Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Southwest Airlines : Case Study

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

  • Login to see the comments

Southwest Airlines : Case Study

  1. 1. Just Plane Smart Harvard Business School – Case Study Summary Abhishek Mehra Balaji P Saruabh Ranadive Sarang Bhutada
  2. 2. <ul><li>The setting </li></ul><ul><li>It’s summer of 1993 </li></ul><ul><li>Southwest is expecting delivery of two uncommitted planes </li></ul><ul><li>McGlade needs to find a way, to put these planes in operation, keeping the organizational objectives are intact </li></ul><ul><li>Final decision would have to preserve the Southwest culture and spirit </li></ul><ul><li>About Southwest </li></ul><ul><li>Started as a intra-state operator in Texas </li></ul><ul><li>Budget airline philosophy, survived a severe price-war </li></ul><ul><li>Operating out of Dallas’s Love Field airport, hence the ticker LUV </li></ul><ul><li>7 th largest in the country by April 1993 </li></ul><ul><li>Expanded to become a national carrier, serving major cities </li></ul><ul><li>Short-haul, high-frequency, low-cost strategy </li></ul>12 time winner of the coveted triple crown award
  3. 3. The Southwest Model
  4. 4. <ul><li>Hiring </li></ul><ul><li>- Identify attitudes rather than skills </li></ul><ul><li>Rigorous interviewing </li></ul><ul><li>Peer hiring </li></ul>People skills of Southwest <ul><li>Structure </li></ul><ul><li>Centered on team-building </li></ul><ul><li>Cross-training encouraged </li></ul><ul><li>Broad latitude offered </li></ul><ul><li>10% of stock held by employees </li></ul><ul><li>Advancement </li></ul><ul><li>Recognition, an important element </li></ul><ul><li>Celebrations quite common </li></ul><ul><li>Most promotions internal </li></ul><ul><li>Compensation </li></ul><ul><li>Varied with position </li></ul><ul><li>At par with industry norm </li></ul><ul><li>Pension through a profit-sharing </li></ul><ul><li>plan </li></ul><ul><li>Culture </li></ul><ul><li>H A “Patina of Spirituality” </li></ul><ul><li>ugs common across office </li></ul><ul><li>Casual dress code </li></ul><ul><li>Field visits </li></ul><ul><li>Strong guidelines to everyone </li></ul><ul><li>At par with industry norm </li></ul><ul><li>Pension through a profit-sharing </li></ul><ul><li>plan </li></ul>
  5. 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. 6. <ul><li>Product: </li></ul><ul><li>Southwest’s product is travel </li></ul><ul><li>Competition - not just other airlines but any mode of transportation. </li></ul><ul><li>frequent, conveniently timed flights and low fares. </li></ul><ul><li>point-to-point route system as compared to hub-and-spoke </li></ul><ul><li>direct nonstop </li></ul><ul><li>Target Market: </li></ul><ul><li>Market Segmentation </li></ul><ul><li>cost- and value-conscious consumers. mostly male </li></ul><ul><li>small business executives </li></ul><ul><li>travel short distances </li></ul><ul><li>prefer low cost fares </li></ul><ul><li>frequent schedules </li></ul><ul><li>The other half consists of </li></ul><ul><li>value-conscious consumers (male, female, families, and senior citizens) </li></ul><ul><li>best value for their dollars </li></ul><ul><li>Senior citizens are a sub-segment that receives special attention </li></ul><ul><li>than a loyal customer - customer evangelist </li></ul>
  7. 7. <ul><li>Competitors and Competition </li></ul><ul><li>  </li></ul><ul><li>11 major carriers (2003): </li></ul><ul><li>Alaska Airlines </li></ul><ul><li>Aloha Airline </li></ul><ul><li>America West </li></ul><ul><li>American Airlines </li></ul><ul><li>Continental Airlines </li></ul><ul><li>Delta Airlines </li></ul><ul><li>Northwest Airlines </li></ul><ul><li>TWA </li></ul><ul><li>United Airlines </li></ul><ul><li>U.S. Air </li></ul><ul><li>Southwest Airlines </li></ul><ul><li>Southwest’s brand exudes an element of fun: Obviously Fun </li></ul><ul><li>Love Theme, </li></ul><ul><li>Love Potions(on-board drinks) </li></ul><ul><li>Love Machines( ticket writing machines) </li></ul><ul><li>Product Positioning </li></ul><ul><li>only low-fare </li></ul><ul><li>short-haul </li></ul><ul><li>high-frequency </li></ul><ul><li>point-to-point carrier </li></ul><ul><li>fun to fly </li></ul><ul><li>Average cost of serving meals per passenger in the industry - $5 </li></ul><ul><li>For Southwest’s - 20 cents </li></ul><ul><li>Seemingly weird things- </li></ul><ul><li>Not assigning seats </li></ul><ul><li>Weird Color Scheme </li></ul>
  8. 8. Product Positioning Example of Southwest Airlines nuttiness - use of the word “love” One ad titled &quot; How Do We Love You? &quot; - flight schedule. Another ad titled &quot; We're Spreading Love &quot; - the rapid growth of the airline. Word &quot; love “ - dedication to customer service <ul><li>Marketing Strategies </li></ul><ul><li>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. </li></ul><ul><li>Building Brand Loyalty </li></ul><ul><li>What is the Southwest Effect? </li></ul><ul><li>Air fares go down </li></ul><ul><li>Tourist traffic increases </li></ul><ul><li>Economic mini-boom ensues </li></ul><ul><li>Marketing Blitz !!!! </li></ul><ul><li>- Smart Campaign </li></ul>
  9. 9. <ul><li>Pricing Strategies </li></ul><ul><li>Charge the lowest possible fare </li></ul><ul><li>Compete with all other forms of transportation, including automobiles </li></ul><ul><li>Instead of increasing fares when market gets busier and more people are flying, it simply increases the number of flights. </li></ul>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 &quot;We're not competing with other airlines. We're competing with ground transportation&quot;
  10. 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. <ul><li>Advertising </li></ul><ul><li>“ Don’t believe the hype.” </li></ul><ul><li>Fares offered by other discounters and airlines on the Web are not good buys. </li></ul><ul><li>Southwest attempts to do three things in their advertising: </li></ul><ul><li>intrigue </li></ul><ul><li>Entertain </li></ul><ul><li>persuade </li></ul>“ We’d like to match their new fares but we’d have to raise ours!!&quot;
  11. 11. <ul><li>Television Sports Advertising </li></ul><ul><li>Sports television programming </li></ul><ul><li>Reaching the corporate set via sports and other venues </li></ul><ul><li>In 2000, Southwest renewed its multi-year sponsorship agreement with the National Football League (NFL). </li></ul><ul><li>Public Relations </li></ul><ul><li>  </li></ul><ul><li>Aims for “Free publicity” </li></ul><ul><li>Triple Crown Award for the fifth time in a row </li></ul><ul><li>Named a plane Triple Crown One and painted 24,000 employee names on it </li></ul>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, &quot; We want people who do things well, with laughter and grace. &quot;
  12. 12. OPERATIONS <ul><li>Did all of its ticketing (not making seats available through computerized systems) </li></ul><ul><li>Did not operate in the hub-and </li></ul><ul><li>spoke route system </li></ul><ul><li>Flew into uncongested airports of small cities, less congested </li></ul><ul><li>airports of large cities </li></ul><ul><li>Did not transfer baggage directly to other airlines </li></ul><ul><li>Only drinks and snacks often </li></ul><ul><li>peanuts served on board </li></ul>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. 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. <ul><li>84% unionized labor force but its labor relations were excellent </li></ul><ul><li>Only flew Boeing 737 - Fleet of 150 and avg of 1500 trips per day. </li></ul><ul><li>Average age of SWA was 7 years (lowest in the industry) </li></ul><ul><li>Differentiation in terms of “turnaround” time , 2 out of 3 planes were turned-around in 15 mins. </li></ul>
  14. 14. COST CONTROL “ Airlines don’t have revenue problems, they have cost problems”
  15. 15. GROWTH STRATEGY <ul><li>Conservative Growth Strategy : Expansion within the current route structure was the first priority (85% expansion was internal) </li></ul><ul><li>External expansion was opportunity driven: After the collapse of Midwest Airlines in 1991, Southwest moved to Midway Airport in Chicago and anchored there. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>
  16. 16. MARKET ENTRY STRATEGY <ul><li>How the company prices its new routes? </li></ul><ul><li>They look to grow in the market when they enter the city </li></ul><ul><li>(quadruple and quintuple the number of passengers in a particular route) </li></ul><ul><li>Pricing against the ground transportation as much as against existing air service (atleast 60% below competitive fares) </li></ul><ul><li>Low operating costs </li></ul><ul><li>They think slightly differently about load factors: </li></ul><ul><ul><ul><li>Initially higher than average load factors </li></ul></ul></ul><ul><ul><ul><li>Low price – expand market faster than they can add equipment </li></ul></ul></ul><ul><ul><ul><li>Demand outpaces supply </li></ul></ul></ul><ul><ul><ul><li>Competitors drop prices – that stimulates demand further </li></ul></ul></ul><ul><ul><ul><li>Keep adding more service to balance out demand and supply </li></ul></ul></ul><ul><ul><ul><li>Eventually leads to maturing of load factors </li></ul></ul></ul><ul><li>On the Oakland-Burbank route, SWA quadrupled the passenger market within two years and drove out USAir and United in 3 years time. </li></ul>
  17. 17. South west North west Number of employees Revenues per employee Revenue Vs. Employees ( DEA )
  18. 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 efficiency <ul><li>Competitors runs with at least three times as much staff . </li></ul><ul><li>E.g., South-West effect on Burbank –Oakland market. </li></ul>Ground Crew Staffing Levels based on number of departures at an Average Southwest city Departures People Marginal emp reqd per departure 10 35 3.5 20 45 1.5 30 60 1.5 60 120 2
  19. 19. ASM: Average Seat Mile ; RPM : Revenue Passenger Mile Employee productivity (1992)
  20. 20. South West Airlines built numbers on its culture where as most competitors let the culture to shape up by their focus on numbers Other large Airlines F O C U S CONCLUSION F O C U S NUMBERS CULTURE SCHEDULING STRATEGY CULTURE SCHEDULING STRATEGY NUMBERS
  21. 21. Thank You