Just Plane Smart

Harvard Business School Case Study Summary

Abhishek Mehra Balaji P Saruabh Ranadive Sarang Bhutada

The setting
Its 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

About Southwest
Started as a intra-state operator in Texas Budget airline philosophy, survived a severe price-war Operating out of Dallass Love Field airport, hence the ticker LUV 7th largest in the country by April 1993 Expanded to become a national carrier, serving major cities Short-haul, high-frequency, lowcost strategy

Final decision would have to preserve the Southwest culture and spirit
12 time winner of the coveted triple crown award

The Southwest Model

Use nonconventional models for low-cost

Have Fun Together

Treat employees as family

Hire people who form the fit

Involve employees

Controlled, Solid growth for the airline

People skills of Southwest Compensation Hiring - Identify attitudes rather than skills - Rigorous interviewing - Peer hiring Culture -Varied with position - At par with industry norm - Pension through a profit-sharing plan

-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

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

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

Product: Southwests product is travel

Target Market: Market Segmentation cost- and value-conscious consumers. mostly male small business executives travel short distances prefer low cost fares frequent schedules

Competition - not just other airlines but any mode of transportation.

1. frequent, conveniently timed flights and low fares. 2. point-to-point route system as compared to hub-and-spoke 3. direct nonstop

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

Competitors and Competition 11 major carriers (2003): 1. Alaska Airlines 2. Aloha Airline 3. America West 4. American Airlines 5. Continental Airlines 6. Delta Airlines 7. Northwest Airlines 8. TWA 9. United Airlines 10. U.S. Air 11. Southwest Airlines Southwests 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 Southwests -20 cents Seemingly weird thingsNot assigning seats Weird Color Scheme

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? 1. Air fares go down 2. Tourist traffic increases 3. Economic mini-boom ensues

Marketing Blitz !!!!

- Smart Campaign

Pricing Strategies 1. Charge the lowest possible fare 2. Compete with all other forms of transportation, including automobiles

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

Instead of increasing fares when market gets busier and more people are flying, it simply increases the number of flights.

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"

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

Advertising
Dont 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: 1. intrigue 2. Entertain 3. persuade

Way of showing Southwests philosophy that every customer is equally important as the other and making ALL passengers feel special.

Wed like to match their new fares but wed have to raise ours!!"

Television Sports Advertising Internal Marketing 1. Sports television programming 2. Reaching the corporate set via sports and other venues 3. In 2000, Southwest renewed its multi-year sponsorship agreement with the National Football League (NFL).

Core Business - Customer Service businessthey just happen to provide airline transportation
Southwests philosophy - Service for Smiles and Profits Encourages employees to treat customer service as the most important aspect of their job

Public Relations 1. Aims for Free publicity 2. Triple Crown Award for the fifth time in a row 3. Named a plane Triple Crown One and painted 24,000 employee names on it

CEO Kelleher, "We want people who do things well, with laughter and grace."

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 doesnt coordinate its services with other airlines

OPERATIONS

84% unionized labor force but its labor relations were excellent Only flew Boeing 737 - Fleet of 150 and avg of 1500 trips per day.

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 737s had average life of 20 years

Average age of SWA years(lowest in the industry)

was

Differentiation in terms of turnaround time , 2 out of 3 planes were turned-around in 15 mins.

US industry average was 55 mins.

COST CONTROL

Airlines dont have revenue problems, they have cost problems

Pilots contributing new ideas to save fuels

Cost Cutting

Fuel costs

Buying fuel from vendors who offer best prices : Carry inventory if possible

Gate costs & Average : $2.50 pp, landing Fees Small airports: $2.00 pp, Large airports: $6 - $8 pp No. of Departures Low cost service
Maximize productivity of people and machinery .Atleast 20 departures per day Offering great service at low cost : SWA cost per passenger was 7.3 cents in 1993.

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 dont 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.

Ground Economics

In-air Economics

Total Economics

Spiritual aspect

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.

Revenue Vs. Employees ( DEA )

Revenues per employee

North west

South west

Number of employees

Ground crew staffing efficiency

Wages as % of total expenses 29.78% ( Industry average = 35.17%) Lowest among Non-Chapter11 Airlines for the year 1992 . How was it possible ?
Ground Crew Staffing Levels based on number of departures at an Average Southwest city Marginal emp reqd per Departures People departure 10 35 3.5 20 45 1.5 30 60 1.5 60 120 2
4 3.5 Employee required per each additional trip 3 2.5 2 1.5 1 0.5 0 0 20 40 60 80 Marginal emp reqd per departure

Number of departures from a city

Competitors runs with at least three times as much staff . E.g., South-West effect on Burbank Oakland market.

Employee productivity (1992)

3500 3000 2500 2000 1500 1000 500
ASM+RPM RPM per employee(000)

ASM per employee(000)

nc A .1 la 06 A ska m er 10 ic a 6 W e A st U ve A LC rag or e p 10 6

ASM: Average Seat Mile ; RPM : Revenue Passenger Mile

TW on A t A m ine er nt al ic a W e S ou st N or thw th e w st es t1 06 C

A ir I

el ta

CONCLUSION
South West Airlines built numbers on its culture where as most competitors let the culture to shape up by their focus on numbers

NUMBERS

Other large Airlines F

CULTURE

O
SCHEDULING

CULTURE

C U

STRATEGY

F O C U
S

SCHEDULING

STRATEGY

NUMBERS

Thank You