Analyzing Southwest

Airlines
Monday, April 30, 2012
Southwest's Competitive Advantage
To reach its highly competitive position, Southwest Airlines has focused on four main strategies: being
low-cost, employee-driven, future-minded, and differentiated.

As mentioned previously, Southwest is a low-cost airline that focuses on fast, no-frills service. It has
never served meals, does not have advanced seat reservations, and flies only Boeing airplanes. These decisions
have helped Southwest be flexible in the face of the recent decreases in airplane passengers caused by the 9/11
terrorist attacks and the world economic crisis. The company did not have to make the drastic changes seen in
its competitors services because it was already operating as a low-cost carrier. While other airlines cut back
costs by reducing their services and firing large portions of their employees, Southwest was able to get by with
nothing more than pay-cuts - no employee was fired because of economic issues. Although a company-wide
pay-cut is nothing to sneeze at, Southwest employees agreed they would rather have their jobs for less pay than
try to find work elsewhere. Through this loyalty, Southwest was able to recover much faster than its competitors
and maintain its strong customer base.


In the last entry, we discussed Southwest employees in detail, so I will mention them only briefly here.
Southwests employees are incredibly loyal, and they are a key part of the companys overall strategy. Having
happy employees means a company is more likely to have happy customers. Southwest knows this and uses it to
its advantage. The company knows how to use motivation tactics that work for their employees. In line with
Douglas McGregors Theory Y employees, workers at Southwest enjoy their jobs and see them as a natural part
of their lives. They dont need to be coerced with threats or promises. Southwests employees genuinely enjoy
their jobs and want to pass that enjoyment on to their customers. This attitude is reflected in Southwests
employee retention rate of 92.3% (a key indicator that employees love Southwest and want to work there). And
an employee who loves their company will make customers love that company, too.

Customers can easily see Southwests low-cost, employee-driven strategies, but what they cant always
see is Southwests internal strategy. One of the companys main focuses is on differentiation. This is an
interesting strategy choice because differentiation is usually seen in high-price and/or unique product companies
(such as BMW or Starbucks). Still, this is one of Southwests key choices, and they are making it work.

One of their key differentiation strategies is their Rapid Rewards frequent flyer program. According to
their financial statements, Southwest has revamped their system so ...members are able to redeem their points
for every available seat, every day, on every flight, with no blackout dates; and...points do not expire so long as
the Rapid Rewards Member has points-earning activity during a 24-month time period. Many airlines have
similar, but much more complicated rewards systems, so Southwests emphasis on flexibility separates them
from the rest of the pack. They also make use of their Chase Visa credit card to help their customers earn and
redeem points. This system brings in new customers, increases business from existing customers, and
strengthens Rapid Rewards partnerships within its various divisions. Southwest has already seen this new
rewards plan pay off by meeting and passing all of their expected growth goals. Theyve increased their overall
business and given customers what they want. This company excels at being attuned to customer needs - they
know that if you give people what they want, they will give you what you want.

Southwests other key differentiation strategy is what they call aggressive promotion. They take their
key messages, put them into easy-to-understand commercials, and let the strategies themselves do the talking.
Here is a commercial from their Bags Fly Free marketing campaign:





Southwest sets up all of its strategies in that commercial. It shows its low costs (bags fly free!),
emphasis on employees, and its differentiation (even going so far as to call out other airlines for charging
baggage fees). This sort of campaign sets the company apart from competitors and makes potential customers
aware of Southwests unique policies.
The fourth key strategy is Southwests focus on its future. Everything it does progresses the company,
and every decision is made with long-term benefits in mind. Their recent acquisition of AirTran shows how
Southwest is thinking of ways to expand its services and grow its market share. In their Annual Report,
Southwest listed the strengths of this integration. It allows...more low-fare destinations by extending...network
and diversifying into new markets.... It also ...increases Companys share of current domestic market share
capacity (as measured by available seat miles or passengers. And it provides access to near-international
leisure markets in the Caribbean and Mexico...and provides firsthand and meaningful insight into...new
expansion opportunities. Essentially, Southwest is working to expand its services, steadily increase its market
share, absorb prior competition, and prepare for future growth. These steps will help the company be successful
both now and in the future. In the current economy, companies must be more flexible and prepared than ever
before, so plans like Southwests are essential.
In line with their future-minded goals, Southwest is updating its aircraft fleet to lower costs and
increase customer capacities. The company purchased new Boeing 737-800s in the first quarter of 2012. These
planes have increased their customer capacity - and more customers of course means access to more profits.
Although adding customers means more money, it can also mean more costs. Southwest has prepared for this;
737-800s have better fuel efficiencies than previous models and can reduce unit costs. The planes are also
larger, so Southwest can add seats without adding flights. This increased efficiency will help cover fuel costs
and contribute to the companys operating margins. In the 2011 Annual Report, Southwest said these new
planes ...will enable Southwest to profitably expand to new destinations and potentially fly to more distant
markets such as Hawaii, Alaska, Canada, Mexico, and the Caribbean.
In addition to these new planes, Southwest has made a deal with Boeing to purchase 150 of their newly
designed 737 MAX planes. These new models are more fuel efficient and environmentally friendly. These
benefits factor into both Southwests low-cost and customer-minded strategies. Fuel efficiencies cut costs, and
environmental considerations are essential to stay on the publics good side. A green company is much more
respected than its less environmental competitors.
According to the company, these new planes will allow for replacing ...certain Boeing 737 and/or
Boeing 717 aircraft. Southwest is planning for the inevitable time when their current fleet becmes outdated. By
being the first customers for this new aircraft, the company is taking a risk, but it is necessary to stay innovative.
They claim that the ...717 aircraft does not fit within [Southwests] long-term overall fleet plans, so they must
replace these models with ones that better serve the companys needs. In spite of these changes, Southwest is
maintaining its strategy of having one type of airplane. They keep strictly to their promise of flying only Boeing
models. This both serves the company by lowering costs and by showing a consistent face to their customers.
Those who fly with Southwest could become disillusioned if the company suddenly changed its aircraft fleet.
Customer loyalty is essential in volatile markets, and Southwest wont risk alienating anyone.
Southwest is a people-oriented company and uses that orientation to leverage its advantages. It cuts
costs by having employees who work for a company they love, instead of for a simple paycheck at the end of
the week. The company also plans for the future and is not afraid to take the risks necessary to stay ahead of the
competition. As seen with their integration of AirTran and the new Boeing planes, Southwest is focused on
expanding its services and increasing its market share. They plan far ahead and make sure their plans are
sustainable for current and future competitive advantages.



For more information about the 737 MAX purchase, check out this Financial News Network clip:




And watch this video for a look at the new plane:






















Posted by TeamSpark at 12:24 PM
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1 comment:
1.
Roshan SubediJuly 1, 2013 at 9:11 AM
thank u, your post has helped me so much to make my presentation in competitive
advantage. god bless u
Reply




Plan for our next class:
1.Read the case "Southwest Airlines: In a different world" in the lines of framing a competitive
strategy. (available in your course-pack)
2.Analyse the case based on three parameters:
a.Cost Leadership strategy
b.Differentiation strategy
c.Focus strategy
3.Read the case keeping in mind the essential reading for the topic competition.

Note:
1.All students to prepare a ppt and CR's to send me 1 day prior.
2.One group presents followed by our discussion on the concepts and theories on competition.




Low-cost Airlines Strategy Model
Analysis: Southwest Airlines

Case Southwest Airlines
About 40 years ago, Rollin King and Herb Kelleher got together and decided to start a different
kind of airline. Southwest Airlines founded in 1971 and it was a novel business model innovation
that breaks all the rules.

They began with one simple notion:
I f you get your passengers to their destinations when they want to get there, on time, at the
lowest possible fares, and make darn sure they have a good time doing it, people will fly your
airline.
A low-cost airline is also known as a no-frills, discount or budget carrier or airline. It is an airline
that generally has lower fares and limited services. The term originated within the airline industry
referring to airlines with a lower operating cost structure than traditional airlines. Low-cost
carriers should not be confused with regional airlines that operate short flights without service, or
with full-service airlines offering some reduced fares, because they have different business
model.
Low-cost airlines the key strategy logics (per perspective) are:
Very low ticket prices (customer)
High utilization rate of fleet of aircraft (growth, routes)
Simple structures (processes)
Lean and productive personnel (resources)
Low-cost airline allow business travelers, who could not fly in First Class, to enjoy a premium
service. Accordingly, elements of the customer perspective focusing on frequent point-to-point
flyers, limited service and refundable ticketless flight. Frequent flyers are people, mostly
business, who frequently travel between destinations that are 250-500 kilometers (150-300 miles)
apart.
The growth perspective follow only the strategy logic of the high utilization of aircrafts, which is
based on elements such as the efficiency in ground services (25 min gate turnaround), short-haul,
frequent and point-to-point routes between mid-sized cities and secondary airports. These the key
issues keep planes in the air the most of the time. The utilization rate with high volume is very
crucial for the low-cost airlines strategy model and every business issues must follow this logic.
The process perspective based on simplicity of operations. Just one type of aircraft (Boeing 737)
keeps costs down related to pilots training, spare parts, maintenance, etc. The hardest part of the
implementation of low-cost airline business model is personnel.
Create lean organization, flexible and productive personnel:
Flexible contracts & multi-skilled personnel
Create right company spirit
Reward: High compensations of employees
Be selective: Only hire persons fit in profile