SouthWest Airlines 2002: An Industry Under Siege

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SouthWest Airlines 2002An Industry Under Siege
Jason Chou-Hong Chen, Ph.D. Professor of
MIS Graduate School of Business, Gonzaga
University Spokane, WA 99223 USA chen_at_jepson.gonza
ga.edu
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Case Information

• Discipline Service management
• Description The company's management is faced
  with long-term 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.
• Setting United States Airline industry 4
  billion revenues 35,000 employees 2002

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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.

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Exhibit Estimate of the Importance of Turnaround
Time as a Contributor to Southwests Operating
Income and the Costs of Each Additional Minute of
Turnaround Time for Southwest Airlines Aircraft,
November 2002
Data from the Southwest Airlines case Flights
per day 2,800 Daily aircraft utilization 11
hours, 10 minutes Cost per aircraft (new) 40
million (a number lower than the 41 million list
price) Current turnaround time 27
minutes Average turnaround time in industry 57
minutes (as per Kellehers estimate of
30-minute average Southwest advantage) Aircraft
saved by faster turnaround than other
airlines 2,800 flights - 355 aircraft 2,445
daily plane turns (assuming that a plane turn is
not associated with the first flight of the
day) Minutes saved (compared to the average for
other airlines) per plane turn 30 Daily minutes
saved 2,445 x 30 73,350 Number of aircraft
represented by minutes saved 73,350

670 (minutes each aircraft

is
utilized each day) Total aircraft saved about
109 737s Fleet investment savings 109 x 40
million 4,360,000,000 Pre-tax cost savings
implied by saved investment 4,360,000,000 x 8
349 million 200l Southwest operating income
(pre-tax) 631 million Share of operating
income achieved through rapid turnaround 349
million/631 million or more than half Cost of
each minute of additional turnaround time 349
million/30 11.6 million
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Case Synopsis

• Following the 9/11 terrorist attacks in the
  United States, the senior management of Southwest
  Airlines is faced with both short- and
  longer-term challenges. In the short-run
  questions have arisen about what, if anything,
  should be done to raise Southwests reported
  on-time performance in the airline industry.
• Although it was a somewhat artificial measure
  based in part on scheduling decisions, the
  airlines usually stellar on-time operating
  performance had fallen to the next-to-lowest
  among the eight largest airlines by September
  2002. This was felt to be a result of the
  disproportionate effects of post-9/11 government
  security directives on Southwests operating
  practices.

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Case Synopsis (cont.)

• But if it continued, it could have the effect of
  tarnishing the airlines image among its
  customers. Longer-term, as Southwest emerged
  successfully from the post-9/11 setbacks to the
  airline industry, questions once again surfaced
  about whether and how the airline should resume
  its 10 to 15 annual growth rate prior to 9/11.
• In particular, to what degree should flights of
  over three hours connecting Southwests more
  distant terminals supplement the strategy of
  focusing on flights of 60 to 90 minutes on which
  the airlines success had been built?

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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-to-point service, 10 minute turnaround
  and an enjoyable friendly atmosphere.
• After the Airline Deregulation Act of 1978,
  Southwest adopted a polity that irregardless 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.

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1). What is the competitive business environment

• The airline industry has always been competitive.
  In an analysis of the most profitably
  investments as per our class discussion,
  surprisingly, airlines come in at the lowest
  return on each dollar invested at around 2.5.
• Southwest Airlines experienced 30 consecutive
  years of profit a mere two years after its
  founding in 1971. Many airports began requesting
  Southwest service for their passengers, but
  throughout Southwests expansion, the company
  aimed to maintain a manageable growth rate and
  focus on their core competencies of low price
  fares that would compete with the cost of driving
  to the destination.
• In the mid 1990s, the major carriers entered
  into price wars to undercut competition.
  Although, these dealings did affect Southwests
  bottom line, Southwest still manage to continue
  to turn a profit and expand due to their
  expansion into a reservation system and their
  commitment to a culture and experience that
  passengers were drawn to.

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2). What is the competitive advantage that the
company obtained as discussed in the case?

• Southwest Airlines competitive advantages are
  their point-to-point services which are generally
  targeting the frequent business traveler. With
  several regular flights per day, if a passenger
  happens to miss their flight, they will be
  automatically booked onto another flight.
• Secondly, Southwest strategically secured routes
  through secondary airports which generally had
  lower fixed costs for the airlines and less
  congestions for passengers ease. Finally,
  Southwest focused on quick, reliable turnaround
  time using only one version of aircraft, allowing
  for familiarity among staff and greater
  efficiency in turnaround. Passengers were not
  assigned seats, simply boarding sections, which
  allowed for passenger loading to be conducted
  more efficiently.

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2). What is the competitive advantage that the
company obtained as discussed in the case? (cont.)

• The traditional airline model is the Hub and
  Spoke model, which in essence takes most
  passengers from the origination, through the hub,
  and then transfers them to their destination.
  Southwests point to point system was more
  reliable because it did not depend on the on time
  arrival of an earlier flight for departure.
• Southwest also implemented the first and most
  simplistic frequent-flier program purchase eight
  flights and get one free. Southwests initially
  connected with four computer reservation and
  ticketing systems and also the powerful SABRE
  system. This allowed travel agents to view
  flight information and even print tickets. In
  1994, Southwest was only connected through the
  SABRE systems which pushed Southwest to develop
  the ticketless travel program as well as
  Southwest.com.

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3). What strategy and/or model was used or
implemented in this case?
Threats
Bargaining power
N
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3). What strategy and/or model was used or
implemented in this case? (cont.)

• 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 was the best in the industry until
  September 11th, which helped to prevent the
  threat of substitutes.

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4). What (IS/IT) solution was used or implemented
in the case?

• Southwest airlines remained competitive in the
  1990s during competitors price wars by joining
  4 computer reservation systems and also the SABRE
  system. This presence allowed for travel agents
  to make reservations, and even print tickets for
  passengers. Also, well see after this case was
  written that Southwest will implement electronic
  kiosks that allow for passengers to check in
  without having to check with an agent.
• Also, Southwest will implement a website with
  reservation capacity and most recently, the
  ability to check into a flight 24 hours ahead of
  time. These solutions assisted Southwest in
  their core competencies that the company
  instilled back in the 1970s of a quick turn
  around time and flexibility in travel.
  Unfortunately, after the tragedy of September
  11th, safety regulations began to hinder
  Southwests passengers and the company quickly
  responded with these new technologies to help
  during the trying travel times with heightened
  security regulations.

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5). From your perspective what other solutions
(strategy/model, IS/IT) might be employed for the
company?

• Looking at Southwest airlines today four years
  after this case study was released, it is
  challenging to say what other solutions should be
  implemented because I am aware of the solutions
  that have been presented to date. Looking at
  Keens six stage competitive advantage model
  though, if I didnt know where Southwest moves
  after this case study,
• I would recommend that Southwest adopt this model
  because their stimulus for action would be the
  delays in security and the fact that the company
  has dropped to second worst as far as on time
  departures. Southwest could take the first major
  move to implement electronic kiosks for self
  check in, saving passengers time. These kiosks
  will slowly build customer acceptance and other
  airlines will scramble to compete. Finally,
  check in kiosks are now a commodity among all
  major airlines.

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Keens Six-Stage Competitive Advantage Model
Stimulus for action

Commoditization
N
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6). Draw and explain how can the Information
Systems Strategy Triangle be employed in this
case?
Business Strategy Low cost Differentiation/ Innov
ation
IS/IT Strategy SABRE Kiosks Website, online
ticketing. Online boarding passes
Organizational Strategy Sustainable
growth Teams Fun/Friendly Culture Frequent
flights Rapid rewards Point-to-Point
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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.

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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.

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2) cont.

• Managers at Southwest should move to inform
  passengers of new safety restrictions and
  potential delays and encourage them to arrive
  earlier for their flights. Southwest responded
  immediately after 9/11 with a patriotic message,
  and it would be again appropriate to clarify to
  their passengers that the delays are for their
  safety. In the meantime, Southwest should pay
  for additional personnel to help during security
  procedures, and perhaps add an extra incentive in
  the Southwest Terminal such as free coffee or
  chocolate chip cookies to help add value to the
  passengers who have to wait longer for flights.
• Also, looking back at the companys history from
  their website, in 2002, facing these delays,
  Southwest created check in kiosks. These
  computerized databases can process customer
  information allowing for greater efficiency for
  passengers without check in baggage. In
  addition, Southwest shortly thereafter
  implemented the 24 hour check in procedure. By
  going online to Southwest.com, passengers can
  check in up to 24 hours ahead of their flight,
  reducing their airport time and confirming their
  seat ahead of time.

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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.

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5)

• N/A since, a 10-15 increased is recommended.

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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.

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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, 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.

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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.