Southwest Airlines 2002: An Industry Under Siege Harvard Business School: 9-803-133 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. 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. 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. 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. 3). What strategy and/or model was used or implemented in this case? Bargaining power of buyers Porters 5 Competitive Forces Model Threa ts Threat of substitute

Southwest vs. All other Airlines

Bargaining power of suppliers

Bargaining Power

Threat of new entrants

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. Southwest did face the threat of new entrants when People Express launched in 1980. It competed on low fares as well and grew rapidly. Ultimately, the company was not able to sustain its growth and dissolved blaming larger competitors. Ryan Air replicated Southwest Airlines in Europe and another low cost competitor now is Jet Blue in the United States. Southwest airlines does struggle against the threat of substitutes much like any other airline and in this case the threat of substitutes is the decision to use an alternate form of travel, such as driving or taking a train. The airline industry is sensitive to

tragedy such as when there is a plane crash or an event like 9/11; consumers tend to switch to a substitute or chose not to travel in the first place. Southwests best defense is a strong PR campaign, which we saw after 9/11 when the company launched ads saying that when America is ready to fly again, Southwest will be there.

Looking at the bargaining power of suppliers, Southwest relies heavily on its employees, pilots and other team members. Employees were very loyal, and turnover was significantly less than other airlines. Also, any union negotiations were taken very seriously by management and generally handled by the CEO himself. Finally, Southwest is vulnerable to variable changes in pricing at different airports for security, etc, but Southwest always sought the lowest cost alternation or the least congested airport for their passengers convenience. Southwest also negotiated fuel prices years ahead, allowing them to maintain this fixed cost on an annual basis. Finally, Southwest helped to counteract the threat of bargaining power of buyers by giving passengers what they want . . . lower fares, reliable service and rapid rewards! Southwest noted that one of passengers most frequent complaints was the fact that they are not able to choose their own seat. According to Southwests website press release, the company in currently looking into making changes to accommodate their clients. Again, this is Southwest strategically counteracting a threat of bargaining power of buyers by consistently monitoring and adjusting to consumer concerns. 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 3

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. 5). From your perspective what other solution(s) (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. Keens Six-Stage Competitive Advantage Model Stimulus for action: On time performance slips to second to last. First major move: Customer Self Check in Kiosks Customer acceptance

Competitor catch-up move

First mover expansion move: Southwest moves to online check in.

Commoditization: All major airlines have check in kiosks.

6). Draw and explain how can the Information Systems Strategy Triangle be employed in this case?

Business Strategy: Low cost Reliability Frequent flights Rapid rewards Culture

Business Strategy

IT Strategy: SABRE Kiosks Website, online ticketing. Online boarding passes

Organizational Strategy

Organizational Strategy: Point-to-Point Sustainable growth Teams Culture

IT Strategy

The Information Systems Strategy Triangle demonstrates the balance that Southwest airlines took to focus on business strategy, organizational strategy and IT strategy. The following priorities fall under each strategy: Business Strategy: Low cost Reliability 5

Frequent flights Rapid rewards Culture Organizational Strategy: Point-to-Point Sustainable growth Teams Culture IT Strategy: SABRE Kiosks Website, online ticketing. Online boarding passes 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. 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. 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. 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. 4). If you would recommend a resumption of previous growth rates, what form should this growth take? For example, should it be achieved within the current network or through an expanded network? By means of great proportion of longhaul flights (over three hours in length) or not? Why? I would recommend an increase in the long-haul flights. As long as Southwest can still continue to maintain the point-to-point service, and they do not lose these core competencies, than by all means, they should continue this growth. Southwest has revolutionized the airline industry because the fast turnaround time, which in essence means that you have more passengers in the air, thereby bringing in more revenues. The point here is that if there is a shift between the number of full seats on a certain route, this is when Southwest needs to look at readjusting their routes. However, if the seats are still

full for shorter flights and longer flights, then by all means, continue to serve the passengers accordingly. 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 profitably 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. 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. 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.