Just Plane Smart

Harvard Business School Case Study Summary

Abhishek Mehra Saruabh Ranadive

Balaji P Sarang Bhutada
The setting About Southwest
Its summer of 1993
Started as a intra-state operator in
Southwest is expecting delivery of two Texas
uncommitted planes
Budget airline philosophy, survived
McGlade needs to find a way, to put a severe price-war
these planes in operation, keeping the
organizational objectives are intact Operating out of Dallass Love Field
airport, hence the ticker LUV
Final decision would have to preserve
the Southwest culture and spirit 7th largest in the country by April
1993
12 time winner
of the coveted Expanded to become a national
triple crown carrier, serving major cities
award
Short-haul, high-frequency, low-
cost strategy
The Southwest Model
People skills of Southwest
Compensation
Hiring
-Varied with position
- Identify attitudes rather than skills - At par with industry norm
- Rigorous interviewing - Pension through a profit-sharing
- Peer hiring plan
Culture

-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 Advancement

-Centered on team-building -Recognition, an important element

- Cross-training encouraged - Celebrations quite common
- Broad latitude offered - Most promotions internal
- 10% of stock held by employees
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
Competition - not just other airlines
but any mode of transportation.
frequent, conveniently timed flights
and low fares.
point-to-point route system as
compared to hub-and-spoke
direct nonstop
Target Market:
Market Segmentation
cost- and value-conscious consumers.
mostly male
small business executives
travel short distances
prefer low cost fares
frequent schedules
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 Product Positioning
only low-fare
11 major carriers (2003): short-haul
4.Alaska Airlines high-frequency
5.Aloha Airline point-to-point carrier
6.America West fun to fly
7.American Airlines
8.Continental Airlines
9.Delta Airlines Average cost of serving meals per
10.Northwest Airlines passenger in the industry - $5
11.TWA For Southwests -20 cents
12.United Airlines Seemingly weird things-
13.U.S. Air Not assigning seats
14.Southwest Airlines Weird Color Scheme

Southwests brand exudes an element

of fun: Obviously Fun
Love Theme,
Love Potions(on-board drinks)
Love Machines( ticket writing
machines)
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?
6.Air fares go down
7.Tourist traffic increases
8.Economic mini-boom ensues
Marketing Blitz !!!!
- Smart Campaign
Pricing Strategies
3.Charge the lowest possible fare
4.Compete with all other forms of
transportation, including
automobiles
Instead of increasing fares when
market gets busier and more people
are flying, it simply increases the
number of flights.
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
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 Advertising

Southwest Airlines wants to Dont believe the hype.

differentiate itself from other airlines
as the airline that can get passengers to Fares offered by other discounters
their destinations when they want to and airlines on the Web are not good
get there, on time, at the lowest buys.
possible fares while having fun.
Southwest attempts to do three
Frequent Flyer Awards things in their advertising:
Rapid Rewards-based on number of 8.intrigue
trips taken 9.Entertain
10.persuade

Way of showing Southwests

philosophy that every customer is
equally important as the other and Wed like to match their new fares
making ALL passengers feel special. but wed have to raise ours!!"
Television Sports Advertising
4.Sports television programming
5.Reaching the corporate set via sports
and other venues
6.In 2000, Southwest renewed its
multi-year sponsorship agreement
with the National Football League
(NFL).
Public Relations
11.Aims for Free publicity
12.Triple Crown Award for the fifth
time in a row
13.Named a plane Triple Crown One
and painted 24,000 employee names
on it
Internal Marketing
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
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 Usually do not share the ground
labor relations were excellent handling crew until unavoidable

Only flew Boeing 737 - Fleet of Other airlines flew variety of jet
150 and avg of 1500 trips per aircrafts, as many as 5 distinct ones
day. including McDonnell Douglas, Airbus
and Boeing

737s had average life of 20 years

Average age of SWA was 7
years(lowest in the industry)
US industry average was 55 mins.
Differentiation in terms of
turnaround time , 2 out of 3
planes were turned-around in 15
mins.
COST CONTROL
Airlines dont have revenue problems, they have cost problems
 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.
 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.
Revenues per employee
Revenue Vs. Employees ( DEA )

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
each additional trip
Employee required per
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
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

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2500

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RPM per
1500 employee(000)

1000 ASM per

employee(000)

500
ASM+RPM
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ASM: Average Seat Mile ; RPM : Revenue Passenger Mile

 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 CULTURE

SCHEDULING

SCHEDULING C F
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STRATEGY

U C
STRATEGY
U
S NUMBERS

S
Thank You