Strategic Management/ Business Policy

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Strategic Management/Business Policy
2
Southwest Airlines

• Strategic issues
• Controlled growth is essential.
• Meeting Growth Objectives while maintaining Focus
• Option 1 New route between Detroit and Phoenix
• Option 2 Initiating service to Dayton
• Option 3 Initiating service to Baltimore

3
Southwest Airlines

• Southwests Business Level Strategy
• LOW COST LEADERSHIP
• no meals
• no seat assignments
• no hub-and-spoke system
• short-haul (avg. 65 min.) and high frequency
• avoids large, congested airports
• no baggage transfers
• no connections with other airlines
• standardized fleet of 737 aircraft

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Southwest Airlines

• Southwests Business Level Strategy
• LOW COST LEADERSHIP
• Limited use of travel agents
• Automatic ticketing machines (avoids travel
  agents commissions)
• 15-minute gate turnarounds
• Higher productivity
• Flexible union contracts
• High level of employee stock ownership

5
Southwest Airlines

• Southwests strategy involves a whole system of
  activities.
• Southwests activities complement and reinforce
  one another in ways that create real economic
  value.
• Further competitive advantage built around
  systems are more likely to be sustainable.

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Southwest Airlines

• Company profile in April, 1993
• Seventh largest (in terms of passengers)
• Served as far North as Chicago
• Served as far East as Cleveland
• Number 1 intrastate carrier in California
• Effectiveness
• Fewest complaints
• Fewest delays
• Fewest mishandled bags (per 1,000 customers)

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Southwest Airlines

• Southwest Business Model
• Service
• Operations
• Cost Control
• Marketing
• People
• Corporate Culture

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Southwest Airlines

• Service
• The airlines management went to great lengths to
  encourage good relations between employees and
  passengers.
• Family Fun as Differentiation

9
Southwest Airlines

• Operations
• did not use computerized ticketing systems such
  as Sabre and as a result only 55 of Southwests
  seats were booked through a travel agent in
  contrast to a 90 average for the industry.
• Non-stop origin to destination
• Uncongested airports of smaller cities

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Southwest Airlines

• Operations
• Flew into smaller, less congested airports of
  larger cities
• Love Field in Dallas
• Midway in Chicago
• Detroit City Airport in Detroit
• Reduced taxi time
• Fewer gate holds
• Less in-air waiting

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Southwest Airlines

• Operations
• Doesnt coordinate its services with other
  airlines
• No meals
• Flexible union rules (even though 84 unionized)
• Only 737 Boeing jets (150 planes averaging 1,500
  trips per day)
• Interchangeability (pilots, parts, mechanics)
• Commitment to short-hauls

12
Southwest Airlines

• Operations
• Boeing 737s seated 137 passengers and had an
  average life of 20 years. (New plane price was
  approximately 27 million)
• Average age of Southwests fleet was 7 years, one
  of the lowest averages in the industry.
• Turns in 15-20 minutes (as opposed to the
  industry average of 55 minutes).
• Do you think this is a fair comparison?

13
Southwest Airlines

• Operations
• (No foods service, less congested airports,
  direct routes, own ticketing, flew only 737s,
  Southwest effect)
• VALUABLE?
• RARE?
• COSTLY TO IMITATE?

14
Southwest Airlines

• Cost Control
• Input from pilots to save on fuel costs
• Buying fuel from a variety of vendors
• Gate fees about 2.50 per passenger
• Costs per passenger mile was 7.3 cents in 1993

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Southwest Airlines

• Southwest
• Operating margin 10.84
• Cost per ASM .0703
• Wages, per ASM .0235

• Industry Average
• Operating margin -3.72
• Cost per ASM .0935
• Wages per ASM .0332
• Note
• ASM Airplane Seat Mile

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Southwest Airlines

• Marketing
• Emphasize price, convenience, and service.
• Public relations
• Smart Campaign
• People
• Rigorous interviewing (peer hiring)
• Low turnover of employees (7)
• Recognition, and internal promotion (80)
• Flexible working hours
• Profit sharing employee stock options

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Southwest Airlines

• Corporate Culture
• Compassionate to customers
• Positive attitude
• Want to work and use common sense
• Have a great sense of humor (humor diffuses
  stress)
• You cant be an elitist
• SERVICE

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Southwest Airlines

• Corporate Culture
• VALUABLE?
• RARE?
• COSTLY (DIFFICULT) TO IMITATE?
• Operations, Marketing, Service and Culture
• STRATEGIC COHERENCE?
• SUSTAINABLE ADVANTAGE?

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Southwest Airlines

• Expansion
• GROWTH STRATEGY
• 85 of expansion internal (within current route
  structure)
• Opportunity to move into Midway Airport in
  Chicago
• Gates with options to expand
• Ability to hire Southwest-type people in region

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Southwest Airlines

• Market Entry Strategy
• What is the starting point of strategic planning?
• Pricing against ground transportation
• Northeast U.S. has better public transportation
• Low Price, over time more service and lower load
  factors

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Southwest Airlines

• Immediate Expansion Decision
• Option 1 Detroit to Phoenix
• projected demand (load factor of 65)
• longer flight
• Airport gate and landing fees would be slightly
  higher than the Southwest system average of 2.50
  per passenger
• (2.75 in Phoenix and 3.25 in Detroit)

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Southwest Airlines

• Immediate Expansion Decision
• Option 2 Enter Dayton Market (population?)
• 226 miles to Chicago Midway
• Contribute to growth goals in Chicago
• Uncongested airport
• Airport gate and landing fees of 2.00
• However, lowest demand (Exhibit 13)

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Southwest Airlines

• Immediate Expansion Decision
• Option 3 Enter Baltimore Market
• population of 2.4 million (highest demand)
• highest growth options (exhibit 13)
• geographic separation
• Southwest-type employees?
• Weather conditions?
• Flights over 3 hours experienced 20-25 lower
  total costs (e.g., efficient use of jet fuel)
• Option to Wait? Lease jets with reasonable
  return

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Southwest Airlines (update)

• Top Ten Airports
• Airports Daily Departures of gates Yr. st.
• Phoenix 167 24 1982
• Houston 142 14 1971
• Las Vegas 139 12 1982
• Dallas 139 13 1971
• Los Angeles 117 09 1982
• Oakland 111 11 1989
• Chicago Midway 104 13 1985
• St. Louis 87 09 1985
• San Diego 78 08 1982
• San Jose 69 05 1993

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Southwest Airlines (update)

• 5th largest airline in terms of customers served
• Serves 52 cities (53 airports) in 26 states
• 2,300 flights/day
• 266 Boeing 737s
• Average age of fleet 8.4 years
• Aircraft utilization 11hrs. 12min./day
• Employees 25,175

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Southwest Airlines (update)

• Net income in 1997 ---gt 318 million
• Number of passengers ---gt 50.4 million
• Load Factors ---gt 63.7
• Net Margins ---gt 8.3
• Aircraft Type
• 737-200 44 planes 122 seats/plane
• 737-300 189 planes 137 seats/plane
• 737-500 25 planes 122 seats/plane
• 737-700 07 planes 137 seats/plane
• recently ordered 63 737-700 planes

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Southwest Airlines

• Where should Southwest Airlines expand next?

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Southwest Airlines

• On September 15, 1993, Southwest Airlines
  established a presence on the East Coast,
  initiating service from Baltimore Washington
  International Airport to Chicago Midway and
  Cleveland.
• Before Southwests arrival, walkup fares ranged
  as high as 349 to Cleveland and 335 to Chicago
  Midway. A fare war involving USAir, Continental,
  and Southwest dropped fares to as low as 19 to
  Cleveland and 34 to Chicago. The Southwest
  Effect

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Southwest Airlines (update)

• Ft. Lauderdale, FLA
• Houston Hobby, TX
• Houston International, TX
• Indianapolis, IN
• Jackson, Miss.
• Jacksonville, FLA
• Kansas City, Missouri
• Las Vegas, Nevada
• Little Rock, ARK
• Los Angeles, CA
• Louisville, KY
• Lubbock, TX
• Manchester, NH
• Midland/Odessa, TX

• Albuquerque, NM
• Amarillo, TX
• Austin, TX
• Baltimore/Washington (BWI)
• Birmingham, AL
• Boise, Idaho
• Burbank, CA
• Chicago (Midway)
• Cleveland, OH
• Columbus, OH
• Corpus Christie, TX
• Dallas, TX (Love Field)
• Detroit Metro, MI
• El Paso, TX

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Southwest Airlines (update)

• Rio Grande Valley (Harlingen, TX)
• Sacramento, CA
• St. Louis, Missouri
• Salt Lake City, Utah
• San Antonio, TX
• San Diego, CA
• San Francisco, CA
• San Jose, CA
• Seattle, WA
• Spokane, WA
• Tampa Bay, FLA
• Tucson, AZ
• Tulsa, OK

• Nashville, TN
• New Orleans, LA
• Oakland, CA
• Oklahoma City, OK
• Omaha, Nebraska
• Ontario, CA
• Orange County, CA
• Orlando, FLA
• Phoenix, AZ
• Portland, OR
• Providence, RI
• Reno/Tahoe, NV

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Southwest Airlines

• Discussion Questions
• How are Southwest Airlines strategies similar to
  Wal-mart strategies?
• In what ways are Southwest Airlines strategies
  different than Wal-marts strategies?

32
Southwest Airlines

• Discussion Questions
• Can the major airlines imitate the Southwest
  Airline model?
• Should Southwest change its expansion strategy?
• Would the entry of new low-cost competitors
  jeopardize the monopoly status that Southwest
  enjoyed in many of its markets?
• What was the real basis of Southwests
  competitive advantage now and in the future?