SouthWest Airlines 2002:

An Industry Under Siege

Jason Chou-Hong Chen, Ph.D.
Visiting Professor, Mingchi University of Technology
Professor of MIS
Graduate School of Business, Gonzaga University
Spokane, WA 99258 USA
chen@jepson.gonzaga.edu
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

Case Information
Discipline: Service management
Description: The company's management is faced with longterm questions regarding the rate and manner of growth in the
wake of the 9/11 attacks and general industry malaise.
Learning Objective: To understand ways of achieving and
maintaining both a differentiated and a low-cost service
offering.
Subjects Covered: Competition, Corporate culture, Service
management, Strategy, Information Technology.
Setting: United States; Airline industry; $4 billion revenues;
35,000 employees; 2002
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

Why Study the Case?

The case provides a vehicle for analyzing one of those rare
competitive strategies that literally change the rules of the
game for an entire industry. Historic information suggests
how the strategy was shaped. And detailed information in
the case helps the reader to understand both how Southwest
makes money while maintaining its low-cost advantage as
well as its differentiation from its competition, the result of a
well-crafted strategic value vision.
The importance of effective leadership and a strong culture
capable of adapting in the face of major competitive threats
as well as external disasters, such as 9/11, is highlighted in
the case. It provides the basis for assessing the conclusion of
one major piece of research described in the next Exhibit,
that Southwest Airlines has been able to preserve its
competitive advantage primarily through its superior
relationship management practices.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

IS/IT Strategy Triangle

Each group:
Complete the case using Strategy
Triangle model

4
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

Draw and explain how can the Information Systems Strategy

Triangle be employed in this case?

Business Strategy:
Low cost
Differentiation/
Innovation

Business Strategy

Organizational Strategy:
Sustainable growth
Teams
Fun/Friendly Culture
Frequent flights
Rapid rewards
Point-to-Point
Organizational
Strategy
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

IS/IT Strategy:
SABRE
Kiosks
Website, online ticketing.
Online boarding passes

IS/IT Strategy

Executive Summary
Southwest Airlines in 2002 faced a serious of important
management decisions after the 9/11 tragedy in order to
continue the record breaking company growth that
Southwest had experienced since the 1970s. Southwest
Airlines revolutionized the airline industry with what is
known as the Southwest Effect: low cost fares, point-topoint service, 10 minute turnaround and an enjoyable
friendly atmosphere (all are with differentiation).
After the Airline Deregulation Act of 1978, Southwest
adopted a policy that regardless of the profitability of
expansion opportunities, the company wanted to commit to
a manageable annual growth rate of about 10-15%. The
following questions and discussion will address the
historical challenges of Southwest airlines, the direction the
company contemplated in 2002, and a brief look at the
challenges of today.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

What other Model can be

Employed?

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

What strategy and/or model was used or implemented in this case?

NEW
MARKET
ENTRANTS
Switching cost
Access to
distribution channels
Economies of scale

Other Airllines
(USA routes
only)

S.W.
Airline

Selection of suppler
Threat of backward
integration

SUPPLIERS

SUBSTITUTE
PRODUCTS
& SERVICES

Threats

Cost-effectiveness
Market access
Differentiation of
product or service

Bargaining power

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

Redefine products
and services
Improve
price/performance

Buyer selection
Switching costs
Differentiation

CUSTOMERS

 The Southwest airlines case can be analyzed with Porters

five competitive forces model. Southwest airlines
benefited after the airline deregulation in 1971, and were
able to lay the groundwork for a successful airline.
Throughout their growth, Southwest differentiated from
the competition by taking a friendly, warm and welcoming
approach to flying. Their low cost flights undercut the
competition, which would fit under the threat of
substitutes. Also, their reliability (differentiation) was the
best in the industry until September 11th, which helped to
prevent the threat of substitutes.

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

Suggested Study Questions

1). How does this company make money even when other
airlines do not? What are the most important contributors
to its financial success?
Southwest Airlines has built its reputation on low cost reliable
service. Over their tenure of 30 years in the airline industry,
they have demonstrated 30 years of sustainable growth. The
reason Southwest has remained financially viable is their
commitment through point-to-point service with a quick turn
around time. The more planes in the air and the less time on the
ground is a profitably business model. Also, Southwest has
tailored to the business traveler who is looking for reliability
and less hassles. Also, Southwest has a generous rapid rewards
system that is easy to comprehend and helps retain customer
loyalty. In addition, Southwest hires the best people and
rewards them accordingly, in a fun, enjoyable atmosphere.
Finally, Southwest negotiates fuel prices for their airlines years
in advance allowing the company to keep their pricing
consistent.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

2). How should management respond to the fact that Southwest

Airlines has fallen to next-to-last place among major airlines in
on-time performance as of September, 2002?
Management faced many challenges due to the increase in security
regulations post-9/11. Southwest was fortune that it was a strong performer
prior September 11th, but many of the security regulations that soon after
would be implemented, directly contrast with Southwest primary core
competencies. For instance, Southwest initially had the colored boarding
cards, which were generic without passenger names. Due to highest
security risk, passenger names had to be cross checked at the gate, causing
delays.
Also, Southwests motto, You are now free to move about the Country
was directly targeting travelers who could walk onto the plane a few
minutes before takeoff because Southwest would keep the doors open to
allow for passengers to keep filing in. Again, this was against new security
measures. Also, since many of Southwest passengers did not generally
arrive as early as other airlines, more often than not, Southwest passengers
would be subject to security searches. Also, random security searches were
being conducted at the gates as well which Southwest actually stepped up to
help mitigate delays by hiring more security personnel.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

3). Once operations are fully stabilized, would you

recommend to the management of the airline that it resume its
historic growth rate of from 10? To 15? Per year? Why?

I would recommend that Southwest continue to grow at 10

to 15 percent per year but no more. Companies such as
Wal Mart and McDonalds, if their growth is too large, too
quickly, their presence can be filled with resentment from
customers because they have pushed out other competition.
At 10-15 percent growth, airports and cities will still ask
for Southwest to expand into their areas, and it will be a
slow, calculated and sustainable growth, as opposed to one
that moves the company away from its core competencies.

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

5)
N/A since, a 10-15 % increased is
recommended.

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

6). What are the implications for Southwest of the actual or

threatened bankruptcies of other major U.S. airlines?
Southwest is in a precarious position because they are
profitable. Through 30 years of diligence, determination and
strategic efforts, Southwest is a very popular and profitable
airline. The trouble is that in the event of a government bailout
of other airlines due to bankruptcy, then Southwest is almost
hindered because the other airlines will be handed large
government checks.
The benefit here though to Southwest is the ability they have to
continue to be profitable, continue to build investor relations
and continue to reward their hard working employees. Since
9/11, many airlines have eliminated pensions, terminated
employees and taken very drastic measures to stay afloat.
Southwest has been fortunate, and although a bailout of other
airlines may not seem fair, Southwest still is in the black and
has the ability to continue to push forward to gain more market
share and continue its excellent track record of profitability.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

7). What is IS/IT role played in the case?

The IS/IT role played in this case was one that

kept Southwest competitive in a challenging
industry. Southwest used a reservation system,
website and check in kiosks (was the first airline
used ticketless system), Southwest was able to help
counter the challenges posed after September
11th.
Southwest was revolutionary in the airline
industry in many of their IT developments and
were quick to move to the online e-commerce
model as far as a reservation system and ticketing.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

8) Why have profits for Southwest Airlines dropped

recently?
Upon further review of Southwest Airlines
website and other sites, I have been unable to find
evidence that profits have dropped. Looking at
their traffic and revenue numbers throughout
2006, it appears that traffic counts and revenue is
up for Southwest however, Southwest has always
negotiated their oil hedge prices years ahead.
Perhaps due to drastic increases in oil prices, this
could be hurting Southwests bottom line. Also,
Jet Blue has gained popularity as a low cost
alternative which may be threatening Southwests
market share.
John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

Southwest today

Fleet consists of 547 Boeing 737s

Employees nearly 35,000 people
Serves 72 cities in 37 states
Just experienced its 38th consecutive year
of profitability

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices

Further Lessons Learned:

SWA Case and Strategic Resource Model
One of the differentiation from SWA is its
corporate culture

What characteristics in Strategic Resource

Model that are related to the corporate culture
of SWA that improves/creates its competitive
advantage

Non-imitable
Non-transferable
Rare
Exploitable

John Wiley & Sons, Inc. & Dr. Chen, Information Systems Theory and Practices