Assignment Questions:

1. What is Southwest‟s competitive strategy? What are the sources of its success? How does it
make money?

Southwest has a short-haul and low fare flight business model. In order to realize this model, it
depends on low cost structure such as focusing on airports underutilized and close to a
metropolitan area like LOVE Field in Dallas. It also utilize only fuel-efficient single aircraft model
Boeing 737, leading to additional reduction of maintenance cost. To cut cost, it doesn‟t provide
meal service or any assigned seating. Simultaneously, Southwest is famous for high level
customer services. Additionally, it defines and broadens its market broadly so that considers
people who may drive their car as potential customers. In summary, lowering the fares and
increasing frequency of flights are key drivers of making money.

2. What are the foundations of Southwest‟s competitive advantage?

Even though its competitive advantage is on the basis of low cost structure, most important
source of Southwest‟s competitive advantage lies in its people, carrying out its remarkable
productivity, which is far ahead of other airlines‟ one and cannot be easily imitated. People in
Southwest share its culture such as team spirit, fun, family, dedication, cost consciousness and
so on.

3. How are these sources of competitive advantage produced and sustained by what the
organization does and how it does it?

Southwest‟s leadership initiated building its culture. Kelleher and senior management team‟s
philosophy has permeated the organization. They uphold its culture of „having fun‟, which leads
to satisfaction of employees, its organizational solidarity, dedication and flexibility. His consistent
efforts to promote and maintain its culture is main source of sustaining the organizational
vitality.

4. To what extent are Southwest‟s sources of advantage difficult to imitate and likely to persist
over time?

Southwest‟s sources of advantages...

What are the sources of Southwest Airlines‟ competitive advantages?

There were three keystones to Southwest Airlines‟ competitive advantage. The first lied in its
employees and how they were managed. Secondly, the firm sought to identify major threats and
opportunities in their competitors, and assess how Southwest could improve and capitalize on
markets where their competition failed. And the final significant success factor was the
company‟s cost structure.
Former CEO, Herb Kelleher, was a prime example of how Southwest fostered a healthy internal
environment. He interacted with customers and employees, promoted company parties and
understood that the firm was only as strong as its employees. Employee satisfaction was
crucial. Therefore, the human resources department (“the People Department”) encouraged
employees to give feedback and to ask questions. Its people were so important, that the firm is
very selective in the recruiting process. Since teamwork is critical, the wrong people could „spoil
the pot‟.
Southwest remained aware of their ever-changing strengths, weaknesses, opportunities, and
threats. They seized opportunities to expand when other airlines closed their airline services to
some cities that they deemed unprofitable. They concentrated on flying to airports that were
underutilized and close to metropolitan areas. Eliminating central hubs created efficiency, in
which flights had point-to-point routes without connection flights, because delays were often
associated with connection flights. Therefore, a Southwest aircraft spent more hours in the air
than its competitors, on average.
Cost efficiency was a two-front strategy for the firm; it not only reduced the firms spending, but it
also allowed them to pass the cost reduction onto the customers through providing lower fares.
Southwest found that a swift turn around of an aircraft created cost advantage. Thus, their
airplanes routinely turn around 15 minutes from the time it

Q1. What is Southwest‟s strategy? What is the basis on which Southwest builds its competitive
advantage?
Q2. How do Southwest‟s control systems help execute the firm‟s strategy?

The Southwest Airlines strategy is best explained by its co-founder Herb Kelleher during a talk
at Wharton: “It‟s an obsession with keeping costs low and treating employees well and a
commitment to managing the company during booms with an eye to the busts that will inevitable
follow. Do that and most of the rest takes care of itself.”

As long as this strategy is well known in its industry it has proved hard to copy. Let see what
Southwest does and others do not.

There are two main strategic areas:

1. Operating Costs
2. People

1. Operating Costs

Southwest Airlines has the lowest fares among its competition. Its lowest fares partly came from
low operational costs. What Southwest is doing?

Southwest flies one airplane type, the Boeing 737 series. The competitors are using all kind of
airplanes and models. That saves millions for Southwest in maintenance cost, spare-parts
inventories and mechanics training. More, every pilot and crew members will be familiar with
every plane. On the other hand, using one type of airplane gives Southwest the opportunity to
move the aircrafts through the route network without costly reconfigurations.

Southwest is using less congested airports (secondary or downtown) and of course they have
lower average fares.

Most of Southwest flying is point-to-point rather than competition that is hub-and-spoke. That
strategy and shorthaul approach with an average flight time of 55 minutes minimizes the time
that airplane sit on the ground waiting delay-prone hubs. According to FlightStats, on-time
performance in June was eight percentage points higher than the industry, and higher than any
of its competitors. As a result 78 percentages of Southwest‟s customers fly nonstop.

Southwest have the simplest in-flight services: No assigned...

Southwest Airlines Expansion Strategy

Southwest Airlines is a company that bases its success in a model of a convenient low fare
airline with frequent, shorthaul flights. Southwest achieves an excellent service based on a deep
rooted culture of friendliness, commitment and good attitude among its labor force and to the
customer. Employees have a high sense of cooperation, working together towards a common
goal. Southwest maintain consistency across markets and between its strategy and its day to
day operations. Efficiencies in this model along with other strategies allows Southwest to have
low operational costs that make the company very competitive among its peers. High integration
of HR (specially the recruitment process) to the business goals allows Southwest maintain its
competitive edge of high quality service at a very low cost.
Detroit - Phoenix
The first option seems contradictory with Southwest model of frequent shorthaul flights (over
1600 miles). High frequent flights have allowed Southwest to maintain a low fare by serving a
high volume of customers, making an efficient use of its assets (Southwest fixed costs).
Southwest will probably have to consider substantially change its price policy make this route
economically viable. Gate fares are just a little above the Southwest average; with three rounds
a day at 65% of load factor this does not seem to have a big impact in the route‟s finances
compared to the additional cost of serving a low volume of customers (flight attendant example
of increases in cost).
Dayton Market.
This is an appealing option for several reasons. First it would help Southwest to achieve its
growth commitment with Chicago (112 flights by 1995, only 70 by 1994). There is one challenge
though, at first instance, the demand seems to be low. Currently there are only 45 departures
and originations from Dayton. Southwest, however, can potentially expand the market given its
low price strategy. Also, the airport is relatively...

This article analyzes the sources of Southwest Airlines‟ competitive advantage using an
integrative approach, employing economic analysis tools to illustrate the roles of commitment
and organizational capabilities in delivering competitive advantage at Southwest. A framework is
presented illustrating that much of the value Southwest generates is:
(1) created through employee needs satisfaction;
(2) converted to customer and shareholder value via organizational capabilities; and
(3) captured by the firm as a result of its cost advantage and superior service.
This three-part framework may be applicable to other labor-dependent service organizations.

Southwest‟s Major Courses of Actions (Southwest Airlines, here-in-after called, „SWA‟)

1. SWA developed its industry niche and (contrary to many airlines) stuck to it.
2. The concept was to offer frequent, no-frills, low-fare service in short-haul markets using a
point-to-point system rather than a hub-and-spoke system:
i. That meant about 10 daily flights between two cities, with no in-flight meals (SWA served only
drinks and snacks),
ii. And a single class of open seating.
3. SWA was not listed on a computer reservation system so travelers or travel agents had to call
SWA‟s own ticket agents to get on a flight.
4. SWA had a frequent flier program that was based on number of trips, not mileage.
5. The Company had one of the best overall customer service records and had been given very
high ratings on the overall customer...

1. Entry/exit of major firms: The airline industry has many entry barriers so the dangers
associated incoming airlines are low. Lately, however, there have been many airlines
exiting which causes fierce competition to gain their customers.

2. Changes in cost and efficiency: Cost of fuel, increasing inflation, increasing interest
rates, maintenance costs, safe flights, and timely arrival and departures all play a major
role in the airline industry

3. The internet: The internet enables flyers to go online and do more comparative
shopping for good prices, flight schedules, and flight destinations. It is also more user
friendly for businesses.

4. Strong regulatory/political/governmental/societal influences: Because of the incidents

of 911, the government has cracked down on flight as well as preflight security. It has
forced airlines to train their pilots, flight attendants, and ground crews. This has forced
airlines to raise their prices and pay more attention as to who they hire. Another major
act of terrorism could cripple the Airline industy.
COMPETITIVE ANALYSIS
Southwest Airline's 5 Forces of Competition

Bargaining Power of Suppliers

Full-service airlines have a high level of fixed and operating costs in order to establish
and maintain air services: labor, fuel, airplanes, engines, spares and parts, IT services
and networks, airport equipment, airport handling services, sales distribution, catering,
training, insurance, and other costs.
The company saved a great deal of money by owning only one type of aircraft, the
Boeing 737. It acquired some of its new aircraft at favorable prices because it also
served as the launch company for the aircraft. It also saves money on parts, training,
and maintenance. They do not serve meals as did most other airlines, they only serve
beverages and...

Brief Introduction
Airline industry can be divided into two sub-sectors. The first is traditional airlines such as
American Airlines, United Airlines and Delta Airlines. These carriers have global air networks
and serve both long-distance and medium-distance routes. The second is low-cost airlines such
as Southwest Airlines and JetBlue, which mainly operate medium or short distance routes and
only serve domestic clients. In today¡¯s competitive environment with high oil prices, most
traditional airlines suffer huge losses while lost-cost carriers still record sizable profits due to
their unique strategy and flexible operations. Southwest Airlines epitomizes the business model
of low-cost airlines.

Low Cost and High Efficiency

The most important asset of Southwest Airlines is its low operating cost, which is currently the
lowest in the industry. Over the past thirty years air fare price has been keeping going down and
therefore a low cost structure places Southwest Airlines in a competitive advantage over its
peers. It can price its fares at or even below industry level but still makes money. Chart 1
compares its unit cost with other major carriers. Southwest Airlines¡¯ unit cost is only 8 cents
per ASM, about 58% lower than Delta Airlines and 29% lower than JetBlue. Given Southwest
Airlines¡¯ low stage length, this cost saving is even more encouraging, signifying the
company¡¯s sound cost control.

If we dig more deeply, we can compare Southwest Airlines¡¯ cost structure to that of JetBlue
(Chart 2). Staff costs and fuel costs are the two largest expenditures. Due to successful oil
hedging, fuel costs only account for 19% of Southwest Airlines¡¯ total expenditure while 29% of
Jetblue¡¯s. In the high oil price environment, this cost savings translates into significant earning
improvements. In the meanwhile, Southwest Airlines allocate more to staff costs, 40% of the
total compared to only 26% of JetBlue. Higher employee compensations are powerful...