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Alex Tallo

Southwest Airlines 1993 (A)


Case Preparation Guide

1. Begin by identifying Southwest Airlines’s core competency.

Initially: low-cost strategy (operational)


Final: customer service strategy
Southwest offers a no-frills approach to customer service but met customer’s
needs that weren’t being addressed by the competition. Essentially, they
were a customer service business operating in the air travel industry.

2. What are the key components of Southwest’s business model? Short-haul,


high-frequency, low-cost strategy
• Use non-conventional models for low-cost
• Have Fun Together (employees & passengers; positioning and practice)
• Treat employees as family
• Hire people who form the fit
• involve employees
• Controlled, Solid growth for the airline
• Market-entry strategy
•Conservative Growth Strategy : Expansion within the current route structure
was the first priority (85% expansion was internal)

•External expansion was opportunity driven: After the collapse of Midwest


Airlines in 1991, Southwest moved to Midway Airport in Chicago and anchored
there.

•Scheduling department decides the appropriate market: They don’t do a lot


of market research. Choose a market, negotiate for gates and look for controlled
growth.

Growth with consistency: When they enter a new city they want to make sure
that they do the business which is consistent throughout the system

Market-Entry Strategy
How the company prices its new routes?
• They look to grow in the market when they enter the city
(quadruple and quintuple the number of passengers in a particular route)

• Pricing against the ground transportation as much as against existing air


service (atleast 60% below competitive fares)

•Low operating costs

•They think slightly differently about load factors:


o Initially higher than average load factors
o Low price – expand market faster than they can add equipment
Case assignment: Southwest Airlines 1993(A) 1
o Demand outpaces supply
o Competitors drop prices – that stimulates demand further
o Keep adding more service to balance out demand and supply
o Eventually leads to maturing of load factors

•On the Oakland-Burbank route, SWA quadrupled the passenger market within two
years and drove out USAir and United in 3 years time.

Non-Conventional Low-Cost Opperational Programs:


• Did all of its ticketing (not making seats available through computerized
systems)
• Did not operate in the hub-and
spoke route system
• flew into uncongested airports of small cities, less congested
airports of large cities
• Did not transfer baggage directly to other airlines
• Only drinks and snacks often
peanuts served on board

Low-Cost Strategies:
-Pilots contributing new ideas to save fuels
-Fuel costs
-Buying fuel from vendors who offer best prices : Carry inventory if possible
-Gate costs & landing Fees
-Average : $2.50 pp,
-Small airports: $2.00 pp, Large airports: $6 - $8 pp
-No. of Departures
-Maximize productivity of people and machinery . Atleast 20 departures per day
-Low cost service
-Offering great service at low cost : SWA cost per passenger was 7.3 cents in 1993.

Employee Productivity: in-place metrics, treated employees as part of the family


without over-paying them or over-hiring (each employee was directly related to the
value chain’s productivity and SWA’s lost-cost strategy)

Improved Customer Service (without incurring additional costs): internal


marketing, rapid
rewards frequent flyer awards, unique brand personality and positioning

• Southwest’s philosophy - “Service for Smiles and Profits”


• Encourages employees to treat customer service as the most
important aspect of their job
Scale economy

3. Distraction. Didn’t pay more than industry. And only retirement plan
was profit-sharing which really supports the low-cost satisfied customer
strategy.

Case assignment: Southwest Airlines 1993(A) 2


Conclusion: South West Airlines built numbers on its culture where as most
competitors let the culture to shape up by their focus on numbers. In order of
priority: strategy (low-cost), scheduling (operational), culture (employees), numbers

4. Looking at the decision about routes that must be made for the two new planes –
the choice being considered is between Baltimore, Dayton, or Phoenix.
a. What decision fits best with the operating philosophy?
b. What fits best with the business model?
c. Which would Herb go with?

3. See Exhibit 2. Return on (average total) assets has declined dramatically.


a. What is driving this decline?
b. Does that tell you something important about Southwest’s strategy? If
so, what?
c. Does it factor into the new route decision?

Case assignment: Southwest Airlines 1993(A) 3