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Case Analysis Southwest Airlines

Yogesh Dalal

The private aeronautic sector could be considered more like a monopoly than an oligopoly. It is pretty difficult to enter and more difficult to sustain in this sector, basically for two reasons: - Economic barriers (economies of scale, capital requirements, cost advantages, technological superiority and oligopoly price setters) - Legal barriers For that reasons when Rollin King and Herb Kelleher got together and decided to start a different kind of airline in 1967 they couldnt start until 1971 due to resistance of the market. Today according to Gary Kelly, chairman, president and CEO of Southwest Airlines the airline carries more passengers in the domestic U.S. than any other airline. The company also alleges that their competition is the surface transportation rather than other airlines. It seems as though the airline industry is in a perpetual state of crisis. While virtually every major U.S. airline has declared bankruptcy in the past 10 years, Southwest Airlines has remained solvent and has consecutively generated a profit for the past 39 years.

Where is the magic wand?

Mastering the art of cost cutting
Having one type of aircraft Southwest's fleet is comprised of one type of aircraft: the Boeing 737. The idea is to train the mechanics on one type of airplanes, ordering inventory for only one type of airplanes, and making plane swap totally impervious to fleet. Using a point-to-point routing system They forgo the usual hub-and-spoke model, which can lead to delays in the event of inclement weather or scheduling conflicts. Instead, Southwest uses a point-to-point routing

system; with this strategy, passengers de-plane the flight and, chances are, the aircraft will turn around and fly back to its starting airport. Putting a premium on customer service Perhaps Southwest's real strategy for success lies in its customer service practices. There's no first class, nor is there assigned seating, which means no wait for your section to be called before you're allowed to board. There is no extra surcharge to check bags. Your luggage will likely greet you on the other side, as Southwest boasts a 99.6 percent completion rate on bags. Southwest gained a reputation for outside the box thinking and proactive risk management, including the use of fuel hedging to insulate against fuel price fluctuation. From a cost point of view, Southwest has maintained a cost per seat mile of $0.12, which is around 25% cheaper than competitors. Aircraft turnaround time is 15 minutes; this is facilitated by multi tasking crews, with pilots and air crew cleaning the plane while on the ground. On average there are 94 employees per aircraft in contrast to competitors who have 130, and the south west staff serves on average 2500 passengers per year compared to competitors 1000.

Competitive Advantage:
Southwest has managed to stay ahead of the game and maintain a competitive advantage by focusing on 3 key areas:

1. Compensation: Southwest offers collective rewards involving profit sharing and stock ownership. Pilots and flight attendants are paid by trip, with flight attendants the second highest paid group in the industry. Seniority brings higher salaries. Southwest offers employees a discounted stock purchase programme in which 85-90% of employees own stock i.e. 12% of Southwests total share.

2. Utilization: Each plane in the fleet flies extra flights per day, saving on maintenance and training costs. Utilization of cost effective revenue streams have been critical to their success. Southwest was one of the first airlines to have a website in early 1995. In 2006 70% of Southwests revenue was generated from bookings online.

3. Customer Service: The Company is famous for providing in-flight competitions as a unique form of entertainment. In addition in 2005 they introduced Ding one of the first mobile app. They reach 2M downloads in the first two years and the app drove 10M visits to southwest.com in Q3 2008. They deliver the best on time performance, fewest lost bags and fewest customer complaints. Fares are kept simple; with no interline connections however code share has been introduced in recent years.

Central to Southwests success has been the people to run the airline, in order to maintain their position, Southwest need to recruit the best to the industry. This is done through an extraordinarily selective process. Typically there are 200,000 applications for roles. Of these 35,000 are interviewed and 4,000 are hired. The focus of interviews is attitude and teamwork with an emphasis on peer recruiting. There is a preference for those without extensive industry experience, where nepotism is encouraged. Southwest was also one of the first companies to introduce employee referrals. Once in the door, training takes over; here the emphasis is on doing things better, faster, cheaper. In doing this each employee is expected to understand other colleagues jobs in order to delivery an outstanding customer experience, which in turn keeps the culture of South West alive.

From a labor relations point of view, Southwest has an interesting model. It is the most unionized airline in the US with 84% membership. They have in place a 10 year agreement with emphasis in gaining stock rather than wages, there are no work rules in the union contract. Southwest has ranked in Fortunes Best Companies to work for in America (1st in 97, 98, 2nd in 99 and 4th in 2000; however since then they have not entered).

Southwests control systems help executing the firms strategy by: 1) Implementing short hauls 2) On-line booking 3) Regress recruitment processes 4) High employee retention 5) Less waiting time for customers

By taking advantage of new fuel-efficient technologies, increasing the capacity of some longhaul flights, and expanding their discreet collection of ancillary fees, Southwest will continue to lead the airline industry for years to come.