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A FUNDAMENTALS OF MANAGEMENT CASE STUDY SUBMISSION

OCTOBER 25, 2013

A CASE STUDY ON SOUTHWEST AIRLINES


FROM “STRATEGIC MANAGEMENT: AN INTEGRATED APPROACH” 9TH EDITION BY HILL & JONES (CENGAGE LEARNING)
(Text Book Page: 105)

SUBMITTED BY: GROUP 10


IMAD SHAHID KHAN (ROLL 27) | SIDDHARTH BHAGAT (ROLL 53) | SOUMYA SUMAN (ROLL 44) | ANSAI SONY (ROLL 7)
SECTION A, 1ST SEMESTER, BACHELOR OF BUSINESS MANAGEMENT (2013-2016)
Group 10, Section A, 1st Semester, Bachelor of Business Management (2013-2016)

A CASE STUDY ON SOUTHWEST AIRLINES

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


and reliable on-time performance (however later it had spread its
operations to major airports as well).

October 25, 2013 A Case Study on Southwest Airlines 1


Group 10, Section A, 1st Semester, Bachelor of Business Management (2013-2016)

Carrier Southwest United/Continental

Parameters

One type (Boeing 737) Variety of fleets


Airplane Type Low training costs, maintenance Higher cost of operations.
costs and inventory costs.

Point-to-Point Hub and Spoke


Transit System Eliminates the need for connection, Is dependent upon hub connections,
reduces travel time and less prone leading to increased travel time
to delay, with minimum employees. while being vulnerable to delays.
Also requires more employees.
Ticketless Operation Traditional Operation
Method of Operation No seat assignment reduces costs Organized system of seat
and back-office accounting assignment reduces chaos yet
functions. subjects to added costs.

Horizontal Organization Hierarchical Organization


Type of Organization Employees are made into cross- Intervention of management every
functional teams which enables now and then, while following a
them to work under tight time traditional hierarchy makes
schedules and high stress. employees counterproductive.
High Relatively Low
Employee Productivity At high employee-to-passenger In 2008, the United’s employee-to-
ratio of 1 to 2400, it reported the passenger ratio was 1 to 1175 and
best in industry in 2008. Continental’s 1 to 1125.

October 25, 2013 A Case Study on Southwest Airlines 2


Group 10, Section A, 1st Semester, Bachelor of Business Management (2013-2016)

Q2. Identify the resources, capabilities, and distinctive competencies of


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
refreshment, so as to minimize the overhead expenses and save the
resources.

October 25, 2013 A Case Study on Southwest Airlines 3


Group 10, Section A, 1st Semester, Bachelor of Business Management (2013-2016)

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.

And while pilots in most other airlines pilots are unionized, there are no
such union affiliations in the Southwest Airlines which therefore does not
restrict the pilot’s flying hours for a particular period.

October 25, 2013 A Case Study on Southwest Airlines 4


Group 10, Section A, 1st Semester, Bachelor of Business Management (2013-2016)

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.

- It is the only carrier that does not charges any nominal amount for
changing the date of the ticket.

October 25, 2013 A Case Study on Southwest Airlines 5


Group 10, Section A, 1st Semester, Bachelor of Business Management (2013-2016)

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.

Applying its Point-to-Point transit system, its admirable how Southwest


Airlines has avoided the congested airports, thus not needing the dozens of
gates or thousands of employees to handle the banks of the flights that
come in and then disperse, leading to reducing a major fraction of the
operational costs.

October 25, 2013 A Case Study on Southwest Airlines 6


Group 10, Section A, 1st Semester, Bachelor of Business Management (2013-2016)

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 fact 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
business model due to following factors:

October 25, 2013 A Case Study on Southwest Airlines 7


Group 10, Section A, 1st Semester, Bachelor of Business Management (2013-2016)

 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
innovative and foresighted strategies.

October 25, 2013 A Case Study on Southwest Airlines 8


Group 10, Section A, 1st Semester, Bachelor of Business Management (2013-2016)

References

 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 http://www.ive.cuny.edu/downloads/cases/Southwest%20Airlines%20IVE%20Case.pdf

 Southwest Investor Information Portal http://southwest.investorroom.com/

 Southwest: Dressed To Kill... Competitors Business Week


http://www.businessweek.com/stories/2005-02-20/southwest-dressed-to-kill-dot-dot-dot-
competitors

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


Wharton, University of Pennsylvania
http://knowledge.wharton.upenn.edu/article/by-acquiring-airtran-will-southwest-continue-to-
spread-the-luv/

 College of Business at Illinois


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

● Thank You ●

October 25, 2013 A Case Study on Southwest Airlines 9