Sample Case Study of Southwest Airlines

Since its inception in 41 years ago, Southwest Airlines continues to differentiate its services from other low-fare carriers, through provision of reliable services and consummate customer service. Within the domestic airline industry, Southwest Airlines is among airlines with lowest cost structures. Due this attribute, Southwest Airlines continues to offer its customers simplest and lowest fares. In spite of low cost fares, Southwest Airlines continues to make outstanding profits because of large passenger turnout. However, the global economic turmoil and escalating fuel prices are threat to Southwest Airlines low priced fares. To combat these threats we recommend Southwest Airlines to continue its emphasis on flyer programs such as EarlyBird Check-In™, business Select and All New Rapid Rewards® that have so far proved profitable. For instance, in 2011, Southwest Airlines net income was $178 million.

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Southwest Airlines undertakes numerous promotion campaigns including celebrity endorsement (like 2009 Bar Rafaeli), open travel programs, advertisements campaigns, and partnership with other partners. Since, open travel programs are strictly offered to Hispanic, this report recommends these programs to be extended to other communities like African American. On place, Southwest Airlines operated exclusively in US domestic market – at 76 cities in 38 states. Due to vulnerability of airline markets we recommend Southwest Airlines to expand its operation to other regions like Brazil, china, India, Canada and Mexico among other countries. On physical environment, Southwest Airlines aircrafts have orange and mustard brown colors. At headquarters there are numerous pictures depicting Southwest Airlines employees at reward ceremonies or having fun. Finally, this report recommends Southwest Airlines to have additional strategic centers for services and customers support in Spokane, Milwaukee, Manchester, and Tampa Bay.

Introduction

Mission and Vision

The Southwest Airlines mission is a dedication of highest quality of service to its customers which it delivers in a sense of friendliness, company spirit, warmth, and individual pride (Southwest Airlines, 2012h). Southwest Airlines is committed to offer its employees stable work environment that presents equal opportunity for personal and learning growth. Southwest Airlines is also committed to emerge as the hometown airline in each community it serves. The company is also committed in maintaining its status of a good environmental steward across all hometowns it operates. Southwest Airlines vision is to sustain to create a balance between community, its employees, the environment, and its financial viability (Southwest Airlines, 2012h).

Background

In 1971, or 41 years ago, Herb Kelleher and Rollin King established Southwest Airlines (Southwest Airlines Co.) – a low fair domestic airline (Bailey, Collins, Collins & Lambert, 2009). Their main aim was to initiate an airline that could deliver passages to their destinations, at their will, on time and at cheaper fares. Southwest Airlines began as minute airline in Texas but later grew to become one among the largest airlines in the United States (US). In 2011, Southwest Airlines made history. Southwest Airlines managed to deliver high quality commercial air services at low price. In addition, Southwest Airlines launched new and Industry leading frequent flier program in early 2011 (Southwest Airlines, 2012a).

Further, Southwest Airlines began operations in new cities namely; Charleston and Greenville-Spartanburg (in South Carolina) and Newark (in New Jersey). Again, in May 2011, Southwest Airlines closed its deal of acquiring AirTran Airways (Datamonitor, 2011). This strategic expansion initiative increased Southwest Airlines fleet by 140 airplanes. Southwest Airlines managed to make $3.7 billion as profit in spite of inefficiencies within the industry that emanate from economic meltdown and escalating fuel costs. The net income in 2011 was $178 million. This figure indicates that Southwest Airlines financial position was stronger as ever. Southwest Airlines short-term and cash investments were worth 3.1 billion; while, that of credit from bank was worth $800 million. The net cash from 2011 was worth $4.1 billion, capital expenditure was $968 million. This generated over $400 million worth of cash flow. This extemporal performance is attributable to Southwest Airlines’ programs such as EarlyBird Check-In™, business Select and All New Rapid Rewards®. This outstanding financial performance managed to blunt the effects of soaring jet fuel prices (Southwest Airlines, 2012a).

Purpose of the Report

This report undertakes strategic analysis of Southwest Airlines in its 7-Ps; that is, price, place, promotion, product (service), people, physical environment, and processes. Further, the report makes necessary recommendation 4-Ps, namely; physical environment, price, promotion, and place.

7-Ps Critical Analysis

Product (Services)

Southwest Airlines provides numerous and diversified services. However, the main service is to fly passengers from one destination to another (Bailey et al., 2009). Southwest Airlines flies passengers in across US cities. Now, Southwest Airlines passenger capacity in a single year is over 104 million people (Southwest Airlines, 2012a). Most of these passengers are flown to an approximate 64 US main cities such as Dallas, San Antonia, and Houston. The Southwest Airlines undertakes over 3,400 fleet flies in a single day. Southwest Airlines is now the largest carriers in US in reference to originating domestic passengers: it serves over 38 states (and District of Columbia) with 76 destinations (Southwest Airlines, 2012a). Southwest Airlines has over 500 aircrafts, most of whom constitute the youngest fleets (average of nine years) in US. In 2010, Southwest Airlines flew over 88 million passengers. Short-haul, point to point, low fair and high frequency, characterizes Southwest Airlines services (Datamonitor, 2011).

The Southwest Airlines website provides numerous services that bring comfort to customers while transacting with the company. For instance, Southwest Airlines provides other services such as hotel and car bookings that a customer can execute from website (Southwest Airlines, 2010a). Southwest Airlines also provides vacation packages in strategic points like Disney Land, Los Angeles, and Las Vegas (Southwest Airlines, 2010a). Customers also get Rapid Rewards for those who undertake 8 trips within 2 consecutive years.

Price

Since its start, Southwest Airlines has always applied low cost fare models. Low cost fares were Southwest Airlines vision of its founders – Herb Kelleher and Rollin King. At the start, these low cost fares were below the cost of undertaking vehicle drive within the same route (Muduli & Kaura, 2011). In spite of low cost fares, Southwest Airlines ensures that it makes profits. Southwest Airlines policy in pricing its services was aimed at competing with automobile transport industry (Tierney & Kuby, 2008). To charge low cost prices, Southwest Airlines ensures that it incurs low operation costs. Again low prices are unsustainable unless Southwest Airlines supports high load passenger factors.

In spite of low cost fares, Southwest Airlines managed to breakeven after two years since inception (Tierney & Kuby, 2008). With its low priced fares, Southwest Airlines encountered some strategic competition form rival firms. For instance, at one point, Southwest Airlines principal competitor, Baniff International started a 60day trip between Houston and Dallas that was Southwest Airlines half price sales; that is $13 (compared to $26 of Southwest Airlines) (Muduli & Kaura, 2011). To overcome this challenge, Southwest Airlines established a counter strategy through an advert that “nobody is going to shoot Southwest out of the sky for a lousy $13” (Muduli & Kaura, 2011 p.116). Southwest Airlines went a head and offered its clients an option of either paying $13 or $26 for similar seats in its flights. The customers who committed $26 to purchase tickets earned themselves a reward like fifths of whisky or ice buckets. This strategy was effective in that an approximate of 80 percent of customers preferred $26 tickets.

Promotion

Southwest Airlines relies heavily on promotion. Among highly used promotion channels is celebrity endorsement. For instance, in February 11, 2009, Bar Refaeli (a celebrity model) unveiled SI One 737 – a Southwest Airlines aircraft in New York’s LaGuardia Airport. On the sides of the plane, it shows the Israeli Model in a bikini (see appendix) (Hollywood Rag, 2009).

Southwest Airlines dedicates some travel programs to students as part of promoting itself and brands. For instance, in collaboration with HACU (Hispanic Association of colleges and Universities), Southwest Airlines has open travel program dedicated to college students (Hispanic Association of colleges and Universities [HACU], 2010). The program dubbed, “Giving Flight to Your Success” is awarded at annual basis. Students are entitled to apply one (http://www.hacu.net/) by the end of April. In this program, students are eligible to get one to four free tickets either for their personal use of their immediate family in a journey, from/ or to universities or college (HACU, 2010). These tickets are offered to Hispanic students who are constrained by their socio-economic situation at their quest for higher education.

To promote its brand, Southwest Airlines has a galaxy of promotional partners. These partners range form credit cards, hotels, rental cars, retail, and dining. In credit cards, its promotional partners include Southwest Visa, membership rewards, and club rewards (Southwest Airlines, 2012d). The rental cars include Thrifty Car Rental, Hertz, Alamo, Avis, Dollar Rent a Car and Budget. Hotel promoters include laQuinta, Marriott, Priority club, Hilton HHonors, Hyatt, Best Western, and Choice Hotels International (Southwest Airlines, 2012d). Teleflora Flower Club and Rapid Reward Dining are Southwest Airlines Retail and Dining promotional partners respectively.

Place

Southwest Airlines operates in US domestic market. It is the largest domestic airline operator in the US airline market (Southwest Airlines, 2012a). Currently, its fleets operate at 76 main cities in 38 states – see destination map in the appendix. Some notable states include Texas, California, Georgia, Arizona, Oklahoma, Florida, Indiana, Washington, Illinois, New Jersey, New Mexico, Oregon, Nebraska, Wisconsin, Minnesota, Iowa, Missouri, South Carolina, Los Angeles, Colorado, and Virginia among other sates (Southwest Airlines, 2012e). Among the main Southwest Airlines airports include Denver, Phoenix, Baltimore/ Washington, Chicago- Midway, Las Vegas, Dallas Love Field, Los Angeles (LAS), Orlando, Oakland and Houston-Hobby (Southwest Airlines, 2012e).

People

Southwest Airlines considers its people as the greatest asset. The company believes that people essential in delivering kindhearted world class service to customers (Southwest Airlines, 2012c). According to Southwest Airlines, it people who establish solutions that enhance customer experience. In addition, Southwest Airlines acknowledges precious time that people spend in sharing their efforts while trying to create positive impact within the company. Southwest Airlines people have passion and excitement of building desirable and sustainable future based on its LUV logo.

Southwest Airlines has a family worth over 45,000 employees (Southwest Airlines, 2012c). This workforce is built through Southwest Airlines’ Fun-LUVing culture. To ensure it is the best working place for any employee to desire, Southwest Airlines gives employees first priority and consideration. For instance, it provides them with excellent health services. Further, Southwest Airlines encourages its employees create their financial security, pursue their good health, be creative and innovative, learn and grow, stay conned, work hard, make a difference as well as have FUN (Southwest Airlines, 2012c). It notable that Southwest Airlines customers do not only reorder its services because it the company does not charge amenities that customers anticipate to get them free, but, its through its people plus their dedication that provides the customers with FUN travel experience.

Southwest Airlines customer service is extended through its employee’s kindhearted spirit of serving communities by giving back to the society through volunteering time, financial aid, and ticket donations (Southwest Airlines, 2012c). The Southwest Airlines Servant Heart has a warrior spirit that strives to do what is right to all company stakeholders namely, planet, suppliers, the customers, shareholders, and communities. Doing the right thing is among passions of airlines.

Processes

The Southwest Airlines has established itself as a successful corporate business through unusual model. This unusual model is based on short but quick trips operating in secondary airports of main cities (Southwest Airlines, 2012b). These operations are less costly and more efficient. For enhance efficiency and ensure that it does not incur large operations costs, Southwest Airlines uses Boeing 737 as the only carrier. Southwest Airlines does not undertake ticket sales through common online venues, but instead, it encourages customers to purchase majority of ticket by booking them through travel agents (Tierney & Kuby, 2008). Southwest Airlines tickets are usually issued directly via phone or online through company’s official website. Southwest Airlines is a dear to customers as it lets them to change their reservation without having to incur extra costs.

Southwest Airlines undertakes refunds to customers through online service. At this point, the customer is supposed to cancel the reservation online. Alternatively, customers can cancel their reservation by simply making a call to the reservation number (Southwest Airlines, 2012b). Southwest Airlines do not assign its customers seats; but instead, it assigns them any of its three boarding groups. Further, Southwest Airlines does not provide its customers with window or aisle seats. In addition, Southwest Airlines does not provide preference nor does it extend upgrades to its frequent travelers.

Southwest Airlines allows free check in of three luggage pieces unlike its rivals within the domestic market who limits passenger luggage pieces to two. In another perspective, Southwest Airlines provides smaller meals compared to those full service airlines. Usually, in shorter flights, Southwest Airlines gives passengers small snacks with soft drinks (Southwest Airlines, 2012b). In longer flights on the other hand, airlines provide passengers with pre-packed goods or snack pack. In flights that cover at least hours, passengers are served pretzels and peanut. In case of non-stop flight, Southwest Airlines service its passengers with packaged snacks. Further, Southwest Airlines provides its customers with other complimentary such as coffee, tea and other non-alcoholic drinks. Southwest Airlines does not offer lounges with gratis dinks.

Physical Environment

Physical environment (also physical evidence) in Southwest Airlines constitutes of actual procedures, flow of activities and mechanisms via which it delivers its services (Muduli & Kaura, 2011). In other words, physical environment constitutes the service delivery as well as operating systems. Southwest Airlines relies heavily on low cost model, people, and fast processes; however, at significant level, the physical environment draws the attention of people.

Southwest aircrafts usually have orange and mustard brown. These aircrafts accentuates uniqueness and their low-cost orientation (Muduli & Kaura, 2011). At headquarters, framed awards and photos cover Southwest Airlines three-storey building. Many of these photos and awards depict Southwest Airlines employees at their party clothes – jeans, black ties and formal dresses. Other photos show Southwest Airlines employees at community voluntary activities. For instance, one photo shows Southwest Airlines employees in their free time with kids Ronald McDonald house across US. One framed photo is that of co-founder Herb Kelleher. Kelleher gained fame because of his preference for unorthodox style of leadership (Muduli & Kaura, 2011). Some photos depict Southwest Airlines employees dressed in casual and formal shorts in summer having fun.

The use of reusable plastic cards at Southwest Airlines is an indication of physical evidence that shows “low costs and no frills to customers” (Muduli & Kaura, 2011 p.18). The company’s official website (http://www.southwest.com) gives tangibility to services it offers. In addition, Southwest Airlines undertakes colorful boarding announcements with its crews bursting out in songs.

4-Ps Recommendations

Physical Environment

With physical environment of Southwest Airlines consisting of hub spoke system with actual procedures, mechanisms as well as the low of activities, the people plays a big role in undertaking the company’s strategic initiatives (Bailey et al., 2009). Currently, Southwest Airlines has six service and customer support centers. These centers include Albuquerque, Phoenix, San Antonio, Houston, Chicago, and Oklahoma City (Southwest Airlines, 2012f). Based on diversity of market Southwest Airlines operates, this report recommends for additional service and customer center in areas such as Spokane, Milwaukee, Manchester, and Tampa Bay (Southwest Airlines, 2012f). These cities are at farthest corners of Southwest Airlines operations. Here, they will serve as hubs for nearby areas.

Southwest Airlines new acquisition AirTran Always has reservations centers in Savannah, Carrollton, and Atlanta. Southwest Airlines has not yet transformed its workers to its culture (Southwest Airlines, 2012g). Therefore, this report recommends Southwest Airlines to undertake quick transformation of AirTran workforce by initiating quick integration of flyer programs such as Rapid Rewards®frequent (Southwest Airlines, 2012g). These programs will reduce Southwest Airlines unit costs and drive more revenue. These Southwest Airlines initiatives at AirTran Airways will facilitate the closing of gap between its current financial performance and that projected in future (Datamonitor, 2011).

Price

The Southwest Airlines price strategy of low cost fares is affected by economic fuel price instabilities. In the last two decades, the prices of fuels have gyrated at high rates, making this industry vulnerable. For instance, in March 2012, the price of Brent crude per barrel was more than $120 (Southwest Airlines, 2012a). This increment called for fare increment or airlines assume losses. In first quarter 2012, Southwest Airlines is anticipating that its economic fuel expense will rise to more than $200 million. This projection is “based on current and forward hedged prices and as compared to first quarter 2011 combined economic fuel expense” (Southwest Airlines, 2012a). This fuel price increment might push Southwest Airlines to increase its fares. As a result, fare increments will interfere will Southwest Airlines low fare pricing model.

Therefore, to ensure that Southwest Airlines does not increase its fare, we recommend the Southwest Airlines to handle the issue of soaring fuel prices. Ceteris paribus, combating fuel prices implies that, the Southwest Airlines operating costs will not change at significant levels. To combat the increment of fuel cost prices, Southwest Airlines must therefore continue adapting its business drive initiatives for more revenues while maintain low fare to its customers. Southwest Airlines should not create hidden fees. For instance, in 2011, Southwest Airlines revenue grew tremendously through route network optimization and proper revenue management while maintaining it’s focusing on value-add products like EarlyBird Check-InTM and Business Select. These successful initiatives enabled Southwest Airlines to generate extra revenue of $4 billion in spite of fuel price bites.

Place

It is notable that Southwest Airlines is a giant operator in the US domestic market. The airline industry is among the fragile businesses in the world. That is, a slight change in economic trends like recession and soaring fuel prices in the global market has significant effects in this industry (The Economist, 2008). Therefore, Southwest Airlines only operation at domestic level making it vulnerable to economic setbacks at domestic market it operates. Some notable setbacks include global economic turmoil noted in 2007-2010 period and terror threats of September 11. For instance, the global economic turmoil of 2007-2010 forced consumers to cut down their expenditure costs (The Economist, 2008). Air travel being considered as a luxury, when situation necessities, the airline industry were highly affected. To combat such challenges in future, this report recommends Southwest Airlines to expand its operations at international level. For instance, it should focus on Mexico, Canada, and emerging economies like Brazil, Russia, India, China, and South Africa. This diversity will enable Southwest Airlines to offset some of its inefficiency losses incurred in one region by those with outstanding performance.

Promotion

Southwest Airlines students program is mainly dedicated for needy Hispanic students. In US, the Hispanic population is among smallest. In addition, there are other communities whose needy population surpasses that of Hispanic community. Therefore, this report recommends, Southwest Airlines to diversify its travel program to other American communities. Particularly, Southwest Airlines should focus on African American whose socio-economic needs surpass that of Hispanic. In general, this open travel for students should encompass all American college and university students. Through this promotional program, Southwest Airlines will open itself to a large pool of customers who at one point shunned the airline because they considered it as skewed towards Hispanic community. The acceptance and trust gain from other communities will enable Southwest Airlines to acquire a large passenger turnout from all Americans communities – a factor that drives its profit making (Datamonitor, 2011).

Conclusion

After 41 years in service, Southwest Airlines continues to define itself as a low fare carrier. It offers extemporary services (products) and outstanding customer care service. Through its low priced fares, Southwest Airlines is differentiated from other carriers in the industry. Since its inception, Southwest Airlines has grown gradually from one state (Texas) up to the current 38 states (and District of Columbia) and 76 cities. Southwest Airlines has proved its success over the last four decades, analysts concur that, this success will remain given than Southwest Airlines will continue to offer low cost and efficiency transportation to customers. Since Southwest Airlines operates in domestic market only, this report recommends this company to initiate operations in other countries particularly in Mexico and Canada as well as emerging economies like China, India and Brazil. The diversity in operation will reduce the vulnerability of regional economic turmoil that may force closer of Southwest Airlines. On physical environment, the report recommends Southwest Airlines to increase its customer and service support center by incorporating cities like Spokane, Milwaukee, Manchester, and Tampa Bay. In addition, we recommend Southwest Airlines to include other American communities such as African American in its open travel programs. Finally, the report also recommends Southwest Airlines to focus highly on EarlyBird Check-InTM and Business Select value-add product programs so that it will continue making large profits in future.

 

 

 

 

 

 

References

Bailey, C. D., Collins A. B. Collins, D. L. & Lambert, K. R. (November 2009). An analysis of Southwest Airlines: Applying the Horngren, Datar, and Foster (2006) Strategic Profitability Analysis Approach. Issues in Accounting Education 24(4), 539-511

Datamonitor. (November 14, 2011). Southwest Airlines Co. www.datamonitor.com . [Business Premier Search.]

Hispanic Association of College and University Students (HACU). (March 16, 2010) Southwest Airlines and HACU Open Travel Program for College Students: Lazante takes off! Retrieved from http://www.hacu.net/NewsBot.asp?MODE=VIEW&ID=768

Hollywood Rag. (2009). Gallery Home: Bar Refaeli. Retrieved from http://www.hollywoodrag.com/index.php?/gallery3/image_full2/27266/

Muduli A. & Kaura, V. (2011). Southwest Airlines success: A case study analysis. BVDIMR Management Edge 4(2), 115-118

Southwest Airlines (March 16, 2012a). 2011 annual report. Dallas, TX

Southwest Airlines. (2012b). Special offers: Great travel deals. Retrieved from http://www.southwest.com/

Southwest Airlines. (2012c). People overview. Retrieved from http://www.southwestonereport.com/2011/#!/people/overview

Southwest Airlines. (2012d). Rapid reward promotions. Retrieved from http://www.southwest.com/rapidrewards/promotions

Southwest Airlines. (2012e). Southwest Airlines Cities. Retrieved from http://www.southwest.com/html/cs/travel_center/routemap.html

Southwest Airlines. (2012f). Fact sheet. Retrieved https://www.southwest.com/html/about-southwest/history/fact-sheet.html

Southwest Airlines. (2012g). Future performance initiatives. Retrieved from http://www.southwestonereport.com/2011/#!/performance/future-performance

Southwest Airlines. (2012h). Mission & Vision. retrieved from http://www.southwestonereport.com/2011/#!/thirty-thousand-foot-view/mission-and-vision

The Economist. (November 19, 2008). A day of reckoning for the airlines. Retrieved from http://www.economist.com.hk/blogs/gulliver/2008/11/a_day_of_reckoning_for_the_airlines

Tierney, S. & Kuby, M. (February 2008). Airline and airport choice by passengers in multi-airport regions: The effect of southwest airlines. The Professional Geographer 60(1), 15-32

 

 

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