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US Airline Industry

Before 1978 derogation Civil Aeronautic Board regulated airline route 2-3 carriers provided the service in a given market cost passed along to customers, no price competition After derogation many new firms enter the market Fuel crisis of 1979 1981 air traffic control strike=more industry

difficulties More than 150 bankrupt carriers during the 1st decade of deregulation
11/14/09 Annie, Luigi, Myra, Wichai, Yonggang MBA -C 1

US Airline Industry
1980s: financial debts increase due to expanded demand

brought about by low fares 1990s: new aircraft orders lowered (not profitable market) to avoid debts Mid-1990s: increase demand, from 200 million (1974) to 500 million(1995) In 1999, global improvement of airline industry September 11, 2001 attack= chaos in the market

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Annie, Luigi, Myra, Wichai, Yonggang MBA -C

New Pressures on Airline Industry


Security : need to increase war risk insurance Customer dissatisfaction: service problem, call for

regulation Labor costs: pressure expected to increase Aircraft maintenance : higher maintenance/replacement costs, stricter government regulation for older planes Debt servicing: airline industry debt load exceeded US industry averages Fuel cost: big impact on the total cost was uncertain Air traffic delays: due to higher travel, airport congestion=negative influence on profitability.
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Southwest Airlines Background


1967: Herb Kelleher and Rollin King founded SW 1970: management team built June 18,1971: 1st fly in Texas-Houston, Dallas, San Antonio

(Golden Triangle) with 3 Boeing 737s aircrafts and 25 employees Operation focus: short-distance flights (>500 miles), point-to-point flights, only 737 Boeing,high frequency flights, low fares, no international flights 1st national carrier to sell seats online ($1 per booking) 1st airline to use ticketless travel (January 31,1995) 2000: biggest aircraft order (94 737s Boeing) >>> 355 fleets in 2002 2003: 4th largest US airlines in terms of domestic passengers carried

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Annie, Luigi, Myra, Wichai, Yonggang MBA -C

Southwest Performance
Passenger load factor is

the percentage filled with paying passengers.

Revenue passenger miles

one paying passenger flown one line

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Annie, Luigi, Myra, Wichai, Yonggang MBA -C

Analysis with Porters 5 Force Model

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Power of Suppliers
The market is dominated by a few large airplane suppliers As for the catering, gift services and other indirect materials,

there are many fragmented sources and therefore their power is of almost no significance The cost (maintenance and training) of switching from Boeing 737 to Airbus A320 is very high The suppliers' customers are fragmented, so their bargaining power is low There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins
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Power of Customers
Travel agents buy large volumes, theres a concentration of buyers,

therefore their switching to a different supplier might have larger impact on the profits Individual buyers usually act as individuals and therefore have no strong bargaining power Switching to an alternative product is relatively simple and is not related to high costs Customers are either price-sensitive, or time-oriented The product is not of strategic importance for the customer because there are many other short distance transportation means There is the possibility for the customer (travel agent only) integrating backwards

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Annie, Luigi, Myra, Wichai, Yonggang MBA -C

Threat of New Entrants


Economies of scale: Southwest is # 7 in market share in 2000, thus has

reached sufficient economies of scale High initial investments and fixed costs: New entrants difficult to compete financially with profitable Southwest Brand loyalty of customers: SW reputation makes it hard to win SW customers Scarcity of important resources: (e.g. qualified expert staff) To train people for technical skills is possible, but to imitate SW culture is very difficult Distribution channels: SW has no special control over distribution channels Legislation and government action: Not so difficult to set up airline company in the US Operational efficiency: many imitators failed to compete with SWs...

the highest passenger miles per employees ratio


lowest employees per aircraft ratio debt-to-equity ratio is much lower than the industry average
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Treat of Substitutes
Brand loyalty of customersso customers are unlikely to switch to other

transportation means, such as train Southwest provides low price or time-optimized tickets good service, care fun to their customers
Switching costs for customers to train/car for the Southwest routes requires more travel times cause a lot of inconvenience Relative price for performance of substitutes Price for trains, or gasoline cost for self-driving are comparable to the price

of Southwest ticket for the same route, not much cheaper.


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Rivalry in the industry


There are many players of about the same size Players have similar strategies All players have their own customer intimacy program

Not much differentiation between players and their products,

hence, there is much price competition Only visible differentiation is in the scope of the service offering, age of airplanes, trainings of the staff, and heartiness of flight attendants where SW ranks very high Low market growth rates (growth of a particular company is possible only at the expense of a competitor) Barriers for exit are high (e.g. expensive and highly specialized equipment)
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Southwest Business Strategies and Service Models


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Business Strategies/Service Models


Short haul (less than 500 miles)
Point to point flight Only Boeing 737

High frequency flights


Low fare No international flights

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Business Strategies/Service Models


Two-tiered pricing structure ($13 or $26 w/ free bottle of

liquor) Consistent with their primary focus (531 miles average trip length of 1.35 hours, 2,800 flights/day to 58 cities, 8 flights/plane, 12 working hours/plane) Operation without major hubs=customer convenience, timesaving Uses no frills approach to services (first come first serve seating, color-coded passes) Online booking (no need for travel agents)

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Human Resource Management Strategies


Positively Outrageous Service (customer service exceeds the norm)

Communication and camaraderie highly valued


Unique new employee orientation (Wheel of fortune game show, scavenger

hunts, company videos) Regular training for advanced employees Leading with Integrity classes for newly promoted managers/supervisors Walk-a-Mile Day program to promote respect for co-workers and increase company awareness Mentoring program

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Human Resource Management Strategies


Employee initiative supported by management Emphasis on cooperative labor relations Employee own 10% company stocks Average age of Southwest employee was 34 years

SW among the highest paid employees in the industry and the

company Enjoyed low employee turnover relative to the airline industry More than 1,000 married couples (2,000 employees) worked for the airline

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New Employees Hiring Strategies


In 2001, Southwest reviewed 194,821

resumes and hired 6,406 new employees Unique: Peers screened candidates and conducted interviews (e.g. pilots hired pilots, gate agents hired gate agents) To better understand what the company sought in candidates, Southwest interviewed its top employees in each job function (e.g. pilots, gate agents, baggage handlers, ground crew) and identified their common strengths, then used these profiles to identify top candidates

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Southwest spirit employees first


If theyre happy, satisfied, dedicated, and energetic, theyll take real good care of the customers. When the customers are happy, they come back. And that makes the shareholders happy.

Herb Kelleher, Southwest CEO and Founder

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Costs of Imitating Southwest Practice

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SW Imitators
By second half of 1994 many imitators One third of the total industry capacity Almost was start up airlines Main Shuttle by United, Continental Line (CaLite) Morris Air, first competition after take over

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Costs of imitating Southwest


increase productivity, frequency of flight
Reserved seating - Lower fare rate Hub congestion - cost of delays Fee travel agents - commission fee

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Future Challenges for Southwest Airlines


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Future Challenges for SW

Interesting and unique position

Good financial status/stability Increase operation in Northeast Provide additional service (Wi-fi on all plane 2009)

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