purchase.
Onboard offerings include free and unlimited brand name snacks and beverages, premium
beveragesandspeciallydesignedproductsforovernightflights.

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 JetBlue Airways Customer Bill of Rights in 2007, which provides for compensation to
customerswhoexperienceavoidableinconveniences(andsomeunavoidablecircumstances)
andcommitstoperformathighservicestandardsandholdsaccountableifJetBluedonot.
JetBlue are the first and currently the only major airline to provide such a fundamental
benefitforcustomers.In2009,JetBluecompleted98.7%ofscheduledflights.JetBluehavea
policyofnotoverbookingourflights.
AllofJetBlueaircraftareequippedwithleatherseatsinacomfortablesingleclasslayout.For

AirbusA320aircraft,with150seats,hasawidercabinthanboththeBoeing737and757,
twotypesofaircraftoperatedbymanyofourcompetitors.WhileJetBlueAirbusA320cabin
hasatleast34inchesofseatpitchateveryseatandasmuchas38inchesofseatpitchin
EvenMore Legroomrows, providingthe most legroomin coachof allU.S. airlines. JetBlue
EMBRAER190aircrafteachhave100seatsthatarewiderthanindustryaverageforthistype
ofaircraftandarearrangedinatwobytwoseatingconfigurationwitheither32or33inches
between rows of seats. JetBlue strive to continually enhance and refine product based on
customerandcrewmemberfeedback.
JetBlue remain focused on building customer loyalty. This past year (2009), based on
extensive customer research and feedback, company made significant enhancements to
customer loyalty program, TrueBlue. Customers now earn points based on the value paid
foraflightandalsobenefitfrommoreflexibleredemptionopportunitiesincludinglastseat
availability on any flight. TrueBlue loyalty program now totals approximately eight million
members.
JetBlue utilized aircraft by scheduling and operating aircraft efficiently, JetBlue are able to
spread fixed costs over a greater number of flights and available seat miles. For the year
endedDecember31,2009,JetBlueaircraftoperatedanaverageof11.5hoursperday.
For distribution costs are low for several reasons. Although most airlines use electronic
tickets in some capacity, electronic tickets are only form of tickets, saving paper, postage,
employee time and backoffice processing expense. Additionally, a majority of sales are
booked through website, www.jetblue.com, which is the least expensive form of
distribution.
Employee efficiency results from flexible and productive work rules, effective use of part
time employees and the use of technology to automate tasks. For example, most of
reservation agents work from their homes, providing better scheduling flexibility and
allowingemployeestocustomizetheirschedules.JetBluearecontinuallylookingforwaysto

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 make workforce more efficient through the use of technology without compromising
commitmenttocustomerservice.
Source:JetBlueAnnualReport2009

Businesslevelstrategy
JetBlue Airways business level strategy is board differentiation strategy. The company
hascostleadershipstrategiesanddifferentiationsstrategiesasfollowing;
Differentiation
o ForJetBlueaircraft,theseatsareequippedwithleatherseatsinacomfortablesingleclass
layout.
o JetBlue onboard offerings include free and unlimited brand name snacks and beverages,
premiumbeveragesandspeciallydesignedproductsforovernightflights.
o The company sell vacation packages through JetBlue Getaways, a onestop, valuepriced
vacation website designed to meet customers demand for selfdirected packaged travel
planning. Getaways packages offer competitive fares for air travel on JetBlue and a
selectionofJetBluerecommendedhotelsandresorts,carrentalsandattractions.JetBlue
alsoofferalacartehotelandcarrentalreservationsthroughourwebsite.
o JetBlue Airways are the first and currently the only major airline to provide such a
fundamentalbenefitforourcustomers.
o None of JetBlue employees are currently unionized. JetBlue believe a direct relationship
with JetBlue leadership, not thirdparty representation, is in the best interests of
employees, customers, and shareholders. Operating only two types of aircraft, both of
which are newer aircraft types, results in cost savings over competitors (who generally
operate more aircraft types) as maintenance processes are simplified, spare parts
inventoryrequirementsarereduced,schedulingissimplifiedandtrainingcostsarelower.
Cost
o JetBlue fleet consisting of only two types of aircraft, the Airbus A320 and the EMBRAER
190,which,withanaverageageofonly4.3 years,istheyoungestfleetofanymajor U.S.
airline.
o Themostsignificantcostisfuel,whichrepresentedapproximately30%oftotaloperating
expenses in 2009. Fortunately, JetBlue have a fuelefficient fleet with an average age of
approximately four years the youngest fleet of any major U.S. airline. JetBlue also
continue to focus on fuel conservation techniques to help reduce aircraft fuel burn. In
addition, the company has built a portfolio of fuel hedges to help manage fuel price
volatilityandsupplyinterruptions.
Source:JetBlueAnnualReport2009

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Corporatelevelstrategy
JetBlue Airways corporate level strategy is market penetration intensive growth
concentration strategy. The company strategy of the firm is focused on improve competitive
positionwithexistingproductsbyincreasingmarketshareofpresentproductsandservices.
JetBlue market services through advertising and promotions in newspapers, magazines,
television, radio, through the Internet, outdoor billboards, and through targeted public
relationsandpromotions.Thecompanyengagesinlargemultimarketprograms,aswellas
many local events and sponsorships, and mobile marketing programs. The targeted public
andcommunityrelationseffortspromotebrandawarenessandcomplementstrongword
ofmouthchannel.
OnJanuary29,2010thecompanybegantheimplementationofanewintegratedcustomer
service system, which includes a reservations system, website, revenue management
system, revenue accounting system, and a customer loyalty management system among
others. The integrated system, when fully implemented, will increase our capabilities
including growing current business, providing for more commercial partnerships and
allowingtoattractmorebusinesscustomers.
Theprimarydistributionchannelisthroughcompanywebsite,www.jetblue.com,thelowest
cost channel that is also designed to ensure customers have as pleasant an experience
booking their travel as they do in the air. Company participation in global distribution
systems,orGDSs,supportsourgrowthinthecorporatemarket,asbusinesscustomersare
more likely to book through a travel agency or booking product that utilizes the GDS
platform. While the cost of sales through this channel is higher than through website, the
average fare purchased through this channel generally covers the increased distribution
costs. The company currently participates in three major GDSs (Sabre, Travelport and
Amadeus) and four major online travel agents, or OTAs (Expedia, Travelocity, Orbitz, and
Priceline).
Source:JetBlueAnnualReport2009

e) JetBlueAirwayscapabilities
Strengths
Companycultureisoneofthecompetitivestrengththatemphasizesfriendly,helpful,team
orientedandcustomerfocusedemployees.Companycultureisimportanttoprovidinghigh
quality customer service and having a productive workforce that helps keep costs low. As
company continues to grow, company may be unable to identify, hire or retain enough
peoplewhomeettheabovecriteria,includingthoseinmanagementorotherkeypositions.

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 Company culture could otherwise be adversely affected by growing operations and

geographicdiversity.
Company strength position as the largest carrier at Bostons Logan International Airport in
termsofnumberofseatsofferedanddestinationsserved.In2010,JetBlueplantocontinue
tofocusonBostonandCaribbeanexpansion.
During 2009, JetBlue codeshare partnership with Deutsche Lufthansa AG, Europes largest
airline and company largest shareholder. This partnership provides customers with
convenient connections at 12 of domestic locations to Lufthansas network of over 400
locations worldwide. JetBlue also continued to benefit from partnerships with Aer Lingus
andCapeAir.JetBluenewterminalatJFKandgrowingpresenceinBostonprovideaunique
foundation for these and other partnerships, as evidenced by recently announced
agreement with American Airlines in Boston and JFK. JetBlue will continue to explore to
monetizevaluablepresenceattheseairportsandlinknetworkwithotherairlines.
Endedoftheyear2009,JetBluehadover$1billionincashandshortterminvestmentsone
of the strongest liquidity positions in the U.S. airline industry relative to revenues.
Additionally,JetBluegeneratedpositivefreecashflowforthefirsttimeinJetBluehistory.
JetBlue have a cost control policy to deliver exceptional customer service at low cost
differentiates from the rest of the industry. Despite a large concentration of operations in
highcostcities,JetBluemaintainoneofthelowestcoststructuresintheindustryduetothe
youngaverageageoffleet,aproductiveworkforceandcostdiscipline.Themostsignificant
cost is fuel, which represented approximately 30% of total operating expenses in 2009.
Fortunately, JetBlue have a fuelefficient fleet with an average age of approximately four
years, the youngest fleet of any major U.S. airline and also continue to focus on fuel
conservation techniques to help reduce aircraft fuel burn. In addition, JetBlue have built a
portfoliooffuelhedgestohelpmanagefuelpricevolatilityandsupplyinterruptions.
Weaknesses
JetBlue is highly dependent on the New York metropolitan market and increases in
competition or congestion or a reduction in demand for air travel in this market, or
governmentalreductionofcompanyoperatingcapacityatJFK,wouldharmbusiness.JetBlue
arehighlydependentontheNewYorkmetropolitanmarketwherethecompanymaintaina
large presence with approximately 60% of our daily flights having JFK, LaGuardia, Newark,
Westchester County Airport or Newburghs Stewart International Airport as either their
originordestination.JetBluehaveexperiencedanincreaseinflightdelaysandcancellations

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 at JFK due to airport congestion, which has adversely affected operating performance and
resultsofoperations.
Capacities
RouteNetwork
o JetBlue operations primarily consist of transporting passengers on aircraft with domestic
U.S.operations,includingPuertoRico,accountingfor89%ofcapacityin2009.Thehistoric
distributionofavailableseatmiles,orcapacity,byregionisasfollows:

Source:JetBlueAnnualReport2009

Figure:19.1JetBlueAirwaysRouteMap2010
Source:http://www.caymankaivacations.com/AirlinesthatserveGrandCayman.htm

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f) JetBlueAirwaysresponseinthefuture
Using data, combined with company knowledge and experience about how comparable
marketshavereactedinthepastwhenpriceswereincreasedordecreased,JetBlueforecast
thelevelofdemandinaparticularmarketexpectedtoresultfromtheintroductionofservice
andlowerprices,aswellastheanticipatedresponseofexistingairlinesinthatmarket.
JetBlue began the implementation of a new integrated customer service system, which
includes a reservations system, website, revenue management system, revenue accounting
system, and a customer loyalty management system among others. The integrated system,
when fully implemented, will increase capabilities including growing current business,
providingformorecommercialpartnershipsandallowingattractingmorebusinesscustomer.
JetBluehaveamarketingobjectivetoattractnewcustomerstoJetBluebrandandgivecurrent
customersreasonstocomebacktoJetBluetimeandtimeagain.JetBluemarketingmessageis
that competitive fares and quality air travel need not be mutually exclusive. JetBlue
competitive fares, high quality product and outstanding customer service create the overall
JetBlueExperiencethatJetBluebelieveisuniqueinthedomesticairlineindustry.
Source:JetBlueAnnualReport2009

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Source:AAwebsite

a) History,development,andgrowth
American Airlines was founded in 1930, American Airlines, formerly American Airways
Inc.,wastheresultoftheconsolidationofmorethan80smallairlinesintoTheAviationCorporation.
American Airways Inc. officially became American Airlines Inc. in 1934, the same year C.R. Smith
became president of the company. The airline began trading on the New York Stock Exchange on
June10,1939.Inthe1940s,theUnitedStateswasagainanationatwar.Americantookaproactive
effortinWorldWarIIbyturninghalfofitsfleetovertothemilitaryairline,AirTransportCommand,
alongwithcrewswhooperatedallovertheworld.Americanfounditsplaceinthewareffortasa
suppliernotonlyofnecessaryassets,butalsoofjobsonthehomefront,asitcontinuedtogrowand
take advantage of new opportunities. By 1950, American added freight service to its fleet and
expanded to become the first American airline to serve Europe. The 1950s and 1960s brought
additionalexpansionandinnovation.
In1959,Americanofferedcoasttocoastjetserviceandintroducedtheturbofanengine
in1961.In1964,Americanwasthefirstairlinetointroduceanautomateddataprocessingsystem,
SABRE,whichwassecondinsizeonlytotheU.S.GovernmentsSAGEsystem.
Deregulation in 1978 brought a significant change to American and the entire airline
industry. Until1978, the U.S. Government regulated much of commercial aviation, including fares,
routesandschedules.The1978removalofregulationschangedthefaceofcivilaviation,andfree
competitionusheredinaneweraofpassengerairtravel.Airlinescanceledroutestosmallercitiesto
focus on larger, more profitable hubcities. Smaller airlines entered the market due to lessened
government regulations. Prices were driven down, and competition was fierce. The year 1979,
consequently,sawrecordhighpassengertravel.Unfortunately,however,theblissdidnotlastlong.
Risingfuelpricesandtheeconomichardshipsofthe1980shittheindustryhard.
American approached the 1980s head on and survived. American reorganized to form
AMRin1982,openedavarietyofinnovativeandprofitablesubsidiaries,andcontinuedexpansionto
newareas, including the Caribbean, India and SouthAmerica. While some of its competitors were
failing,AMRmovedforwardwithavarietyofinnovativeprogramsfocusingoncustomerserviceand
value pricing. The late 1980s brought OneStopAutomated CheckIn and the AADVANTAGE travel
awards program. In the 1990s came the Super Saver fares and AAirpass. And in 1999, AMR

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introduced its crowning achievement the customerdriven oneworld global alliance a multi
million dollar program designed to raise the standard of global air travel. The oneworld Alliance
memberairlines areenable to offertheir customers moreservices and benefitsthan any member
airline can provide individually. These services include a broader route network, opportunities to
earn and redeem request flyer miles across the combine oneworld network and more airport
lounges. Together, oneworld members serve nearly 700 destinations in approximately 150
countries, with more than 8,000 daily departures. American Airlines is also one of the largest
scheduled airfreight carriers in the world, providing a wide range of freight and mail services to
shippersthrough its system onboardAmerican Airlines passenger fleet. The company eventually
acquiredTWAin2001.
Source:
AMRCorporateAnnualReport2009
Americanairlines.(2015).www.aa.com.Retrieved27September,2015,from
http://www.aa.com/i18n/amrcorp/corporateInformation/facts/americanairlinesgroup.jsp
JeffreysHarrison,SiriKalbur&ColleenKochReed.(2012).AmericanAirlines:Bankrupt,LikeEveryOtherLegacy.Robinschoolofbusiness,Universityof
Richmond

Table19.3AmericanAirlinesthreeyearshighlightdata
YE2009 YE2008 YE2007
Domesticrevenuepassengermiles(RPM)(MilUSD) 74,967 81,516 87,849
Domesticpassengers(000) 66,142 71,539 76,552
Domesticmarketshare1/(%) 13.91 14.35 14.83
Source;
Theofficeoftheassistantsecretaryforresearchandtechnology(ostr).(2015).USDepartmentofTransportationsBureauofTransportationStatistics
(BTS).Retrieved27September,2015,fromhttp://www.transtats.bts.gov/carriers.asp?pn=1
Remark;
1/Marketsharebasedonrevenuepassengermiles

Table19.4AmericanAirlinestopdomesticmarkets*
YE2009 YE2008 YE2007
Market Passengers Market Passengers Market Passengers Market
(Mil) Share** (Mil) Share** (Mil) Share**
Dallas/FortWorth,TX 17.72 73.02% 18.08 73.21% 18.80 72.65%
Chicago,IL 6.85 19.98% 7.90 21.85% 8.76 21.97%
Miami,FL 5.81 70.39% 5.91 70.90% 5.85 69.13%
NewYork,NY 3.63 16.10% 4.10 17.38% 4.38 17.81%
LosAngeles,CA 3.94 19.55% 4.04 19.46% 4.30 19.76%
Other 28.20 5.54% 31.51 5.86% 34.45 6.17%
Remark
*Basedontotalenplanedpassengersatallairportsinacity.
**Thetableshowsthecarrier'sshareineachofthemarkets.

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b) Futureobjectives
Vision:Tobecomethelargestairlineintheworld.
Mission:Companycommittedtoprovidingeverycitizenoftheworldwiththehighestquality
air travel to the widest selection of destination possible. The company will continue to
modernizeitsfleetwhilemaintainingitspositionas thelargestaircarrierintheworld, with
the goal of becoming the most profitable airline. American Airlines is the airline that treats
everyone with equal care and respect, which is reflected in the way each employee is
respected.AmericanAirlinesrecognizethatitsemployeesarethekeytotheairlinessuccess
andinvestinthefuturesinlivesofitsemployees.Byinvestingintomorrowtechnologiesand
by following a strict adherence towards environmental regulations, AMR demonstrate its
commitmenttotheworldenvironment.
Source:360connextcom.(2012).CustomerExperienceConsulting.Retrieved27September,2015,fromhttp://360connext.com/customerorcompanymission/

Objectives
o Customer: seek to earn customer loyalty by meeting or exceeding our customers'
expectations.
o Environment:actasgoodenvironmentalstewardsandimplementinnovativeideasandwise
investmentstominimizeourenvironmentalfootprint.
o Employee: strive to make our company a good place for good people to work and build a
career by creating and maintaining a safe, collaborative, inclusive and respectful work
environment.
o Communities: become a part of the communities we serve and are deeply committed to
supportingimportantcausesandlocaleconomicdevelopment
Source:Americanairlines.(2015).PerformanceandGoals.Retrieved27September,2015,from
http://www.aa.com/i18n/aboutUs/corporateResponsibility/company/perfomanceandgoals.js

c) AmericanAirlinesbelievesabouttheindustry(Assumptions)
American Airlines believe that in the med fit by DOT is free to operate scheduled
passengerservicebetweenanytwopointswithintheUnitedStatesanditspossessions.Mostmajor
carriershavedevelopedhubandspokesystemsandschedulepatternsinanefforttomaximizethe
revenuepotentialoftheirservice.
Source:AMRCorporateAnnualReport2009

d) AmericanAirlinescurrentstrategies
Functionallevelstrategy
American Airlines functional level strategies are superior efficiency, quality and
customerresponsiveness.
Inlateyear2009,AmericanAirlineslaunchnewstrategicplanFlightPlan2020which
becomesablueprinttolongtermsuccessforAmericanAirlinesbasedonthefollowingfivetenets:

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 Invest Wisely: Every day, American Airlines depend on people, aircraft, facilities, and
technological infrastructure. American Airlines must continue to invest in these areas if
AmericanAirlinesaretosucceedinthelongterm.Investinginpeopleisongoing.American
Airlines are also continuing initiatives related to fleet renewal, facility renovations, and
upgradestotechnologyinfrastructure.
Earn Customer Loyalty: American Airlines must deliver value for every customer and
differentiateairline.AmericanAirlinesaremakingnumerousenhancementstoproductsand
servicestoimprovecustomertravelexperience.
Strengthen and Defend Global Network: American Airlines, network alignment around
cornerstone hubs of DFW, Chicago, Miami, New York, and Los Angeles strengthens of
company domestic network. Deepening company relationships with oneworld airlines and
securingantitrustimmunitywithselectinternationalcarriersstrengthensglobalnetwork.
Be a Good Place for Good People: Company future depends on creating and maintaining a
good place to work and build a career, where all employees are treated with respect and
dignity,andwherediversityisembraced.
Fly Profitably: American Airlines must constantly find ways to cut costs, operate more
efficiently,andgenerateadditionalrevenueforthecompanytosustainbusiness,grow,and
create job security. American Airlines have cut more than $6 billion in costs since 2003,
includingmorethan$4billioninnonlaborcosts.
ThefivetenetsofFlightPlan2020areunderscoredbythekeychargetoBeCompetitive
toSecureAmericanAirlinesFuture.Thismeansthattoestablishandsustainlongtermprofitability,
AmericanAirlinesmustimprovethecompanysabilitiestoachievecompetitiveadvantagesincluding
costs, product, revenue, service, and schedule. Moreover, the company recognized that an
important aspect of serving customers is developing new partnerships to expand access to
convenientanddependabletraveloptions.
Source:
Americanairlines.(2015).FlightPlan2020GetToKnowWhoWeAre.Retrieved27September,2015,from
zttp://www.aa.com/i18n/aboutUs/corporateResponsibility/profile/flightplan2020.jsp

Businesslevelstrategy
American Airlines business level strategy is differentiation strategy. American Airlines
haveasuperiornetworkamongU.S.airlines,withnonstopservicethatcouldbeusedby52percent
of the domestic nonconnecting traffic in the top 10 U.S. cities, ranked by traffic (domestic and
international). The nearest competitor offers nonstop service to 47 percent of nonconnecting
passengers in these cities. American Airlines have an important aspect of serving customers is
developingnewpartnershipstoexpandaccesstoconvenientanddependabletraveloptions.
Corporatelevelstrategy

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 American Airlines corporate level strategy is market penetration intensive growth

concentration strategy. The company strategy of the firm is focused on improve competitive
positionwithexistingproductsbyincreasingmarketshareofpresentproductsandservices.
American Airlines established the AAdventage frequent flyer program (AAdvantage) to
develop passenger loyalty by offering awards to travelers for their continued patronage.
AAdvantage benefits from a growing base of approximately 64 million members with desirable
demographics who have demonstrated a strong willingness to collect AAdvantage miles over the
loyaltyprogramincentivesandaregenerallydisposedtoadjustingtheirpurchasingbehaviorinorder
toearnadditionalAAdvantagemiles.
Source:
AMRCorporateAnnualReport2009
AmericanAirlinesEnhancesStrategicPosition

e) AmericanAirlinescapabilities
Strengths
American Airlines operate in five primary domestic markets: Dallas/ Fort Worth (DFW),
ChicagoOHare,Miami,NewYorkCityandLosAngeles.Thesecitiesrepresentfiveoutof10
of the largest metropolitan areas in the country and form what the company calls the
cornerstonesofitsnetwork.
The essence of Americans network is the strength of its cornerstone markets, combined
with the global reach the airline has via oneworld flying to cities worldwide that matter
most to travelers, especially premium ones. Here are some interesting facts about
Americansnetworkanditskeycities.
American has a superior network among U.S. airlines, with nonstop service that could be
usedby52percentofthedomesticnonconnectingtrafficinthetop10U.S.cities,rankedby
traffic (domestic and international). The nearest competitor offers nonstop service to 47
percentofnonconnectingpassengersinthesecities.

Weaknesses
AmericanAirlineshavethreemajoritylaborunions:theAlliedPilotsAssociation(theAPA),
theTransportWorkersUnionofAmerica(AFLCIO)andtheAssociationofProfessionFlight
Attendants (the APFA). The high bargaining powers of threemajority union tend to
generatehighlaborcost.AmericanAirlineslaborcostsarehigherthantheircompetitors,
these may adversely affect the ability to achieve and sustain profitability while competing
withotherairlineswithlowerlaborcosts.
Since the terrorist attacks, American Airline parent company (AMR)s rating has been
loweredtosignificantlybelowinvestmentgrade.Thesereductionshaveincreasedcompany

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 borrowingcostsandborrowingterms,andlimitedborrowingoptions.Moreover,therating
reductionshaveincreasedrestrictiontoraisefunds.
Thecompanypassengeryieldremainsverylowbyhistoricalstandardsthataredueinlarge
partofcorrespondingdeclineinAmericanAirlinepricingpower.BecauseAmericanAirlines
havesettheticketpricelowerthanpreviousbecausemostcompetitorsindomesticairlines
marketdecreasetheticketprice.Thereareseveralfactorsincluding:greatercostsensitivity
onthepartoftravelers;pricingtransparencyresultingfromtheuseoftheinternet;greater
competitionfromlowcostcarrier;othercarriersbeingwellhedgedagainstrisingfuelcosts
andabletobetterabsorbhighjetfuelprices;faresimplificationeffortsbycertaincarriers;
andtheeconomy
source:
AMRCorporateAnnualReport2009
Americanairlines.(2010).Https://wwwaacom/content/images/aboutUs/newsroom/ny_backgrounder_factsheetpdf.Retrieved28September,2015,from
https://www.aa.com/content/images/aboutUs/newsroom/ny_backgrounder_factsheet.pdf

Figure:19.2AmericanAirlinesRouteMap2010
Source:http://cdn.thepointsguy.com/wpcontent/uploads/2013/02/DomesticRoutes.png?c22584

f) AmericanAirlinesresponseinthefuture
In late 2009, the company unveiled a new business plan FlightPlan 2020, which is a
evolutionoftheTurnaroundPlanthatguidedthecompanythroughthelastdecade.FlightPlan2020
can help to secure the companys future by focusing on what will be required to succeed in the
airlinebusinessoverthenextdecade.Thisplanforachievingsustainedprofitabilityhasfivetenets;
(i)investwisely,(II)earncustomerloyalty,(iii)strengthenanddefendcompanyglobalnetwork,(iv)
beagoodplaceforgoodpeopleand(v)flyprofitably.ThecompanybelievesthatFlightPlan2020
provides clear direction for effectively serving companys customers, partners, employees, and

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investors. American Airlines are implementing Flight Plan 2020 so there is alignment between
corporateresponsibilityeffortsandbusinessobjectives.
Source:
AMRCorporateAnnualReport2009
Americanairlines.(2015).FlightPlan2020GetToKnowWhoWeAre.Retrieved27September,2015,from
http://www.aa.com/i18n/aboutUs/corporateResponsibility/profile/flightplan2020.jsp

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Source:Deltawebsite

a) History,development,andgrowth
Delta Air Lines, Inc. (Delta), incorporated on March 16, 1967, provides scheduled air
transportation for passengers and cargo throughout the United States and around the world. Its
routenetworkiscenteredonasystemofhubandinternationalgatewayairportsthatitoperatesin
Amsterdam,Atlanta,Detroit,LosAngeles,MinneapolisSt.Paul,NewYorkLaGuardia,NewYorkJFK,
ParisCharlesdeGaulle,SaltLakeCity,SeattleandTokyoNarita.Eachoftheseoperationsincludes
flightsthatgatheranddistributetrafficfrommarketsinthegeographicregionsurroundingthehub
or gateway to domestic and international cities and to other hubs or gateways. The Companys
segmentsincludeitsAirlinesegmentandRefinerysegment.

The Company has operations in six continents. The Companys airline operations also
includeaircraftmaintenance,repairandoverhaul(MRO),staffingservicesforthirdparties,vacation
wholesale operations and its private jet operations. Its MRO operation, known as Delta TechOps,
serves aviation and airline customers around the world. Its staffing services business, Delta Global
Services, provides staffing services, security, training services and aviation solutions. Its vacation
wholesalebusiness,MLTVacations,providesvacationpackagestothirdpartyconsumers.Itsprivate
jet operations, Delta Private Jets, provides aircraft charters, aircraft management and programs
allowing members to purchase flight time by the hour. The Companys tickets are sold through
variousdistributionchannels,includingdelta.comandmobile,telephonereservationsandbrickand
mortar,andonlinetravelagencies.

The Companys Airline segment is managed as a single business unit that provides
scheduledairtransportationforpassengersandcargothroughouttheUnitedStatesandaroundthe
worldandotherancillaryairlineservices,includingmaintenanceandrepairservicesforthirdparties.
Its flight equipment forms one fleet, which is deployed through a single route scheduling system.
TheCompanyleasesmostofthelandandbuildingsthatitoccupies.Itsaircraftmaintenancebase,
various computers, cargo, flight kitchen and training facilities are located at or near the Atlanta
airport, on land leased from the City of Atlanta. It leases ticket counter and other terminal space,
operating areas and air cargo facilities in airports that it serves. It also leases marketing, ticketing
andreservationsofficesincertainlocationsforvaryingterms.

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 TheCompanycompeteswithAmericanAirlines,UnitedAirlines,AlaskaAirlines,JetBlue
Airways and Southwest Airlines, Spirit Airlines and Allegiant Air, Emirates, Etihad Airways, Qatar
Airways,SkyTeam,theStarAllianceandtheoneworldalliance.

InOctober2008,awhollyownedsubsidiaryofmergedwithandintoNorthwestAirlines
Corporation (Northwest). As a result of this merger, Northwest and its subsidiaries, including
NorthwestAirlines,Inc.(NWA),becamewhollyownedsubsidiaries.OnDecember31,2009,NWA
merged with and into Delta, ending NWAs existence as a separate entity. Delta anticipates that
DeltawillcompletetheintegrationofNWAsoperationsintoDeltaduring2010.

Figure19.3:DeltaFamilysTree
Source:Reuterswebsite/DeltaAirLineswebsite/Deltaannualreport2009(Form10K)

Table19.5DeltaAirLinesthreeyearshighlightdata

YE2009 YE2008 YE2007

Domesticrevenuepassengermiles(RPM)(MilUSD) 56,672 60,853 64,009
Domesticpassengers(000) 55,627 59,276 61,494
Domesticmarketshare1/(%) 10.51 10.71 10.81
Source:
The office of the assistant secretary for research and technology (ostr). (2015). US Department of Transportations Bureau of Transportation Statistics
(BTS).Retrieved28September,2015,fromhttp://www.transtats.bts.gov/carriers.asp?pn=1
Remark:
1/Marketsharebasedonrevenuepassengermiles

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Table19.6DeltaAirLinestopdomesticmarkets*

YE2009 YE2008 YE2007

Market Passengers Market Passengers Market Passengers Market
(Mil) Share** (Mil) Share** (Mil) Share**
Atlanta,GA 19.95 52.78% 20.69 53.02% 20.61 53.34%
SaltLakeCity,UT 3.77 38.94% 3.86 39.74% 4.09 39.76%
NewYork,NY 3.80 16.85% 3.92 16.63% 3.81 15.49%
Cincinnati,OH n/a n/a 2.09 33.05% 2.47 33.52%
LosAngeles,CA 1.93 9.59% 1.99 9.59% 2.18 10.00%
Orlando,FL 1.75 11.78% n/a n/a n/a n/a
Other 24.43 4.76% 26.72 4.84% 28.34 4.92%
Source:
Theofficeoftheassistantsecretaryforresearchandtechnology(ostr).(2015).USDepartmentofTransportationsBureauofTransportationStatistics
(BTS).Retrieved28September,2015,fromhttp://www.transtats.bts.gov/carriers.asp?pn=1
Remark:
*Basedontotalenplanedpassengersatallairportsinacity.
**Thetableshowsthecarrier'sshareineachofthemarkets.

b) Futureobjectives
Vision:Tobetheworldsgreatestairline.
Mission: Making Delta, carrier of choice for customers through operational excellence,
secondmileserviceandbuildingemotionalconnectionswiththedisabilitycommunity.
Objectives:
o FuturepurchaseaircraftasofDecember31,2009areestimatedtototalapproximately$1.1
billionfortheyearendedDecember31,2010.Approximately$800millionofthe$1.1billion
isassociatedwiththepurchaseof20 B737800aircraftforwhichDeltahaveentered into
definitiveagreementstoselltothirdpartiesimmediatelyfollowingdeliveryofthoseaircraft
to us by the manufacturer. Delta Air Lines have not received any notice that these parties
have defaulted on their purchase obligations. The remaining commitments relate to the
purchaseoftwoB777200LRaircraft,twoB737800aircraftand11previouslyownedMD
90aircraft.WehavenoaircraftpurchasecommitmentsafterDecember31,2010.
o Themergerwillgenerateapproximately$2billioninannualrevenueandcostsynergiesby
2012 from more effective aircraft utilization, a more comprehensive and diversified route
systemandreducedoverheadandimprovedoperationalefficiency.Rightsizeoperations.In
responsetotheglobalrecessionandhighfuelprices,we

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 o Inyear2010,toprovideasafe,secureoperationisfirstandmostfundamentalobligationto
customersandemployees,aswellastothecommunities.Thekeygoalsof2010flightplan
include
(1) TopositionDeltaastheglobalairlineofchoice
(2) Toenhancecustomerservice
(3) Topromotepositiveemployeerelations
(4) Tobuildadiversified,profitableworldwidenetworkandglobalalliance
(5) Todeliverindustryleadingfinancialresults.
Source:
Lines,D.A.(n.d.).CodeofEthicsandBusinessConduct.Retrievedfromhttp://ir.delta.com/files/doc_downloads/governance/CodeofEthics_021004.pdf
Deltaannualreport2009(Form10K)

c) DeltaAirLinesbelieveabouttheindustry(Assumptions)
Lowcost carriers, including Southwest, AirTran and JetBlue, have placed significant
competitivepressureintheUnitedStatesandonothernetworkcarriersinthedomesticmarket.In
addition, other network carriers have also significantly reduced their costs over the last several
years.Theabilitytocompeteeffectivelydepends,inpart,onabilitytomaintainacompetitivecost
structure. If cannot maintain costs at a competitive level, then business, financial condition and
operatingresultscouldbemateriallyadverselyaffected.Inlightofincreasedjetfuelcostsandother
issues in recent years, larger carriers may be able to generate higher amounts of revenue and
competemoreefficiently.
Source:Deltaannualreport2009(Form10K)

d) DeltaAirLinescurrentstrategies
Functionallevelstrategy
Delta Air Lines have functional level strategies to achieve superior efficiency, and
customerresponsiveness.
Rightsizecompanyoperations.Inresponsetotheglobalrecessionandhighfuelprices,the
company reduced domestic and international capacity to better match capacity with
demand. Delta Air Lines have focused on removing the associated capacityrelated costs,
includingaircraftfleetandstaffing.Toreducefleetcosts,thecompanyremoved18mainline
passenger aircraft from the fleet during 2009, retired entire fleet of B747200F freighter
aircraft during 2009 and plan to remove over 30 regional jets from network beginning in
mid2009andcontinuingthroughearly2011.DeltaAirLineshavereducedstaffingprimarily
through voluntary reduction programs as well as normal attrition. At December 31, 2009,
totalworkforcewas4%lowerthanthecombinedworkforceofDeltaandNWAatDecember
31,2008.

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 Improve operating margins. Delta Air Lines believe that the scope of network, combined
withinvestmentsaremakinginproductandcustomerservice,willenabletogenerateaunit
revenuepremiumtotheindustryandthatcoststructureallowscompanytogeneratehighly
competitiveunitcosts,bothofwhichprovidethetoolstoimproveoperatingmargins.And
while consolidated nonfuel unit costs are the lowest among the major network carriers,
DeltaAirLineshaveadditionalimprovementopportunitiesasreducecostsassociatedwith
rightsizingbusiness,increaseproductivityandrealizemergersynergies.
Strengthen balance sheet. The company currently, and will continue to, prudently manage
costsandfreecashflowtoconserveliquidity.DeltaAirlinesfinished2009with$5.4billionin
unrestricted liquidity (consisting of cash, cash equivalents, shortterm investments and
undrawn revolving credit facility capacity). Delta Air Lines have no immediate need for
significantaircraftpurchasesandcurrentlyhavelimitedaircraftcapitalexpendituresplanned
forthenextthreeyears.Thecompanywillcontinuetofocusoncostdisciplineandcashflow
generationtowardgoaloffurtherstrengtheningcompanybalancesheet
DeltaAirLineshaveairserviceagreementswithmultipledomesticregionalaircarriersthat
feedtraffictoroutesystembyservingpassengersprimarilyinsmallandmediumsizedcities.
These arrangements enable to increase the number of flights have available in certain
locations, to better match capacity with demand and to preserve presence in smaller
markets.Approximately22%ofpassengerrevenuein2009relatedtoflyingbyregionalair
carriers.
Source:
Deltaannualreport2009(Form10K)

Businesslevelstrategy
DeltaAirLinesbusinesslevelstrategyisdifferentiationstrategy.Deltahaveenteredinto
a marketing alliance with Alaska and Horizon, which includes mutual code sharing and reciprocal
frequent flyer and airport lounge access arrangements. In 2009, the company enhanced alliance
agreementwithAlaskaandHorizontoprovideformoreextensivecooperationwithrespecttowest
coastpresence.
DeltaAirLineshavelaunchedSkyMilesfrequentflyerprogramisdesignedtoretainand
increasetravelerloyaltybyofferingincentivestocustomerstoincreasetravelonDelta.TheSkyMiles
program allows program members to earn mileage for travel awards by flying on Delta, Deltas
regionalcarriersandotherparticipatingairlines.Mileagecreditmayalsobeearnedbyusingcertain
servicesofferedbyprogramparticipants,suchascreditcardcompanies,hotels,carrentalagencies,
and telecommunication services. In addition, individuals and companies may purchase mileage

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credits.TheCompanyreservestherighttoterminatetheprogramwithsixmonthsadvancenotice,
andtochangetheprogramstermsandconditionsatanytimewithoutnotice.
Source:Deltaannualreport2009(Form10K)

Corporatelevelstrategy
DeltaAirLinescorporatelevelstrategyishorizontalgrowthconcentrationstrategy.The
company believes the Northwest merger better positions Delta Air Lines to manage through
economiccyclesandvolatilefuelprices,investinfleet,improveservicesforcustomersandachieve
companystrategicobjectives.DeltaAirLinesalsobelievethemergerwillgenerateapproximately$2
billioninannualrevenueandcostsynergiesby2012frommoreeffectiveaircraftutilization,amore
comprehensive and diversified route system and reduced overhead and improved operational
efficiency.
Source:
Deltaannualreport2009(Form10K)

e) DeltaAirLinescapabilities
Strengths
Delta Air Lines global route network gives a presence in every major domestic and
international market. The route network is centered on the hub system; the company
operates at airports in Atlanta, Cincinnati, Detroit, Memphis, Minneapolis/St. Paul, New
YorkJFK,SaltLakeCity,ParisCharlesdeGaulle,AmsterdamandTokyoNarita.Eachofthese
hub operations includes flights that gather and distribute traffic from markets in the
geographic region surrounding the hub to domestic and international cities and to other
hubs.DeltaAirLinesnetworkissupportedbyafleetofaircraftthatisvariedintermsofsize
andcapabilities,givingthecompanyflexibilitytoadjustaircrafttothenetwork.
Delta Air Lines have bilateral and multilateral marketing alliances with foreign airlines to
improve the company access to international markets. These arrangements can include
codesharing, reciprocal frequent flyer program benefits, shared or reciprocal access to
passenger lounges, joint promotions, common use of airport gates and ticket counters,
ticket office colocation and other marketing agreements. These alliances often present
opportunities in other areas, such as airport ground handling arrangements and aircraft
maintenanceinsourcing.
DeltaAirLineshavefrequentflyerandreciprocalloungeagreementswithHawaiianAirlines,
andcodesharingagreementswithAmericanEagleAirlines(AmericanEagle),USHelicopter
andMidwestAirlines.Thesemarketingrelationshipsaredesignedtopermitthecarriersto
retaintheirseparateidentitiesandroutenetworkswhileincreasingthenumberofdomestic
andinternationalconnectingpassengersusingthecarriersroutenetworks.

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 DeltaAirLineshaveairserviceagreementswithmultipledomesticregionalaircarriersthat
feed traffic to the company route system by serving passengers primarily in smalland
mediumsizedcities.Thesearrangementsenabletoincreasethenumberofflightswehave
available in certain locations, to better match capacity with demand and to preserve
presence in smaller markets. Approximately 22% of passenger revenue in 2009 related to
flyingbyregionalaircarriers.
Delta Air Lines maintenance, repair and overhaul (MRO) operations known as Delta
TechOpsisthelargestairlineMROinNorthAmerica.Inadditiontoprovidingmaintenance
andengineeringsupportforfleetofapproximately800aircraft,DeltaTechOpsservesmore
than 150 aviation and airline customers from around the world. Delta TechOps employs
approximately 8,800 maintenance professionals and is one of the most experienced MRO
providersintheworld.
Weaknesses
Companybusinessislaborintensive,utilizinglargenumbersofpilots,flightattendantsand
other personnel. As of December 31, 2009, approximately 39% of the company workforce
was unionized. Strikes or labor disputes with unionized employees may adversely affect
abilitytoconductbusiness.
Agreements governing company debt, including credit agreements and indentures, include
financial and other covenants that impose restrictions on company financial and business
operations.
BusinessisheavilydependentonoperationsattheAtlantaairportandatotherhubairports
in Cincinnati, Detroit, Memphis, Minneapolis/St. Paul, New YorkJFK, Salt Lake City, Paris
Charles de Gaulle, Amsterdam and TokyoNarita. Each of these hub operations includes
flightsthatgatheranddistributetrafficfrommarketsinthegeographicregionsurrounding
thehubtoothermajorcitiesandtootherDeltahubs.Asignificantinterruptionordisruption
in service at the Atlanta airport or at one of other hubs could have a serious impact on
business,financialconditionandresultsofoperations.
Source:
Deltaannualreport2009(Form10K)

184

Figure19.4:DeltaAirlinesDomesticRouteMap
Source:http://www.thestreet.com/tsc/common/images/storyimages/delta.gif

f) DeltaAirLinesresponseinthefuture
Delta Air Lines believe that global network, hub structure and alliances with other
airlines enables to offer customers a service which results in a competitive advantage over other
domestic and international airlines. In 2009, Delta Air Lines implemented a joint venture with Air
FranceKLM that further strengthens transatlantic network, expanded alliance agreement with
Alaska Airlines and Horizon Air to enhance West coast presence, and received U.S. Department of
TransportationapprovalforacodesharingagreementwithVirginBlue,whichwillexpandcompany
networkbetweentheU.S.andAustraliaandtheSouthPacific.
Delta also plans to invest $1 billion through mid2013 to improve the customer
experienceandtheefficiencyofaircraftfleet.Plannedenhancementsincludeinstallingfullflatbed
seats in BusinessElite on 90 transoceanic aircraft, adding inseat audio and video throughout
EconomyClasson68widebodyaircraft,addingFirstClasscabinsto66CRJ700aircraftandinstalling
wingletsonmorethan170aircrafttoextendaircraftrangeandincreasefuelefficiency.
OnDecember31,2009,NorthwestAirlines,Inc.mergedwithandintoDelta.Asaresult
of this merger, Northwest Airlines, Inc. ceased to exist as a separate entity. Delta believes the
Merger better positions the company to manage through economic cycles and volatile fuel prices,
investinfleet,improveservicesforcustomersandachievestrategicobjectives
Source:Deltaannualreport2009(Form10K)

185


Source:http://www.ieyenews.com/wordpress/wpcontent/uploads/2014/08/unitedairlineslogo.jpg

a) History,development,andgrowth
UnitedAirlines(United/company)tracesitsrootstoVarneyAirLinesairmailservice
ofWalter Varney, who also founded Varney Speed Lines, from whichContinental Airlineshad
originated.Founded inBoise, Idahoin1926, the carrierflew the firstContractAir Mailflight in the
U.S. on April 6, 1926, marking the first scheduled airline service in the country's history. In 1927,
aviation pioneerWilliam Boeingfounded his ownairline, Boeing Air Transport to operate the San
FranciscotoChicagoairmailroute,andbeganbuyingotherairmailcarriersincludingVarneyAirlines.
In 1929, Boeing merged his company withPratt & Whitneyto form theUnited Aircraft
and Transport Corporation(UATC). In 1933, United began operating theBoeing 247,the first all
metal airliner. It was able to fly a transcontinental flight in 20 hours, making it significantly faster
than its predecessors. After passage of theAir Mail Actin 1934, UATC separated into United
Aircraft(the futureUnited Technologies), theBoeing Airplane Companyand United Air Lines.
AfterWorldWarII,Unitedgainedfromaboomincustomerdemandforairtravel,withitsrevenue
per passengermiles jumping fivefold in the 1950s, and continued growth occurring through the
nexttwodecades.
In 1954 United Airlines became the first airline to purchase modern flight simulators
whichhadvisual,soundandmotioncuesfortrainingpilots.PurchasedforUS$3million(1954)from
CurtissWright, these were the first of today's modern flight simulators for training of commercial
passengeraircraftpilots.
United merged with Capital Airlines in 1961 and regained its position as the United
States' largest airline. In 1968, the company reorganized, creating UAL Corporation, with United
Airlinesasawhollyownedsubsidiary.In1970,theUALCorporationacquiredWesternInternational
Hotels, and its name was later changed to Westin Hotel Company. The 1970s also saw economic
turmoil, resulting in "stagflation" and labor unrest. The 1978 Airline Deregulation Act, resulting in
industryshakeups,furtheraddedtothecarrier'sdifficultiesinalossmakingperiod.
In 1982, United became the first carrier to operate the Boeing 767, taking its first
delivery of 767200s on August 19. In May 1985, the airline underwent a 29day pilot strike over
management's proposed "Bscale" pilot pay rates. Thencompany CEO Richard Ferris changed

186

United'sparentcompany'snamefromUALCorporationtoAllegisinFebruary1987,butfollowinghis
termination, the company reverted to the name UAL Corp. in May 1988, and divested nonairline
properties.
In 1985, United expanded dramatically by purchasing Pan Am's entire Pacific Division,
givingitaprimeAsianhubatTokyo'sNaritaInternationalAirport,andin1991purchasedroutesto
LondonHeathrowAirportfromailingPanAm,makingitoneoftwoUScarrierspermittedexclusive
accesstoHeathrowunderBermudaIIuntil"openskies"tookeffectin2008(AmericanAirlinesbeing
the other, after it purchased TWA's Heathrow landing slots). The aftermath of the Gulf War and
increased competition from lowcost carriers led to losses in 1991 and 1992. In 1994, United's
pilots, machinists, bag handlers and noncontract employees agreed to an Employee Stock
OwnershipPlan(ESOP),acquiring55%ofcompanystockinexchangefor1525%salaryconcessions,
makingthecarrierthelargestemployeeownedcorporationintheworld.Thecarrieralsolaunched
alowcostsubsidiaryin1994,ShuttlebyUnitedahighfrequency,westcoastbasedoperation,inan
attempttocompetewithlowcostcarriers;thesubsidiaryremainedinoperationuntil2001.
In 1995, United became the first airline to introduce the Boeing 777 in commercial
service.In 1997, United cofounded the Star Alliance airline partnership. In May 2000, United
announcedaplannedUS$11.6billionacquisitionofUSAirways,butwithdrewtheofferinJuly2001
beforetheUnitedStatesDepartmentofJusticebarredthemergeronantitrustgrounds.May2000
alsosawabittercontractdisputebetweenUnitedanditspilots'unionoverpaycutsandconcessions
tofundtheESOPandovertimework,causingsummerflightcancellationsuntilasalaryincreasewas
agreedupon.
DuringtheSeptember11,2001attacks,twoofthefourairlinershijackedandcrashedby
alQaedamemberswereUnitedAirlinesaircraft(UnitedAirlinesFlight175wasflownintothesouth
WorldTradeCentertower;UnitedAirlinesFlight93wascrashedinafieldinPennsylvaniaafterthe
passengers fought back against the hijackers). An airline industry downturn resulted, and coupled
witheconomicdifficulties,skyrocketingoilprices,andhigherlaborcosts,thecompanylostUS$2.14
billionin2001.InthesameyearUnitedappliedforaUS$1.5billionloanguaranteefromthefederal
Air Transportation Stabilization Board established in the wake of the September 11 attacks. After
attempts to secure additional capital failed, UAL Corporation filed for Chapter 11 bankruptcy
protectioninDecember2002andtheESOPwasterminated.
United'sbankruptcyoperationsresultedinfurloughingthousandsofworkers,closingall
U.S. city ticket offices, cancelling several existing and planned routes, downsizing its Miami
operations, closing maintenance bases, and fleet reductions. The carrier also negotiated cost cuts
with employees, suppliers, and contractors, and terminated feeder contracts with United Express

187

carriers Atlantic Coast Airlines and Air Wisconsin. The carrier launched a new, all coach, lowcost
carriernamedTedin2003,andaluxury"p.s."(for"premiumservice")coasttocoastserviceonre
configured757sin2004.In2005,UnitedcancelleditspensionplaninthelargestsuchdefaultinU.S.
corporatehistory.
In2005,UnitedannouncedithadraisedUS$3billioninfinancingtoexitbankruptcyand
filed its Plan of Reorganization, as announced, on September 7, 2005. In late 2006, Continental
Airlines participated in preliminary merger discussions with United. On June 4, 2008, United
announced it would close its Ted unit and reconfigure the subsidiary's aircraft for a return to
mainlineconfiguration.
On April 16, 2010, United resumed merger talks with Continental Airlines. (The two
airlineshadpreviouslydiscussedmergingin2008.)TheboardofdirectorsofbothContinentaland
UALCorporation'sUnitedAirlinesreachedanagreementtocombineoperationsonMay2,2010.The
combined carrier would use the United Airlines name, but keep Continental's logo and livery.
Continental's CEO Jeff Smisek would head the new company. The merger was contingent upon
shareholderandregulatoryapproval.
The Continental United merger was approved by the European Commission in July
2010 and by the US Justice Department on August 27, 2010. On September 17, 2010, United's
shareholders approved the merger deal with Continental Airlines. Both carriers planned to begin
mergingoperationsin2011toformtheworld'sbiggestcarrier.OnOctober1,2010,UALCorporation
completed its merger with Continental Airlines and changed its name to United Continental
Holdings,Inc.

Table19.7UnitedAirlinethreeyearshighlightsdata

YE2009 YE2008 YE2007

Domesticrevenuepassengermiles(RPM)(MilUSD) 56,719 62,273 68,177
Domesticpassengers(000) 45,571 51,661 56,399
Domesticmarketshare1/(%) 10.52 10.96 11.51
Source:
The office of the assistant secretary for research and technology (ostr). (2015). US Department of Transportations Bureau of Transportation Statistics
(BTS).Retrieved29September,2015,fromhttp://www.transtats.bts.gov/carriers.asp?pn=1
Remark
1/Marketsharebasedonrevenuepassengermiles

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Table19.8UnitedAirlinestopdomesticmarkets*

YE2009 YE2008 YE2007

Market Passengers Market Passengers Market Passengers Market
(Mil) Share** (Mil) Share** (Mil) Share**
Chicago,IL 8.56 24.98% 9.09 27.38% 10.73 26.90%
Denver,CO 7.48 32.50% 8.72 37.64% 9.54 41.50%
SanFrancisco,CA 5.04 34.75% 5.21 37.29% 5.42 41.66%
Washington,DC 3.63 21.99% 3.63 21.37% 3.84 21.57%
LosAngeles,CA 3.45 17.14% 3.60 17.34% 4.10 18.83%
Other 17.42 3.42% 20.60 3.81% 22.75 4.04%
Source:
Theofficeoftheassistantsecretaryforresearchandtechnology(ostr).(2015).USDepartmentofTransportationsBureauofTransportationStatistics
(BTS).Retrieved29September,2015,fromhttp://www.transtats.bts.gov/carriers.asp?pn=1
Remark:
*Basedontotalenplanedpassengersatallairportsinacity.
**Thetableshowsthecarrier'sshareineachofthemarkets.

b) Futureobjectives
Vision:tobetheWorldsnumberonechoiceforairlinetravel
Mission:
o Createstheworldsmostcomprehensiveglobalnetwork.
o Enhancedconnectivityforcommunitiesofallsizes
o Carriersofchoiceforbusinessandpremiumtravelers
o Platformforincreasedprofitabilityandsustainablelongtermvalue
o Financiallystablecompanyprovidesjobsecurity
Objectives:
o ExpectstheMergertodeliver$1.0billionto$1.2billioninnetannualsynergiesonarunrate
basis by 2013, including between $800 million and $900 million of incremental annual
revenues, in large part from expanded customer options resulting from the greater scope
andscaleofthenetwork,fleetoptimizationandadditionalinternationalserviceenabledby
thebroadernetworkofthecombinedcompany.
o Toexpectsthecombinedcompanytorealizebetween$200millionand$300millionofnet
costsynergiesonarunratebasisby2013.
o Toexpectthatthecombinedcompanywillincursubstantialexpensesinconnectionwiththe
Merger, combined network (Continental Airlines and United Airlines) will attract more
passengers,netincreaseofover2millionnewpassengersperyear.
Source:
AmericanAirlineInvestorpresentation,BankofAmericaConference,June152010
UALForm10KYear2010

189

c) UnitedAirlinesbelieveabouttheindustry(Assumptions)
Thecompanybelievesthat,domesticairlineindustryishighlycompetitiveanddynamic.
Indomesticmarkets,newandexistingU.S.carriersaregenerallyfreetoinitiateservicebetweenany
twopointswithintheUnitedStates.Unitedscompetitorsconsistprimarilyofotherairlines,and,to
a lesser extent, other forms of transportation and emerging technological substitutes such as
videoconferencing. Competition can be direct in the form of another carrier flying the exact non
stoprouteorindirectwhereacarrierservesthesametwocitiesnonstopfromanalternativeairport
inthatcity,orviaanitineraryrequiringaconnectionatanotherairport.
Domesticpricingdecisionsarelargelyaffectedbytheneedtobecompetitivewithother
U.S.airlines.FarediscountingbycompetitorshashistoricallyhadanegativeeffectontheCompanys
financial results because United often finds it necessary to match competitors fares to maintain
passenger traffic. Attempts by United and other airlines to raise fares often fail due to a lack of
competitivematching.
Source:UnitedAirlinesannualreport2009(Form10K)

d) UnitedAirLinescurrentstrategies
Functionallevelstrategy
United Air Lines have functional level strategies to achieve superior efficiency, quality
andcustomerresponsivenessasfollowing:
Alignedcapacitytodemandwithoutdiminishingthenetwork
o Downgaugedsupplytomatchdemand.
o TargetedthePacificentitythatwasdisproportionatelyimpactedbythedownturn.
Optimizedthenetwork
o MovedcapacityfromunderperformingmarketstostartservicestonewmarketsinEurope,
MiddleEastandAfrica
NewInternationalpremiumcabinscompletedon747and767fleets
o Bestinclasspremiumtravelexperience
o Reducedfrontcabincapacity
o 777Reconfigurationunderway
The Company characterizes its business approach as Focus on Five, which refers to a
comprehensive set of priorities that focuses on the fundamentals of running a good airline:
onethatrunsontime,withcleanplanesandcourteousemployees,deliversindustryleading
revenues and competitive costs, and does so safely to achieve bestinclass safety
performance, exceptional customer satisfaction and experience and industryleading margin
andcashflow.

190

 Anewinternationalpremiumtravelexperiencefeaturing180degree,lieflatbedsinfirstand
business class. The Company has completed first and business class equipment upgrades on
45 international aircraft that have been refitted with new premium seats, entertainment
systemsandotherproductenhancements.TheCompanyexpectstocompletetheremaining
aircraftupgradesbetween2010and2012.
United Express is an extension of the United Mainline network. Atlantic Southeast Airlines,
ColganAirlines,ExpressJet,GoJetAirlines, MesaAirlines(Mesa),ShuttleAmerica, SkyWest
Airlines(SkyWest)andTransStatesAirlinesareallregionalcarriers,mostofwhichoperate
undercapacitypurchaseagreements withUnited.Underthese agreements,Unitedpays the
regionalcarrierscontractuallyagreedfees(carriercontrolledcosts)foroperatingtheseflights
plus a variable reimbursement (incentive payment) based on agreed performance metrics.
Thecarriercontrolledcostsarebasedonspecificratesforvariousoperatingexpensesofthe
regionalcarriers,suchascrewexpenses,maintenanceandaircraftownership,someofwhich
aremultiplied byspecific operatingstatistics (e.g., blockhours, departures)while others are
fixedmonthlyamounts.Theincentivepaymentisamarkupappliedtothecarriercontrolled
costs for superior operational performance. Under these capacity purchase agreements,
United is responsible for all fuel costs incurred as well as landing fees, facilities rent and
deicingcosts,whicharepassedthroughwithoutanymarkup.Inreturn,theregionalcarriers
operate this capacity on schedules determined by United. United also determines pricing,
revenues and inventory levels and assumes the inventory and distribution risk for the
availableseats.
The Company also generates revenue through its Mileage Plus Frequent Flyer Program
(Mileage Plus), United Cargo and United Services. MileagePlus, which helps the Company
attractandretainhighvaluecustomers,contributedapproximately$774milliontopassenger
andotherrevenuein2009.
Source:UnitedAirlinesannualreport2009(Form10K)

Businesslevelstrategy
UnitedAirlinesbusinesslevelstrategyisboarddifferentiationstrategy.
Unitedhascontractualrelationshipswithvariousregionalcarrierstoprovideregionaljetand
turboprop service branded as United Express. United Express is an extension of the United
Mainline network that operates under capacity purchase agreements with United. Under
these agreements, the carriercontrolled costs are based on specific rates for various
operatingexpensesoftheregionalcarriers,suchascrewexpenses,maintenanceandaircraft

191

 ownership, some of which are multiplied by specific operating statistics (e.g., block hours,
departures)whileothersarefixedmonthlyamounts.
Unitedhasanumberofbilateralandmultilateralallianceswithotherairlines,whichenhance
travel options for customers seeking access to markets that United does not serve directly.
These marketing alliances typically include one or more of the following features: joint
frequentflyerprogramparticipation;codesharingofflightoperations(wherebyseatsonone
carriers selected flights can be marketed under the brand name of another carrier);
coordination of reservations, ticketing, passenger checkin, baggage handling and flight
schedules; and other resourcesharing activities. The most significant of the Companys
alliancesistheStarAlliance,aglobalintegratedairlinenetworkcofoundedbyUnitedin1997
andthemostcomprehensiveairlineallianceintheworld.AsofJanuary1,2010,StarAlliance
carriersserveapproximately1,100destinationsin175countrieswithover19,700dailyflights.
During 2009, Continental joined United and its 24 other partners in the Star Alliance. With
Continental as a partner, United has added more than 60 new destinations to its alliance
network and dramatically enhanced its market presence in New York and Latin America.
United and Continental are exploring opportunities to capture important cost savings in the
areas of information technology, frequent flyer programs, airport operations, lounges,
procurementandsalesandmarketing.
Distribution Channels. The majority of Uniteds airline seat inventory continues to be
distributed through the traditional channels of travel agencies and GDS, such as Sabre and
Galileo. The growing use of alternative distribution systems, including www.united.com and
GDSnewentrants,providesUnitedwithanopportunitytoloweritsticketdistributioncosts.
To encourage customer use of lowercost channels and capitalize on these costsaving
opportunities,thecompanywillcontinuetoexpandthecapabilitiesofitswebsite.
Source:UnitedAirlinesannualreport2009(Form10K)

Corporatelevelstrategy
UnitedAirlinescorporatelevelstrategyishorizontalgrowthconcentration,Unitedstay
insideasingleindustry;
Strategic Alliance; United has a number of bilateral and multilateral alliances with other
airlines, which enhance travel options for customers seeking access to markets that United
doesnotservedirectly.ThemostsignificantoftheCompanysalliancesistheStarAlliance,a
globalintegratedairlinenetworkcofoundedbyUnitedin1997andthemostcomprehensive
airlineallianceintheworld.

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 Merger;Inyear2010,UnitedandContinentalmergertocombinednetworkwillattractmore
passengers,integratefacilitiesandserviceintegrationduetolargerscaledrivingmoreoptimal
spacerequirementsandstaffing.
Source:UnitedAirlinesannualreport2009(Form10K)

e) UnitedAirlinescapabilities
Strengths
Unitedoperatesapproximately3,300flightsadayonUnitedMainlineandUnitedExpressto
morethan230U.S.domesticandinternationaldestinationsfromitshubsatChicagoOHare
International Airport (OHare), Denver International Airport (Denver), Los Angeles
International Airport (LAX), San Francisco International Airport (SFO) and Washington
DullesInternationalAirport(WashingtonDulles),basedonitsannualflightscheduleasof
January1, 2010.With key globalair rightsin the Pacificregion, Europeand Latin America,
UnitedisoneofthelargestinternationalcarriersbasedintheUnitedStates.
UnitedalsoisafoundingmemberofStarAlliance,theworldslargestairlinenetwork,which
providesconnectionsforitscustomerstoapproximately1,100destinationsin175countries
worldwide. United offers a unique set of services to target distinct customer groups. This
strategyofmarketandproductsegmentationisintendedtooptimizemarginsandcosts,and
is focused on delivering an improved experience for all customers and a bestinclass
experienceforpremiumcustomers.
Inoverallcustomersatisfactionscores,Unitedrankednumberoneinontimeperformance
fordomesticscheduledflightsfor2009amongthefivelargestglobalU.S.basedcarriers,as
measuredbytheDOTandaspublishedintheAirTravelConsumerReportfor2009.
InOctober2009,ContinentaljoinedUnitedandits24partnersintheStarAlliancelinkingthe
airlines networks and services worldwide and creating new revenue opportunities, cost
savingsandotherefficiencies.
Weaknesses
TheCompanysbusinessreliesextensivelyonthirdpartyproviders.Failureoftheseparties
to perform as expected, or unexpected interruptions in the companys relationships with
theseprovidersortheirprovisionofservicestothecompany,couldhaveanadverseeffect
onthecompanysfinancialpositionandresultsofoperations.
The Companys net operating loss carry forward may be limited or possibly eliminated.
Unitedsfiscalfinancialperformancelossintwoyearscontinuously.
Unitedhasvarietyfleetswhichgeneratedhighmaintenanceexpense;

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Table19.9:TypeofUSAirwaysAircraft2009
AircraftType Totalnumberoffleet
A319100 50
A320200 97
B747400 25
B757200 96
B767300 35
B777200 52
Total 360
Source:UnitedAirlinesannualreport2009(Form10K)

Figure19.5:UnitedAirlinesDomesticNetwork
Source:InvestorPresentation,BankofAmericaAirlineConferenceJune15,2010

f) UnitedAirlinesresponseinthefuture
TheCompanycontinuestoidentifyandimplementimprovementprogramstoenhance
thedeliveryofitsservicestoitscustomers,reduceitscostsandincreaseitsrevenues.Inresponseto
theunprecedentedincreaseinfuelpricesduring2008andtheweakenedU.S.andglobaleconomies,
the Company has been implementing certain operational plans in line with its Focus on Five
operating agenda. The Companys efforts are focused on cost savings in areas such as
telecommunications,airportservices,catering,maintenancematerials,aircraftgroundhandlingand

194

RegionalAffiliatesexpenses,amongothers.Inaddition,thecompanysignificantlyreducedMainline
domestic and consolidated capacity and removed 100 aircraft from its Mainline fleet, including its
entire B737 fleet of94 aircraft and six B747 aircraft. United eliminated its Ted product and
reconfiguredthatfleets56A320stoincludeUnitedFirstclassseats.TheCompanywillcontinueto
review the deployment of all of aircraft in various markets and the overall composition of fleet to
ensurethatcompanyisusingassetsappropriatelytoprovidethebestavailablereturn.Inconnection
with the capacity reductions, the Company streamlined its operations and corporate functions in
ordertomatchthesizeofitsworkforcetothereducedsizeofitsoperations.TheCompanyreduced
its workforce by approximately 9,000 positions during 2008 and 2009, through a combination of
furloughsandfurloughmitigationplans,suchasearlyoutoptions.
Source:UnitedAirlinesannualreport2009(Form10K)

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Source:http://www.mbmobilecoupons.com/images/usairwayslogo.png

a) History,development,andgrowth
1939

AllAmericanAviationbringsthefirstairmailservicetomanysmallwesternPennsylvaniaandOhio
Valleycommunitieswithintroductionofaunique'flyingpostoffice'service.
1948

PiedmontAirlinesbeginsoperations.
1949

All American Aviation becomes All American Airways and makes the transition from airmail to
passenger service with introduction of the DC3 and an expansion of its service. Pacific Southwest
AirlinesbeginsoperationswithserviceinCalifornia.
1953

All American's route system grows and the name is changed to Allegheny Airlines, recognizing the
mountainsandriverofthesamenamethatlieintheheartoftheairline'snetwork.
1965

Allegheny Airlines begins the transition to turbinepowered aircraft with introduction of the first
Convair580,itsworkhorseforthenextseveralyears.
1966

Thefirstjet,aDC910,makesitsdebutinAlleghenycolors.Itisreplacedthefollowingyearbythe
firstofwhatwouldeventuallybecomeafleetof62largerDC930jets.
1967

ThefirstAlleghenyCommuterservicebegins,betweenHagerstown,MDandBaltimore/Washington
International Airport by Henson Aviation, forerunner of today's Piedmont Airlines. It was the
beginningoftoday'snetworkof10regionalairlinesthatprovideUSAirwaysExpressserviceto172
citiesthroughoutthenation.
1968

Allegheny merges with Indianapolisbased Lake Central Airlines, expanding the growing route
network beyond Pittsburgh to the Midwest including Dayton, Columbus and Cincinnati, OH;
Indianapolis,IN;andSt.Louis,MO.

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1972

AlleghenyacquiresMohawkAirlines,aUtica,NYairlinewithservicetomostcitiesthroughoutNew
York and New England. With the merger, Allegheny acquired Mohawk's BAC111 jets to
complementitsDC9sandbecomesthesixthlargestairlineintheworldasmeasuredbypassenger
boarding.
1978

Deregulation comes to the U.S. airline industry. Airlines have new freedom to expand their route
systems and more flexibility to develop new and innovative pricing structures, but lose the
protectionofthefareandroutesettingauthoritiesexercisedbytheCivilAeronauticsBoard,which
closesdownby1984.
1979

Allegheny changes its name to USAir to reflect its expanding network, including postderegulation
entryintoArizona,Texas,Colorado,Floridaandlater,California.
1983

AmericaWestAirlinesbeginsoperationsinPhoenixonAugust1with230employeesandthree737s,
serving Colorado Springs, CO; Kansas City, KS; Los Angeles, CA; and Wichita, KS. The airlines
schedulecallsfor20dailydepartures.
1984

USAirintroducesitsFrequentTravelerprogram,whichprovidestravelbenefitstoUSAir'smostloyal
customers.
1986

PiedmontacquiresEmpireAirlinesanditsSyracuse,NYhub.
1987

Largescaleairlineconsolidation,apartialproductofderegulation,continues.Piedmontintroduces
European routes in its system. Competition for the lucrative California market intensifies as local
carriers are bought and merged into larger partners. Pacific Southwest Airlines of San Diego
becomesawhollyownedsubsidiaryofUSAirGroupinMay.PiedmontAirlines,thedominantcarrier
throughoutthemidAtlanticregionoftheUnitedStates,alsobecomesasubsidiaryofUSAirGroupin
November1987.
1988

PSAismergedintoUSAir.

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1989

Piedmont is integrated into USAir, the largest merger in airline history. The merger brings with it
Piedmont's international routes as well as its Charlotte, Baltimore, Dayton and Syracuse hubs.
BaltimoreandCharlotteremainhubs.ThemergeralsobringsUSAir'sfirstwidebodyjets,theBoeing
767200ERsnowusedonitstransatlanticandsometranscontinentalroutes.
1990

USAir expands its international flying with service between Pittsburgh and Frankfurt, Germany,
complementing existing CharlotteLondon service begun in 1987 by Piedmont; and in 1991,
international expansion continues with the introduction of new non stops between Charlotte and
Frankfurt.
1992

PhiladelphiaParis is added to USAir's transatlantic schedules in January. Daily non stops between
bothPhiladelphiaandBaltimore/WashingtonInternationalAirportandLondonGatwickAirportare
introduced in May. USAir and Trump Shuttle begin a marketing affiliation under which the service
becomestheUSAirShuttle.TheShuttleprovideshourlyservicebetweenNewYorkandBostonand
betweenNewYorkandWashington,DC.USAir'snewterminalatNewYorkLaGuardiaopens,asdoes
thenewMidfieldTerminalatPittsburghInternationalAirport.
1993

USAir and British Airways announce an investment/alliance plan, under which USAir gives up its
Londonrouteauthority.
1994

USAir makes its largest expansion ever of its 10yearold Frequent Traveler Program by becoming
theexclusiveU.S.domesticairlinepartnerofLatinPass,whichhas14LatinAmericanairlinessharing
programbenefits.
1995

USAir posts its first profitable year since 1988, with earnings of $119.3 million on sales of $7.474
billion.USAirintroducesPriorityTravelWorksSM,allowingbookingsfrompersonalcomputers.
1996

StephenM.WolfiselectedchairmaneffectiveJanuary22.SethE.Schofieldretiresaschairmanafter
38years'servicetothecompanyandthreeandahalfyearsandchiefexecutive.USAircontinuesits
transatlantic expansion, winning the right to serve Munich, Rome and Madrid from Philadelphia
beginning in 1996. USAir introduces ticketless travel. USAir, in a dramatic twoweek period,
announceswhatmightintimebethelargestsingleorderforairliners;thenannouncesanewname,

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image,identitydesignedtocarrytheairlineaggressivelyintothenextcentury.Theairlineordered
upto400newAirbusA319,A320andA321narrowbodytwinjetsfordeliverystartingin1998and
continuing through 2009; then within days announced its new identity as US Airways. The airline
challenged its relationship with British Airways in court, seeking rights to London Heathrow from
fourU.S.gatewaysandtorequireBritishAirwaystodisposeofitsUSAirstock.USAirnotifiesBAthe
codesharebetweenthetwowillendinMarch,1997,andinDecember,BritishAirwaysannouncesit
willsellitssharesinUSAirandthatitsthreedirectorswillresign.
1997

ThenameUSAirwaysisputintouseofficiallyonFebruary27.Signs,stationery,ticketstock,business
cards,advertisements,marketingmaterials,ticketfoldersandcountersallstarttosportthenewUS
Airwaysblue,red,grayandwhiteidentity,andthefirstaircraftarepaintedinthenewschemeasthe
changeoverapproaches.TheUSBAcodeshareexpiresinMarch.
1998

USAirwaysInc.,purchasedShuttleInc.,fromaconsortiumofbanks.TheShuttlehasflownunderthe
US Airways name since 1992, when US Airways became an investor in the Shuttle with a minority
ownership stake. US Airways Shuttle flies 17 daily round trips between Boston and New York
LaGuardia, and 16 daily round trips between New York LaGuardia and Washington Reagan. US
Airways introduces Personal TravelWorks, an online travel reservation system. MetroJet by US
Airways starts service, providing the airline with a lowfare unit to compete in the eastern United
States. MetroJet's singleclass, using Boeing 737200 aircraft, proves highly popular. US Airways
Express introduces regional jets to its system. US Airways fleet transformation begins with the
introductionofthefirstofasmanyas400AirbusA320familyaircraft.
1999

USAirwaysfirstAirbusA320aircraftentersservicewithscheduleddailyflightsbetweenPhiladelphia
andLosAngeles.Thenew142seatA320ispartoftheUSAirwaysplantosimplifyandmodernize
thefleetbyaddingAirbusA319,A320 andA330300aircraft.USAirwaysexpandsits international
route network by adding nonstop service between its Charlotte, NC hub and London Gatwick.
CharlottebecomesthethirdUSAirwaystransatlanticgateway.ColganAir,Inc.joinstheUSAirways
Express ninecarrier network, expanding service to destinations across the East Coast from Bar
Harbor,MEtoAtlanta,GA.TheSabresystembecomestheplatformforthemajorityofUSAirways'
computeroperations,givingtheairlinethemostmoderncomputertechnologiesavailableandY2K
readiness.ThefleettransformationcontinueswithA320familyaircraftarrivingatarateofoneper
weekinthesecondhalfoftheyear.TheUSAirwaysShuttlebeginsitstransformationtoanallA320
fleet,retiringthevenerableBoeing727s.

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2000

US Airways unveils its enhanced and redeveloped website, usairways.com, originally launched in
1996, offering customerfriendly features that include a streamlined process for checking fares,
makingreservations,purchasingtickets,checkingflightstatusandaccessingDividendMilesaccount
information.Thesitebeginsdrawingmorethan600,000visitorsaweek.USAirwaysbeginsservice
toitseighthEuropeandestinationwiththeintroductionofPhiladelphiaManchester,UKservice.US
AirwaysopensaninternationalreservationscenterinLiverpool,UK.USAirwaystakesdeliveryofits
first A330300 widebody aircraft, making the next step in its fleet transformation. Six A330s will
enterthefleetbytheendoftheyear.
2001

US Airways becomes the first carrier to fly the 169seat Airbus A321. In addition to a common
cockpit, which vastly simplifies pilot training and scheduling, US Airways' A320family aircraft also
have common cabin fittings, such as seats, overhead bins, galleys and lavatories, simplifying cabin
service and maintenance. US Airways opens a 65,000squarefoot, sevengate addition at Boston
Logan,givingUSAirwaysShuttlepassengersadedicatedticketingcounter,concessionsandaspecial
lowerlevel arrivals area for deplaning Shuttle passengers. It features a clublike atmosphere,
individual workstations equipped with power outlets and phones with dataports. US Airways
launches service to Amsterdam. The airline also introduces four new Caribbean destinations:
Antigua,Barbados,GrandBahamanIslandandSt.Lucia.
2002

DavidN.SiegeltakesoverasUSAirwayspresidentandCEOinMarch,namingothernewmembersof
the senior management team over the next several months and undertaking a proactive
restructuring plan for the company. As part of the restructuring, US Airways enters Chapter 11
bankruptcy reorganization on August 11, with the stated goal to emerge as a leaner, more
competitivecarrierinMarch2003.USAirwaysintroducesservicetosixnewCaribbeandestinations,
bringing the total to 35 destinations. With 21 mainline jet destinations, four US Airways Express
Caribbean destinations and the additional nine islands served through the new GoCaribbean
marketingrelationshipwithWindwardIslandAirwaysandCaribbeanStarAirlinesinsummer2002,
USAirwaysservesmoreCaribbeandestinationsthananyotherU.S.carrier.USAirwaysimplements
expanded checkin options for customers, rolling out both Web Checkin on usairways.com and
nearly 250 selfservice checkin kiosks at 46 airports across the U.S. and Puerto Rico. As a result,
customerscanbooktickets,checkluggageandobtainboardingpassesinaslittleas30seconds.US
Airways Express begins service out of a new 95,000squarefoot facility in Charlotte, having added
approximately64percentmorepassengerseatsatCharlottesinceJune2000.

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2003

US Airways begins implementation of a codeshare agreement with United Airlines, introducing

customersofbothairlinestomorethan3,000codeshareflightsegmentsinthefirsthalfoftheyear,
reciprocal airport club use and simplified ticketing and baggage procedures. Midway Airlines joins
the US Airways Express tencarrier network, bringing expanded regional jet service to destinations
such as Jacksonville, FL and Myrtle Beach, SC. US Airways launches service in May between
Philadelphia and both Dublin and Shannon, Ireland, the airline's ninth and tenth European
destinations.
2004

US Airways join the Star Alliance network, an alliance of member airlines that share networks,
loungeaccess,checkinservices,ticketingandotherservices.USAirwaysGroup,Inc.filesagainfor
reorganizationunderChapter11oftheUnitedStatesBankruptcycodeonSeptember14,seekingto
restructureoperatingcostsinlightofeverincreasingfuelpricesandcutthroatindustrycompetition.
2005

America West Holdings and US Airways Group, Inc. announce plans to merge on May 19. Former
America West Airlines Chairman and Chief Executive Officer Doug Parker is chosen to run the
combinedairline.
InAugust,AmericaWestandUSAirwaysunveiltheliverythatwillappearontheaircraftofthenew
US Airways. Employees of both airlines, some sporting 'retro' uniforms heralding back to various
periodsintheairlines'pasts,celebratethenewpaintschemeasafreshlypaintedAirbusA320makes
its way across the country, stopping for special events with union leaders of both airlines. The
mergertransactionisofficiallycompleteonSeptember27,andUSAirwaysGroup,Inc.isnolongerin
bankruptcy.StockofthemergedairlinebeginstradingontheNewYorkStockExchangeunderthe
LCCtickersymbol.
2006

USAirwaysaddsLisbon,StockholmandMilantoitsexpandinginternationalroutemapwithseveral
domestic routes including Portland, OR to/from Philadelphia; Orlando to/from Key West, FL; and
Sarasota, FL to/from Washington, DC. Throwback liveries are dedicated mirroring the schemes of
PSA,Piedmont,AlleghenyandAmericaWest.Eventsareheldintheprogenitorairlineshubcities.
The airline posts profits for both the first and second quarters of the year, surpassing analyst
expectations and contributing tens of millions of dollars to employee profit sharing programs. The
airlineemploysmorethan35,000aviationprofessionalsanditsroutemapencompasses3,800+daily
flightsserving239destinationsand28countries/territories.

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2007

US Airways inaugurated new service from Philadelphia to Athens, Brussels and Zurich and
announcedtheairlinesfirsteverservicetoLondonHeathrowfromPhiladelphiatobeginMarch29,
2008.USAirwaysannouncedanewcodeshareagreementwithAirNewZealand,givingpassengers
theabilitytoconnectseamlesslybetweentheUnitedStates,NewZealand,AustraliaandthePacific
IslandsfromLosAngelesandSanFrancisco.USAirwaysagreedtoaddsevenAirbusA330200stothe
airlines widebody fleet to be used to support the airline's international growth plans. The airline
obtained a single operating certificate from the FAA, hired a new Chief Operating Officer (COO),
Robert Isom, and announced plans to build a new 60,000squarefoot flight operations control
centerinPittsburgh.Theairlinemigratedtworeservationssystemsontooneplatform,launcheda
mobiledevice friendly version of usairways.com and became the first airline to implement text
message technology that allows customers to receive ondemand flight status and enroll in the
frequent flyer program via mobile phone or PDA.US Airways introduced upgraded buy on board
inflightmealsandsnacksandalsolaunchedupgradedFirstClassmealsonflightsintheU.S.,Canada,
LatinAmericaandtheCaribbean.USAirwayswasawardedanindustrycovetedFreddieAwardinthe
Best Promotion category for Dividend Miles' popular 'Everything Counts' program, which allows
memberstoaccruemilesthroughavarietyofpartners.
2008

USAirwayswasthe#1ontimeairlinein2008amongthe'BigSix'hubandspokeairlinesaccording
totheU.S.DepartmentofTransportations(DOT)monthlyAirTravelConsumerReport.USAirways
inaugurateditsfirsteverservicetoLondonHeathrowfromitsinternationalgatewayinPhiladelphia.
US Airways also announced plans to operate yearround, daily nonstop service to Tel Aviv from
Philadelphia,scheduledtobeginJuly2009.USAirwaysannouncedthreenewtransatlanticflightsto
beginspring2009:Birmingham,UKandOslo,NorwayfromPhiladelphia;andParisCharlesdeGaulle
fromCharlotte.Transatlanticflightsin2009willtotal27dailyflightsto23destinations.USAirways
received final DOT approval to begin firstever nonstop service between Washington Reagan and
Akron/Canton, OH. Other new service agreements included a new codeshare with Swiss
InternationalAirLinesandAirChina,whichallowformoreconvenientconnectionsforUSAirways
customerstobothEuropeandAsia.Theairlineimplementedanalacartepricingstrategy,charging
for checked bags, inflight meals and Choice Seats, which was originally expected to generate
approximately $300 to $400 million annually in incremental revenue; US Airways revised its
estimates by $100 million based on positive results thus far. US Airways now anticipates it will
generate$500millioninincrementalrevenueannually.Inthefourthquarter,theairlinecompleted
a series of financial transactions, which raised approximately $810 million in gross proceeds and

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included a $400 million pay down at par of the Companys bank loan. US Airways successfully
activatedtheairlinesnew,stateoftheartOperationsControlCenterinPittsburghwhereallflight
controlanddispatchfunctionsforUSAirways'1,300dailymainlineflightsarecarriedout.
2009

On January 15, the crew of flight 1549, bound from New York LaGuardia to Charlotte successfully
ditchedtheircrippledaircraftintheHudsonRiver.All155passengersandcrewsurvived.USAirways
was awarded and began yearround service from its Charlotte hub to Rio de Janeiro, resumed its
CharlottetoParisserviceandbeganservicefromCharlottetoRome.Alsoin2009,theairlinebegan
nonstopflightsfromPhiladelphiatoTelAvivandfromPhoenixtoMontegoBay.Duringtheyear,the
airline entered into codeshare agreements with Qatar Airways, ANA and TACA. The airline
introduceditsPowerNapSackpillowandblanketkitsandreinstatedcomplimentarynonalcoholic
beverages in flight. US Airways also reintroduced complimentary house wine and beer in the US
Airways Clubs and announced free WiFi. The airline also announced the ability to prepay for
checked bags online. During the third quarter US Airways unveiled its newest transatlantic, lieflat
business class cabin, the Envoy Suite.In the third quarter US Airways announced an airport slot
transaction with Delta Airlines. Upon regulatory approval, US Airways will obtain 42 pairs of slots
(round trip flights) at Washington Reagan and will acquire the rights to expand to Sao Paulo and
Tokyo.USAirwayswilltransfertoDelta125pairsofslotsusedtoprovideUSAirwaysExpressservice
at New York LaGuardia. US Airways also announced that, once the transaction is complete, the
airline would provide service to 15 new destinations from Washington Reagan. The airline
announced that the transaction is expected to improve profitability by more than $75 million
annually. In October, US Airways announced a strategic plan to strengthen its core network by
realigningitsoperationalfocusonitshubsinCharlotte,PhiladelphiaandPhoenixanditsfocuscity
Washington,DC.Thesefourcities,aswellastheairlineshourlyShuttleservicebetweenNewYork
LaGuardia,BostonandWashingtonReaganwillserveasthecornerstoneoftheairlinesnetworkand
willpresent99percentoftheairlinesavailableseatmiles,comparedtothe93percentin2009,by
theendof2010.TheairlinecompletedamajorliquidityimprovementplaninNovember,reducing
capital spending and deferring certain debt repayments, which improved the projected yearend
2009liquiditybyapproximately$150millionandwouldgenerate,inaggregate,approximately$450
millionofprojectedliquidityimprovementsbytheendof2010.
Source:USAirwaysWebsite

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Table19.10USAirwaysthreeyearshighlightdata

YE2009 YE2008 YE2007

Domesticrevenuepassengermiles(RPM)(MilUSD)1/ 43,449 47,040 31,997

Domesticpassengers(000) 44,515 48,504 37,194
Domesticmarketshare2/(%) 8.06 8.28 5.40
Source:
The office of the assistant secretary for research and technology (ostr). (2015). US Department of Transportations Bureau of Transportation Statistics
(BTS).Retrieved2Octoberr,2015,fromhttp://www.transtats.bts.gov/carriers.asp?pn=1
Remark:
1/RevenuePassengerMiles
2/Marketsharebasedonrevenuepassengermiles

Table19.11USAirwaystopdomesticmarkets*

YE2009 YE2008 YE2007

Market Passengers Market Passengers Market Passengers Market
(Mil) Share** (Mil) Share** (Mil) Share**
Charlotte,NC 8.77 54.86% 8.94 55.27% 8.44 54.38%
Phoenix,AZ 6.66 37.22% 6.96 37.23% 2.43 12.22%
Philadelphia,PA 4.61 35.08% 4.78 34.74% 4.71 33.97%
LasVegas,NV 2.21 12.16% 3.22 16.39%
Washington,DC 1.90 11.47% 2.16 12.72% 2.27 12.71%
Boston,MA 1.67 14.07%
Other 20.37 3.80% 22.48 3.97% 17.68 2.95%
Remark
*Basedontotalenplanedpassengersatallairportsinacity.
**Thetableshowsthecarrier'sshareineachofthemarkets.

b) Futureobjectives
VisionandMission:MissionStatementsandVisionStatementsarewrittenforcustomersand
employees of corporations. A Mission Statement can be defined as a sentence or short
paragraphwrittenbyacompanyorbusinesswhichreflectsitscorepurpose,identity,values
and principle business aims. The definition for a Vision Statement is a sentence or short
paragraphprovidingabroad,aspirationimageofthefuture.

204

 USAirwaysCustomerServiceStatement:CustomerservicehasalwaysbeenapriorityatUS
Airways, and we are committed to making every flight count for our valued customers.
Ourpromise to you: The safety and satisfaction ofour customers is a top priority for our
airline.Customersfirstaretheresultofajointeffortoftheairlineindustry,theUSCongress,
and the US Department of Transportation to address the key service elements that affect
ourcustomers.
Source:http://www.makingafortune.biz/listofcompaniesu/usairwaysgroup.htm

Objectives
o In October 2009, US announced the realignment of operations to focus on core network
strengths,whichincludeourhubsinCharlotte,PhiladelphiaandPhoenixandourfocuscity
at Washington National Airport. These four cities, as well as US popular hourly Shuttle
service between LaGuardia, Boston and Washington National airports, will serve as the
cornerstoneofnetworkandbytheendof2010areexpectedtorepresent99%ofourASMs
(availableseatmiles)versusapproximately93%in2009.
o In first half year 2010, reducing job 1,000 positions will reduce cost for eliminating
unprofitableflyingandbebetterpositionedtoreturnUSAirwaystoprofitability.
o US agreed with Barclays Bank Delaware, company cobranded credit card provider, to
permanently lower the monthly unrestricted cash condition precedent for the advance
purchaseof frequentflyer miles anddefer for 14months the amortizationof $200 million
advanced in connection with the previous purchase of miles. In the aggregate, these
transactions improved yearend 2009 liquidity by approximately $150 million and will
generate approximately $450 million of projected liquidity improvements by the end of
2010.
Source:USAirwaysAnnualReport2009

c) USAirwaysbelieveabouttheindustry(Assumptions)
USAirwaysbelievethatthemarketsarehighlycompetitive.Pricecompetitionoccurson
amarketbymarketbasisthroughpricediscounts,changesinpricingstructures,farematching,
target promotions and frequent flyer initiatives. Airlines typically use discount fares and other
promotionstostimulatetrafficduringnormallyslacktravelperiods,orwhentheybeginserviceto
new cities or have excess capacity, to generate cash flow and maximize revenue per ASM and to
establish, increase or preserve market share. Discount and promotional fares are generally non
refundableandmaybesubjecttovariousrestrictionssuchasminimumstayrequirements,advance
ticketing, limited seating and change fees. In addition to price competition, airlines compete for
market share by increasing the size of their route system and the number of markets they serve.

205

Airlineswithinternationaloperationsarelessexposedtodomesticeconomicconditionsandmaybe
abletooffsetlessprofitabledomesticfareswithmoreprofitableinternationalfares.
Source:USAirwaysAnnualReport2009

d) USAirwayscurrentstrategies
Functionallevelstrategy
US Airways formulate company functional level strategy to achieve superior
responsivenesstocustomers,andquality;
US have an established East Coast route network, including the US Airways Shuttle service,
withasubstantialpresenceatWashingtonNationalAirport.
Frequent Traveler Program allows participants to earn mileage credits for eachpaid flight
segmentonUSAirways,StarAlliancecarriersandcertainotherairlinesthatparticipateinthe
program.
InOctober2009,companyannouncedtherealignmentofoperationstofocusoncorenetwork
strengths, which include hubs in Charlotte, Philadelphia and Phoenix and focus city at
Washington National Airport. These four cities, as well as popular hourly Shuttle service
betweenLaGuardia,BostonandWashingtonNationalairports,willserveasthecornerstoneof
networkandbytheendof2010areexpectedtorepresent99%ofASMsversusapproximately
93%in2009.
US Airways continued strong operational performance. In year 2009 ontime performance
ratewas80.9%andrankedsecondamongthebigfivehubandspokecarriersasmeasuredby
the DOT Air Travel Consumer Report. Flight mishandled baggage ratio for 2009 improved
36.5%ascomparedto2008.Our2009mishandledbaggageratioof3.03alsorankedsecond
among the big five hubandspoke carriers as measured by the DOTAir Travel Consumer
Report. The combination of continued strong ontime performance and fewer mishandled
bags contributed to 34.8% fewer reported customer complaints to the DOT in 2009 as
comparedto2008.
USAirwaysisamemberoftheStarAlliance,theworldslargestairlinealliance,whichnowhas
26memberairlinesservingapproximately1,077destinationsin175countries.Membershipin
theStarAlliancefurtherenhancesthevalueofourdomesticandinternationalroutenetwork
by allowing customers wide access to the global marketplace. Expanded benefits for
customersincludenetworkexpansion,frequentflyerprogrambenefits,airportloungeaccess,
convenient singleticket pricing with electronic tickets, onestop checkin and coordinated
baggagehandling.
Source:USAirwaysAnnualReport2009

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 Businesslevelstrategy
USAirwaysbusinesslevelstrategyisfocusdifferentiationstrategy.
US Airways have hubs in Charlotte, Philadelphia and Phoenix and a focus city at Ronald
Reagan Washington National Airport. US offers scheduled passenger service on more than
3,000 flights daily to more than 190 communities in the United States, Canada, Mexico,
Europe,theMiddleEast,theCaribbean,CentralandSouthAmerica.UShaveanestablished
East Coast route networks, including the US Airways Shuttle service, with a substantial
presenceatWashingtonNationalAirport.
US mainline operation provided regularly scheduled service or seasonal service at 138
airports while the US Airways Express network served 152 airports in the United States,
Canada and Mexico, including 75 airports also served by mainline operation. US Airways
Expressaircarriershadapproximately27millionpassengersboardingtheirplanesin2009.
As of December 31, 2009, US operated 349 mainline jets and are supported by regional
airline subsidiaries and affiliates operating as US Airways Express either under capacity
purchase or prorate agreements, which operated approximately236 regional jets and 60
turboprops.
USAirwaysoperateasignificantnumberofflightsintheeasternUnitedStates,averagetrip
distance, or stage length, is shorter than other major airlines. This makes US more
susceptible than other major airlines to competition from surface transportation such as
automobiles and trains. Surface competition can be more significant during economic
downturnswhenconsumerscutbackondiscretionaryspending.
Source:USAirwaysAnnualReport2009

Corporatelevelstrategy
US Airways corporate level strategy is horizontal growth concentration strategy. The
company strategy of the firm is focused to achieve competitive advantages by mergers and
acquisition with other airlines since US airways was All American Aviation. US Airways started 1st
mergeinyear1968andstillmergedoverthetime.
Source:USAirwayswebsite

Figure19.6:MajorUSAirlinemergers
Source:http://aviationweek.com/sitefiles/aviationweek.com/files/uploads/2015/02/us%20major%20airlines%20merger%20chart%20pic%20REV%20B.jpeg

207

e) USAirwayscapabilities
Strengths
US is second of top ranked ontime performance rate was 80.9% among the big five hub
andspokecarriersasmeasuredbytheDOTAirTravelConsumerReport.
USmishandledbaggageratiofor2009improved36.5%ascomparedto2008.Inyear2009,
mishandled baggage ratio of 3.03 also ranked second among the big five hubandspoke
carriersasmeasuredbytheDOTAirTravelConsumerReport.
Lowrateofcustomercomplaints,inrange1.3%to2%per100,000passengers
USAirwaysisamemberoftheStarAlliance,theworldslargestairlinealliance,whichnow
has 26 member airlines serving approximately 1,077 destinations in 175 countries.
Membership in the Star Alliance further enhances the value of domestic and international
routenetworkbyallowingcustomerswideaccesstotheglobalmarketplace.
USAirwaysoperateoncorenetworkstrengthhubsincludinghubsinCharlotte,Philadelphia
andPhoenixandfocuscityatWashingtonNationalAirport.
Weaknesses
US Airways faced bankruptcy since September 27, 2005. US Airways have to formulate
conservativecoststructureandtightfinancialpolicy.
US Passengers can book tickets for travel on US Airways through online travel agent sites
(e.g.,Orbitz,Travelocity,Expediaandothers),traditionaltravelagents,reservationscenters
and airline ticket offices. Traditional travel agencies use Global Distribution Systems
(GDSs), such as Sabre Travel Network, to obtain their fare and inventory data from

airlines.Bookingsmadethroughthese agenciesresultinafee,referredtoasaGDSfee,
thatischargedtotheairline.Allticketsbookingbecame37%ofUSAirwayssales
HighcostofmaintenancebecauseUSAirwayshavevarietyofaircrafttype

Source:USAirwaysAnnualReport2009

208

 Routenetwork

Figure19.7:USAirwaysdomesticroutenetwork
Source:http://cdn.thepointsguy.com/wpcontent/uploads/2013/02/DomesticRoutes.png?c22584

f) USAirwaysresponseinthefuture
USAirwayshaveoftenelectedtomatchdiscountorpromotionalfaresinitiatedbyother
aircarriersincertainmarketsinordertocompeteinmarkets.Mostairlineswillquicklymatchprice
reductionsinaparticularmarket.USAirwaysabilitytocompeteonthebasisofpriceislimitedby
fixed costs and depends on ability to maintain our operating costs. Some of competitors have
greaterfinancialresourcesand/orlowercoststructuresthanUSdo.Inaddition,recentyearshave
seentheentranceandgrowthoflowfare,lowcostcompetitorsinmanyofthemarketsinwhichUS
operate. These competitors include Southwest, AirTran, JetBlue, Allegiant, Frontier and Virgin
America. These low cost carriers generally have lower cost structures than US Airways.US Airways
alsocompeteonthebasisofscheduling(frequencyandflighttimes),availabilityofnonstopflights,
ontime performance, type of equipment, cabin configuration, amenities provided to passengers,
frequent flyer programs, the automation of travel agent reservation systems, onboard products,
markets served and other services. US Airways compete with both major full service airlines and
lowcostairlinesthroughoutUSnetwork.Additionally,becauseUSoperateasignificantnumberof
flightsintheeasternUnitedStates,USaveragetripdistance,orstagelength,isshorterthanthoseof
othermajorairlines.ThismakesUSmoresusceptiblethanothermajorairlinestocompetitionfrom
surfacetransportationsuchasautomobilesandtrains.Surfacecompetitioncanbemoresignificant
duringeconomicdownturns.
Source:USAirwaysAnnualReport2009

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g) Prepare BCG Growth Share Matrix to show the competitive position of the company versus
competitorsforthepresentyear.
ToseebigpictureofcompetitivepositionfromBCGgrowthsharematrixcanmentionin
competitivepositionandbusinessgrowthrate.WhencalculateSouthwestAirlinesandcompetitors
inyear2009theresultasfollowing;
In year 2009, to find out Relative Competitive Position (RCP), the information as
following;
The highest revenue airlines in 2009 was American Airlines, however the highest
revenuewillcomparewiththesecondrankforrevenuewasSouthwestAirlines.
BusinessgrowthratecancalculatebyusingCompoundAnnualGrowthRate(CAGR)

Source:investopediawebsite

DomesticRevenue
Airlines PassengerMiles(MilUSD) RCP(time) CAGR
YE2008 YE2009
(56,672/60,853)1=
DeltaAirlines 60,853 56,672 56,672/74,967=0.76
6.87%
(22,833/24,149)1=
JetBlueAirways 24,149 22,833 22,833/74,967=0.30
5.45%
(74,967/81,516)1=
AmericanAirlines 81,516 74,967 74,967/74,462=1.01
8.03%
(74,462/73,498)1=
SouthwestAirlines 73,498 74,462 74,462/74,967=0.99
1.31%
(56,719/62,273)1=
UnitedAirlines 62,273 56,719 56,719/74,967=0.76
8.92%
(43,449/47,040)1=
USAirways 47,040 43,449 10,458/74,967=0.58
7.63%
Table19.12:RCPandCAGRCalculationdetail

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Fromtheabovecalculation,BCGgrowthsharematrixasfollowingfigure;

Figure19.8:Year2009BCGgrowthsharematrix
Fromfigure19.8whichshowstherecentyearcompetitionpositionofeachairline,most
airlinestillinthedogareabecauseinyear2009theUSeconomicwasbecomerecession,thevery
weakdemandofdomesticairlines,highandvolatilefuelprices,mostairlinesrevenuegrowthminus
whileonlySouthwestAirlinesstillbepositive.

211

h.)DrawatabletocompareFutureObjectives,Assumptions,CurrentStrategies,CapabilitiesandFuturesResponsesforeachcompetitor.Canyouobserve
anyopportunitiesandthreat?

SouthwestAirlines JetBlueAirways AmericanAirlines DeltaAirLines UnitedAirlines USAirways

Future TobecometheWorld's TobecomeAmericasFavorite Tobecomethelargest Tobetheworldsgreatest TobetheWorldsnumber Customerservicehas
Objectives MostLoved,MostFlown, Airlineforouremployees airlineintheworld airline onechoiceforairlinetravel alwaysbeenapriorityat
andMostProfitable (whomwerefertoasCrew USAirways,and
Airline. members),customers,and committedtomaking
shareholders. everyflightcountfor
companyvalued
customers
Assumption Mainlyfocusonoperating Lowerfaresandincreased Mostmajorcarriershave Lowcostcarrierscreate Highcompetitiondueto Marketsarehighly
efficiencywithreliability. lowcostairlinecapacity developedhubandspoke competitivepressureinthe Domesticpricingdecisions competitive.Price
SWAcansurviveifthe createdanunprofitable systemsandschedule UnitedStatesandonother arelargelyaffectedbythe competitionoccursona
companyhasstrong operatingenvironmentfor patternsinaneffortto networkcarriersinthe needtobecompetitivewith marketbymarketbasis
culture.Highrelation thetraditionalnetwork maximizetherevenue domesticmarket. U.S.airlines throughpricediscounts,
coordination.Simple airlines.WhileJetBluecosts potentialoftheirservice Competitivecoststructure changesinpricing
workpractice.Served remainlowerthanthoseof isthemaincompetitive structures,fare
highservicewithlowfare largestcompetitors,the competency matching,target
canbesurvivedinthe differenceinthecost promotionsand
market. structuresandthe frequentflyerinitiatives
competitiveadvantage
previouslyenjoyedbylow
costairlineshasdiminished.

212

 SouthwestAirlines JetBlueAirways AmericanAirlines DeltaAirLines UnitedAirlines USAirways

Current Functionallevelstrategies Functionallevelstrategies; Functionallevelstrategies; Functionallevelstrategies; Functionallevelstrategies; Functionallevel
Strategies Customerresponsiveness Customerresponsiveness Customerresponsiveness Customerresponsiveness Customerresponsiveness/ strategies;
Lowcostfare,nofrills Provideservicetocustomers Mustdelivervaluefor Multipledomesticregional Quality Customerresponsiveness
Highflightturnover overtheirexpectation(e.g. everycustomerand airtoservepassengers NewInternational /Quality
Lowrateofdelayedflight leatherseat,beverage, differentiateairline primarilyinsmalland premiumcabinscompleted EstablishedEastCoast
Quality snacks,customerbillofright) Networksalignment mediumsizedcities on747and767fleet routenetwork,including
Friendlycabincrews Quality aroundcornerstonehubsof Efficiency Upgradefirstandbusiness theUSAirwaysShuttle
Highrateontimeflight Completemostflight, DFW,Chicago,Miami,New Reduceddomesticand classwithpremium service,withasubstantial
Efficiency providewiderseatto York,andLosAngeles internationalcapacityto equipment presenceatWashington
Equipmentandaircraft passenger Quality bettermatchcapacitywith Focustorunontimewith NationalAirport.
purchasefromBoeing Efficiency Havefleetrenewal,facility demand. cleanplanes USAirwayscontinued
Havefuelhedgingto Controlthecostbyhigh renovations,andupgrades Strengthenbalancesheet Efficiency strongoperational
diversifyfuelpricerisk. utilizationofaircraft,online totechnologyinfrastructure byfocusingoncost Downgaugedsupplyto performance,highon
Noconnectingflight ticket,automatetask Createandmaintaina disciplineandcashflow matchdemand timerate,low
Maximizeaircraft employeetoachieveeffective goodplacetoworkand generation. Movedcapacityfrom mishandledbagrates
turnover efficiency. buildacareer underperformingmarkets Staralliancenetworkto
Minimizedturnaround Efficiency tostartservicestonew providedestinations
time Investcarefullyandgain marketsinEurope,Middle aroundtheworld
profitinlongterm EastandAfrica
Findthewaytoreducecost
whileoperatemore
efficiency

213

 SouthwestAirlines JetBlueAirways AmericanAirlines DeltaAirLines UnitedAirlines USAirways

Current Businesslevelstrategies; Businesslevelstrategies; Businesslevelstrategies; Businesslevelstrategies; Businesslevelstrategies; Businesslevelstrategies;
Strategies Costleadershipstrategy Boarddifferentiationstrategy Differentiationstrategy Differentiationstrategy Boarddifferentiation Focusdifferentiation
Companymainlyfocuses Focusoncostleadership; Superiornetworkamong Enteredintoamarketing strategy strategy
onlowercostoperation onlytwotypesofaircraft,fuel U.S.airlines,52percentof alliancewithAlaskaand Unitedhasanumberof USmainlineoperation
toachievecostleadership efficientfleet thedomesticnon Horizontoprovideformore bilateralandmultilateral providedregularly
ascompetitiveadvantage Tofocusondifferentiation; connectingtrafficinthetop extensivecooperationwith allianceswithotherairlines, scheduledserviceor
overthecompetitors. luxuryseatequipped,have 10U.S.cities respecttowestcoast whichenhancetravel seasonalserviceat138
Companyfocusoncost vacationpackagesale,only Developingnew presence optionsforcustomers airportswhiletheUS
tobringupefficiencynot onemajorairlineprovide partnershipstoexpand LaunchedSkyMiles seekingaccesstomarkets AirwaysExpressnetwork
cuttingthecost. customerbenefit. accesstoconvenientand programwhichoffer thatUniteddoesnotserve served152airportsinthe
dependabletraveloptions. incentivestocustomersto directly UnitedStates,Canada
increasetravelonDelta Developcompanywebsite andMexico
toenhancecustomer USAirwaysoperatea
utilization significantnumberof
JoinedwithContinentalas flightsintheeastern
addedmorenew UnitedStates,average
destinationsandenhance tripdistance,orstage
companymarket length,isshorterthan
othermajorairlines.

214

 SouthwestAirlines JetBlueAirways AmericanAirlines DeltaAirLines UnitedAirlines USAirways

Current Corporatelevelstrategies; Corporatelevelstrategies; Corporatelevelstrategies; Corporatelevelstrategies; Corporatelevelstrategies; Corporatelevel
Strategies Marketpenetration Marketpenetrationintensive Marketpenetration Horizontalgrowth Horizontalgrowth strategies;
intensivegrowth growthconcentration intensivegrowth concentrationstrategy concentrationstrategy Horizontalgrowth
concentrationstrategy; strategy;JetBlueenhanceto concentrationstrategy; Northwestmergerbetter Unitedhasanumberof concentrationstrategy
SWApenetratemarketto advertiseandpromotionon Establishedthe positionsDeltaAirLinesto bilateralandmultilateral Firmisfocusedtoachieve
underservedmarketby differentmarketing AAdventagefrequentflyer managethrougheconomic allianceswithotherairlines competitiveadvantages
usingcompanylow communicationtoenhance programtodevelop cyclesandvolatilefuel toenhancecustomers bymergersand
operatingcostas brandawareness passengerloyalty prices,investinfleet, needs acquisitionwithother
advantagetogenerate improveservicesfor MergedwithContinental airlines.
newdemandin customersandachieve inyear2010tohavelarger
underservedroute. companystrategic scaleofcapabilities
objectives.
Capabilities Strengths Strengths Strengths Strengths Strengths Strengths
Employeesattitudeis Companyculturethat Operateinfiveprimary Deltaroutenetworkin Basedonannualflights USissecondoftop
positiveandbeonthe provideproductiveworkforce domesticmarkets majordomesticmarket Unitedisoneofthelargest rankedontime
samedirectionofcompany Thelargestcarrierat Strengthnetwork, Deltahasbilateraland internationalcarriersbased performancerate
culture BostonsLoganInternational combinedwiththeglobal multilateralmarketing intheUnitedStates.(3.300 Staralliancemember,
Highemployeeloyalty Airport reachtheairlinehasvia allianceswithforeign flights/day) theworldslargestairline
Brandimageispositively Thelargestshareholder oneworld airlinestoimprovethe FoundingmemberofStar alliance
easytorememberand (DeutscheLufthansaAG) companyaccessto alliance(theworldslargest USAirwaysoperateon
havepositivebrandimage. networkhelpstoprovide internationalmarkets. airlinenetwork) corenetworkstrength
Highefficiencyofcost moreservice highnetworkamongthe hubsincludinghubsin
controltoachievelow Highliquidity(over$1billion domesticcarriertoprovide Charlotte,Philadelphia
operatingcostsas cash) flightinsmallandmedium andPhoenixandfocus
competitiveadvantage Lowcoststructure(low sizecities. cityatWashington
maintenance,youngfleet) NationalAirport.

215

 SouthwestAirlines JetBlueAirways AmericanAirlines DeltaAirLines UnitedAirlines USAirways

Capabilities Weakness. Weaknesses Weaknesses Weaknesses Weaknesses Weaknesses
Aircraftsupplieronly Highlydependentonthe Laborcostarehigherthan Canhavelaborstrike Companysbusinessrelies USAirwaysfaced
oneisBoeing,highly NewYorkmetropolitan competitors Operationmostlybasedon extensivelyonthirdparty bankruptcysince
dependonBoeinginterm market Highcostofborrowingdue Atlanta providers. September27,2005.US
ofequipmentandaircraft tolowerratingofparent Lossinfinancial Airwayshaveto
Limitedservicefor company performance2years formulateconservative
internationalroute Lowmarginfromlowfare continuously coststructureandtight
Baseonsecondary withhighcoststructure Unitedhasvarietyfleets financialpolicy.
airportwhichhaveless whichgeneratedhigh USAirwaysfaced
facilities. maintenanceexpense bankruptcysince
September27,2005.US
Airwayshaveto
formulateconservative
coststructureandtight
financialpolicy.
Future SWAmainlyfocusonlow JetBluecompetitivefares, FormulateFlightPlan2020 Deltaimplementjoint Improveprogramsto Electedtomatch
Responses costascompetitive highqualityproductand toachievesustainableprofit venturewithinternational enhancethedeliveryofits discountorpromotional
advantageandto outstandingcustomerservice byenhancecustomer airlines,andexpandalliance servicestoitscustomers, faresinitiatedbyother
maintaincompanyculture createtheoverallJetBlue royalty,strengthcompany agreementwiththeUS reduceitscostsand aircarriersincertain
tomaintainthehighly ExperiencethatJetBlue network,investcarefully, carriers increaseitsrevenues. marketsinorderto
positiveattitudestaffsto believeisuniqueinthe effectivelyserving MergedwithNorthwest Focusoncostsaving competeinmarkets
performefficiency domesticairlineindustry companysstakeholders. Airlines Streamlinedoperations Competeonwith
performance Investhighamountto andcorporatefunctionsin performbetterservice
increaseefficiencyand ordertomatchthesizeof providingtopassengers
enhancecustomer itsworkforcetothereduced
satisfaction sizeofitsoperations

216

WhenanalyzeSWAcompetitors,thereareseveralopportunitiesandthreatsforSWA.
Threat;
T9MostthemajorUSAairlines(hubandspoke)arememberofairlinealliance;theycanprovide
moredestinationsandcanpenetratetheinternationalmarketmorethanSWA.
T10Thecompetitorsoperatetheiroperationinmajordomesticairports,whichhavehightrafficand,
higheramountofpassengers.
T 11 The competitors tend to formulate strategy by focusing on cost control, in the future
competitiveadvantageofSWAfromlowercostthancompetitorswillbediminished.

217

20.) What does the market analysis reveal you about the
industrys customer? Can you identify any opportunity and
threat?
a.) Target Market
Targetmarketforairlineindustryistypicallyseparatedintotwomajorsegmentsbased
onthegeographicalareasofdestinationi.e.,1)Domesticflightand2)Internationalflight.

IntheUS,demandfordomesticflightisconsideredhighduetoitsvastareaswhich
requireverylonghoursiftravellingtoothercitiesbycar.Lowcostcarriers(LCC)likeSouthwest
AirlinesorJetblueAirways,etc.grabanopportunityfromthetargetcustomerswhoaretiringof
spendinglonghoursonacarbyofferingfaresthatarecompetitivewithtravellingbyautomobile.

SouthwestAirlinesoperatesitsbusinessinthedomesticflightsegmentwhichthetarget
marketscanbeidentifiedintwogroupsasfollows:

1) Businesstraveler:Groupofcustomerswhotravelforbusinesspurposes.Factors
thataretakenintoconsiderationwhentravelingforbusinessisthereliabilityand
flexibilityoftheflight.Thebusinessgroupofcustomersgenerallytravelsduring
businessdaysandprefersairlinesthatprovideflexiblescheduleandroutesand,
aboveall,ontimeflightswithlessconcerningonpricefactors.
2) Leisuretraveler:Customerswhotravelforpurposesotherthanbusiness,e.g.
holidays,homevisit,etc.Leisuretravelersaremoresensitivetoprice.Theynormally
searchforpricesofeachserviceprovidersontheinternetandprefertoselectthe
onethatoffersthemostcompetitiveprices.

b.) Degree of Penetration

A continuous investment by LCCs in various marketing and promotional campaigns including
competitive price offering resulted in a continuous growth in terms of revenue and market share
comparedtofullservicecarriers(FSC).TheDomesticRevenuePassengermilesoftopthreeLCC
andFSCintheUSbetween2003and2009areshowninTable20.1below.BasedontheDomestic
RevenuePassengermilesinformationin20.1,themarketshareofLCCwasonanupwarddirection
whilethemarketshareofFSCwasontheoppositetrendwhichcouldbeimpliedthattheLCChad
takenthemarketshareofFSCovertheperiodbetween2003and2009.

218

 Table20.1:SummaryofDomesticRevenuePassengermilesofLCCsandFSCsintheU.S.between2003and2009

Unit:millionUS$
AllU.S. Lowcostcarriers Fullservicecarriers
and
Year Total LCC Total FSC American Others
foreign Southwest Jetblue AirTran Others Delta United Others
carriers LCC % FSC % Airlines
2003 494,172 101,373 20.5 47,948 11,520 7,090 34,815 249,030 50.4 68,002 82,987 65,677 32,364 143,769
2004 544,573 117,822 21.6 53,424 15,553 8,408 40,437 266,235 48.9 73,022 86,508 71,284 35,421 160,516
2005 570,855 135,795 23.8 60,229 19,910 11,214 44,442 268,988 47.1 75,388 89,837 67,045 36,718 166,070
2006 576,445 152,179 26.4 67,698 22,805 13,750 47,926 258,371 44.8 65,016 88,932 69,491 34,932 165,897
2007 594,606 168,815 28.4 72,325 24,620 17,212 54,658 259,855 43.7 64,009 87,849 68,177 39,820 165,937
2008 570,149 173,271 30.4 73,498 24,149 16,198 56,883 258,497 45.3 60,853 81,516 62,273 53,855 138,382
2009 540,615 173,756 32.1 74,462 22,833 16,392 58,152 238,391 44.1 56,672 74,967 56,719 50,033 95,630

Source:OfficeoftheAssistantSecretaryforResearchandTechnology,BureauofTransportationStatistics.UnitedStatesDepartmentofTransportation

219

 Table20.2:SummaryofDomesticRevenuePassengermilesofSouthwestAirlinesinand
MarketSharebasedonDomesticRevenuePassengermilebetween2003and2009

Unit:millionUS$
SouthwestAirlines
AllU.S.andforeign DomesticRevenue
Year Marketshare
carriers Passengermiles
(%)
(MillionUS$)
2003 494,172 47,948 9.7
2004 544,573 53,424 9.8
2005 570,855 60,229 10.5
2006 576,445 67,698 11.7
2007 594,606 72,325 12.2
2008 570,149 73,498 12.9
2009 540,615 74,462 13.8
Source:OfficeoftheAssistantSecretaryforResearchandTechnology,BureauofTransportationStatistics.UnitedStates
DepartmentofTransportation

IfconsideringSouthwestAirlinesperformancesduring20032009alone,itcanbeseen
thatbothDomesticRevenuePassengermilesandmarketshareofSoutwestAirlineshadconstantly
beenonanupwardtrendthroughouttheperiodincludingtherecessionperiodin2009.Asaresult,
it can be considered that the degree of penetration for low cost carrier market and Southwest
Airlinesitselfareathighlevel.

(O14:Increasingdemandofdomesticflight)

220

c.) Customers Current Needs

Typically,thefactorsaffectingcustomersatisfactioninairlineindustrycouldincludethe
following:

Servicequality(e.g.checkin,boarding,inflightservices,etc.);
Promptnessandaccuracyofservice;
Price;and
Physicalevidences(e.g.aircraftandotherfacilities,etc.)
Degreeofinfluencesoftheabovefactorscouldbevariedbyeachtypeofcarrier(either
LCCorFSC).ForLCCcustomers,priceandpromptnessandaccuracyofservicearethekey
influencingfactors.Meanwhile,FSCcustomersgenerallyexpecthigherservicequality,fullfacilities
andaircraftingoodconditions,whichmatchthehigherpricestheypaid.

Basedonthesegmentationoftargetmarketin20(a)above,SouthwestAirlineshasbeenfocusingon
domestic flight customer which the target market can be further classified into two groups, i.e. 1)
Business traveler and 2) leisure traveler. For business traveler group, the customer tends to rely
more on promptness and accuracy of services including flexible and more option flight schedules
while less sensitive on price factors. Leisure traveler, on the other hand, relies more on air fare
prices. This group of customer normally searches for information on the internet or receives
informationfrompeersandfamiliesandselectstheserviceprovidersthatofferslowestpricewhile
concerninglessonservicesandfacilities.

d.) Customers Future Needs

Inthefuture,goodservicequality,basicfacilitieswouldbecomeabasicrequirementfor
all airline companies. Since the competition is expected to become higher intensive, airlines that
cannot meet the basic needs would be unable to compete in the market. In order to satisfy
customers future needs, the airlines should be seeking to diversify themselves by focusing on
adoptionofnewtechnologiesandapproachesintheareasashighlightedinTable20.3below.

221

Table20.3:Listoffutureneedsofcustomersinairlinesindustryandpossibleactionplan
Customersfutureneeds
Fewertimespentonqueuingupattheairport
Alternativechannelforairticketbookingand
customerloyaltyprogram
Stayconnectedwhiletravelingontheflight
Possibleactionplan
Implementationofautomaticboardinggate
whichinstallascannerthatreadNearField
Communication(NFC)signal.Passengerscan
simplytaptheirmobilephonewithNFCatthe
scannerthatwillreadandrecognizewhether
theintegratedcircuitboardingpassisvalidfor
theflight.Thiswouldhelpeliminatingthe
checkinprocess,especiallyfordomesticflight
thatdoesnotrequireapassport,andshorten
thetimespassengersspentattheairport.
(o15:Availabilityofwirelessinternetand
aviationtechnology)
Developmentofmobileapplicationswith
friendlyuserinterfacethatallowsusersto
comparepricesandschedules.Themobile
applicationshouldalsomaintaincustomers
personaldataforsimplifyingtheprocessinthe
nextbooking.Furthermore,theappshouldbe
abletoenablethecustomerstoaccessthe
loyaltyprogramstocheckthepoints/mileages
andredeemthebenefits.
(o15:Availabilityofwirelessinternetand
aviationtechnology)
BasedontheresearchofHoneywell,86%of
passengersintheU.S.saidthatinflight
connectivityshouldbeavailable.Business
travelersnormallyrequireinflightinternetto
stayconnecttotheirbusinesses.However,
leisuretravelersalsofeelthatinflightinternet
wouldgivemorefreedomtothemduringthe
flight.Honeywellssurceyresultshowsthat
73%ofpassengersintheU.S.thinkthatthey
usetheinflightbecausetheywanttodonot
anobligationtodo.
(o15:Availabilityofwirelessinternetand
aviationtechnology)
222

e.) Distribution Channels

Distributionchannelsforairticketbookingcanbecategorizedintwogroupsasfollows:

Directchannel
Directchannelallowstheairlinestoconnectwithcustomersdirectly.Thedirect
channelcouldbevariedfromatraditionalchannellikesellingviaairlinesoffice,
airportcounter,orcallcentertoauseofnewdirectchannelswhichhasbeen
growinginpopularitysuchasairlinewebsiteormobileapplication.Sincethe
intermediariesareeliminated,theintermediarycostsarealsodisabled.Asaresult,
airlinescanearnhigherprofitmarginsunderthedirectchannel.
BasedontheresearchofInternetWorldStat,239millionpeopleintheU.S.were
usinginternetduring20052010.Inaddition,thenumberofsmartphoneuserin
theU.S.hadbeenincreasingsignificantlyduringthesameperiod.In2005,only2%of
peopleintheU.S.ownedasmartphonewhilein2010thefigurehadbeenincreasing
to23%whichrepresentedasharpincreaseof1050%overthefiveyearperiod.
(o11:Increasingnumberofsmartphoneuser)
Indirectchannel
Insomecases,attractingcustomerstobuyairticketsfromairlinesdirectchannels
aremoredifficultthanpurchasingviaindirectchannel,especiallyonlinebooking
agent,e.g.Expedia,Priceline,etc.asitisfairlyhardtocomparethepriceswith
competitorsinanairlinesofficialwebsite.Inmostcases,theonlinetravelagentoffer
theticketpricesatacheaperpricethanthosepricesquoteonacompanysofficial
websiteinordertoattractcustomers.Someoftheonlinetravelagentsprovide
customerswithanopportunitytocustomizetheirownflight.Byusingtheonline
intermediaries,SouthwestAirlinescanspendfewerbudgetsonsaleactivities.

(O12:Availabilityofonlinetravelagencyandpackagediscounts)

Figure20.1belowpresentsthemostpopularairlinewebsitesandtravelwebsitesinthe
U.Sin2010

223

 Figure20.1themostpopularairlinewebsitesandtravelwebsitesintheU.Sin2010

Source:Hitwise,basedonsearchesfortheweekofJune26,2010.

f.) Channel Markups

1)Directchannel

Southwest can get more markup and offer more promotions through direct booking
channelasitcancommunicatewithcustomersdirectlywithoutintermediaries.

2)Indirectchannel

For indirect channel, the online travel agency, in addition to the direct channel like
officialwebsite,cangeneraterevenuestoLCC.Thetrafficofpopularonlinetravelagencysuchas
Expedia,Pricelineisverylargewhichcreatesmoreopportunitiesforairlinestoselltheirairtickets.

Generally, commission charged by online travel agency is relatively high. Figure 20.2
presentsthecostdistributionofairlinebusinessbysaleschannel.

224

 Figure20.2:CostDistributionofAirlineBusinessbySalesChannel

Source:JPMorgan,1999.

Sincetheonlinetravelagencychargesveryhighcommissionsforusingtheirdistribution
channel,itwouldbenecessaryfortheairlinestodevelopitsdirectchanneltoensurethattheprofits
areobtainedappropriatelyandnotleakingtotheintermediaries.Inthefuture,airlinescouldtryto
cuttheintermediariesorminimizetheirbargainingpowerbychargingadditionalfeetocustomersif
theybooktheairticketviaotherindirectchannel.

(t8:Highbargainingpowerofsuppliers)

g.) PriceSensitivity
BasedontheAirTravelDemandReport(IATA,2008),ingeneral,businesstravelersare
less sensitive to travel price changes than leisure travelers. One reason is that, due to business
reasons, business travelers are less likely to postpone or cancel their travel than leisure travelers.
Eventhough,insomeothercases,acompanymaytrytoeliminatethebusinesstravelcostsifthe
economy or the business itself is in a decline stage, the degree of price sensitivity for business
travelersisstillconsideredlowerthanleisuretravelers.

Another factor to be considered is shorthaul routes versus longhaul routes. If

comparing between shorthaul and longhaul travel, the price sensitivity on shorthaul routes are

225

higherthanonlonghaultravels.Forexample,ifthepriceofshorthaulflightgoesupsignificantly,
customersmaychoosetotravelbyothermodeoftransportation(e.g.byrailorcar)thatoffermore
economicalprices.

h.) Current Trends

Revenue,expenseandprofitstrend

TrendofrevenuegrowthintheU.S.airlineindustryhasbeenonanupwarddirection
untiltherecessionin2009whichresultedinadramaticdeclineinrevenueofairlinecompanies.

Anincreasinginfuelpriceswillalsobeathreatforairlineindustryasthefuelisoneof
themajorexpensesforairlinebusiness.In2008,fuelwasthelargestsinglecostitemfortheglobal
airlineindustryasitrepresentedapproximately32.3%oftheoperatingcostwhilethefigurewas
27.4%in2007.

Sincethecosthasbeenincreasingwhilethecompetitionstillputpressureontheairline
companiestobeunabletoincreasepricestoreflecttherealcost.Asaresult,profitsgenerated
amongtheairlineindustryarestillnothigh.

Futuregrowth

Agrowingpopularityofusinginternetviamobiledevicesprovidesairlinecompaniesan
opportunitytoconnectwiththecustomerseasier.Onlineairticklebookingwouldturnto
companysownwebsitewhichwouldhelpdecreasingintermediarycostsandincreasingprofits.The
intermediarieswouldthenfocusmoreonattractingcustomersbyofferingtotalpackageswhich
givescustomermorevalueforthetripasawhole.

226

21.) Carry out the internal environment analysis to discover the

strengths and weaknesses
a.) Resources
a1)Tangibleresources

Physicalresources
SouthwestAirlineshasbeenusingonlyonemodelofaircraft,i.e.Boeing737sin
providingtheservicestocustomers.AuseofsinglemodelaircraftbenefitsSouthwestAirlinesin
keepingthecostintermsofmaintenance,inventoryholding,andhumanresourcetraining,atalow
level.

SouthwestAirlinesalsochangedalltheseatcovertoleathercover.Anadvantageof
leatheroverothertypeofmaterialsisthatitismoredurableandrequiresfewermaintenanceand
care.However,costofleatheritselfisconsideredhighwhich,therefore,theinitialinvestmentis
high.

Financialresources
ThefinancialpolicyofSouthwestisrelativelyconservative.SouthwestAirlinesfocuses
ontheprofitswhilemaintaininglowdebtsandlowinterestexpenses.Duringtherecessionand
declinestageofairlineindustry,SouthwestAirlineswastheonlyairlineintheU.S.thatstill
generatedprofitsandachievedpositiveROIC.SouthwestAirlines,therefore,hasaverystrong
financialpositions.

Moreover,SouthwestAirlinestriedtoalleviatetheeffectfromfuelpricefluctuationby
enteringintofuelpricehedging.SouthwestAirlineswasoneofthefirstcompaniesthatenteredinto
thefuelpricehedging.

Technologicalresources
SouthwestAirlinesalwaysadoptednewtechnologiestoimprovetheservice
performances.

SouthwestAirlineswasamongthefirstairlinesthatintroducedticketlesssystemto
eliminatetheticketingprocesswhichhelpreducinglaborandpapercosts
Adoptiontolatestsoftwaretomanagetheairlinesdatabaseandinformationsystem,
i.e.flightschedule,forbetterefficiency
Amongthefirstairlinethatusedwinglettoimprovetheaircraftefficiencyandreduce
thefuelconsumption.

227

a2)Intangibleresources

Humanresourcesandcorporateculture
Southwestisknownforitsreputationinvaluingthehumanresources.

Startingfromtherecruitment,thecandidateswillbescreenedandinterviewedby
takingtheattitudetowardstheworksandpersonalityintoconsideration.Southwest
Airlinesselectstheemployeeswhohavepositiveattitudewithsenseofhumorsand
socializedpersonalitieswhichwouldmakethemhappytoprovideservicestothe
customers.Aselectionofrightpersonsfromthebeginningisoneofthefactorsthat
makeSouthwestAirlineshasthelowestemployeeturnoverrateintheindustry.
SouthwestAirlinesprovidestrainingtoallemployeesateverylevelatitsown
SouthwestUniversityofPeopletoensurethatitsemployeeshassufficientskillsin
providingservicesandalsosharethesameculture.
EmployeesatSouthwestAirlinesareeligibletoperformcrossfunctionalworkswhich
createacultureofhelpingeachotheratthecompany.
TopmanagementofSouthwestAirlinesareeasyreachableandopenforfeedback
andsuggestions.ThishelpsSouthwestAirlinesreceivedideasforcontinuous
improvement.
Encouragethefunandsharingworkingenvironment.Employeesareencouragedto
haveanopendiscussionofproblemsandbrainstormforsolutionstothoseproblems.
Brandimage
SouthwestAirlineshasawellestablishedbrandimageastheleaderofLCCmarketin
theU.S.foralongperiod.
SouthwestAirlinesisknownforitslowpriceswhichisaffordableformostcustomers
intheU.S.marketandalsocompetitivecomparingwithothertransportationmode
whentakingtimefactorsintoconsideration.
SouthwestAirlineswasawardedTripleCrownAwardsinitsaccuracy.Inaddition,
SouthwestAirlinesalsowidelyrecognizedasoneoftheworldstopperformancein
termsofsafetyandreliabilitywhilereceivingthelowestcomplaintfromcustomers

228

b.) Capabilities and c.) Core competency

BelowisananalysisofeachcapabilityofSouthwestAirlinestoidentifycorecompetency

Tangibleresources
1)Physicalresources Valuable Rare Costlytoimitate Nonsubstitutable

Useofsingleaircraft
model,i.e.Boeing737s
Lowmaintenance SouthwestAirlineis Ifexistingcompetitors Ifusingother
costandspeedup theonlyairlinethat wouldliketousethe aircraftmodelwhich
maintenancetime usessinglemodel samesingleaircraft havemorenumber
Decreasetraining aircraft model,itwillincur ofseatsthanBoeing
cost massiveamountof 737s,itwilltake
Shortboardingtime cost longerboarding
duetolessnumber time.
ofseats

2)Financialresources Valuable Rare Costlytoimitate Nonsubstitutable

Sourceofinvested
capital
SouthwestAirlinesuses Highcapabilitiesin Lowestdebtto Requirearestructure Ifacompanywould
policytomaintaindebt makingloanfor equityratiointhe offundsandcost liketodofurther
toequityratioatlower futureinvestment industry whichiscomplicated investment,other
levelthantheindustry andtimeconsuming sourceoffundscan
average. beusedaswell

3)Financialresources Valuable Rare Costlytoimitate Nonsubstitutable

Fuelpricehedging
SouthwestAirlinestried Canmaintainairfare SouthwestAirlines Competitorscanalso Thecompanycan
toalleviatetheeffect atlowlevelduring wasoneofthefirst enterintofuelprice useothermethodto
fromfuelprice theoilpricecrisis companiesthat hedging preventfromfuel
fluctuationbyentering enteredintothefuel pricefluctuation,
intofuelpricehedging. pricehedging. e.g.stockmoreoil,
butitwillbevery
costly.

4)Technological Valuable Rare Costlytoimitate Nonsubstitutable

resources
Adoptionofnew
technology
SouthwestAirlines Decreasethecostof SouthwestAirlines Competitorscanalso Otheralternative
usuallyadoptsnew staffattheairport wasamongthefirst usethesame technologiescould
technologytoimprove Improvecustomer companiesthat technologywithsome bereplacedthe
itsserviceperformance satisfactiondueto adoptedticketless costsincurring existingoneinthe
i.e.,ticketlesssystem shorterqueuingtime systemandwinglet future
winglettechnology technologytoits
operation

229

Intangibleresources
5)Humanresources Valuable Rare Costlytoimitate Nonsubstitutable

Employeeselection
througharecruitment
process
SouthwestAirlines Staffarehappyand Employeesat Itrequiresexisting Basedonthe
selectstheemployees willingtoprovidethe competitorsmay companiesalotof companysvalue
whohavepositive bestservicesto havetheskillto costsincreatingthe thatemployee
attitudewithsenseof customers provideservicesbut attitudeofexisting comesfirstand
humorsandsocialized Aselectionofright theattitudeof staff customersare
personalitiesthat personsfromthe servicemindsishard second,itmakes
matcheswiththe beginningmakes toimitate humanresources
corporateculture SouthwestAirlines becomeavaluable
hasthelowest resourcesof
employeeturnover SouthwestAirlines
rateintheindustry whichisdifficultto
besubstituted

6)Humanresources Valuable Rare Costlytoimitate Nonsubstitutable

Trainingatforstaffat
owntrainingcenter
SouthwestAirlines Employeeshave SouthwestAirlines Competitorscanalso SouthwestAirlines
providestrainingtoall sufficientskillsand wastheonlyairline establishtheirown canusesitsownin
employeesatevery goodattitudein thatpossessitsown universitybutit houseresourcesor
levelatitsown providingservices university. requiresamassive outsourcesexternal
SouthwestUniversityof andalsosharethe investment professionalto
People. sameculture. providetraining

7)Humanresources Valuable Rare Costlytoimitate Nonsubstitutable

Employeeretention
SouthwestAirlines Lowemployee Competitorshave Generally,corporate Corporateculture
developedworking turnoverenables higheremployee cultureandworking thatcreatean
atmospherethatmake SouthwestAirlines turnoverrateand atmospheretakelong employee
employeesfeel tohavesufficient doesnothave timestoestablish. engagementishard
comfortableatwork. andskilledhuman Therefore,itisnot tocreateand
Thecompany resourcestoprovide easyforcompetitors cannotbe
promotedcultureof goodqualityservices toimitate. substituable
helpingeachotherby tocustomers
enablesstaffto
performcross
functionaltasks.
Southwestencouraged
funandsharing
workingenvironment
Topmanagementof
SouthwestAirlinesare
easyreachableand
openforfeedbackand
suggestions.
Lifetimeemployment
policy

230

 Basedontheanalysisinthetablesabove,thecorecompetenciesofSouthwestcanbe
summarizedasfollows:

Theuseofsinglemodelaircraftwhichenablethecompanytoincurlowoperation
costandhighefficiency
RecruitmentprocesswhichenableSouthwestAirlinestorecruitemployeesthathave
agoodattitudetowardadeliveryofhighqualityservicestocustomers
Strongemployeeretentionviathestrongcorporatecultureandemployee
remunerationscheme

d.) Distinctive Competency
In a consideration whether the core competencies identified above are distinctive
competenciesofthecompany,theROICofSouthwestAirlinesanditscompetitorsshouldbetaken
intoaccount.ROICofairlinesintheU.S.issummarizedinTable21.1below.

Table21.1:SummaryofROICofAirlinesintheU.S.between2005and2009

USAirlinesROIC 2005 2006 2007 2008 2009

AmericanAirlines 6.50% 1.80% 3.30% 26.40% 21.30%
ContinentalAirlines 1.20% 6.20% 8.50% 11.60% 6.40%
DeltaAirlines 9.50% 51.80% 9.10%
JetBlueAirways 0.70% 0.20% 0.80% 2.00% 2.10%
SouthwestAirlines 9.00% 9.70% 11.70% 3.20% 1.80%
UnitedAirlines 6.00% 95.40% 11.70%
USAirways 17.80% 10.20% 9.40% 63.40% 5.80%
AverageROIC 3.44% 5.62% 7.03% 35.34% 7.20%

BasedonTable21.1above,between2005and2009,SouthwestAirlineshadaverage
ROICovertheperiodhigherthanitscompetitors.Asaresult,itcanbeconcludedthatthecore
competenciesofSouthwestAirlineswerealsothedistinctivecompetenciesofthecompany.

231

e.) Company Analysis (Corporate Value Chain Analysis)

232

Primaryactivities
Activities
Inboundlogistics
Singlemodelaircraft timespentduetoautilizationofsinglemodel
Wingletinstallment
Fuelhedging
Operations
Servetheunderservedmarket s4:Wellestablishedinunderservedroute
Baseonsecondaryairport
Pointtopointflight
Onlinebooking
Allinclusiveairfare
Ticketlesssystem
Singletypeofseat operation
Noseatreservation
Highdensityseat
Strengthsandweaknesses
s1:Lowoperationalcostandlessmaintenance
aircraft
s2:EarlyadoptionofWinglettechnologyto
increasefuelefficientandreducefuelcost
s3:Lowriskonfuelpricefluctuationdueto
continuousfuelpricehedging
s5:Smoothoperationandlownumberofflight
delayduetofewertrafficatsecondaryairport
w1:Baseonsecondaryairportwhichhasless
facilities
s6:Operatetheflightonpointtopointflight
whichprovidesafasteroperationatalowercost
s7:KnownforthefirstLCCthatprovideonline
bookingviaitsownwebsitethataredesigned
withuserfriendlyinterface
s8:Allinclusiveairfarewithsingleseattypeand
noseatreservationthatiseasyunderstandable
forcustomersandspeeduptheboarding
operation
w2:Nocostsavingoptionsforpassengersthat
donotcheckinluggage
S9:Adoptionofticketlesssystemwhichallowsa
fastercheckinandboardingprocedures
s8:Allinclusiveairfarewithsingleseattypeand
noseatreservationthatiseasyunderstandable
forcustomersandspeeduptheboarding
w3:Nooptionsforpassengerswhowantto
travelwithmorespaciousandcomfortableseat
andwillingtopaymore
s8:Allinclusiveairfarewithsingleseattypeand
noseatreservationthatiseasyunderstandable
forcustomersandspeeduptheboarding
operation
w4:Customersthattravelinabiggroupmaynot
prefernoseatreservationpolicyasthey
normallyliketositnearbyeachotherinthe
group
s8:Allinclusiveairfarewithsingleseattypeand
noseatreservationthatiseasyunderstandable
233


Shorthaulflight
Highaircraftutilization
Consistentlyextendnumberof
routeandflight
FunLUVingservice
Outboundlogistics
Noconnectionflightservice
Marketingandsales
Productstrategy
Focusonqualityofcoreservice
Pricestrategy
Lowcost,allinclusive
Onpeakoffpeakpricing
Placestrategy
Directselltocustomer
Promotionstrategy
AggressivePR
Tripflownbasedloyaltyprogram
Services
Beyondunconventionalservice
Firminfrastructure
Sharedgoal,sharedknowledge
,mutualrespect
Highrelationalcoordination
forcustomersandspeeduptheboarding
operation
s10:Operateonlyshorthaulflightandhavehigh
aircraftutilizationratewhichofferlesstotal
traveltimeandfewerdelays
s10:Operateonlyshorthaulflightandhavehigh
aircraftutilizationratewhichofferlesstotal
traveltimeandfewerdelays
s11:Consistentexpansionofrouteandnumber
offlight
s12:Recruitmentprocessthatselectonly
employeewithattitudesthatmatcheswiththe
company'sculture
w5:Noconnectionflightservicecouldmake
customerswhohavetoconnecttootherflight
choosescompetitorsoverSouthwest
s13:Providethecustomerswithsafe,reliable,
ontimeservicesatareasonableprice
s14:Offercompetitivelylowpriceforonpeak
andoffpeakperiod
s14:Offercompetitivelylowpriceforonpeak
andoffpeakperiod
s7:KnownforthefirstLCCthatprovideonline
bookingviaitsownwebsitethataredesigned
withuserfriendlyinterface
s15:Constantlylaunchadvertisingcampaignto
maintaincustomerawareness
s16:Simpleandeasyunderstandableloyalty
program
s17:Developemployee'smindsetstofocuson
deliveringgoodexperienceandservicesto
customer
s17:Developemployee'smindsetstofocuson
deliveringgoodexperienceandservicesto
customer
s17:Developemployee'smindsetstofocuson
deliveringgoodexperienceandservicesto
234


Crossfunctionaloperation
Unifiedcorporateculture
Conservativefinancialposition
Stimulatedemandin
underservedmarkets
Simplifyworkpractice
Humanresource
Hireandtrainforrelational
competenceandculturalfit
Highsupervisory
Unionizeworkforce
Aboveaveragewage
Lifetimeemployment
Internallycareerpromotion
Peopledepartment
Catastrophicassistantcharity
Technologydevelopment
Wingletinstallment
Procurement
Companyoperatenoncoreservice
customer
s19:Strongcultureimprintedinthecompanyvia
theSouthwestWay
s19:Strongcultureimprintedinthecompanyvia
theSouthwestWay
w6:Conservativefinancialpositionstrategy
couldcausethecompanytorespondtothe
opportunityataslowerrate
s4:Wellestablishedinunderservedroute
s24:Wellestablishedandorganizedwork
process
s17:Developemployee'smindsetstofocuson
deliveringgoodexperienceandservicesto
customer
s24:Wellestablishedandorganizedwork
process
s21:Unityamongworkforce
s18:Strongemployeeretentionandlow
employeeturnoverrate
s18:Strongemployeeretentionandlow
employeeturnoverrate
s18:Strongemployeeretentionandlow
employeeturnoverrate
s18:Strongemployeeretentionandlow
employeeturnoverrate
s2:EarlyadoptionofWinglettechnologyto
increasefuelefficientandreducefuelcost
s23:Stayfocusonthemainbusinessby
outsourcingthenoncoreservicetoexternal
partner
235

f.) Financial Analysis

SouthwestAirlinesBalanceSheet(USDmillions)
FYEDecember 2008 2009

Assets

CurrentAssets

Cashandcashequivalents 1,368 1,114

Shortterminvestments 435 1,479

Totalcash 1,803 2,593

Receivables 209 169

Inventories 203 221

Deferredincometaxes 365 291

Prepaidexpenses 73 84

TotalCurrentAssets 2,653 2,258

NonCurrentAssets

Grossproperties,plantandequipments 15,491 15,888

Accumulateddepreciation (4,831) (5,254)

Netproperties,plantandequipment 10,660 106,634

Otherlongtermassets 755 277

Totalnoncurrentassets 11,415 10,911

Totalassets 14,068 14,269

236

 SouthwestAirlines(LUV)BalanceSheet(USDmillions)

FYEDecember 2008 2009

Liabilities

Currentliabilities

Shorttermdebt 163 190

Accountspayable 668 746
Taxespayable

Accruedliabilities 1,012 696
Deferredrevenues

Othercurrentliabilities 963 1,044

Totalcurrentliabilities 2,806 2,676

Noncurrentliabilities

Longtermliabilities 3,498 3,325

Capitalleases

Deferredrevenues 105 102

Otherlongtermliabilities 802 493

Totalnoncurrentliabilities 6,309 6,127

Totalliabilities 9,115 8,803

Shareholder'sEquity

Commonstock 808 808

Additionalpaidincapital 1,215 1,216

Retainedearnings 4,919 4,983

Treasurystock (1,005) (963)
Accumulatedothercomprehensive
income (984) (578)

Totalstockholder'sequity 4,953 5,466

Totalliabilitiesandstockholder'sequity 14,068 14,269

237

 SouthwestAirlinesBalanceSheet(USDmillions)

FYEDecember 2008 2009

Operatingrevenue
Passenger 10,549 9,892

Freight 145 118

Other 329 340

Totaloperatingrevenues 11,023 10,350

operatingexpenses

Salaries,wagesandbenefits 3,340 3,468

Fuelandoil 3,713 3,044

Maintenancematerialsandrepairs 721 719

Aircraftrentals 154 186

Landingfeesandotherrentals 662 718

Depreciationandamortization 599 616
Acquisitionandintegration
Otheroperatingexpenses 1,385 1,337

Totaloperatingexpenses 10,574 10,088

Operatingincome 449 262

Interestexpense (105) (165)

Otherincome(expense) (66) 67

Incomebeforetaxes 278 164

Provisionforincometaxes (100) (65)

Netincome 178 99

EBITDA 982 945

Tax 35.9% 38.4%

238

 Financialdata Southwest American Delta JetBlue United

Year2008

Sales 10,549.00 12,323.37 8,707.00 2,595.07 11,702.40

EBIT 408.00 (782.11) (4,794.98) 129.07 (3,082.55)

ProfitBeforeTaxes 278.00 (1,259.70) (5,200.50) (76.43) (3,445.02)

InvestedCapital 8,614.00 4,771.14 10,034.59 3,744.86 3,607.53

OperatingExpenses 10,119.31 15,258.50 17,837.93 2,784.44 684.94

AircraftFuel 3,713.00 5,361.14 4,225.52 1,186.30 4,901.87

WorkingCapital (153.00) (2,042.99) (1,218.30) (101.05) (1,533.02)

PPE 11,040.00 9,215.76 11,864.92 3,795.81 5,661.71
Year2009

Sales 9,892.00 10,249.77 10,863.00 2,307.83 9,877.25

EBIT 350.00 (606.00) (177.71) 233.30 (62.66)

ProfitBeforeTaxes 164.00 (1,053.29) (927.24) 78.03 (443.27)

InvestedCapital 8,981.00 4,934.61 10,230.18 3,817.22 3,780.98

OperatingExpenses 9,641.59 9,495.88 16,648.74 2,370.09 630.60

AircraftFuel 3,044.00 3,338.44 4,330.66 744.84 2,246.03

WorkingCapital 682.00 (652.90) 1,205.83 290.84 (902.37)

PPE 10,634.00 9,126.74 11,983.79 3,655.64 5,302.08

239

ProfitabilityDrivers Southwest American Delta JetBlue United
Year2008
ROIC 3.23% (26.40%) (51.83%) (2.04%) (95.50%)
ReturnonSales 3.87% 6.35% (55.07%) 4.97% (26.34%)
OperatingExpenses/Sales 95.93% 123.82% 204.87% 107.30% 5.85%
AircraftFuel/Sales 35.20% 43.50% 48.53% 45.71% 41.89%

CapitalTurnover 1.22 2.58 0.87 0.69 3.24
WorkingCapital/Sales (1.45%) (16.58%) (13.99%) (3.89%) (13.10%)
PPE/Sales 104.65% 74.78% 136.27% 146.27% 48.38%
Year2009
ROIC 1.83% (21.35%) (9.06%) 2.04% (11.72%)
ReturnonSales 3.54% 5.91% (1.64%) 10.11% 0.63%
OperatingExpenses/Sales 97.47% 92.64% 153.26% 102.70% 6.38%
AircraftFuel/Sales 30.77% 32.57% 39.87% 32.27% 22.74%

CapitalTurnover 1.10 2.08 1.06 0.60 2.61
WorkingCapital/Sales 6.89% 6.37% (11.10%) 12.60% (9.14%)
PPE/Sales 107.50% 89.04% 110.32% 158.40% 53.68%

Analysis
During 2008 and 2009, Southwest Airlines was among the two airlines that
achieved positive ROIC and profit before tax which represented that the company has
capabilitytocontinuouslygenerateprofitsfromitsoperation.Thiscouldberesultedfrom
Southwest Airlines effective cost management even during the downturn of the airline
industry. Southwest also had relatively good operating expenses/sale ratio compared to
other airlines in the industry. This could represent that Southwest Airlines capability in
managingoperatingexpenseswasamongthebestintheindustry.During2008and2009,
SouthwestAirlineshadstrongperformanceinmanagingtheaircraftfuelcosts.Accordingto
the aircraft fuel/sales ratio, Southwest Airlines achieved the lowest ratio compared to
competitors in the industry which represent that the companys strategy in fuel price
hedging assisted it in alleviate the fuel price fluctuation risk even during the upward fuel
priceperiod.SinceSouthwestAirlinesmadealoanformajorinvestmentinfixedassetsin
240

2008,thecapitalturnoverofthecompanywaslowerthantheindustryaverage.However,
whenconsideringthePPE/salesratio,itcanbeseenthatSouthwestAirlinesperformancein
fixedassetutilizationwashigherthantheindustryaverage.

241

22.) Strategic Factors Analysis

a.) Determine and Summarize Strategic Factors for Strategy Formulation

StrengthsofSouthwestAirlinesfrominternalanalysiscanbesummarizedinTable22.1below;

Table22.1:SouthwestAirlinessInternalAnalysisStrengths

Strengths Sources

Lowoperationalcostandlessmaintenancetimespentdue
S1 Inboundlogistics
toautilizationofsinglemodelaircraft

EarlyadoptionofWinglettechnologytoincreasefuel
S2 Inboundlogistics
efficientandreducefuelcost

Lowriskonfuelpricefluctuationduetocontinuousfuel
S3 Inboundlogistics
hedging

S4 Wellestablishedinunderservedroute Operationalstrategy

Smoothoperationandlowdelayflightsduetofewertraffic
S5 Operationalstrategy
atsecondaryairport

Operatetheflightonpointtopointflightwhichprovidesa
S6 Operationalstrategy
fasteroperationatalowercost

S7 Haveawebsitethatareuserfriendlyforonlinebooking Operationalstrategy

Allinclusiveairfarewithsingleseattypeandnoseat
S8 reservationthatiseasyunderstandableforcustomersand Operationalstrategy
speeduptheboardingoperation

Adoptionofticketlesssystemwhichallowsafastercheckin
S9 Operationalstrategy
andboardingprocedures

Operateonlyshorthaulflightandhavehighaircraft
S10 utilizationratewhichofferlesstotaltraveltimeandfewer Operationalstrategy
delays

242

 Strengths Sources

S11 Consistentexpansionofrouteandnumberofflight Operationalstrategy

Recruitmentprocessthatselectonlyemployeewith Operationalstrategyand
S12
attitudesthatmatcheswiththecompany'sculture humanresourcemanagement

Providethecustomerswithsafe,reliable,ontimeservices
S13 Productstrategy
atareasonableprice

Offercompetitivelylowpriceforonpeakandoffpeak
S14 Pricingstrategy
period

Constantlylaunchadvertisingcampaigntomaintain
S15 Promotionstrategy
customerawareness

S16 Simpleandeasyunderstandableloyaltyprogram Promotionstrategy

Developemployee'smindsetstofocusondeliveringgood
S17 humanresourcemanagement
experienceandservicestocustomer

S18 Strongemployeeretentionandlowemployeeturnoverrate Humanresourcemanagement

StrongcultureimprintedinthecompanyviatheSouthwest
S19 Humanresourcemanagement
Way

Strongbrandreputationfromawardsandcustomer
S20 Humanresourcemanagement
testimonial

S21 Unityamongworkforce Firminfrastructure

S22 Dedicatedpeopledepartmenttodevelophumanresources Humanresourcemanagement

243

WeaknessesofSouthwestAirlinesfrominternalanalysiscanbesummarizedinTable22.2below;

Table22.2:SouthwestAirlinessInternalAnalysisWeaknesses

Weaknesses Sources

W1 Basedonsecondaryairportwhichhaslessfacilities Operationalstrategy

Nocostsavingoptionsforpassengersthatdonotcheckin
W2 Operationalstrategy
luggage

Nooptionsforpassengerswhowanttotravelwithmore
W3 Operationalstrategy
spaciousandcomfortableseatandwillingtopaymore

Customersthattravelinagroupmaynotprefernoseat
W4 reservationpolicyastheynormallyliketositnearbyeach Operationalstrategy
otherinthegroup

Noconnectionflightservicecouldmakecustomerswho
W5 havetoconnecttootherflightchoosescompetitorsover Outboundlogistics
southwest

Conservativefinancialpositionstrategycouldcausethe
W6 Firminfrastructure
companytorespondtotheopportunityataslowerrate

W7 Riskofdependenceonsinglesupplier(Boeing) ProcurementStrategy

OpportunitiesofSouthwestAirlinesfromexternalanalysiscanbesummarizedinTable22.3below;

Table22.3:SouthwestAirlinessExternalAnalysisOpportunities

Opportunities Sources

GeneralEnvironment
O1 GDPwasexpectedtoincrease
Economic

GeneralEnvironment
O2 Lowinterestrate
Economic

244

 Opportunities Sources

GeneralEnvironment
O3 Americansocietybecomeshighlycosmopolitan
Sociocultural
GeneralEnvironment
O4 IncreasingnumberofU.S.populations
Demographic
GeneralEnvironment
O5 IncreasingnumberofimmigrantstoU.S.
Demographic

GeneralEnvironment
O6 IncreasingnumberofGenerationY
Demographic

GeneralEnvironment
O7 Improvementofaircrafttechnology
Technology

GeneralEnvironment
O8 DeregulationintheU.S.airlineindustry
Political&Legal

GeneralEnvironment
O9 Expandroutetoanothercountry
Global

O10 Acquirethefirmthatexitsindustry Industrylifecycle

O11 Increasingnumberofsmartphoneuser Industrydrivingforces

O12 U.S.economicpolicy(QE) Industrydrivingforces

IndustryMatrixandDegreeof
O13 ExpandroutestoothercitiesintheU.S.
marketpenetration

O14 Availabilityofwirelessinternetandaviationtechnology Futureneeds

Futureneeds,distributionand
O15 Availabilityofonlinetravelagencyandpackagediscounts
channels

O16 Growingtrendofonlineairticketbooking Distributionchannels

245

ThreatsofSouthwestAirlinesfromexternalanalysiscanbesummarizedinTable22.4below;

Table22.4:SouthwestAirlinessExternalAnalysisThreats

Threats Sources

GeneralEnvironment
T1 Effectfromterroristattack
Political&Legal

GeneralEnvironment
T2 Lawspreventinganticompetitiveenvironment
Political&Legal

T3 SouthwestAirlinesisinashakeoutstage Industrylifecycle

T4 Fluctuationinoilprice Industrydrivingforces

LCCcompetitorsprovideinflightservicesand
T5 Industrymatrix
entertainment

T6 Availabilityanddevelopmentoflessexpensivesubstitutes FiveForcesModel

T7 Intensivecompetition FiveForcesModel

T8 Highbargainingpowerofsuppliers FiveForcesModel

T9 largerroutenetworkfromcompetitors CompetitiveIntelligence

Operateinminorairportswhichhavelessamount
T10 CompetitiveIntelligence
passengerscomparewithmajorairports

Competitorshighlyfocusoncostcontrol,costcompetitive
T11 CompetitiveIntelligence
advantagewillbeabletodiminished

T12 Shrinkageofairfaregapbetweeneachclass Futureneeds

T13 Growingpopularityofonlinetravelagency Channelmarkups

246

b.) Perform External Factor Analysis Summary (EFAS) to see how well the
companys strategies effectively take advantage of existing opportunities and
minimize the potential adverse effects of external threats

Summaryofexternalfactors(opportunityandthreats)arelistedinTable22.5and22.6below;

Table22.5:SummaryofSouthwestAirlinessOpportunities

Opportunities CoreOpportunities

O1 GDPwasexpectedtoincrease

O2 Lowinterestrate

O3 Americansocietybecomeshighlycosmopolitan

O4 IncreasingnumberofU.S.populations

O1:Increasingtravellingdemand
O5 IncreasingnumberofimmigrantstoU.S.
usinglowcostairlinefrom
growingUSandglobaleconomy
O6 IncreasingnumberofGenerationY

O9 Expandroutetoanothercountry

O12 U.S.economicpolicy(QE)

O13 ExpandroutestoothercitiesintheU.S.

O7 Improvementofaircrafttechnology

O11 Increasingnumberofsmartphoneuser
O2:Newtechnologytoincrease

O14 Availabilityofwirelessinternetandaviationtechnology airlineoperationalefficiencyand

betterservecustomerwithlower
Availabilityofonlinetravelagencyandpackage
O15 cost
discounts

O16 Growingtrendofonlineairticketbooking

247

 Opportunities CoreOpportunities

O8 DeregulationintheU.S.airlineindustry
O3:Expansionopportunityinto
newmarketandcustomer
O10 Acquirethefirmthatexitsindustry

Table22.6:SummaryofSouthwestAirlinessThreats

Threats CoreThreats

T1 Effectfromterroristattack
T1:Possibilityoflesstraveling
Availabilityanddevelopmentoflessexpensive demand
T6
substitutes

T2 Lawspreventinganticompetitiveenvironment

T3 SouthwestAirlinesisinashakeoutstage

LCCcompetitorsprovideinflightservicesand
T5
entertainment

T2:Highlycompetitioninthe
T7 Intensivecompetition
airlineindustry

T9 largerroutenetworkfromcompetitors

Competitorshighlyfocusoncostcontrol,cost
T11
competitiveadvantagewillbeabletodiminished

T12 Shrinkageofairfaregapbetweeneachclass

T4 Fluctuationinoilprice T3.Highfuelpricevolatility

T4.Highsuppliernegotiation
T8 Highbargainingpowerofsuppliers
power

T5.Growingpopularityofonline
T13 Growingpopularityofonlinetravelagency
travelagency

248

ExternalFactorAnalysisSummary(EFAS)ofSouthwestAirlineisperformedinTable22.7below;

Table22.7:EFASofSouthwestAirlines
Weight
ExternalFactors Weights Rating Comment
Score
Opportunities

Increasingtravelling
demandusinglowcost
O1
airlinefromgrowingUS
andglobaleconomy
SouthwestAirlineshasshownto
beresponsivetoindustry
0.25 3 0.75
demandbyitsprevious
marketingstrategy.

Newtechnologyto
increaseairlineoperational
O2
efficiencyandbetterserve
customerwithlowercost
Expansionopportunityinto
O3
newmarketandcustomer
Threats
Possibilityoflesstraveling
T1
demand
Highlycompetitioninthe
T2
airlineindustry
T3 Highfuelpricevolatility 0.10
Highsuppliernegotiation
T4
power
Growingpopularityof
T5
onlinetravelagency
SouthwestAirlinehasshownto
beanindustryleadertoapply
0.15 4 0.60
technologyintoitsoperation
suchaswingletandticketless.
SouthwestAirlinehasshownto
0.10 4 0.40 getintonewmarketbydoing
M&A(MorrisAirandAirTran).
SouthwestAirlinehasbeen
constantlycomingupwith
0.05 2 0.10
attractivepromotiontostimulate
demand.
SouthwestAirlinehasbeen
0.25 3 0.75 fightingandadjustingtothe
competitionverywell.
SouthwestAirlinehasbeen
3 0.30
activelyhedgingfuelprice.
SouthwestAirlineshasshownto
0.05 3 0.15 managerelationshipwithBoeing
verywell.
SouthwestAirlinehasbeen
0.05 2 0.10
respondingbypromotion.

Total 1.00 3.15

249

Note:
Weightingisusedtodeterminethefactorimportancelevelthatimpacttothestrategicpositionof
SouthwestAirline,thescorerangingfrom01(fromtheleastimportanttothemostimportant)
The rating score is given to Southwest Airlines to determine its strategic position response to
factors,thescorerangingfrom14(fromtheleasttothemost)

FromEFASabove,theweightedscoreofSouthwestisat3.15whichishigherthanthe
averagescoreof2.5reflectinghighcapabilityofSouthwestAirlinetorespondtotheexternalfactors
comparingtothelowcostairlineindustry.

c.) Perform Internal Factor Analysis Summary (IFAS) to see how well the
company is responding to current and expected factors in its internal
environment

Summaryofinternalfactors(Strengthandweakness)arelistedinTable22.8and22.9below;

Table22.8:SummaryofSouthwestAirlinessStrengths

Strengths CoreStrengths

Recruitmentprocessthatselectonlyemployeewithattitudes
S12
thatmatcheswiththecompany'sculture

Developemployee'smindsetstofocusondeliveringgood
S17
experienceandservicestocustomer

S18 Strongemployeeretentionandlowemployeeturnoverrate S1.Strongcorporate

cultureswhichdevelop
StrongcultureimprintedinthecompanyviatheSouthwest employeetobe
S19
Way performanceexcellence.
Strongbrandreputationfromawardsandcustomer
S20
testimonial

S21 Unityamongworkforce

S22 Dedicatedpeopledepartmenttodevelophumanresources

250

 Strengths CoreStrengths

Lowoperationalcostandlessmaintenancetimespentdueto
S1
autilizationofsinglemodelaircraft

EarlyadoptionofWinglettechnologytoincreasefuelefficient
S2
andreducefuelcost

Lowriskonfuelpricefluctuationduetocontinuousfuel
S3 S2.Highabilitytobecost
hedging
efficientandefficiency
Smoothoperationandlowdelayflightsduetofewertrafficat
S5 operationusingavailable
secondaryairport
technologyinordertooffer
Operatetheflightonpointtopointflightwhichprovidesa
S6 lowpriceticketto
fasteroperationatalowercost customers.
Adoptionofticketlesssystemwhichallowsafastercheckin
S9
andboardingprocedures

Operateonlyshorthaulflightandhavehighaircraft
S10 utilizationratewhichofferlesstotaltraveltimeandfewer
delays

S4 Wellestablishedinunderservedroute

S11 Consistentexpansionofrouteandnumberofflight S3.GoodImageand

customersatisfaction
Providethecustomerswithsafe,reliable,ontimeservicesat
S13
areasonableprice

S7 Haveawebsitethatareuserfriendlyforonlinebooking

Allinclusiveairfarewithsingleseattypeandnoseat
S8 reservationthatiseasyunderstandableforcustomersand
speeduptheboardingoperation
S4.Goodmarketingand
S14 Offercompetitivelylowpriceforonpeakandoffpeakperiod Promotion

Constantlylaunchadvertisingcampaigntomaintaincustomer
S15
awareness

S16 Simpleandeasyunderstandableloyaltyprogram

251

Table22.9:SummaryofSouthwestAirlinessWeaknesses
Weaknesses CoreWeaknesses

W1 Baseonsecondaryairportwhichhaslessfacilities

Nocostsavingoptionsforpassengersthatdonotcheckin
W2
luggage

Nooptionsforpassengerswhowanttotravelwithmore
W3
spaciousandcomfortableseatandwillingtopaymore W1.Offerlimitedservice
capabilitytocustomer
Customersthattravelinagroupmaynotprefernoseat
W4 reservationpolicyastheynormallyliketositnearbyeach
otherinthegroup

Noconnectionflightservicecouldmakecustomerswhohave
W5 toconnecttootherflightchoosescompetitorsover
southwest

Conservativefinancialpositionstrategycouldcausethe W2.Conservativefinancial
W6
companytorespondtotheopportunityataslowerrate strategy

W3.Riskofdependenceon
W7 Riskofdependenceonsinglesupplier(Boeing)
singlesupplier(Boeing)

InternalFactorAnalysisSummary(IFAS)ofSouthwestAirlineisperformedinTable22.10below;

Table22.10:IFASofSouthwestAirlines
Weight
InternalFactors Weights Rating Comment
Score
Strengths

Strongcorporatecultures
S1 whichdevelopemployeeto
beperformanceexcellence.
FromtheoriginofSouthwest
Airline,ithasfocusedonit
0.20 4 0.80
humancapitalandhas
provedtobeitscompetitive.

252

 Weight
InternalFactors Weights Rating Comment
Score

Strengths

Highabilitytobecost SouthwestAirlineshasbeen
efficientandoptimize continuouslycapturedvalue
S2 availabletechnologyinorder 0.20 4 0.80 ofbeingcostefficientwhich
toofferlowpriceticketto translatetolowerticket
customers. price.

SouthwestAirlineshas
GoodImageandcustomer continuouslygainbrand
S3 0.10 3 0.30
satisfaction imageandrepeating
customerandloyalty.

SouthwestAirlineshas
Goodmarketingand developedmarketingand
S4 0.15 4 0.60
Promotion promotionthatattract
targetedcustomer

Weaknesses

Offerlimitedservice
W1
capabilitytocustomer
SouthwestAirlinespositions
0.15 2 0.30 itselftoofferlimitedservice
withlowerticketprice.

SouthwestAirlinesmaylose
Conservativefinancial opportunityofgrowinginto
W2 0.10 2 0.20
strategy newmarketdueto
conservativefinancialpolicy.
Ifthereisanythinghappen
Riskofdependenceonsingle toBoeing,Southwest
W3 0.10 2 0.20
supplier(Boeing) Airlinesoperationwillbeat
highrisk.

Total 1.00 3.20

253

Note:
Weightingisusedtodeterminethefactorimportancelevelthatimpacttothestrategicpositionof
SouthwestAirlines,thescorerangingfrom01(fromtheleastimportanttothemostimportant)
The rating score is given to Southwest Airlines to determine its strategic position response to
factors,thescorerangingfrom14(fromtheleasttothemost)

From IFAS above, the weighted score of Southwest is at 3.20 which is higher than the
averagescoreof2.5reflectinghighcapabilityofSouthwestAirlinetorespondtotheexternalfactors
comparingtothelowcostairlineindustry.

d.) Compare the position in IE Matrix and BCG GrowthShare Matrix. What would
be the strategic guideline for the company in formulating corporate strategy?

Figure22.1:SouthwestAirlinessInternalExternalMatrix(IEMatrix)

Strong Average Weak

3.20

Hi

gh
EFA
3.15
S
We

igh

ted
Sco M
ed
res
iu

Lo

IFASWeightedScores
254

 FromaboveIEmatrix,SouthwestAirlinesisputintheWinnerposition(GrowandBuild
StrategiesI) with its EFAS at 3.15 and IFAS at 3.20. Therefore, it suggests Southwest Airlines to
pursuegrowthstrategy.

Figure22.2:SouthwestAirlinessBCGGrowthShareMatrix

From above BCG GrowthShare Matrix, Southwest Airlines is put in the Dog position
with its market share of 0.46 and average growth rate of 8.1%. This reflects Southwest Airliness
positionofrelativelowmarketshare(<1)andgrowinginrevenueof8%.BCGGrowthShareMatrix
recommends Southwest Airline to harvest or divest the business. However, the company has a
potentialtomoveuptotheQuestionMarksas8%growthiscloseto10%.

By comparing the position of Southwest Airlines from the two matrixes, IE matrix
suggestsSouthwestAirlinetogrowwhileBCGGrowthShareMatrixsuggestsdivestingorleavethe
market. It seems to be a mix of strategy direction. However, it can be inferred from the strong
potential of IE matrix of Southwest Airlines that it should try to grow the business. Therefore,
Southwest Airline should formulate the corporate strategy with Intensive Growth (concentration
strategy)whichrequiresittoexpandmarketshareviamarketpenetrationandmarketdevelopment
strategies.
255

23.) Generating strategies alternatives by employing a TOWS

Matrix

FromEFASandIFASanalyzedinnumber22.TOWSMatrixcanbeformulatedinTable22.11below;

Table22.11:SouthwestAirlinessAlternativeStrategyFormulationbyTOWSMatrix
Strengths(S) Weaknesses(W)
InternalFactors
S1.Strongcorporatecultureswhich W1.Offerlimitedservice
developemployeetobeperformance capabilitytocustomer
excellence. W2.Conservativefinancial
S2.Highabilitytobecostefficientand strategy
optimizeavailabletechnologyinorder W3.Riskofdependenceon
toofferlowpricetickettocustomers. singlesupplier(Boeing)
S3.Goodimageandcustomersatisfaction
ExternalFactors S4.Goodmarketingandpromotion

SOStrategies WOStrategies
O1.Increasingtravelling SO1.Increaseflightsandroutesoracquire WO1.Consideroffering
demandusinglow otherairlinestorespondtohigher varietyofserviceand
costairlinefrom customerdemanddomesticallyand withnewtechnology
growingUSand internationally(S1,S2,S3,S4,O1,O3) insomeroutes
globaleconomy SO2.Continuousattractivemarketingand (O1,O2,O3,W1)
Op O2.Newtechnologyto promotiontoincreasemarketshare WO2.Starttobefinancial
po increaseairline (S3,S4,O1) aggressivetoexpand
operational SO3.Continuousgoodhumanresource oracquiretonew
rtu
efficiencyandbetter managementtocreatecompetitive market(O1,O3,W2)
nit
servethecustomer advantage(S1,O1) WO3.Considerdiversify
y withlowercost SO4.Continuousimprovementin typeofaircrafts
(O O3.Expansion technologytobeleaderincost ratherthanBoeing
) opportunityinto efficiency(S1,S2,O2) (O1,O2,O3,W3)
newmarketand
customer
STStrategies WTStrategies

T1.Possibilityofless ST1.Newmarketingandpromotionto WT1.Diversifyintoother

travelingdemand stimulatedemand(S1,S3,S4,T1) relatedbusiness
T2.Highlycompetition ST2.Bedifferentiatedinofferingbetter (W1,W2,W3,T1,T2,T3,
Th intheairline serviceexperienceatlowerprice T4,T5)
re industry (S1,S2,S3,S4,T2) WT2.Becomestrategic
ats T3.Highfuelprice ST3.Activefuelpricehedgingtostabilize alliancewithother
(T) volatility fuelcost(S1,S2,T3) airlinesandtravelling
T4.Highsupplier ST4.Negotiatetobepartnerswith agency
negotiationpower Boeing(S1,S2,S3,T4) (W1,W3,T1,T2,T3,T5)
T5.Growingpopularity ST5.Startofferingflighttoonlineagency
ofonlinetravel (S2,S3,S4,S5,T5)
agency ST6.Cutroutesthatisnotprofitable
(S1,S2,T1,T2)

256

SOStrategies

SO1.Increaseflightsandroutesoracquireotherairlinestorespondtohighercustomerdemand
domesticallyandinternationally(S1,S2,S3,S4,O1,O3)
ByleveragingthestrengthsofSouthwestAirlines,itshouldconsiderincreasingnumber
of flights (Market Penetration Strategies), expanding to other routes or acquiring other airlines to
respond to the increasing domestic and international traveling demand (Market Development
Strategies) which will increase its coverage service. Thus, revenue will increase by the increasing
numberofcustomersandifSouthwestAirlinescanmaintaintobecostefficient,itsprofitandROIC
willincrease.

SO2.Continuousattractivemarketingandpromotiontoincreasemarketshare(S3,S4,O1)
With well accepted brand, suitable marketing and promotion that respond to the
targeted customer, Southwest Airlines can attract more customers both in the existing routes
(Market Penetration Strategies) or new routes (Market Development Strategies). As demand for
travelingincreases,SouthwestAirlinecancapturethisopportunity.

SO3.Continuousgoodhumanresourcemanagementtocreatecompetitiveadvantage(S1,O1)
OneofthemainreasonswhycustomersflywithSouthwestAirlineisthatitsemployees
deliverbestperformance withWarriorSpirit, witha ServantHeartand FunLovingAttitude. This
performanceexcellenceisfromthecorporatecultureandexcellencehumanresourcemanagement
which make Southwest Airlines competitive advantage. Therefore, Southwest Airline needs to
continuenurtureandimplantitsculture,traitsandattitudetoitsemployeeviarecruiting,training,
promotion, compensation and management style so that it can maintain its excellence service to
newcustomer.

SO4.Continuousimprovementintechnologytobeleaderincostefficiency(S1,S2,O2)
Another reason, why customers fly with Southwest Airlines is that its ticket price is
cheaperthanthecompetitors.Lowerticketpriceisdeliveredfrombeingcostefficiency.Therefore
astechnologyimproves,Southwestshouldtakesuchopportunityandapplyinitsoperatingpractice
if it sees fit. This includes mobile boarding pass and online checkin flight status monitoring via
internet.

257

STStrategies

ST1.Newmarketingandpromotiontostimulatedemand(S1,S3,S4,T1)
AsSouthwestAirlinessmarketingandpromotionworkswelltoattractcustomer,itcan
leveragesuchstrengthstostimulatedemandforleisureactivitypromotiontooffsetpossibleriskof
improvingcommunicationtechnology(MarketPenetrationStrategies).

ST2.Bedifferentiatedinofferingbetterserviceexperienceatlowerprice(S1,S2,S3,S4,T2)
Being low cost with excellence service experience is always the root of Southwest
Airliness competitive advantage. Southwest Airlines should continue to be cost efficient by using
technology and human resource excellence to counter the threat from high competition in airline
industry.

ST3.Activefuelpricehedgingtostabilizefuelcost(S1,S2,T3)
Asfuelcostisthemaincostdriverofairlineindustryanditspriceisvolatile,Southwest
Airlineshouldstudyatitscoststructureanditsacceptablemargin,thenitshouldconsiderenterfuel
price hedging to lock in at acceptable fuel price. This will reduce their cash flow volatility so that
SouthwestAirlinecanfocusontheircoreairlinebusiness.

ST4.NegotiatetobepartnerswithBoeing(S1,S2,S3,T4)
As Southwest Airline is a leading low cost airline and is growing into to many
destinations, it should consider negotiating with Boeing for long term supplier contract for lower
priceof737aircraftsorspecialrateforparts,maintenanceandadvisoryfee.

ST5.Startofferingflighttoonlineagency(S2,S3,S4,S5,T5)
Ascustomersstarttosearchforflightandcompareonlinewithonlineagency,offering
online flight via only its own webpage can be risky. Therefore, Southwest Airlines should consider
giving out flight though online travel agency so that it can compete with other airline that are
offeringtheirflightthoughonlinetravelagencytoo.

ST6.Cutroutesthatisnotprofitable(S1,S2,T1,T2)
SouthwestAirlineshouldconsidercutitsunprofitableroutestostaycostefficientand
expandintomarketwithhighdemand.

258

WOStrategies

WO1.Considerofferingvarietyofserviceandwithnewtechnologyinsomeroutes(O1,O2,O3,W1)
As traveling demand increases, Southwest Airline should take this opportunity to start
provide extended service both onboard or with improved technology such as mobile check in.
Therefore,SouthwestAirlinecanpenetratetoservemorecustomers.

WO2.Starttobefinancialaggressivetoexpandoracquiretonewmarket(O1,O3,W2)
Inthepast,SouthwestAirlineusuallyhasbeengrowinggraduallybyorganicgrowth.As
the cycle of growing economy begins, Southwest Airline should consider growing aggressively by
acquiringotherairlinesbyusingmorefinancialleverage.

WO3.ConsiderdiversifytypeofaircraftsratherthanBoeing(O1,O2,O3,W3)
There is a risk when Southwest Airlines only relying on Boeings aircrafts so it should
takethisgrowingopportunitytoconsiderdiversifyingaircraftbygroupingtypeofaircraftsusedto
serviceintoregionsothatitcanmanageaircraftefficiently.

WTStrategies

WT1.Diversifyintootherrelatedbusiness(W1,W2,W3,T1,T2,T3,T4,T5)
Southwest Airline should consider diversify into other related business such as online
travelingagentandairmaildelivery.Therefore,ifairlinebusinessisnotgood,SouthwestAirlinecan
get the revenue from other business as an option to mitigate threats from high industry
competition.

WT2.Becomestrategicalliancewithotherairlinesandtravellingagency(W1,W3,T1,T2,T3,T5)
If the threats in airline in the industry increase for example; the number of passenger
decrease,airlinescuttheirticketpriceoroilpricepresentswithhighestvolatility,Southwestshould
consider becoming partner with other airline which can synergize their routes, connect flight or
facilitiessothatitcanreduceandsharesomecostsandcompetewithotherairlines.

259

24.) Recommend strategies and operation plan for company

a.) Short Term Strategy (within 1 year)

Forshorttermstrategy(1year),SouthwestAirlineshouldimplementthebelowstrategies;

1.SO3:Continuousgoodhumanresourcemanagementtocreatecompetitiveadvantage(S1,O1)
This is because human resource is the key success factor of airline industry therefore
SouthwestAirlineshouldtakethisissuehighprioritysothatitsemployeecancontinuetheirservice
dedicationtoSouthwestAirlines.

2.SO2:Continuousattractivemarketingandpromotiontoincreasemarketshare(S3,S4,O1)
ST1:Newmarketingandpromotiontostimulatedemand(S1,S3,S4,T1)
AsthecompetitionisintensebecauseSouthwestAirlinesscompetitorsarelaunchingits
new marketing and promotion every day, therefore, therefore Southwest Airlines should focus on
creating better and more attractive marketing and promotion in order to compete with them and
stimulatedemandforcustomersintime.

3.ST2:Bedifferentiatedinofferingbetterserviceexperienceatlowerprice(S1,S2,S3,S4,T2)
Southwest Airline should continue to be different in providing customer experience to
customerasthecompetitionintheindustryisfierce.

4.ST5:Startofferingflighttoonlineagency(S2,S3,S4,S5,T5)
As distribution channels of competitor increase with the online traveling agency,
SouthwestAirlinesshouldalsomatchtheavailabilityofitsservicetocompetitorviaonlineassoonas
possiblesothatwhenpotentialcustomerslookforflightbyonlineagency,theycanseeSouthwest
airlinesasachoicetoo.

5.ST3:Activefuelpricehedgingtostabilizefuelcost(S1,S2,T3)
Asfuelpriceisveryvolatile,hedgingprogramisrequiredtostabilizeSouthwestAirliness
operatingmarginsoitshouldbeexecutedeveryyear.

ShorttermoperationplanandactionasdescriptedinTable22.12and22.13respectively.

260

Table22.12:RecommendedShortTermOperationPlansforSouthwestAirlines

Strategy Measure(KPI) BaselineData Target OperationPlans

1.SO3:Continuousgood 1.5%morethan2009
1.Traininghours 1.Traininghoursin2009
humanresource 2.Top3ofLCC/10%from Developintegratedhuman
2.Ave.benefits/employee 2.$23,800/employee
managementtocreate thehighestbenefit resourcemanagementplan
3.%ofInternalpromotion 3.80%90%
competitiveadvantage 3.Atleast85%

2.SO2:Continuousattractive
marketingand 1.Enplanedpassenger/ 1.Ave.lastthreeyear
promotiontoincrease Loadfactor increaseof3%/76% 1.Increaseby3%/to80% Developintegrated
marketshare 2.Marketshare 2.13.8%ofMarketshare 2.20% marketingandpromotion
ST1:Newmarketingand 3.Numberofnew (revenueperpassenger) 3.1promotion/month plan
promotiontostimulate promotion 3.
demand

1.ASIIndex
1.79 1.85
3.ST2:Bedifferentiatedin 2.%ofontimearrival
2.83.3% 2.85% Developcustomer
offeringbetterservice 3.Mishandledbaggage
3.3.30per1,000 3.2.00per1,000 satisfactiondevelopment
experienceatlower ratio
4.1.42per10,000 4.0.5per10,000 plan
price 4.DeniedBoardingratio
5.0.13per100,000 5.0.05per100,000
5.Complaintratio

261

 Strategy Measure(KPI) BaselineData Target OperationPlans

4.ST5:Startofferingflightto 1.Numberofonlineagency Developplantoofferflight

1.3onlineagencies
onlineagency thatisofferedflight toonlineagency

5.ST3:Activefuelpricehedging 1.15%lessthanthe Developfuelpricehedging

1.Ave.realizedfuelprice
tostabilizefuelcost marketprice plan

Table22.13:RecommendedShortTermActionPlansforSouthwestAirlines

Time Expected Budgetand Responsible

OperationPlan ActionPlan
Frame Results AdditionalResource Unit

1.Designquestionsfor 1.Questionthatreallyknow
1Month
interviewingemployee employeesneed
Setbudgetforhiring
1.Developintegrated 2.Interviewemployee/Summary 2Months 2.Understandemployeesneed Human
ITfirmtodevelop
humanresource Resource
3.Developplanandproposeto 3.Planthatcanrespondto employeesneed
managementplan 1Month Department
management employeesneedwithapproval databaseand
4.Executeplantocorrespond 4.Employeesatisfactionand managementsystem
8Months
withemployeeneed. engagementincrease

262

 Time Expected Budgetand Responsible

OperationPlan ActionPlan
Frame Results AdditionalResource Unit

1.Developandconductcustomer 1.Moreunderstandingofcustomer
1Month
survey need
2.Analyzecustomerneedand 2.Tacticalpromotionalstrategy
Setbudgetfor
developpromotionstrategythat 1Month whichcanincreasenumberof
advertingand Marketing
2.Developintegrated respondtocustomerneed customer
promotion,whichis andPublic
marketingand 3.Developadvertingplanand
3.Goodadvertingplanandsuitable settobe5%increase Relation
promotionplan selectchanneltoconveynew 1Month
channeltoreachtargetmarket from2019orat$210 Department
promotiontotargetcustomer
million
4.Targetedcustomerareawareof
4.Executeadvertingplan 9Months thenewadvertingandconsiderto
buytheticket

1.Developandconductcustomer 1.Resultofcustomersatisfaction
1Month
satisfactionsurvey survey

2.Analyzecustomersatisfaction 2.Moreunderstandingofwhat Marketing

3.Developcustomer
anddevelopsatisfaction 12Months servicewillsatisfycustomermost andPublic
satisfaction
improvementstrategy andCustomerimprovementplan Relation
developmentplan
3.Executecustomersatisfaction Department
3.Customerismoresatisfiedwith
improvementplan 9Months
SouthwestAirlinesservice

263

 Time Expected Budgetand Responsible

OperationPlan ActionPlan
Frame Results AdditionalResource Unit

1.Searchandcontactwith 1.SouthwestAirlinecanselectthe
2Month
appropriateonlineagency potentialonlineagency

2.Selectandenterintocontract
4.Developplanto
withtheselectedonlinetraveling 1Month 2.Agreedcontractthatwillbesign Marketing
offerflighttoonline
agency Department
agency
3.Customerstartstopurchaseand
3.Onlineagencyoffers
9Month compareSouthweststicketvia
Southwestsseatonline
onlinetravelingagent

1.Gatherfuelvolumeusageand 1.Knownfuelvolumerequirement
1Month
forecastfuelprice andforecastedfuelprice

2.Studyofcoststructureand Budgeting
1Month 2.Knownacceptablemargin
calculateacceptablemargin Setbudgetforfuel and,Financial
5.Developfuelprice
3.Knownavailablehedging pricehedgingsuchash Risk
hedgingplan 3.Studyhedginginstrumentsand
1Month instrumentandpricingsuchas optionpremium Management
contactwithbanks
forward,optionandcollar Department

4.Southwestcanlockinacceptable
4.Enterintohedgingcontracts 9Month
rangeoffuelpricewithisvolume

264

b.) Medium Term Strategy

Fortheperiodofwithin25year,SouthwestAirlinescangatherinformationofcustomer
behavior,routestrafficinformation,newtechnologytobeusedandtargetedairlinetoacquirewith
cost and benefit analysis so that it can make decision on certain strategies, the strategy that
SouthwestAirlineshouldimplementisthefollowing;

1.SO1:Increaseflightsandroutesoracquireotherairlinestorespondtohighercustomerdemand
domesticallyandinternationally(S1,S2,S3,S4,O1,O3)
ST6:Cutroutesthatisnotprofitable(S1,S2,T1,T2)

2.SO4:Continuousimprovementintechnologytobeleaderincostefficiency(S1,S2,O2)

3.ST4:NegotiatetobepartnerswithBoeing(S1,S2,S3,T4)

4.WO1:Considerofferingvarietyofserviceandwithnewtechnologyinsomeroutes(O1,O2,O3,W1)

5.WO2:Starttobefinancialaggressivetoexpandoracquiretonewmarket(O1,O3,W2)

6.WT2:Becomestrategicalliancewithotherairlinesandtravellingagency(W1,W3,T1,T2,T3,T5)

MediumtermoperationplanandactionasdescriptedinTable22.13and22.14respectively.

265

Table22.13:RecommendedMediumTermOperationPlansforSouthwestAirlines

Strategy Measure(KPI) BaselineData Target OperationPlans

1.Numberoftripsflown
1.SO1:Increaseflightsandroutesor 1.Increaseby5%with
increasewithacceptable 1.Increaseby3%(ave.
acquireotherairlinesto loadfactorofatleast Developintegratedflight
loadfactor 20092005)withload
respondtohighercustomer 80% androutesplan
2.Numberofacquired factoratleast75%(2009)
demanddomesticallyand 2.Acquire1airlinesper Developlistoftargeted
airlines 2.
internationally 3year airlinestoacquire
3.Numberofunprofitable 3.
ST6:Cutroutesthatisnotprofitable 3.
routescut

1.Numberofnew
1.3newtechnology
2.SO4:Continuousimprovementin technologyintegratedin Developtechnology
peryear
technologytobeleaderincost SouthwestAirlines 1. improvementintegration
2.15%cost
efficiency 2.Costthatcanbesaved plan
saving/newtechnology
fromnewtechnology

3.ST4:Negotiatetobepartnerswith Preferabletermand 1.10%relatedcost DevelopBoeingpartnership

1.
Boeing conditionwithBoeing savingfromBoeing improvementplan

266

 Strategy Measure(KPI) BaselineData Target OperationPlans

4.WO1:Considerofferingvarietyof
Numberofnewservice Developmentnewservice
serviceandwithnew 1newservice/year
offeredtocustomer offeringimprovementplan
technologyinsomeroutes

5.WO2:Starttobefinancial
Higherfinancialleverage Developcomprehensive
aggressivetoexpandor D/Eratioof65% D/Eratioof80%
used financialmanagementplan
acquiretonewmarket

6.WT2:Becomestrategicalliancewith Joinatleastone
Bepartofastrategic Developstrategicalliance
otherairlinesandtravelling strategicalliances
alliance/travelingagency plan
agency routeperyear

267

Table22.14RecommendedMediumTermActionPlansforSouthwestAirlines

Time Budgetand Responsible

OperationPlan ActionPlan ExpectedResults
Frame AdditionalResource Unit

1.Collectandforecasted 1.Reliablepassengerdatafor
1Year
trafficinformation focusrouteandcurrentflight
Business
Development
2.Analyzeloadfactorand
2.Selectnewflightandnewroutes Department
considertocut/addnew 3Months
tobeadded
flight/routetobeadded

1.Developintegratedflight 3.Preparenewflightrollout
3.Wellandsynchronizedplanfor Setbudgetfornew
androutesplan plan,includingrecruiting, Operation
3Months expansionandgetapprovalfrom routeandflight
trainingemployeeandnew Department
management expansion
airplanepurchasing

4.Executetherolloutplan 4.Newflightandroutecanbe Spendtheset

forcut/addnew 3Months/ addedaccordingtorolloutplan budgetfor Operation
flight/routestobein 3Year andcustomerstarttoenjoyflying employmentand Department
operation withSouthwestAirlines. aircraftpurchases.

268

 Time Budgetand Responsible

OperationPlan ActionPlan ExpectedResults
Frame AdditionalResource Unit

1.Collectinformationof 1.Understandthecharacteristicof
12year
targetedcompany targetedcompany

2.Analyzeifthetarget 2.Southwestknowwhichtarget
Business
Developlistoftargeted airlinesfitSouthwest 6Months airlinescanfitwellwithits
Development
airlinestoacquire expansionplans expansionplan.
Department

3.GetapprovalfromBoard
ofDirectortoaddtothe
targetedlisted
3.Getthelistoftargetedairlines
1Months
readytobeacquired

1.Createtechnology
1.Studyresultofproven Setbudgetfor
improvementteamandstudy
2Year technologytobeintegrateinto adviserofairlines
thetechnologythathelpscut
Southwest technologyexpert
2.Developtechnology cost
Operation
improvementintegration
Department
plan 2.Narrowandchoose

suitabletechnologytofit 2.Technologytobeintegratedand
6Months
Southwestoperationand addbenefittoSouthwestoperation

service

269


Time Budgetand Responsible
OperationPlan ActionPlan ExpectedResults
Frame AdditionalResource Unit

3.Integratesuchtechnology 3.Technologyintegratedinto
1Year
toSouthwestoperation Southwestoperationsmoothly
2.Developtechnology
Operation
improvementintegration 4.Customersatisfactionincrease
After3.5 Department
plan 4.Launchingnewtechnology andSouthwestcanreduce
year
tocustomer operationcostandbecomevery
onwards
efficient

1.Setupnegotiationteam
andgatherrelateddatato
discusswithBoeing
3.DevelopBoeing 2.Analyzethatdataand
partnershipimprovement comeupwithkeypointsto 6Months
plan negotiatewithBoeing
1.Knowledgeableteamwith
1Year
requiredinformation
Procurement
andOperation
Department
2.Keyspointstodiscussand
negotiatewithBoeing

3.Bothpartiesagreeonfavorable
3.DiscusswithBoeingbased Top
6Months termandconditionforboth
onWinWinprinciple Management
parties

270

 Time Budgetand Responsible

OperationPlan ActionPlan ExpectedResults
Frame AdditionalResource Unit
1.Setupteamandstudynew 1.Knowledgeableteammember
servicetooffertotargeted 1Year andstudyresultofnewserviceto
customer include

2.Chosenservicewhichwill
2.Analyzeandselectservice
3Months increasebothcustomerand Customer
androutetoaddsuchservice
customersatisfaction Service
4.Developmentnewservice
Department
offeringimprovementplan 3.Newserviceissmoothly
3.Includenewserviceinto andOperation
6Months integratedwithtrainingprovideto
SouthwestOperation Department
allrelatedemployee

After3.5 4.Customersenjoynewservice
4.Newservicepromotionto
year andhavegoodfeedbackwhich
customers
onwards increaserrevenue.

1.Setupteamand Business
5.Developcomprehensive study/analysesfinancial 1.Knowledgeableteamandstudy Development
6Months
financialmanagementplan performanceofSouthwest resultoffinancialanalysis andFinance
Airlines Department

271


OperationPlan
5.Developcomprehensive
financialmanagementplan
6.Developstrategicalliance
plan
Time Budgetand Responsible
ActionPlan ExpectedResults
Frame AdditionalResource Unit
2.Integratewiththe
2.Financialanalysiscanbe
operationplan1tobecome 3Months
integratedtoflightandroute
morefinancialaggressivein Business
managementplan/acquisition Setbudgetfor
fundingchoiceoffurther Development
planandbecomereadytoexecute interestexpensefor
acquisition andFinance
additionborrowing
Department
1Year 3.Higherdebtisusedfor
3.Executetheplanin2.
onwards additionalfinancing
1.Setupteamand
1.Knowledgeableteamandstudy
study/analysesthebenefitof
1year resultoftheadditionbenefitand Business
becomingstrategicalliance
impactofjoiningstrategicalliance Development
withotherairlines
andOperation
Department
2.List/selectthestrategic 2.Targetedstrategicallianceto
3Months
alliancetobepartnerwith discussandnegotiatewith
3.Contactanddiscusswith 3.Finaltermandconditiontobe Top
6Month
selectedpartner strategicalliance Management
272

 Time Budgetand Responsible

OperationPlan ActionPlan ExpectedResults
Frame AdditionalResource Unit

4.Integrateoperationplanof
4.Strategicallianceoperationplan
strategicallianceinto
6Months canbeintegratedintoSouthwest
SouthwestAirlinesincluding
operationsmoothly
6.Developstrategicalliance system,routesandfacilities Operation
plan Department
5.Increasecustomertoexperience
5.Southwestcanoffer
3Year Southwestservicewhichcreate
servicetostrategicalliance
onwards opportunityforreturning
customer
customer

273

c.) Long Term Strategy

For the period of more than 5 years, the strategies that Southwest Airline should
implementarethefollowing;

1.WO3:ConsiderdiversifytypeofaircraftsratherthanBoeing(O1,O2,O3,W3)
Inorder to make decision on aircraft supplier, Southwest Airline has to carefully study
thecostandbenefitbecausepurchaseaircraftisaheavyinvestmentandalsoadecisiontopurchase
aircraftfromnewsupplierwillincuradditionalcostandswitchingcost.Moreover,SouthwestAirline
cangetitsexperiencefromusingBoeingforsomeperiodoftime,ifsomethingisnotgoingwell,it
canseriouslylooktodiversifyingaircraft.

2.WT1:Diversifyintootherrelatedbusiness(W1,W2,W3,T1,T2,T3,T4,T5)
SouthwestAirlinesshouldlookintodiversifyingitsbusinessasalongtermstrategy;this
isincasetheairlineindustryisnotmakingmuchmarginanymore.

LongtermoperationplanandactionasdescriptedinTable22.15and22.16respectively.

274

Table22.15:RecommendedLongTermOperationPlansforSouthwestAirlines
Strategy Measure(KPI) BaselineData Target OperationPlans

1.Studyresulttocompare 1.Decisiontodiversify
1.WO3:Considerdiversifytypeof Developaircraftdiversifying
costandbenefitof aircraftornotwithin5
aircraftsratherthanBoeing plan
diversifyingaircraft years

1.Numberofrelated
2.WT1:Diversifyintootherrelated Developdiversifying
profitablebusinessto 1.12businesses
business businessplan
diversity

Table22.16RecommendedLongTermActionPlansforSouthwestAirlines

Time Expected Budget Responsible

OperationPlan ActionPlan
Frame Results andAdditionalResource Unit

1.Setupstudyteamandgatherrelated
1.Comprehensivedata
dataandinformationofBoingand 1Year
formakeadecision
Airbustocompare
1.Developaircraft Operation
diversifyingplan Department
2.Analyzethedataalongwith 2.Studyresultwith
discussionwithBoingandAirbusfor 1Year informationfrom
relatedinformation suppliers

275

 Expected Budget Responsible

OperationPlan ActionPlan TimeFrame
Results andAdditionalResource Unit

1.Developaircraft 3.Makeadecisionwhethertodiversify 3.Approvalfrom Operation

3.3Months
diversifyingplan aircraftornot Management Department

1.Setupteamtostudyandgather 1.Comprehensivedata Setbudgetfor

1.1Year
relatedbusinessdata formakeadecision consultancy

2.Analyzetherelatedbusinessandthe 2.Listofrelated
possibilitytointegrateandsynergize businessesthat Business
2.1Year
intoSouthwestsmodeland Southwestshould development

operation enterinto
2.Diversifyintoother
3.Makeadecisionwhethertodiversify 3.Approvalfrom Setbudgetfornew
relatedbusiness 3Months
torelatedbusinessesornot Management businessdivision

4.Relatedbusinessis
4.Integrationandpreparationprocess
1Year readytobegin
tostartrelatedbusiness
businesswithsynergy Operation
After3.5 5.Higherprofit Department
5.Starttoofferrelatedbusinessesto
year generatedfrom
customer.
onwards relatedbusiness

276