Case Study – Southwest Airlines 2011
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Southwest airlines was founded in Texas in 1971 as a small, regional intra-state carrier. They chose to service the Golden Triangle of Houston, Dallas, and San Antonio. By staying within Texan borders, they could avoid federal regulations. They used Boeing 747 planes in their fleet. Since their inception, they have been striving to become the leading low-cost carrier in the United States. They have successfully accomplished this. The company has remained profitable despite the setbacks caused to other airlines in the industry following the 9/1/1 attacks and the recession of 2008/2009. This airline remained afloat during those troubled times, even when many other airlines folded or filed bankruptcy under the economic pressure.
In October 1978, President Carter signed the Airline Deregulation Act. Prior to the signing of that act, the Civil Aeronautics Board had regulated airline route entry and exit, passenger fares, mergers and acquisitions, and airline rates of return. The deregulation gave all airlines more power to affect their financial future by allowing them to set their own fares, choose their service areas and acquire other airlines for expansion. After the economic fallout of September 11, eight out of the ten major airlines that controlled the industry in 1978 ended up filing bankruptcy. The three major airlines that survived – Delta, United, and American – controlled over two thirds of the domestic and trans-Atlantic air travel. The terrorists attacks of September 11, 2011brought to light the need to focus on better airline security, and new security measures were implemented to meet this need and help ease the fears of wary travelers. However, the additional security measures caused delays at the airports and made air travel less desirable because of this inconvenience. Customer complaints rose to new heights. The September 11th incident caused domestic airlines to lose about $30 billion. Industry and Competitive Analysis:
The operating costs of an airline are fixed or semi-variable, and they depend mostly on distance traveled rather than on the number of passengers on board the planes. Southwest Airlines focused its primary business on routes that are less than 500 miles long. They also did not choose to turn to using the hub and spoke system that the other airlines followed. Instead they used a spider web pattern. This was how they differentiated themselves from other airlines and were able to keep their costs down. They turned the savings in operating cost over to their customers by offering lower ticket prices. Following the Airline Deregulation Act, completion in the airline industry began to increase as new competitors entered the market and fares began to drop. The drop in airfares and the increase in availability caused air travel to become more affordable to the average person. Air travel began to boom, as more and more Americans began to take advantage of this switch in the industry conditions.
As the number of competitors grew, Southwest airlines began to have stiff competition from other low cost carriers such as JetBlue. Southwest Airlines has been able to keep their costs down by offering no-frill service. They offer snacks instead of in-flight meals, no baggage transfers, no first class seating, and no assigned seats. They stand competition from other carriers who do offer these amenities, which many customers prefer and are willing to pay for having the luxury of enjoying them. Even though JetBlue also offers limited amenities, they do offer such things as leather seats, free LiveTV and pre-assigned seating. In 2010, JetBlue’s revenue was $3.8 billion, which is about one third that of Southwest Airlines.
Strength: Southwest biggest strength is that it is the largest air carrier in the United States. They have been a multiple Triple Crown Winner in U.OT rankings. They have enjoyed thirty-one consecutive profitable years of business. They are dedicated to offering the highest quality of customer service delivered with a sense of warmth, friendliness and individual price. They have consistently high ratings with consumers. Southwest spends more money on employee training than anyone else in the industry. They encourage their employees to interact with customers and to think outside the box. They have a family-friendly atmosphere that leads to high customer and employee morale and low employee turnover. The shorter routes help Southwest Airlines maintain better R.O.I. Their planes are in the air 12 hours per day vs. industry average of 8 hours per day. Weaknesses: Southwest has been seeing a turnover of some of their key personnel, which is making it difficult to maintain the corporate culture. There are labor challenges caused by increased tensions between labor unions and management.
Their current air traffic control system is based on World War II technology using analog transmissions that cannot penetrate mountains, are impacted by bad weather, and cannot reach across oceans. Their planes are now outdated. They have a huge problem with mishandling bags – over 400,000 of them in 2011. This cost them over $53 million. The result is dissatisfied customers. Slower turnaround time, and less productive employees. Opportunity:At the beginning of this case study, Southwest was in the position to acquire AirTran, who used to be one of their larger competitors. This acquisition meant that Southwest would have to integrate all of AirTran’s 8,000 employee workforce and AirTran’s routes into their own. It also meant that Southwest would now own a fleet of aircraft that were not the Boeing 747 that Southwest Airlines has been using in their fleet to increase efficiency and turnaround time. In addition, the acquisition meant that Southwest would be added new markets in non-U.S. destinations. Southwest can improve its services by offering NextGen Air Transportation System. Its key components are Next Generation Data Communications, Next Generation Enabled Weather, and NAS voice switch. Threats:
Southwest is seeing more competition in the low-cost carrier market from JetBlue, Frontier and others. Now that they are the largest airline in the United States, virtually all other airlines, as well as other global airlines are their competitors. Rising fuel costs and low fuel efficiency planes are eating up their operating capital. Recommendations:
Southwest’s air Boeing 747 fleet has an average plane age of 20.1 years. With the acquisition of AirTrans, they acquired 88 Boeing 717s. They need to replace their old fleet with new Boeing 737s. These planes are 17-19% more fuel efficient. They are highly reliable and have a 15 minute turnaround time 99.7% of the times. They have 38 more seating capacity and offer improved amenities for the consumer.
They need to expand their business by attracting new customers. They can do this by catering to business travelers, offering an improved frequent flyer program and developing marketing campaigns to expand international markets in the Caribbean, Mexico, Canada, etc. and expand their domestic market.
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