1.

Assess the US Airline industry in early 1990¶s

Airlines' profitability is closely tied to economic growth and trade. During the first half of 
the 1990s, the industry suffered not only from world recession but travel was further
depressed by the Gulf War. In 1991 the number of international passengers dropped for
the first time. The financial difficulties were exacerbated by airlines over-ordering aircraft
in the boom years of the late 1980s, leading to significant excess capacity in the market.
IATA's member airlines suffered cumulative net losses of $20.4bn in the years from 1990
to 1994.

Since then, airlines have had to recognize the need for radical change to ensure their
survival and prosperity. Many have tried to cut costs aggressively, to reduce capacity
growth and to increase load factors. At a time of renewed economic growth, such actions
have returned the industry as a whole to profitability: IATA airlines' profits were $5bn in
1996, less than 2% of total revenues. This is below the level IATA believes is necessary
for airlines to reduce their debt, build reserves and sustain investment levels. In
addition, many airlines remain unprofitable.

To meet the requirements of their increasingly discerning customers, some airlines are
having to invest heavily in the quality of service that they offer, both on the ground and
in the air. Ticketless travel, new interactive entertainment systems, and more
comfortable seating are just some of the product enhancements being introduced to
attract and retain customers.

The United States is the largest single market in the world, accounting for 33 per cent of 
scheduled RPMs (41 per cent of total scheduled passengers) in 1996. The most
significant change in the history of the industry came in 1976 when the Civil Aeronau
Aeronau tics
Board (CAB) asked Congress to dismantle the economic regulatory system and allow the
airlines to operate under market forces. This changed the face of commercial aviation in
the United States. Congress passed the Airline Deregulation Act in 1978, easi ng the
entry of new companies into the business and giving them freedom to set their own
fares and fly whatever domestic routes they chose.

Deregulation of the industry was followed quickly by new entrants, lower fares and the
opening of new routes and services to scores of cities. The growth in air traffic brought
on by deregulation's first two years ended in 1981 when the country's professional air
traffic controllers went on strike. Traffic surged again after 1981, adding 20 million new
passengers a year in the post strike period, reaching a record 466 million passengers in
1990.

In 1989 events began which severely damaged the economic foundations of the
industry. The Gulf crisis and economic recession caused the airlines to lose billions of 
dollars. The industry experienced the first drop in passenger numbers in a decade, and
by the end of the three-year period 1989 -1992 had lost
lost about US$10 billion
billion - more than
had been made since its inception. Great airline names like Pan American and Eastern
disappeared, while others, such as TWA and Continental Airlines, sought shelter from
bankruptcy by going into Chapter
Chapter 11.

Today the domestic industry in the US is a low cost, low fare environment. Most of the
major airlines have undergone cost restructuring, with United Airlines obtaining
employee concessions in exchange for equity ownership. Some airlines sought the
protection of Chapter 11 bankruptcy to restructure and reduce costs and then emerged
as strong low-cost competitors. The majority have entered into cross-border alliances to
improve profitability through synergy benefits.
In 1993 President Clinton appointed the National Commission to ensure a strong
competitive industry. Its recommendations seek to establish aviation as an efficient,
technologically superior industry with financial strength and access to glo bal markets.

The early 1990¶s were different years for the airline industry. In the period 1990 -9,
airlines lost as much profits as they had made since the industry was deregulated in
1978.

The main reasons:

1. US Economic recession which resulted in reduction of air -traffic

2. Gulf War in 1990¶s reduced the load factors
3. Price of jet fuel ± all time hig
4. Perceived terrorist threat resulted into decline in demand

All this lead to destructive competition and the industry waved red flag to this when it
forced an unprecedented industry collapse.

2. How is southwest positioned within the industry? What is the Competitive

strategy?

The mission of Southwest Airlines is dedication to the highest quality of customer servic e
delivered with a sen se of warmth, friendliness, individual pride, and company spirit.

Southwest Positioning
 only low-fare
 short-haul
 high-frequency
 point-to-point carrier
 fun to fly

At a glance, the company's source of competitive advantage is its low price tickets. Most
of its customers are people who are willing to forego in-flight meals, direct routes and
fancy seats if that would mean for a cheaper ticket. Not to i mply that Southw est doesn't
provide direct flights, but that is offered at a higher price. Southwest Airlines was in
better shape than its for a simple reason: their low-cost model.

There were three keystones to Southwest Airlines¶ competitive advantage. The first lied
in its employees and how they were managed. Secondly, the firm sought to identify
major threats and opportunities in their competitors, and assess how Southwest could
improve and capitalize on markets where their competition failed. And the final
significant success factor was the company¶s cost structure.

CEO, Herb Kelleher, was a prime example of how Southwest fostered a healthy internal
environment. He interacted with customers and employees, promoted company parties
and understood that the firm was only as strong as its employees. Employee
satisfaction was crucial. Therefore, the human resources department (³the People
Department´) encouraged employees to give feedback and to ask questions. Its people
were so important, that the firm is very selective in the recruiting process. Since
teamwork is critical, the wrong people could µspoil the pot¶.
Southwest remained aware of their ever-changing strengths, weaknesses, opportunities,
and threats. They seized opportunities to expand when other airlines closed their airline
services to some cities that they deemed unprofitable. They concentrated on flying to
airports that were underutilized and close to metropolitan areas. Eliminating central
hubs created efficiency, in which flights had point-to-point routes without connection
flights, because delays were often associated with connection flights. Therefore, a
Southwest aircraft spent more hours in the air than its competitors, on average.
Cost efficiency was a two-front strategy for the firm; it not only reduced the firms
spending, but it also allowed them to pass the cost reduction onto the customers
through providing lower fares. Southwest found that a swift turnaround of an aircraft
created cost advantage.

3. How would you describe the structure and culture off Southwest Airline?

Structure:

Centered on team-building
Cross-training encouraged
Broad latitude offered
10% of stock held by employees

Southwest Airlines is an upside-down pyramid. The upper management is at the bottom

and supports the front line employees, who are the experts. This is Herb Kelleher's
unorthodox leadership style, in which management decisions are made by everyone in
the organization, not just the head executives. The company is described to not have
much emphasis on structure; instead employees are encouraged to think freely without
constraints such as titles.

Southwest Airlines values employees, initiating the first profit-sharing plan in the U.S.
airline industry in 1974 and offered it ever since.

Culture:

The culture of this company is what helps make it a wonderful place to work for. The
leaders of this company have tried their best to develop a place where everyone loves to
come to work and wants to work. Managers who do not follow this theory are stuck with
employees who just come to get as little done and still get paid.

It's a company that not only nurtures nuttiness but also makes its pleasure a
requirement for employment. And it's a company unique culture, which includes a order
that people have fun at work which are part of Southwest, which set itself on low fares
and low frills, serving peanuts instead of meals. Employees also are constantly reminded
that they are No. 1 in the company's eyes. The reminders include cards, notes, gifts,
celebrations - and profit sharing to motivate them that there are ³our children´ 
In fact they believe: ³Yes, Southwest it¶s a good home´ 

Attributes:

Casual dress code

Field visits
Strong guidelines to everyone
Celebrations quite common
Recognition ± an important element
influencing motivation and service. Southwest Airline¶s concept of service is the true
source of motivation and excellence.

Apart, Southwest were the first airline with a frequent flyer program to give credit for
the number of trips taken and not the nu mber of miles flown.

Processes and Operations

1. Did all of its ticketing (not making seats available through computerized
systems)
2. Did not operate in the hub-and spoke route system
3. Flew into uncongested airports of small cities, less congested airports of large
cities
4. Did not transfer baggage directly to other airlines Only drinks and snacks often
peanuts served on board

1. Travel agents had to contact the airlines directly to book seats

2. SWA passengers flew non-stop origin to destination. Did not promote connecting
services
3. Savings in reduced taxi time, fewer gate holds and less in-air waiting time
4. It doesn¶t coordinate its services with other airlines

 84% unionized labor force but its labor rel ations were excellent
 Only flew Boeing 737 - Fleet of 150 and avg of 1500 trips per day.
 Average age of SWA was 7 years(lowest in the industry)
 Differentiation in terms of ³turnaround´ time , 2 out of 3 planes were turned-
around in 15 mins.

 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
 737¶s had average life of 20 years
 US industry average was 55 mins.

Cost Control

³Airlines don¶t have revenue problems, they have cost probl ems´ 

Cost Cutting
Pilots contributing new ideas to save fuel s
Fuel costs
Buying fuel from vendors who offer best prices : Carry inventory if possible
Gate costs & landing Fees
Average : $2.50 pp,
Small airports: $2.00 pp, Large airports: $6 - $8 pp
No. of Departures
Maximize productivity of people and machinery .Atleast 20 departures per day
Low cost service
Offering great service at low cost : SWA cost per passenger was 7.3 cents in 1993.