Team Australia

Background

• Only USA airline which had been able to

be profitable even in times of energy
• One of the largest Airline in USA • One of the largest airline in the world crises, the September 11 terrorist attack
based on number of passengers and the 2008-09 recession
 The Airline Deregulation Act

Before After
 Before the Airline Deregulation Act 4

• Civil Aeronautics Board regulated: airline route entry and exit, passenger
fares, mergers and acquisitions and airline rates of return

• There were routes covered by only one carrier

• Cost increase passed along to customer

 After the Airline Deregulation Act

In October 1978, the President Jimmy Carter signed the Airline Deregulation Act
• Industry faced difficulties: severe recession

1979 1981
• More than 150 and 8 out of the major 11
airlines fall into bankruptcy and
Early
disappeared from the radar.
Fuel crisis
1980’s
Air traffic controllers strike

• By merging the three major carriers survived Delta, United and American but
Southwest had the rapid growth compared to its major competitors.
After the Airline Deregulation Act
 After the Airline Deregulation Act

• Employee wages fall from $42,928 in 1978

to much lower levels over the subsequent
decades

• About 20,000 airline industry employees were laid off

• Many companies filled bankruptcy to diminish the role of unions
• Airline workers at American, Delta and other major airline were forced to accept
pay cuts of up to 35%
 Challenges of US Airline Industry

• Fuel: Because of employee loyalty, pilot of southwest always try

to find ways to save fuels.
• Customer Service.
• Security: Early boarding for an additional fee
• Open Skies Agreement

• Maintenance: No passenger had ever died

because of safety incident
• Air-Traffic Delays
• Environmental Regulations
 The Journey of Southwest Airline

• In 1966, Herb Kelleher a Practicing Lawyer and Rollin King

decided to start an Airline company.
• Their initial plan to launch in three cities of Texas.
• Two Texas airline company Braniff and Texas International
tried to waged battle twice to prohibit Southwest from
flying
• But Herb Kelleher won the both battles in Court
• Southwest Airlines began flying on June 18, 1971 to three
Texas cities with three aircraft and 25 employees
• New boarding processes were introduced in 2007 where
early boarding for an additional fee
Strength
•Profitable in difficult times
•Good human resource team
•First to initiate internet ticketing
•Employee profit sharing
•Employee turnover around 2%
•Debt to equity ratio lower than
industry average
•No passenger died because of
safety incident
S W
Opportunity
O T
•Chance to increase revenue from
ancillary revenue(Baggage fees)
•Increasing efficiency by reducing
employee cost
Weakness
•Had high labor cost per employee in US
airline industry
•Rarely offered delayed customers hotel
room
•They are failing to maintain cost advantage
per available seat.
Threat
• Mega mergers were happening
(Delta/Northwest), (Continental/United).
• Small companies pressuring Southwest’s
cost advantage
• Fuels costs were constant uncertainty
• Northeast airlines coming which
challenges which can reduce efficiency
Strength
Weakness
•Profitable in difficult times
•Had high labor cost per employee in US
•Good human resource team
airline industry
•First to initiate internet ticketing
•Rarely offered delayed customers hotel
•Employee profit sharing
room
•Employee turnover around 2%
•They are failing to maintain cost
•Debt to equity ratio lower than industry
advantage per available seat.
average
•No passenger died because of safety
incident
S W
Opportunity Threat
O T • Mega mergers were happening
•Chance to increase revenue from
ancillary revenue(Baggage fees) (Delta/Northwest),
•Increasing efficiency by reducing (Continental/United).
employee cost • Small companies pressuring
Southwest’s cost advantage
• Fuels costs were constant uncertainty
• Northeast airlines coming which
challenges which can reduce efficiency
Strength Weakness
•Profitable in difficult times
•Had high labor cost per employee in US
•Good human resource team
airline industry
•First to initiate internet ticketing
•Rarely offered delayed customers hotel
•Employee profit sharing
room
•Employee turnover around 2%
•They are failing to maintain cost
•Debt to equity ratio lower than industry
advantage per available seat.
average
•No passenger died because of safety
incident
S W
Opportunity Threat
O T • Mega mergers were happening
•Chance to increase revenue from
ancillary revenue(Baggage fees) (Delta/Northwest),
•Increasing efficiency by reducing (Continental/United).
employee cost • Small companies pressuring
Southwest’s cost advantage
• Fuels costs were constant uncertainty
• Northeast airlines coming which
challenges which can reduce efficiency
Strength
•Profitable in difficult times
•Good human resource team
•First to initiate internet ticketing
•Employee profit sharing
•Employee turnover around 2%
•Debt to equity ratio lower than industry
Weakness
•Had high labor cost per employee in US
airline industry
•Rarely offered delayed customers hotel
room
•They are failing to maintain cost
advantage per available seat.

S
average
•No passenger died because of safety
incident
W
Opportunity Threat
O T • Mega mergers were happening
•Chance to increase revenue from
ancillary revenue(Baggage fees) (Delta/Northwest),
•Increasing efficiency by reducing (Continental/United).
employee cost • Small companies pressuring
Southwest’s cost advantage
• Fuels costs were constant uncertainty
• Northeast airlines coming which
challenges which can reduce efficiency
Strength
•Profitable in difficult times
•Good human resource team
•First to initiate internet ticketing
•Employee profit sharing
•Employee turnover around 2%
•Debt to equity ratio lower than industry
Weakness
•Had high labor cost per employee in US
airline industry
•Rarely offered delayed customers hotel
room
•They are failing to maintain cost
advantage per available seat.

S
average
•No passenger died because of safety
incident
W
Opportunity Threat
O T • Mega mergers were happening
•Chance to increase revenue from
ancillary revenue(Baggage fees) (Delta/Northwest),
•Increasing efficiency by reducing (Continental/United).
employee cost • Small companies pressuring
Southwest’s cost advantage
• Fuels costs were constant uncertainty
• Northeast airlines coming which
challenges which can reduce efficiency
 Porter’s Five forces

THREAT OF NEW ENTRENCE 01

05 •
SUBSTITUTE
Other transports like
• Deregulation- High threat of competitors
• Cost advantage- High cost advantage over Delta,
United, US airways
train, cars etc. • Cost advantage – Low cost advantage over
05 01 JetBlue
• High Switching cost-Positive outrageous service

04 RIVALRY
• Major 4-5 players- Less rivalry as less
04 02 B.P OF BUYERS 02
• Less purchasing options- low bargaining power of
competition
buyers
• Industry demand – Growing demand of 03 • Southwest spirit – low bargaining power of
airlines, rivalry decreases
buyers
• Exit barrier – Very high, as the
investment is high
B.P OF SUPPLIERS
•
03
Scarcity of fuel – High bargaining
power of suppliers.
• Low switching cost as new airlines
enters.
 Cost Structure of Airline Industry

• Fixed Cost: 80% | Variable Cost: 20%

Cost reduction was very difficult because of the nature of the cost structure ( Fuel Cost 37%),
So the airline uses different tools to maximize Capacity Utilization

Capacity Utilization
• Load Factor

• Yield Management
 Managing Human Resource

“How you treat your people determines how

• In Southwest employee is considered as the biggest asset.
• Major airline companies reduced employee salary by 35% to ensure
financial stability VS Southwest had shared profit with their employees.
they treat people outside. I give people the
license to be themselves and motivate others
in that way.”
Herb Kelleher, CEO, South West Airlines

Benefit:
• In southwest fewest number of employee per aircraft.
More over More passengers per employee than any other
major airline.
• Increased Customer service.
• Employee loyalty: Pilots looked for ways to conserve fuel
during flights.
• The voluntary turnover was around 2.5%, lowest in the
industry.
• During recession when other competitors collapsed,
Southwest survived because of the loyalty of their
employees.
• No union strike ever happened
 Point to Point VS Hub-and–Spoke

• Major Airline companies use Hub-and-spoke
network.
• It creates efficiency because of the distribution of
services across wide network.
• Before starting the Journey of Southwest, most of the hub-and-
spoke network was already established.
• Huge investment was needed for Southwest to build Hub-and-
Spoke Network as all the airport was already given lease to
other carrier.

• Instead of Hub-and-Spoke Network, Southwest introduced Point to Point Flight.

Benefit:
• It create more convenience for the passengers as they do not have to wait in the hub.
• By point to point flight Southwest reduced the turn around time at gate. So it flew more routes
each day and became able to offer lower fare.
 Pricing Strategy

• Many airlines earn 25% of total revenue from ancillary revenues such as baggage fees and change
fees.
• But Southwest did not charge for checked bags.
• Instead they introduced Innovative Pricing Strategy.
Southwest Innovative Pricing Strategy
In 1972, Southwest charged $20 as fare
The competitor price was $28 as fare

But Southwest quickly discovered there are two types of travelers:

1) Convenience, Time oriented business travelers - $26 and free bottle of liquor
2) Price sensitive leisure travelers - $13

The highest price of Southwest was even lower than all the competitors.
75% passengers chose $26 and free bottle of liquor of Southwest
Benefit:
• One of the biggest competitor Braniff Airlines got kicked out of the market because of Southwest pricing strategy
with this Strategy.
• In 11 months Rio Grande Valley to Golden triangle passengers grew from 123000 to 325000.
• Within 1 year Oakland to Burbank route became 25th largest passenger market.
 Future Concerns

• JetBlue airlines is offering lower ticket price than SWA which

was their one of PODs.
- Reason: Southwest has the highest per employee cost.
• Consider employee as the biggest asset & this higher cost
providing more productivity and helping southwest to
maintain the growth of the profitability.

• For the reason of cost reduction the new CEO Gary

Kelly of Southwest had outsourced maintenance
work from foreign countries with non certified
mechanics instead of using their certified employees.
• This has put threat to the job of the employees,
safety of the aircraft and the lives of the passengers.
• Load factor of JetBlue is 85.1 where Southwest is 84.
 Recommendation

• Through the whole journey we can see that Human resource is the biggest strength of Southwest.
• Southwest should never took any decision which threat their biggest strength.
• JetBlue is a big concern for SouthWest Airline according to their performance. So, as they can’t
reduce price that much, customer satisfaction should be a major focus for them.
THANK YOU