Southwest Airlines : Case Study

A classroom presentation of the legendary Harvard Business case study on Southwest Airlines.

1. Just Plane Smart
Harvard Business School – Case Study Summary
Abhishek Mehra
Balaji P
Saruabh Ranadive
Sarang Bhutada

2. The setting
•It’s summer of 1993
•Southwest is expecting delivery of two
uncommitted planes
•McGlade needs to find a way, to put
these planes in operation, keeping the
organizational objectives are intact
•Final decision would have to preserve
the Southwest culture and spirit
About Southwest
•Started as a intra-state operator in
Texas
• Budget airline philosophy, survived
a severe price-war
• Operating out of Dallas’s Love Field
airport, hence the ticker LUV
• 7
th
largest in the country by April
1993
• Expanded to become a national
carrier, serving major cities
• Short-haul, high-frequency, low-
cost strategy
12 time winner
of the coveted
triple crown
award

3. The Southwest Model

4. Hiring
- Identify attitudes rather than skills
- Rigorous interviewing
- Peer hiring
People skills of Southwest
Structure
-Centered on team-building
- Cross-training encouraged
- Broad latitude offered
- 10% of stock held by employees
Advancement
-Recognition, an important element
- Celebrations quite common
- Most promotions internal
Compensation
-Varied with position
- At par with industry norm
- Pension through a profit-sharing
plan
Culture
-H A “Patina of Spirituality”
-ugs common across office
- Casual dress code
- Field visits
- Strong guidelines to everyone
- At par with industry norm
- Pension through a profit-sharing
plan

5. “After lengthy deliberation at the highest executive levels, and extensive
consultation with our legal department, we have arrived at an official
corporate response to Northwest Airlines Claim to be number one in Customer
Satisfaction……
…Liar Liar. Pants on Fire”

6. Product:
Southwest’s product is travel
Competition - not just other airlines
but any mode of transportation.
•frequent, conveniently timed flights
and low fares.
•point-to-point route system as
compared to hub-and-spoke
•direct nonstop
Target Market:
Market Segmentation
•cost- and value-conscious consumers.
mostly male
•small business executives
•travel short distances
•prefer low cost fares
•frequent schedules
The other half consists of
•value-conscious consumers (male,
female, families, and senior citizens)
•best value for their dollars
Senior citizens are a sub-segment that
receives special attention
than a loyal customer - customer
evangelist

7. Competitors and Competition

11 major carriers (2003):
4.Alaska Airlines
5.Aloha Airline
6.America West
7.American Airlines
8.Continental Airlines
9.Delta Airlines
10.Northwest Airlines
11.TWA
12.United Airlines
13.U.S. Air
14.Southwest Airlines
Southwest’s brand exudes an element
of fun: Obviously Fun
Love Theme,
Love Potions(on-board drinks)
Love Machines( ticket writing
machines)
Product Positioning
only low-fare
short-haul
high-frequency
point-to-point carrier
fun to fly
Average cost of serving meals per
passenger in the industry - $5
For Southwest’s -20 cents
Seemingly weird things-
Not assigning seats
Weird Color Scheme

8. Product Positioning
Example of Southwest Airlines
nuttiness -
use of the word “love”
One ad titled "How Do We Love
You?" - flight schedule.
Another ad titled "We're
Spreading Love" - the rapid
growth of the airline.
Word "love“ - dedication to
customer service
Marketing Strategies
Southwest offers a travel product that is
built around flights targeted to specific
demographics and ticket pricing that is
simplified so that passengers know
exactly what they are getting for what
they pay.
Building Brand Loyalty
What is the Southwest Effect?
6.Air fares go down
7.Tourist traffic increases
8.Economic mini-boom ensues
Marketing Blitz !!!!
- Smart Campaign

9. Pricing Strategies
3.Charge the lowest possible fare
4.Compete with all other forms of
transportation, including
automobiles
•Instead of increasing fares when
market gets busier and more people
are flying, it simply increases the
number of flights.
Distribution and Promotion

Product Distribution Strategies
SWA does not rely on travel agents
Travel bookings - direct marketing
Does not interline or offer joint fares
with other airlines
Southwest's Internet ticketing saves it
$50 million a year, or 1% of revenue
"We're not competing with other airlines. We're competing with ground
transportation"

10. Promotion Strategies: Marketing Mix

Southwest Airlines wants to
differentiate itself from other airlines
as the airline that can get passengers to
their destinations when they want to
get there, on time, at the lowest
possible fares – while having fun.
Frequent Flyer Awards
Rapid Rewards-based on number of
trips taken
Way of showing Southwest’s
philosophy that every customer is
equally important as the other and
making ALL passengers feel special.
Advertising
“Don’t believe the hype.”
Fares offered by other discounters
and airlines on the Web are not good
buys.
Southwest attempts to do three
things in their advertising:
8.intrigue
9.Entertain
10.persuade
“We’d like to match their new fares
but we’d have to raise ours!!"

11. Television Sports Advertising
4.Sports television programming
5.Reaching the corporate set via sports
and other venues
6.In 2000, Southwest renewed its
multi-year sponsorship agreement
with the National Football League
(NFL).
Public Relations

11.Aims for “Free publicity”
12.Triple Crown Award for the fifth
time in a row
13.Named a plane Triple Crown One
and painted 24,000 employee names
on it
Internal Marketing

Core Business - Customer Service
business—they just happen to provide
airline transportation
Southwest’s philosophy - “Service for
Smiles and Profits”
Encourages employees to treat
customer service as the most
important aspect of their job
CEO Kelleher, "We want people who
do things well, with laughter and
grace."

12. OPERATIONS
Did all of its ticketing (not making
seats available through
computerized systems)
Did not operate in the hub-and
spoke route system
Flew into uncongested airports of
small cities, less congested
airports of large cities
Did not transfer baggage directly
to other airlines
Only drinks and snacks often
peanuts served on board
Travel agents had to contact the airlines
directly to book seats
SWA passengers flew non-stop origin to
destination. Did not promote
connecting services
Savings in reduced taxi time, fewer gate
holds and less in-air waiting time
It doesn’t coordinate its services with
other airlines

13. OPERATIONS
Usually do not share the ground
handling crew until unavoidable
Other airlines flew variety of jet
aircrafts, as many as 5 distinct ones
including McDonnell Douglas, Airbus
and Boeing
737’s had average life of 20 years
US industry average was 55 mins.
84% unionized labor force but its
labor relations were excellent
 Only flew Boeing 737 - Fleet of
150 and avg of 1500 trips per
day.
Average age of SWA was 7
years(lowest in the industry)
 Differentiation in terms of
“turnaround” time , 2 out of 3
planes were turned-around in 15
mins.

14. COST CONTROL
“Airlines don’t have revenue problems, they have cost problems”

15. GROWTH STRATEGY
•Conservative Growth Strategy : Expansion within the current route structure was the
first priority (85% expansion was internal)
•External expansion was opportunity driven: After the collapse of Midwest Airlines in
1991, Southwest moved to Midway Airport in Chicago and anchored there.
•Scheduling department decides the appropriate market: They don’t do a lot of
market research. Choose a market, negotiate for gates and look for controlled growth.
•Growth with consistency: When they enter a new city they want to make sure that
they do the business which is consistent throughout the system.

16. MARKET ENTRY STRATEGY
How the company prices its new routes?
•They look to grow in the market when they enter the city
(quadruple and quintuple the number of passengers in a particular route)
•Pricing against the ground transportation as much as against existing air service
(atleast 60% below competitive fares)
•Low operating costs
•They think slightly differently about load factors:
 Initially higher than average load factors
 Low price – expand market faster than they can add equipment
 Demand outpaces supply
 Competitors drop prices – that stimulates demand further
 Keep adding more service to balance out demand and supply
 Eventually leads to maturing of load factors
•On the Oakland-Burbank route, SWA quadrupled the passenger market within two
years and drove out USAir and United in 3 years time.

17. South west
North west
Number of employees
R
e
v
e
n
u
e
s

p
e
r

e
m
p
lo
y
e
e
Revenue Vs. Employees ( DEA )

18. Wages as % of total expenses – 29.78% ( Industry average = 35.17%)
Lowest among Non-Chapter11 Airlines for the year 1992 . How was it possible ?
Employee required per each additional trip
Number of departures from a city
Ground Crew Staffing Levels based
on number of departures at an
Average Southwest city
DeparturesPeople
Marginal emp
reqd per
departure
10 35 3.5
20 45 1.5
30 60 1.5
60 120 2
Ground crew staffing efficiency
•Competitors runs with at least three times as much staff .
•E.g., South-West effect on Burbank –Oakland market.

19. 0
500
1000
1500
2000
2500
3000
3500
USAir I nc. 106
Ala sk a 10 6
Am eric a We st
Av erage
UALCorp 106
Delt a TWA
Cont ine ntal
Am eric a We st
Sou thwes t
North we st 106
RPM per
employee(000)
ASM per
employee(000)
ASM+RPM
ASM: Average Seat Mile ; RPM : Revenue Passenger Mile
Employee productivity (1992)

20. South West Airlines built numbers on its culture where as most
competitors let the culture to shape up by their focus on numbers
NUMBERS
CULTURE
SCHEDULING
STRATEGY
CULTURE
SCHEDULING
STRATEGY
NUMBERS
Other large Airlines
F
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CONCLUSION
F
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21. Thank You