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Topic: South West Airlines:

Can Luv Rule the World?

SW Airlines - Case
1968:
Feb 20 License for Texas states (Herb Kelleher)
Introduction
(Braniff, Continental, Trans Texas competitors)
1971-78: Proud Texan Period
1978: US Market De-regulation (Competition Start)
1978 - 86: Inter-state Expansion
1987- 97: National Achievement

Financials of 1996:

Heavy Losses to
Op. Margin: 15% / Net Margin: 7 ~ 8%
Aviation
ROE: 15%, Debt / Equity Ration: <60% Industries in
Target for 1997: Margin Expansion
1992 (Pan Am,
Eastern)
Mission & Objective:
1.High Degree of Customer Service & Employee
Commitment
2.Safe, Low price Transportation with max. customer
Theme: Make Love not War. LUV
Stock ticker
convenience
symbol

Aviation Industry
1. Value Adding Activities (Airline procurement,
Aircraft maintenance, reservation system,
Schedule & route planning, In-flight services,
after-flight services like hotel, Taxi etc.,
2. Customers (Travel agents, Corporate travel
managers, Individual travelers Leisure/Business)
3. Geographical Coverage (Short haul Point to
Point, Long haul Hub and Spoke / Different
Pricing structure)
4. Passenger Service (meals, advance seat
bookings, frequent flier program, full service
(Business/first class), Sparton/
Coach
(No
3. High
InfraService
Structure
Competitive
frills)
cost
Environment:
4. High Inefficient
1.High Cost Structures
Planes

Structural Characteristics
(Aviation)
Porters 5 Forces:
1.
2.
3.
4.
5.

Suppliers: High Bargaining power, Boeing 737


Customers: Surface Transport
New Entrants: Low Cost, Outsourcing, Trg., Maintenance
Competitors
Barrier to Entry: Leasing (Aircrafts and Gates)

High Debt and Lower Profitability [= (Yield x Load


Factor) Cost]
Cost Reduction + Cyclical expansion of air travel
1995: 10% federal ticket tax abolished
1996: US Domestic Market Maturity (value jet aircrashed)
1997: Tax rate 7.5% abolished and user fee
($1/pass/tkt)
Capacity: Growth in Low cost, short haul travel

SW Airlines - Strategy
Category : Low fares / No frills airline
Cheapest / efficient operator in domestic
circuit
motivation
level
of employees
High
Cost Leadership
(Low
cost structure
due to secondary
airports, less landing charges, lower gate costs, cheap
schedule cost due to Point to point, focus on good
weather)
Route Structure ( Specialized in short haul flights,
price sensitivity, Threats from ground transportation, no
frills, less cost, extended snack, Ex. Lousiville-Chicago
increase from 8000 to 26000 passenger load, Huge
saving in one-way/non-stop city pairs / round trips
Low Turn Around Time (Huge saving15-20min, Inds
avg 55 min) increases more trips/plane and assets
turnover.

SW Airlines - Strategy

Fleet Composition: Boeing 737, fuel efficient,


single source, good relation with supplier for price
advantage, youngest fleet, standardized cockpit,
flexibility of pilots, routes, maintenance, training,
service etc.
Disadvantages: Delay in delivery of planes. (21
planes in 1997-98), affected expansion planes in
1998. (only 1 route added).
Travel agency exposures: <60% vs 80% Inds avg.
Saving of $2.50 / flight segment (agency
commission, computer reservation system fees).
Gates: Purchase / lease gates at airports, Use own
ground staff. Rent saving.
Connections: Does not offer to other airlines,
Simple operations, limits international passengers.

SW Airlines - Strategy
Labour: 4 Unions (IAM-customer service &
reservation employees, TWU-flight attendants,
SWAPA-Pilots, IBT-cleaners, trainers, flight
instructors), Good relations, Profit sharing and
participation, stock options, 5/10 year bonus
eligibility for pilots. Ex.1994 10 yr agreement with
SWAPA, 5 yrs same package, 1.4Mn shares / year
option
Customer service: POS, Excellent service due to
good labour relationship, Emphasis on flight
frequency and on-time performance.

Culture: Major strategic weapon and unique due to good employee


relations,

Marketing: Strategic pricing, convenience &


Service.
Good marketing
mix, Competing
with
POS:
Positively
Outrageous
Service, Compete
ground transportation- Expand market, Cost
ground transportation

SW Airlines - Strategy
Growth: Go-Slow Philosaphy, favourable market,
labour availability, prohibits monetary subsidies
offered by cities/airports.
Highly skilled in market selection, Select under
served markets, abandoned segments/city, poor
performance in service, high cost structures, start
up carrier, other markets neglected by competitors.
PTP < 500 miles avg, low AT congestion, new
airports, gates availability, quick turn around time.
Strategy to dominate high population market.
Ex. In 1996, SWA controlled 40% marekt share in
top 61 cities of top 100 US domestic market.

Core Competencies PTP, Low cost, No frills, Safety,


Quality service, Customer satisfaction

SW Airlines Structure:
Organization
High Degree of Formalization and Standardization in
operations
High Level of Customer and Employee Satisfaction.
Informal Job Description.
Size:
Small Company, less ASMs, lesser ground crew (own staff).
Outsourced only major Overhauls & Repairs.
Adaptability / Flexibility:
Quick to adopt abandoned Gates.
Acquire more planes & Capture Mkt. Share (eg; California,
Chicago)
HRM:
Great Attitude, Culture and Fit.
Great emphasis on Socialization & Training.

Fundamental Concept : Loose-Tight design, People


Management

SW Airlines Culture and Control:


Organization
Informed employees are better equipped to make decisions.
Have fun at work., high level of coordination
Cooperative relationship among employee groups.
Management:
Centralized with a very strong, if not dominating CEO.
Most powerful dept. is the Customer Department.
Technology:
1st company to offer Ticket Less Travel.
Supports activities like; Scheduling to Reservation to
general Operations support.
50% travel agencies direct access to its own reservation
system.
Mission Statement: Recognizing that our people are the
competitive advantage, we deliver the resources and
services to prepare our people to be winners, to support

SW Airlines SWOT
Analysis
Strengths :
High capacity usage
Low cost structure
Young &
Standardized Fleet
Short Haul/PTP
No frills,
Safety & Reliability
Quality service,
Customer
satisfaction
Good Labor
Relations

Weakness :

No Expertise in Long
Haul, offering other
associated airlines and
services
No international flights
No segmented seating
Dependent on a single
supplier (Boeing-737)
Lack of Technological
upgradation of fleet,
CRS
Highly Unionized &
Deteriorating Labour
Relation

SW Airlines SWOT
Analysis
Opportunities :
New Segment in
Domestic
Operating Long Haul
thro Hub & Spoke
system
Explore international
Mkts
Technology upgradation
of fleet & system for
operation in bad weather
Online Services & E-Mktg
Growth of business and
leisure travel /High
capacity usage

Threats :
Major & New Small
Competitors in Short
Haul
New government
regulations/
amendments
Fuel price
fluctuations.
Terrorist attacks.
Annual airline
security costs have
increased.
No Leader for

SW Airlines 24 years of profitability (incl. 1991-92 when majors lost Money)


Performance
Safe & Reliable operations
Top Ranking in quality service, CSI (only airline to top all 3
category-Best on time record, Best baggage handling & low
cust. complaints)
South West Effect due to low cost-$60 difference 243 Boeing737 aircrafts, 52 airports, 25 states & >50Mn customer, market
leader in top 100 cities, >60% passenger share)
Peaceful & cooperative Labour relation, High Employee
satisfaction , Lower Labour cost, Profit sharing & 10% stock
option
Single agent for staff gates ( others 2-3 ), Ground Crew <6
employees (other 10-12), turnaround time <50% of others, Pilot
wages are comparable with higher productivity, Younger & fuel
efficient Fleets.

Low Cost Structure, Top Market Share, Good A rating in


unsecured debt, debt/equity & better coverage

SW Airlines - Challenges
Growth
Opportunity:
1.Long haul market
2.Selection of Market
Competition:
1.New Cost Competitive
Smaller Players in short
haul (PTP)
2.Major Players matching
in short haul
3.Deteriorating Labour
Relation
4.Wright amendment
5.Increasing Turnaround
Time/Cost
6.Greater Coordination

Short haul market


saturation

Limitation:
1.Poor weather
condition
2.Direct competition
majors
3.Volume increase
(investment, inventory,
integration, yield,
inadequate existing
systems)
4.North South Hub
5.Longer Flights,
National marketing,
Frequent flier program,

SW Airlines To overcome
Challenges

Existing
Strategy :

Low Cost
No Frills
On Time
Quality Service
(POS)
PTP & Short Haul
Good Weather
Less Congested
Airport
Rapid Turnaround
time Required
No Sponsorships

11-Oct-2011

New Strategy :

Cost Control
Food Service
Inter-airline
Agreement with
International Airlines
Hub & Spoke and
Long Haul
Fleet upgradation to
manage Bad
Weather
Selection of New
Cities/Markets
NFC Sponsorship

SW Airlines Proposed
strategy in a changing
environment
creat
Ability to obtain
scarce resources

increase
s

Competitive
advantage

Organizational
strategy
develop

creat
e

Core
Competencies

Value- creation
cycle

SW Airlines Value creation


thro global expansion
Transfer of core
competencies
abroad

Use of global
learning to
enhance core
competencies

Establishment of
global network

Gaining access to
global skills &
resorces

SW Airlines 4 levels of
Strengthen
strategy
organizations
Functional level strategy

resources &
coordination
abilities to create
core competences

Business level strategy

Core competences
to gain competitive
advantage

Corporate level strategy

Global expansion strategy

Developing core
competences and
expansion into new
domains
To obtain scarce
resources &
develop core
competences