Southwest Airlines Case Study

Problem - Southwest Airlines has come under intense competition in its Southwestern U.S. routes. This has led to a decline in revenue. This loss can be attained to competitors such as Shuttle by United trying to replicate the Southwest business model in these areas. Southwest needs to decide how they are going to respond to this new competition.

Summary

Southwest Airlines is the leading low cost national air carrier in the U.S. Their unique business model has led to years of success and profitability. With an airline industry with intense competition it has led Southwest competitors to try and duplicate some of Southwest's success. This has led to the Creation of Shuttle by United, and Continental Lite.

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With the deregulation of the airline industry there has been a large influx of competitors, and an overall lowering of prices. This has led to most airlines experiencing financial trouble.
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Airlines are categorized intro three major areas, major, national, and regional carriers. There are five major carriers in the U.S. and they account for over 80% of the airline market share. United is the largest airline with 22.1% market share and is categorized as a major carrier. While Southwest is a national carriers with 4.4% market share.
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The major carriers utilize a hub and spoke travel model where passengers and brought to a central location on smaller planes, and transferred to larger planes for major routes. Southwest operates on a point-to-point system where more flights are direct.
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The majority of airlines expenses are fixed costs; these include fuel, planes, labor and facilities. Half of these fixed costs are labor.
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A carrier's passenger capacity is measured in Available seat miles (ASM). An ASM is one seat flown one mile. Carrier productivity is calculated by dividing total operating costs by ASM. Load factor is another measure of airline utilization of ASM and is measured by dividing revenue passenger miles (RPM) by ASM. Finally yield is calculated by diving passenger revenue by RPM. Yield is an expression of the cost of flying one passenger on mile.
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The airline within an airline concept was an attempt by the major carriers to make their hub and spoke systems coexist with the Southwest model of point-to-point. This was devised as a way to compete with Southwest on similar routes. Originally Continental had their Continental Lite service, however due to high costs they abandoned it. United has their Shuttle by United service and is in direct competition with Southwest on nine routes.
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Fifty nine percent of Southwest's ASM are flown in the western U.S. Superior customer service, operations, creative marketing, and commitment to people characterize Southwest's model.
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Southwest's commitment to customer service has led to an excellent track record. They held the unofficial Triple Crown in customer service for three consecutive years. The Triple Crown consists in being the best in on time performance, baggage handling, and customer satisfaction. This is an amazing feat considering no other airlines has held all three components for a single month.
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Southwest has a major advantage over other airlines because it operates a single type of plane, the Boeing 737. This means that all their pilots, facilities, and crews are trained on any plane that Southwest owns. Southwest also operates a fleet with an average age of 7 years. This means that they have less maintenance problems, and this leads to fewer delays, and higher customer service.
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Southwest relies on direct ticket booking and does not heavily utilize travel agents this is a cost saver. They also do not have full food service on their flights, leading to a faster turn around. Southwest also has a unique open seating system, with no assigned seats the planes load faster.
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Southwest does not fly into major hub airports in most cities, this leads to lower gate costs, less congestion, and quicker turn around times.
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Southwest has been marketed as the low price leader, and their planes have been painted in funky colors. Southwest views it's major competition as the automobile and not other airlines.

Problems and Opportunities
Southwest has been able to dictate the terms of the point-to-point system in the U.S. Southwest. Shuttle by United had originally been able to compete with Southwest on price, however they are planning on raising fairs by $10. Southwest needs to decide if this is a sign of Shuttle by United losing money, or just trying to raise prices industry wide. Since Southwest views its major competition coming from cars and not airlines they need to be sensitive to price changes. United has been able to erode some of Southwest's market share on the nine routes they compete directly on, this is expected with similar prices considering there is low customer loyalty in the airline industry. Southwest has an opportunity to raise, maintain, or lower their prices in order to draw business away from Shuttle by United. Southwest already has the superior model for national or regional carrier. They need to stick with their company philosophy of being the low cost high service leader. They should either maintain prices or lower prices in order to get market share back from United, raising prices would be a critical error by Southwest.
Alternative Courses of Action
1. Southwest in the year 1994 was the second most profitable airline in the industry. They did this by sticking to their simple formula of low prices, high service, and low operating costs. .
The airline was the best performer in term of labor productivity in the industry. Southwest does not need to match United's new price increases. They need to focus on what their core competencies are and continue to be Southwest.

2. The price raise by United may be a sign of weakness, or a sign that consumers are willing to pay a little more for the options that United offers. If you frequently fly these short Southwest routes you are not able to ear air miles to use on international flights. United also offers a first class option that may be more appealing to business travelers. Maybe Southwest should charge more and begin to offer its customers more perks. With such a large portion of Southwest's business in this west coast market they cannot afford to lose large amounts of market share.

3. Southwest needs to launch a new promotional campaign. They need to remind customers in the California market that they are the winner of the Triple Crown, and that low cost means high service and customer satisfaction when it comes to Southwest. With lower turn around times, and fewer delayed flights southwest has great unique selling points. They just need to remind the public about how great an Airline they are. This can be done with more TV ads, and more sponsorship of major sporting events.

Recommended Course of Action

Southwest needs to continue to be Southwest. They have a winning business model, and have made money every year of their existence. They cannot abandon what their core competencies are. They need to keep prices where they are, or even lower prices, and they advertise that fact to the public.

SWOT

Strengths and Weaknesses
Planes also have a lower turnaround time; they make twice as many flights per day than the average carrier. This leads to more ASM, with fewer planes. Southwest operates a single type of plane B737 in an all coach configuration. They do not offer meals, and do no transfer bags to other airlines leading to lower operating costs. The airline has won the Triple Crown and is setting the industry standard in customer service.
Southwest has come under intense competition from United. They are not a full service airline and do not offer the amenities and services for international travelers. They also do not have a higher cost first class option on their planes.
Opportunities and Threats
United has become a serious threat by taking away market share in the nine California routes. Southwest has an opportunity to take market share back from United by not raising prices.

Porters Five Forces Analysis

The bargaining power of customers
Customers in the airlines industry have many options and are price sensitive. If driving is cheaper than flying Southwest may lose customers. There are also over 100 carriers in the U.S. market therefore there are many options for customers.
The bargaining power of suppliers
Southwest is at the mercy of the labor Unions and Gas suppliers. If these costs become too high then price raises will mandatory.
The threat of new entrants
With so many major airlines going bankrupt there is a large supply of airplanes and personnel. This means that it is easier than ever to start up and airline and try and compete with Southwest.
The threat of substitute products
Flying has very few substitutes in the U.S. market if you need to be somewhere in a hurry. However there are other forms of transportation including busses, trains, and cars.
The intensity of competitive rivalry
There is intense industry competition. Every route is hotly contested with price wars, and a grab for customers. Price margins are low, and airlines need to be able to trim costs any way they can.