Jerome Martin

Southwest Airline – Case Analysis

1. How does Southwest make money when other airlines don’t?

a. Southwest has been in the airline business for 30 years. During those 30

years they run into troubles, near bankruptcy, yet they were still able to

sustain growth. During the economic downturn, terrorist attacks, and other

events that affect the airline industry Southwest was able to turn a profit

when others could not. One of the reasons is their point-to-point route

system. Unlike the Hub-and-spoke systems, P2P enabled Southwest to

speed the turnaround and increase its airtime of their aircrafts. This also

resulted in a greater utilization from their Boeing 737 fleet. Cutting the

average turnaround time to 24 minutes set new standards for the airline

industry, which saw 55-minute turnarounds on average. In addition they

don’t assign seats, which eliminated the time in reconciliation of double

assignments of seats. Secondly, they didn’t spread themselves thin over an

extensive system. Their strategy was to open markets was to limit markets

served and provide high-frequency departures daily. Thirdly, they paid $1

bookings to the SABRE system in addition to having lower-priced tickets.

This saved the airline an excess of $30 million per year in booking fees.

Lastly, Southwest frequent flier program was the easiest to understand and

use in he entire industry. “If you fly eight flights, you get one free.” This

resulted in colossal customer loyalty no other airline had, nor could

compete with. It is also important to note that Southwest negotiates their

fuel prices years in advanced, which turns what most companies see as a

variable cost into a fixed cost.

2. How should management respond to the fact that Southwest Airlines has fallen

next to-last place among major airlines in on-time performance as of September,

2002?

a. After the September 11th terrorist attacks, airports implemented heightened

security measures. This affected Southwest’s core way of business. One

way was that Southwest passengers carried a high percentage of their

baggage on board, which was limited by the FAA. It resulted in more

work and size of their baggage handling crews. Many of the 200 directives

issued by the FAA were security directives. These directives put

Southwest at a competitive disadvantage. Many directives dealt with

tracking passengers from the curb to their seat; SABRE was not designed

to provide these types of detailed reports. In turn they had to extinguish

the use of their reusable plastic boarding passes in favor of paper passes,

which had information about the selected passenger. Southwest used to

have the motto, “”You are now free to move about the Country”. This was

created and directed towards travelers who would walk onto the plane

minutes before takeoff, since they kept their doors open till then. Since

their passengers were used to arrive later than other airline passengers,

they were subject to security searches more than any other airline

passenger. Managers should have reviewed the directives and came up

with solutions to keep constant the way business is done. With these new

security directives in play, managers should have told passengers about

them and the delays that will be caused. Since security at the gate slows

down their boarding time, maybe they should hire more people to help get

through this process. Any services they can offer their passengers as an

additional benefit would be greatly appreciated and increase customer

loyalty and attract new customers.

3. Would you recommend to the management of the airline that it resume its historic

growth rate of 10% to 15% per year? Why? Why not?

a. Yes I would recommend management of the airline to resume its historic

growth rate. Maintain growth would allow Southwest to maintain a strong

balance sheet. One of their senior managers often said, “manage in the

good times in order to service in the bad times”. A growth rate of 10-15%

is not significant enough to be considered growing too fast, I would say

that it is a powerful growth rate that allows the company to create strategic

advantages based on size, with their focus on quality. This slow

sustainable growth will allow Southwest to move into new areas in the

country and not spread their numbers too thin. Also, by growing at a

sustainable rate they won’t lose focus on their core competencies.

4. What are the implications for Southwest of the actual or threatened bankruptcies

of other major U.S. airlines?

a. Southwest is unlike any of their competitors. Because they focus on

sustainable growth, Southwest is able to maintain a strong balance sheet

and continue to make a profit. Their competitiors are barely skimming by,

which is a serious problem from Southwest. The airlines are viewed like

banks by the government. If they fail, they will be bailed out because they

are too big to fail. It would hurt the economy much more if an airline went

bankrupt, the to just hand them to money to climb out of the hole. If this

happened, Southwest’s competitors would be handed a large sum of cash

to help them get back on their feet. This would allow them to have

expendable cash to use in an economy of scale situation. But unless their

competitors change their ways, they will find themselves in the whole

again. So really Southwest may be hindered short-term by bailouts in the

industry, but overall they will beat them out time and time again.

5. Additional Information:

a. SWOT Analysis

i. Strengths: Point-to-point system, rewards programs, low priced

tickets, strong values, imprinting culture, high frequency

departures, low turnaround time, low cost carrier, and no assigned

seats.

ii. Weaknesses: No international coverage, and no assigned seats.

iii. Opportunities: Increased domestic coverage, un/related

diversification, international coverage, and vertical integration

iv. Threats: Terrorism, government bailouts, and operation costs.

b. Marketing Mix

i. Price: Lowest out of their competitors

ii. Product: Flights

iii. Place: Strong southern prensense in the United States

iv. Promotion: Rapid rewards program.

c. Thoughts:

i. If I were the CEO of Southwest airline, I would keep on track with

what I am doing. I would definitely create contingency plans

incase certain events happened, either good or bad, but keep

business moving forward with the same thought process that has

kept it winning. Sustainable growth is a serious competitive

advantage they need to keep in their mind, because it will keep

them winning in the good times and the bad.