Solved Case Study of Southwest Airlines

(1)

A CASE STUDY ON SOUTHWEST AIRLINES

FROM “TRATEGIC MANAGEMENT: AN INTEGRATED APPROACH TH EDITION BY HILL & JONE“ CENGAGE LEARNING Te t Book Page:

“UBMITTED BY: GROUP

IMAD SHAHID KHAN ROLL | SIDDHARTH BHAGAT ROLL | SOUMYA SUMAN ROLL | ANSAI SONY ROLL

(2)

-O to e , A Case “tud o “outh est Ai li es

A CA“E “TUDY ON “OUTHWE“T AIRLINE“

Case Discussion Questions

Q1. How would you characterize the business model of Southwest

Airlines? How does this differ from the business model used at many

other airlines such as United and American Airlines?

Southwest Airlines, being a Low Cost Carrier (LCC), is famous for its uniquely competitive low fares, which are often some 30% lower than most of its major rivals. They have achieved this low cost leadership position in their industry by emphasizing on:

 Faster than average gate turnarounds to yield higher utilization rates.

 _{One class of seating.}

 _{No meals or movies on flight.}

 One type of airplane – Boeing 737.

 _{Point-to-Point flight routes.}

 _{High employee productivity.}

 _{A very successful fuel hedging program (long-term contract with oil}

companies to buy fuel equivalent to $51 per barrel through 2009 that has reduced a major fraction of its operating expense).

 _{Serves relatively less-congested airports to achieve high asset utilization}

(3)

O to e , A Case “tud o “outh est Ai li es

Eliminates the need for connection, reduces travel time and less prone to delay, with minimum employees.

Hub and Spoke

Is dependent upon hub connections, leading to increased travel time while being vulnerable to delays. Also requires more employees.

Method of Operation

Ticketless Operation

No seat assignment reduces costs and back-office accounting

Horizontal Organization

Employees are made into cross-functional teams which enables them to work under tight time schedules and high stress.

Hierarchical Organization

Intervention of management every now and then, while following a traditional hierarchy makes employees counterproductive.

Employee Productivity

High

At high employee-to-passenger ratio of 1 to 2400, it reported the best in industry in 2008.

Relatively Low

In 2008, the United’s employee-to-passenger ratio was 1 to 1175 and Continental’s 1 to 1125.

(4)

Southwest Airlines.

Resources:

 Southwest Airlines had always managed its resources well including the

financial resources. In 2012, Southwest returned $422 million to Shareholders through repurchasing $400 million of common stock (approximately 46 million shares) and distributing $22 million in dividends. It made money every year and earned a Return on Invested Capital (ROIC) of 5.8%. Even in 2008, an awful year for the airline industry it made a profit and earned an ROIC of 4%.

 _{By October 2013, Southwest Airlines has a large standardized fleet of 550}

of Boeing 737 aircrafts.

 Implementing a new reservation system as a part of its endeavor towards

technological resources, Southwest Airlines introduced the e-ticketing service a few years back which is now responsible for generating 46% of its revenues.

 _{Hiring at the rate of only 3% of the job applicants interviewed, Southwest}

Airlines has the most thorough recruitment process which equips it with the most competent workforce. Apart from this the company culture of

teamwork is influential in efficient handling of operations.

 _{The Airline’s Employee Profit-sharing plan which makes atleast 25% of the}

employee’s share of the plan invested in Southwest Airlines stock, acts as a major motivating factor of the workforce making it more flexible and productive.

 _{Southwest Airlines excludes meals and provides for light snacks as inflight}

(5)

Capabilities:

Southwest Airlines focuses mainly on point-to-point service, rather than the hub-and-spoke service provided by major US airlines. Point-to-point

service allows for direct nonstop routing by minimizing connections, delays and total trip time. As a result, approximately 71% of Southwest Airlines’ customers flew nonstop in FY2011. During the year, the

company's average aircraft trip stage length was 664 miles with an average duration of approximately 1.8 hours. This service also enables the company to provide its markets with frequent, conveniently timed flights and low fares.

The management of Southwest Airlines is considered to be the most

dynamic of all time. The policies introduced by Southwestern Airline’s top management is considered to be intuitive and effective by many industrial analysts.

Even as its general expansion strategy has been more of an organic growth. In May 2011, the company acquired AirTran Holdings, the parent company of AirTran Airways, one of the largest low cost scheduled airlines in the US. The transaction was valued at approximately $1.4 billion. The

acquisition provides Southwest Airlines an opportunity to grow its presence in key markets it didn't yet served. Moreover, it would allow the company to expand its presence in slot-controlled markets where the company currently has little (New York LaGuardia) or no (Ronald Reagan Washington National Airport) service; expand its service in other key domestic markets, including Boston and Baltimore and to add destinations to its route system; and provide access to near-international leisure markets in the Caribbean and Mexico, as well as smaller cities.

(6)

Distinctive Capabilities:

There are many distinctive capabilities of Southwest Airlines that makes it a different and the most successful carrier:

-They operate 1 type of aircraft Boeing 737, which lowers maintenance, training and inventory costs to a huge extent.

-They hedge aggressively on fuel which allowed them to be profitable when other airlines were losing money, Southwest have maintained a cost per seat mile of $0.12, which is around 25% cheaper than its competitors.

-They have a strong domestic network.

- Their philosophy is to treat their employees well and put them ahead of

their customers.The benefits it gives it employees, include: profit-sharing

and empowering employees to make decisions. The logic is if the employees are valued, they will treat the customers well and that will spread the reputation of the Airlines further.

-The airline employs a fun and casual work environment. Southwest Airlines is popular for asking its candidates one time to change from suit clothing to Bermuda shorts. Those who were fast enough were selected.

- No formal hierarchy is enforced. It’s not uncommon to see the pilots assisting the flight stewards in helping them check the passengers in the plane or cleaning the plane. This helps in achieving the swiftest turnaround of the aircraft.

(7)

Q3. How do Southwest

’

s resources, capabilities, and distinctive

competencies translate into superior financial performance?

Southwest’s top management has cleverly made these three factors to their advantage. At one point they have stressed on maintaining a lower cost structure by keeping a standardized fleet with minimal inflight meal and entertainment amenities, a workforce motivated for quick aircraft

turnaround and an aggressive fuel hedging program, however at the same time they have equally stressed on winning customer satisfaction which is seen by their stupendous customer retention. They have respected the basic requirement of any passenger i.e. – to reach on time, by maintaining a decent record of on schedule flights.

On average there are 94 employees per Southwest aircraft in contrast to competitors who have 130, and the Southwest staff serve on average 2500 passengers per year compared to competitors 1000. Keeping the workforce number minimal, they have cut off a major fraction of labor costs incurred generally by other carriers, whilst not letting any shortcoming come in smooth running of operations. When the pilots of the other carriers are affiliated to Unions which have restricted working hours at for one period, Southwest Airlines pilots are not unionized under such regulations which allows them to work smoothly unhindered. With the innovative profit-sharing plan, they have wittily made each and every employee his/her own performance appraiser, ensuring that no employee falters behind the line.

(8)

Q4. How secure is Southwest

’

s competitive advantage? What are the

barriers to imitation here?

Looking at the developments in the aviation industry till recent, it would be safe to say that Southwest enjoys the most secure competitive edge than any other carrier.

Its strategy, right from having standardized fleet to having minimal but motivated employees while wittily introducing cost-cutting initiatives like fuel-hedging and employee profit-sharing plan, have helped it gain a benchmark position which cannot be easily touched by any of its competitors. With its punctual flight record,

pleasantly approachable staff, impressive Customer service, despite the fa t that it

offers no-frills, there is still a high degree of customer satisfaction that continuously builds customer loyalty for the company.

This is one of the reasons why, even in the aftermath of the 9/11 terror attacks, when the entire aviation industry was reeling under the disastrous consequences of running empty flights, Southwest Airlines not only was successful in maintaining fully seated flights but also earned an ROIC of 5.8%.

Its hiring process which lays stress on applicants possessing teamwork skills and optimistic outlook has helped it shape a dynamic and motivated workforce which not only helps in smooth functioning of an informal horizontal organization but also promotes accountability among the employees not just as individual but as a team. Its method of offering differentiated products like Rapid Rewards frequent flyer program have made it stand apart in the LCC sector.

However even while being an epitome of success in the Aviation industry, it has

been unfeasible and impossible for Southwest’s rival carriers to imitate its

(9)

 _{Southwest Airlines, in order to cut its maintenance, training and inventory}

costs had standardized its fleet by Boeing 737 aircrafts; something which its

rival cannot think of doing. Its Cost Leadership is one of its vital factors

which it has been able to stay ahead of its rivals.

 _{While it follows a Point-to-Point transit system enabling it to have punctual}

and less cost-incurring flight schedule, most of its competitors follows a Hub and Spoke transit mechanism; and changing from the latter to the former is not recommendable at this fragile state of the aviation industry.

 Southwest Airlines has a unique, thorough and highly selective hiring

process which ensures that its workforce has the requisite motivation at par with the spirit of the Airlines. Now, this cannot be as easily applied by its rivals which are mostly very hierarchical and formal.

 _{Southwest Airlines innovated the strategy of fuel hedging for a long time,}

something which its rival cannot start and reap short-term benefits.

 _{With its unique way of communication to both prospective and incumbent}

passengers, either by goofy humor or funny flight attendants, Southwest

Airlines has been able to sustain a Differentiation Leadership. No other

carrier can practically think of depending too much on its on-board staff in absence of any kind of inflight entertainment.

Hence, we can see how Southwest Airlines was successful in able to maintain both Cost effectiveness as well as Customer loyalty and retention, through its

(10)

 _{Strategic Management: An Integrated Approach” 9th Edition by Hill &}

Jones (CENGAGE Learning)

 SOUTHWEST AIRLINES 2007 Thomas M. Box, Pittsburg State

University & Kent Byus, Texas A&M University – Corpus Christi (EBSCO Host)

 _{Company Profile Southwest & Co.}_{Market Line}_{(EBSCO Host)}

 Southwest Airlines Co By: Stephen Leavenworth City University of New

York htp:// .i e. u .edu/do loads/ ases/“outh est% Ai li es% IVE% Case.pdf

 _{Southwest Investor Information Portal}htp://south est.i esto oo . o /

 _{Southwest: Dressed To Kill... Competitors}_{Business Week}

htp:// . usi ess eek. o /sto ies/ - - /south est-d essed-to-kill-dot-dot-dot-o peitessed-to-kill-dot-dot-dot-o s

 _{By Acquiring AirTran, Will Southwest Continue to Spread the LUV?}

Wharton, University of Pennsylvania

htp://k o ledge. ha to .upe .edu/a i le/ -a ui i g-ai t a - ill-south est- o i ue-to-sp ead-the-lu /

 College of Business at Illinois

business.illinois.edu/josephm/BA449_Fall_2013/BA449Chap004.ppt