Cost Leadership Strategy at Southwest

Southwest’s marketing positioned the airline as fun, with low prices that allowed
frequent, convenient travel. From the beginning, its advertising was playful, often
poking fun at the competition and emphasizing its low-price and convenience. Year
after year, Southwest steadily expanded its network, entering new markets with a
predictable impact on customers and competitors—referred to by analysts as the
“Southwest effect.” The company would identify markets that appeared
underserved and overpriced. To keep costs low and avoid the harshest
competition, it focused much of its early expansion on medium-sized cities and
secondary airports of major cities. Through heavy advertising and low
introductory fares, it would immediately initiate a price war with incumbent carriers,
stimulating overall market demand. Often the introductory fares would be 50%
less than existing fares in that market and would be competitive with bus fares and
the cost of driving. The low fares would grow the overall demand at that airport,
which Southwest would fill through further expansion. Typically Southwest would
enter the new city with at least 10 flights operating from two gates and quickly
move to double that to 20 flights. As Southwest matured, it successfully
pushed this same strategy into many entrenched hubs of its competitors like
Philadelphia (USAir) and Denver (United).

The following points helped southeast to execute the cost leadership strategy.

Digital Strategy at Southwest

Southwest was an internet-ready firm long before the internet. It started out selling
direct— keeping costs low by not paying sales commissions to travel agents. In
1995, when the web was still in its infancy, Southwest was the first airline to launch
a site. A few months later, it began offering customers the ability to quickly
purchase ticketless flights. Southwest continued innovating on the web—developing
the consumer application DING that notified customers of special low fares and
SWABIZ, Southwest’s free online booking tool that allowed business travelers to
plan, purchase, and track business travel. In 2008 a staggering 78% of its
tickets were purchased via southwest.com, which remained the exclusive on-line
ticket outlet. In 2009, southwest.com was ranked the 4th largest travel site and
largest airline site in terms of unique visitors. Besides planning and purchasing air
travel, hotels, and rental cars, customers also used the site to check-in (77% did so
online or at a kiosk) and track the status of their flights.

Service Differentiation

For the first 30 years, service at Southwest was shockingly different than its
competitors. With no meals, no seat assignments, and a single class of service,
many travelers thought Southwest was the “bus” of air travel. Often the point of
many jokes, it only offered peanuts, simple snacks, and drinks while other airlines
historically provided full meals and lavish treatment in business and first class
cabins.

Rather than emphasize meals and differentiated service, the Southwest model
focused on fun. Presenting the image of a happy family, its playful approach
included on-board games (such as guess the flight attendant’s weight) and jokes
that made even serious aspects of flying (such as emergency evacuation
instructions) fun. For example, when describing how to inflate the life vests, a
cheeky flight attendant might say, “blow into the tubes like you would a
breathalyzer”; when instructing parents on the use of oxygen masks, they might
say “first put a mask on yourself and then your children—starting with your favorite
child”; when talking about emergency exits, they might say “find the closest
available exit and move quickly off the plane. We will follow with the beer and
wine.”

Operation

Southwest’s operations also significantly differed from other U.S. airlines. Most
noticeable, they firm only flew Boeing 737 jets. Other major airlines flew a
portfolio of planes from small regional jets to wide-body jumbo jets. Using the
small jets, Southwest focused on point-to-point travel rather than building a hub-
and-spoke system. Airlines such as American built large hub-and-spoke networks
with airports like Dallas-Fort Worth representing major hubs. For example,
passengers traveling from Denver to Kansas City would pass through Dallas.
Southwest would fly many such “low-volume” links directly. With its point-to-point
model, Southwest also preferred smaller, less congested airports in medium sized
cities (like Manchester NH instead of Boston) or secondary airports (like Midway in
Chicago rather than O’Hare). Smaller airports provided many benefits
including reduced runway costs and the ability to lease multiple gates to support a
growing schedule of

flights. In highly congested airports like Atlanta and Chicago O’Hare, runway
capacity was limited and congestion often resulted in delays. Runway delays
translated into higher fuel costs, more employee time, and customer dissatisfaction.
Labor flexibility helped Southwest speed the turn process. Even though they were
unionized (77 percent of employees), flight attendants and even pilots often helped
turn planes,

including cleaning cabins, moving baggage, and loading passengers. Labor rules for
other unionized airlines typically prohibited such practices—limiting plane cleaning
to cleaners. If a cleaning crew was not immediately available when a plane arrived
the departure could be delayed. Not so at Southwest, where everyone would help
out when needed. Moreover the employees were selected by the peers which
meant accountability and responsibility towards the airlines. They were also offered
profit sharing plan that would motivate them to work for the airlines heartily.
About the control system I think it is the corporate culture that have
contributes to maintain the airlines to its best

So how does an airline that provides 2,300 flights per day and employs more than
31,000 people support individuality, innovation, and fun without creating chaos and
anarchy ? In large part, success is due to employee education, much of which takes
place in Southwest Airlines’ festive learning center: the University for People which
basically works in two improratant areas:

Identifying the individual strengths and

Identifying the differences with co workers and the resolution

Also,

it encourages employees to be innovative, to communicate, understand, and care,

to be individuals—mavericks even. Southwest is not afraid to use the “p” words:
people, personal, personalities. Even the place in which employees are hired shares
this spirit in its name. Southwest doesn’t have a Human Resource Department—it
has a People and Leadership Development Department!

Southwest is turning around long-held corporate beliefs by acting on the conviction

that a business is not an entity— it’s people. Herb Kelleher, chairman of the board
of Southwest Airlines’ founders, states emphatically “competitors have tried and
failed to copy us because they cannot copy our people.“American icon” by a survey
conducted to determine the top 10 role model companies in America, believes the
best way to succeed is to treat employees with respect and give them the latitude
and encouragement they need to do their jobs better than anyone thought possible.