Case Presentation

SOUTHWEST AIRLINE

CASE PRESENTATION

Group Members.

This report is a result of combined effort put forward by the students of Lahore School of Economics ( Pakistan), BBA-IV.

Group Members:

Bilal Mustafa M.Azeem Rehan Alam Khan Waleed Maqsood

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CASE PRESENTATION

Executive Summary
This report contains the analysis of Case Study on Southwest Airline by Amit.J,Shah. In this report we have done the strategic analysis of the airline company. We have analyzed it internally through financial analysis, identifying internal Strength and Weaknesses. After that we have done its external analysis, by identifying the threats and opportunities, applying the Porters 5 forces model. The strategies being used by Southwest in the case are also analyzed by using different matrices. After analyzing and evaluating the strategies being used we have suggested our own recommendations.

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Table of Contents 1. History..(5) 2. Vision and Mission..(6) 3. External Audit.(8) 4. Internal Audit.(18) 5. Strategies in Action(25) 6. Strategies analyses and choice..(28) 7. Possible strategies...(35) 8. Recommendation(38) 9. References...(39)

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Companys History:

Southwest Airlines was founded by Rollin King and Herb Kelleher and began in 1971, servicing Dallas, Houston and San Antonio. In the mid 1980's Southwest Airlines was the first to offer the frequent miles program. Allowing the passenger to bank traveled air miles to be latter used credit for a free ticket or reduced airfare. Southwest Airlines were also the pioneers of the senior discounts, fun fares and the fun packs. Southwest Airlines was originally incorporated to serve three cities in Texas as Air Southwest on March 15, 1967, by Rollin King and Herb Kelleher. According to frequently-cited story, King described the concept to Kelleher over dinner by drawing on a paper napkin a triangle symbolizing the routes (Dallas, Houston, San Antonio). Southwest Airline's first strategy concentrates on flying large numbers of passengers on high frequency, short hops. The Dallas-based low-fare carrier offers some 2,700 daily flights to more than 55 cities in 29 states, and has built on its western heritage by boosting service in the eastern US. This top-10 US airline typically has short-haul flights (about an hour), and the airline usually lands at small airports to avoid the congestion at competitors' larger hubs. Their focus on pointto-point systems results in more direct routes, reducing connections, delays and overall trip time. Southwest Airlines' second strategy is to offer their customers low fares. Southwest continues to be the least expensive airline in its market. Even when they tried to match Southwest's cut-rate fares, the large carriers could not do so without incurring substantial losses. Southwest keeps it simple: It offers a single class, open seating, and no meals. Its fleet of about 345 aircraft consists only of one type -- the Boeing 737 -- to minimize training and maintenance costs and simplifies scheduling. Southwest offers a ticketless travel system to trim travel agents' commissions, run its own reservation system, and sells a significant portion of reservations through its Web site. Southwest also has cut costs in the customer service areas because its flights are usually one hour or less and it does not offer meals- only peanuts and drinks. Southwest Airlines' third strategy is their commitment to their employees and customers. Southwest achieved a team spirit that others can only envy. Southwest is known for providing their employees with tremendous amounts of information that will enable them to better understand the company, its mission, its customers and competitors. By sticking to its formula, which also emphasizes customer service and a sense of fun, Southwest has enjoyed 28 consecutive years of profits. Flamboyant CEO Herb Kelleher, who has announced plans to step down in 2001.

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Southwest's fourth and final strategy is their aggressive marketing approach. Through marketing strategies, Southwest Airlines tries to distinguish themselves from the rest of the airline industry. They try and portray themselves as the fun-loving airline.

Vision Statement
Southwest Airlines Co. does not have a companys vision statement. For this reason, a vision statement has been proposed: Our vision is to be the leader in the flight transportation, while providing highest value at an affordable price

Mission Statement
The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. To Our Employees We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer.

Analysis of the Mission Statement

Southwest Airlines mission statement is not very broad in scope and does not include all of the nine essential components of an effective mission statement. These components are listed below:

1. Customers: Southwest Airlines mentions customers in its mission statement. 2. Products and services: This component is not mentioned in its mission statement as there is no mention of the product or service that the company provides.

SOUTHWEST AIRLINE 3. Markets:

CASE PRESENTATION

The company does not include this component as it does not mentions where it geographically competes. 4. Technology This very important component has also been ignored and not included in the mission statement. 5. Concern for survival, growth, and profitability There is no mention of firms commitment to growth and financial soundness. 6. Philosophy This component is present in the firms mission statement as it promises to deliver customer value with a sense of warmth, friendliness, individual pride, and Company Spirit. 7. Self-concept This component is not included as the firm does not mentions its distinctive competence or major competitive advantage of low-cost, low-fare, no frills airline. 8. Concern for public image This component is also missing in the mission statement 9. Concern for Employees This component has been given special attention in the mission statement and a paragraph is dedicated for their concern for employees. This shows the level of commitment Southwest has towards its employees.

Proposed Mission Statement

Our mission is to best understand the needs of people looking for air travel, and provide highest quality of customer service to our customers. Southwest provides air transportation to cities all around the United States. Our technology is current such as our check-ins process is faster. Striving to expand and grow in a conservative manner is key, and being financially stable by keeping quality high and cost low. Our philosophy is to provide the highest standards of safety for all our customers and to deliver our services with a sense of warmth, friendliness, individual pride, and Company Spirit. Our distinctive competence is in providing low-cost, low-fare, no frills services. We treat our employees like customers, family and motivate and compensate them

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for doing a job well done. Since our first flight in 1971, our employees have been the vital asset in making Southwest the most recognized airline today.

External Assessment

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Key External Forces

Key external forces are the external factors that affects any organization performance negatively and positively.

Political & Legal Forces : Incorporation of the new tax system replaced a percentage tax with a tax that included a
flat, per-segment fee, which hits low-fare carriers harder. Deregulation of U.S Airline in 1978. With the deregulation of the airline industry came the advent of hyper competition and also a decrease in wages for airline industry employees Southwest was unable to proceed for three years in the beginning due to legal battle with other competitors. Terrorist attacks led to new government mandated security procedures that caused delays and longer check-in times.

Economic Forces:
To analyze the Economical impact on the airline we have taken into account Inflation Rate, Interest Rate and Disposable Income Trend in the 6 years concerning the Case. Through Fig 1 we can see that Inflation Rate is decreasing from 2005 onwards. It is benefiting the Airline as it is Increasing the Purchasing Power of the consumers. It would have been beneficial if the Inflation Rate would be increasing as Southwest Airline focus on Cost leadership and more consumers would prefer it over the others Airlines. The Annual Income of the consumers was increasing during the time period. It can leas to higher consumer expenditure thus resulting in more traveling. The interest Rate during 2005-2007 was increasing. This would lead to increase in cost of debt. This would result in lower capital expenditure and expansion of Southwest Airline. It would also result in lower consumer expenditure as their Saving would increase.

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Year Inflation, average consumer prices 2000 2001 2002 2003 2004 2005 2006 2007 3.367 2.817 1.596 2.298 2.668 3.366 3.222 2.867

FIG.1 CPI INDEX of USA

Components Real GDP growth % Population Density per sq km Annual Disposable Income Consumer Expenditure GDP measures as PPP Interest Rate FIG.2 Economic Factors.

2005 1.34 32.9 9,593,155.9 9,522,135.7 14,028,700 6.19%

2006 1.8 33.2 10,147,077.6 9,770,946.6 14,291,500.00 7.96%

2007 1.9 33.5 9,9927,844.9 9,621,854.6 13,939,000 8.05%

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Social, Demographic and Environmental Forces:

The fastest growing age group is 55 to 59 year olds, increased by 41% between 1997 and 2005. The fifty something population is considered the biggest spenders. There was Growth in 40 to 64 year olds with a decrease in population in the 25 to 39 year olds.

Frequent flyer is defined as between 45 to 54, married, own their home, income level

from $50,000 to $100,000 (median income = $65,143), two income earners in home, no children, and use credit card and bank cards for travel/entertainment. .The West is the fastest growing area in the United States between 1997 and 2005 at 17%.
The South and the West is home to 59% of the Americans in 2005. Travelers becoming more time and cost oriented.

Technological Forces: Airlines have converted to E-Tickets have self checking machine. Southwest Airline have
converted to E-ticketing system. It was the first Airline to set up the first Website. To keep up with Technological advancement Southwest added new automated systems and technologies that have streamlined the check-in process. It includes computer generated baggage tags and boarding passes and self-service.

Competitive Forces:
The major competitors of Southwest Airline are Low-fare airlines. The major airlines faced heavy losses and thus the competition shifted towards low-fare airlines. The list includes United, Delta, JetBlue and America West. Southwest faces head to head competition from all of the airlines. Currently Southwest has a competitive edge over all other small carriers. The low- fare airline United and Delta faced financial losses and had to downsize to cover their cost. United filed for bankruptcy in 2002. Recent terrorist attacks caused many airlines to incur losses. Southwest had the cost advantage over the other airlines that included rapid twenty minutes gate turnarounds, productive workforce and an efficient all Boeing 737 fleet.

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Competitors Ratio (year 2006)

Jet Blue Net profit Margin ROA ROE -0.04% -0.02% -0.10% Air Tran 0.84% 0.99% 4.17% Delta -36.12% -31.61% -18.65% United Airlines 0.13% 0.098% 10.08%

Seeing the above table it shows you the ratios of southwest airline competitors for the year 2006 and according to the ratios we can analyze that southwest returns are greater than that of its competitors and also the company is performing better than its competitors. The Net profit margin of its competitors in year 2006 are less, which means that southwest is performing well and is having a profitable position because the company's net profit margin are greater from its competitors. Similarly the return on assets and return on equity for southwest are far more greater as some competitors are having negative return and some are very low.. The net profit margin for south west in 2006 was 5.49% and for its competitors it was -0.04 %, 0.84%, -36.12% and 0.13%. the ROA for southwest in 2 006 was 3.7 % and for its competitors it was -0.02%, 0.99%, -31.6% and 0.098% . Also the ROE for southwest was 7.7% while for its competitors was -0.10%, 4.17%, -18.65% and 10.08 % respectively. So overall southwest airlines is performing far better than its competitors.

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CASE PRESENTATION

Porters Five Forces Model:

Rivalry among Competitive Firm:
There is high competition in the Airline Industry. Southwest Airline is not only competing with the low-cost fare carrier but also with major airline. The rivalry among the competitive firms is very strong. Changes in external environment have caused each other to alter their strategies. Different technological advancement have caused other airline to adopt them. We can see in the case that other airline have learned the tactics of Southwest and its unique management. They are using them to win over customers.

Threat of New Entrants:

The threat of new entrant in airline industry is low. There are two major factors that are main barriers to entry. First is the cost of investment. The new entrants would have to invest very high to enter in this industry. Secondly there is high competition in the industry that would make life harder for new entrants. Lastly the services being offered by Southwest Airline is not simple enough that everyone can do it.

Threat of Substitutes:
There are number of substitute for airline. But the satisfaction it provides to the customer is the main key role. Bus, Train and Car are the main substitute. Using train and bus instead of airplane is cheaper but it is also time consuming. Most of the business people would rather pay more and get to their destination faster. Using car for long distance trips is not feasible because not only the fuel is expensive but also the maintenance cost of the car would be too much. Secondly the increase of Video Conferencing has led to decline in Air travel. As many of Southwest Airline Passenger are business people.

Bargaining Power of Buyers:

The bargaining Power of Buyers is strong. The reason being there are many major air service provider and also Low-cost fare airlines. So the buyers

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have large option of bargaining. They would look forward toward those airlines that would offer them best value. Southwest airline would grab more attention through low cost air fare.

Bargaining Power of Supplier:

The main suppliers of airline are the manufacturers and the fuel supplier. Airline manufacturers, such as Boeing or Airbus have high bargaining power due to large switching cost associated with changing airplanes. The fuel suppliers also have high bargaining as there are many fuel suppliers. The I.T infrastructure is owned by Southwest Airline.

OPPORTUNITIES: More than 100 new cities have encouraged southwest to offer flight service. International expansion to Canada and Mexico. As there is increased demand for
international travel. Only operating in 63 cities and 32 states. Can expand into other cities such as New York and Atlanta. Focus toward faster growth strategies. Introduction of better security system. To cope up with security threats. Growth in 40-64 years old by 17% in 2007. The frequent flyers according to Southwest are 45-54. Lay off of experienced staff. 21% in Delta and 44% in United Airline. Reach the top ranking in Airline service provider. Currently ranked 8th.

Threats: Jet blue is the noteworthy competitor of Southwest Airline. The introduction of new tax system that is hurting low fare carriers. As the ticket fare is
increasing. Rise in security issues after 9/11 attack. Decrease in Customer Air travel due to security threats. As there were more terrorist attacks. More security regulations by government caused delays and longer check-ins. Lead to increase in airline security cost. Increase in energy cost. There was fluctuating Fuel Oil price and increase of 11% was witnessed in 2006. Introduction of new rail service from Dallas to Houston. Increase of new substitutes. Competitor are adopting Southwest Airline strategy to win more customers.

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CASE PRESENTATION

Competing online ticket system.

Opportunities 100 cities encouraged Southwest to offer flight service International Expansion to Canada & Mexico Domestic expansion into cities like Newyork. Currently operating in 63 cities and 32 states Focus toward faster growth strategies. Utilize experienced staff layoff by delta and United. Delta 21% and United 44% Introduction of better security system. Achieve first rank in Airline Service. Currently ranked 8 Growth in people between 40-64 by 17%. Frequent flyers are 40-54. Threats Rising competition. Jet Blue Introduction of new tax system raising the ticket price. Rise in security issues after 9/11 leading to low air travel. More government security regulations causing delays Introduction of new rail service from Dallas to Houston and introduction of other substitutes. Increase in energy cost. Increase in fuel price by 11% Competitors adopting fast growth strategy and winning customers. Competing online Ticket System. Total

Weight Rating 0.04 0.08 0.09 4 1 1

Weighted Score 0.16 0.08 0.09

0.1 0.02 0.08 0.03 0.07

2 2 3 3 4

0.2 0.04 0.24 0.09 0.28

EFE MAT RIX.

0.08 0.07 0.09 0.07 0.06

4 3 3 3 3

0.32 0.21 0.27 0.24 0.18

0.06 0.05 0.03 1.00

4 2 4

0.24 0.1 0.12 2.77

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CASE PRESENTATION

The total score of EFE is above average. This indicates that Southwest Airline is taking advantage of its existing opportunities and minimizing the potential adverse affects of the threats.

CPM Matrix Southwest

Critical Succes Factors Advertising Global Expansion Customer Loyalty Management Security Measures Price Competition Customer Service Management Financial Position Brand Awareness Weight 0.14 0.10 0.09 0.08 0.09 0.10 0.14 0.08 0.12 0.06 Rating Score 3 1 4 4 3 4 4 4 3 4 0.42 0.10 0.36 0.32 0.27 0.40 0.56 0.32 0.36 0.24

United
Rating 3 3 2 3 3 3 2 3 1 3 Score 0.42 0.30 0.18 0.24 0.27 0.30 0.28 0.24 0.12 0.18

Delta
Rating 2 3 2 3 2 3 1 3 1 4 Score 0.28 0.30 0.18 0.24 0.18 0.30 0.14 0.24 0.10 0.24

1.00

3.35

2.53

2.20

The total weighted score shows that Southwest Airline is overall the strongest. As it has major strength in major critical factors comparative to other Airline. It has the strongest position in Customer Loyalty, Management, Security Measures, Price Competition, Customer Service and Management .United doesnt have any major strength. Delta holds strong position in Brand Awareness.

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INTERNAL AUDIT

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Management Functions

Planning:
The planning is done at the higher level by the CEO and the Vice president Kelleher and Muse. They focused toward low- cost, low-fare and no-frill. Currently there has been no change in their core philosophy and basic business model. Although there have been changes at higher level but the philosophy have been kept consistent. The company is using its basic philosophy to achieve its further objectives.

Organizing:
The company has Functional Organizational Structure. The unity of command stays with the head of the department. The communication is vertically flown. This groups tasks and activities by business function, such as Procurement, Aircraft Operation, Finance and Chief Financial Officer.

Motivating:
The employees are given the preference over the customer. Unlike other company Southwest priority their employees. Barrett the chief operating officer visit each of companys stations to reiterate the airline history and motivate employees. The employees are given special treatment their birthdays are celebrated. The employee knows the culture of the organization. There is no restriction toward the clothing and working hours. Employees have flexible working hours. The employees are provided with various information to better understand the company. as they believe more information is the resource that helps them to work better.

Staffing:
The employees were availing benefits at Southwest Airline. There was no overstaffing at the time of hiring. Similarly at time of recession there were no excessive firing. Only 3 employees were furloughed and then they were called back. Employment faced promotion opportunities as one of the long-time of employees was to succeed Barrett as president and COO. Over the time employees wages, benefits and salaries have increased. The

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employee retention policy has contributed to employees feeling of security and fierce sense of loyalty.

Controlling:
The company was not using any kind of controlling method. Except for rewarding it employees.

Marketing

Southwest Airline plays up its fun loving, rebel reputation. It is using price promotion as well advertising to establish itself and create awareness. It is using low-fare and cost to establish competitive advantage in the airline industry. It has 59% cost advantage over high bigger rivals at flights of 500 miles as well as 35% lead for flights at fifteen hundred miles. Its price is 15-20% below its rival. Similarly it was the first airline to construct the web page and start e-ticketing. Passenger revenue generated by online booking increased from 65% in 2005 70% in 2006.

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FINANCIAL RATIOS
Liquidity Ratio
Current Asset Current Liability Current Ratio Current asset less inventory Quick Ratio 2006 (millions $) 2601 2887 0.9 2420 0.83 2005 (million $) 3620 3848 0.94 3470 0.90 2004 (million$) 2172 2142 1.01 2635 0.95

Activity Ratio
Sales Inventory Inventory turnover Fixed Assets Fixed Asset Turnover Total Assets Total Assets Turnover Account receivable Sales per day Account Receivable Average Collection period 9086 181 50.1 10859 0.836 13460 0.675 241 24.89 37.7 9.68 7584 150 50.56 10598 0.715 14218 0.5334 258 20.77 29.39 12.42 6530 137 47.6 9165 0.712 11337 0.575 248 17.89 26.33 13.86

Profitability Ratio
Operating Income Net income Stockholder Equity Outstanding Shares Operating profit Margin Net Profit Margin ROA ROE Eps 934 499 6449 807 10.27% 5.49% 3.7% 7.7% 0.618 820 548 6675 801 10.81% 7.22% 3.8% 8.2% 0.684 554 313 5534 790 8.48% 4.79% 2.76% 5.6% 0.396

Growth Ratio
Growth in sale Growth in Profit Growth in Eps 19.80% -8.94% -9.64% 16.14% 75.07% 72.72% -

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Leverage Ratio Total Debt Long term debt Total Interest Debt to total assets Debt to equity Long term debt to equity Times interest earned

CASE PRESENTATION

7011 1567 128 0.52 1.08 0.24 7.29

7543 1394 122 0.53 1.13 0.20 6.7

5813 1700 88 0.51 1.05 0.307 6.29

The liquidity ratios for a company measure a firms ability to meet maturing short-term obligations. The value for the ratios is taken from balance sheet which shows assets, liabilities, and owners equity at a given date. The current ratio is calculated by dividing current assets to current liabilities. It shows that how well the company can pay its short term debts. Over the years the ratio has been either 1 or near 1 which shows that company is in a strong position to pay its short term debts on the other hand the quick ratio is calculated by current assets minus inventory divided by current liability, and which shows that the company is having a good quick ratio. Activity ratio shows that how efficiently the firm is using its resources and combines different ratios. The fixed asset ratio shows that how well company is utilizing its plants to increase its sales and the ratios shows that the company is utilizing resources well as the ratio over the years is increasing and came out to be 0.836 in year 2006 as compared to 0.712 in year 2004. Similarly the total asset turnover shows how efficiently the total assets of the company are being used. The ratio is 0.575 in year 2004 and in 2006 it is 0.675, which shows company turnover is increasing over the years. The Profitability ratio measures management overall effectiveness as shown by the returns generated on sales and investment. Operating profit margin is calculated by Ebit divided by sale and it shows profitability without concern of taxes and interest. Operating profit in 2004 was 8.48% and it increased to 10.27%. Net profit margin is calculated by net income divided by sales. Over the years the trend has been uncertain as it was high in 2005 to 7.22% and decreased in 2006 to 5.49% but over the company is performing well. The ROA is calculated by net income divided by total assets. The ROA shows the return the company is getting from its assets and in 2004 it was 2.46 % which increased to 3.7% in 2006 so company is getting more returns from assets over the year. The ROE is the return from the investment by the stockholders and over the year the ration increased to 7.7%. EPS is calculated net income divided by outstanding share. It the return the share is giving which increased to 0.618 in 2006 as compared to 0.396 in 2004. The leverage ratios measure the extent to which a firm has been financed by debt. The debt to total asset ratio is calculated when total debt is divided by total assets and it shows that what percentage of funds are financed by the creditors and it shows that in all of the years 50% of the

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funds have been provided by the creditors as ratio in all years is above 0.5 which means 50%. The debt to equity ratio is calculated by dividing debt to the equity and it shows the percentage on funds provided by creditors against the owners. The ratio has been above 1 which means that debts is stronger against owner's capital, more debt is taken compared to the owners capital. The times interest earned ratio is calculated by dividing EBIT to total interest charged and it shows that how many times a company can pay its interest from the operating income, and according to the ratio the company is in good position as in 2004 it can pay 6.29 times interest and in 2006 it can pay 7.29 times which has i0ncreased over time so company is having financial position.

Strengths:
Southwest Airline has been known for offering the lowest fares as compared to its competitors. The fare that southwest airline offered was 15 to 25 percent less than its competitors. For sixteen constitutive years (1991-2006) the department of transportation air travel consumer report listed southwest as among the top five of all major carriers for on time performance and fewer customer complains ( ranked number one in 2006 for customer satisfaction ) According to DOT report southwest is the only airline to ever hold triple crown ( first in all categories ) for its annual performance. No other airline has earned the triple crown for even a month. Fuel expenses were increasing by 11% so southwest took advantage of that by doing fuel hedging according to which the company got fuel at a fixed rate. The southwest airline had an effective advertisement campaign ( first airline to establish a homepage on web, which increased passenger revenue by 65% in 2005 to 70% in 2007 ). Whenever the competitors launched an ad against the company , they retaliated with effective ways that did not affect the image of the company . Major strength for southwest airline was team spirit as the company provided tremendous amount of information to employees which enabled them to better understand the company. Employees were considered as customer of the company ( 1st priority to employees, no layoff) All planes are of a single type which was Boeing 737, which lowered the company's cost of training, maintenance and inventory ( turnaround time was 20 or less). There was a critical success factor which was that the company was quickly able to seize a strategic opportunity whenever one arises. Financial position compared to competitors was strong ( net profit in 2006 was 5.9%, ROA was 3.7%, Roe was 7.7%) The company favored small satellite fields and avoided congested major airports. As major airports were far from cities, southwest took advantage of that as small fields were preferred as they were near to cities.

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CASE PRESENTATION

Weakness
The conservative strategy of the southwest airline is a weakness according to which the company is going slow and not adapting to change that easily. So there are new competitors coming in the market they adopting the faster strategy that will cause problems for the company in near future. The southwest airline was providing no international flights, they were only flying in U.S. so the market for them gets narrow down. The southwest airline was also not providing flights in Atlanta which is one of the biggest city in U.S. so the companies that are flying to Atlanta are having edge over southwest airlines. The vision statement of the company is not mentioned which means that the company is not clear that what it wants to achieve. There were no segmented seats which means that the company did not favor anyone, no one can come first and reserve a particular seat. Everyone has an equal opportunity of getting a window seat.

IFE Matrix
Weights Strengths Low fare (15%-25% less) Listed as top five major carrier (1991-2006) Fuel hedging (increased by 11%) First airline to establish a website (revenue increased from 65% to 70%) Employees motivation , no layoff (employees priority over customer) Single type of planes ( turnaround time was 20 mins or less) Strong financial position (net profit in 2006 was 5.9%, ROA was 3.7%, Roe was 7.7%) Small fields favored over major airports Weakness Conservative Strategy ( 100 cities asked to provide service) No international flights ( narrow market) Vision statement not mentioned 0.2 0.02 0.01 0.05 Rating 4 3 3 4 Weighted score 0.8 0.06 0.03 0.2

0.1

0.3

0.15 0.09

3 3

0.45 0.27

0.11

0.33

0.07 0.03 0.08

2 1 1

0.14 0.03 0.08

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No flights to Atlanta, Newyork No Reserved seats Total 0.04 0.05 1 1 2

CASE PRESENTATION
0.04 0.1 2.83

Total weighted score of 2.5 is the average score. Total weighted scores well below 2.5 characterize organizations that are weak internally, whereas scores significantly above 2.5 indicate a strong internal position. As the total weighted score for Southwest is 2.83. It can be said that the organization has a strong internal position. The firm is exploiting its strengths and minimizing its weaknesses. The internal strength of low fare has the highest weight of 0.2 and it is ranked as the major strength of the firm. Another internal strength is that the company is the first one to build a website and that is helpful for the company because people are booking ticket online and this has increased revenue for the company from 65% in 2006 to 70% in 2007. As well as another major strength for the company is its employees. The company is motivating its employees and considered them more important than customers. Benefits to employees are being provided and company is maintaining good relations with its employees.

Strategies in Action
Types of strategies
Intensive Strategies Market penetration, market development, and product development are sometimes referred to as intensive strategies because they require intensive efforts if a firms competitive position with existing products is to improve. Market Penetration A market penetration strategy seeks to increase market share for present products or services in present markets through greater marketing efforts. This strategy is widely used alone and in combination with other strategies. Market penetration includes increasing the number of salesperson, increasing advertising expenditures, offering extensive sales promotion items, or increasing publicity efforts. Five guidelines for when market penetration may be an especially effective strategy are: When current markets are not saturated with a particular product or service.

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CASE PRESENTATION

When the usage rate of present customers could be increased significantly. When the market shares of major competitors have been declining while total industry sales have been increasing When the correlation between euro sales and euro marketing expenditures historically has been high. When increased economies of scale provide major competitive advantages.

Southwest has been using market penetration strategies to increase its market share. It was the 1st airline to offer online booking. In its attempt to increase market share it has worked hard to reduce its turnaround time and has one of the lowest in the industry. Southwest recognized that planes only earn you money while they are in the air, so the company worked hard to achieve a faster turnaround time on the ground. Most airlines take up to one hour to unload passengers, clean and service the plane, and board new passengers. Southwest has a turnaround time for most flights of twenty minutes or less. This helps Southwest to fly more than 3200 flights a day. In its marketing approach, Southwest always tries to set itself apart from the rest of the industry. It also plays up its fun-loving, rebel reputation. In response to Braniff ad offering a $13 fare to fly between Houston and Dallas, Southwest placed an ad that read, Nobodys going to shoot Southwest airlines out of the sky for a lousy $13. It then offered passengers opportunity to purchase tickets from Southwest for the same price which was half the normal fare, or to buy a full fare ticket for $26 and receive a bottle of premium whiskey along with it. The response was unprecedented. Southwests planes were full and, for a short time, Southwest was one of the top liquor distributors in the state of Texas. Southwest ads always try to convince the customers that what the airline offers them is of real value to them. In August 2006, the Southwest airline television commercial Flight Attendant. was named in Adweeks Best Spots. With its ads, the company wants customers to know that when they fly Southwest, theyll have an experience unlike any other.

Market Development Market development involves introducing present products or services into new geographic areas. Southwest has been following this strategy from the start. This is one of their major strategies which they call conservative growth. They have been adding new geographic destination throughout their years of operations. They started their operations from 1 state and 3 cities and now are flying in 32 states and 63 cities.

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Defensive Strategies Defensive strategies include Retrenchment, Divestiture and Liquidation. As of now the company is not following any of these strategies because the company is growing and showing increasing profits. Diversification Strategies There are two general types of diversification strategies: related and unrelated. Currently the company is not using any of these strategies. Integration Strategies Forward integration, backward integration and horizontal integration are sometimes collectively referred to as vertical integration strategies. Vertical integration strategies allow a firm to gain control over distributors, suppliers and competitors. The company is currently not following any of these strategies.

Porters Five Generic Strategies

Cost Leadership

Differentiation

Focus

LARGE

TYPE 1 TYPE 2

TYPE 3

---------

MARKET SIZE

SMALL

--------

TYPE 3

TYPE 4 TYPE 5

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CASE PRESENTATION

When southwest started its operation it was using Type 4 strategy. That is using Focus- Low cost strategy. The company was focusing at niche market segment. It targeted 1 state Texas and 3 cities that were Dallas, San-Antonio and Houston. The airline industry has typically been an industry where profits are hard to come by without charging high ticket prices. Southwest Airlines challenged this concept by marketing itself as a cost leader. Southwest attempts to offer the lowest prices possible by being more efficient than traditional airlines. As the time progressed the strategy of Southwest Airline changed from Focus toward Cost leadership. It adopted Type 2. It was focusing toward large market and was providing the customer with best value. Southwest airline expanded its services into 32 states and 63 cities offering customer with best Value. It has adopted certain competitive pricing and strategies that are difficult to imitate by Rival firms. It using no-frill strategy to introduce low fares and reduce cost.

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CASE PRESENTATION

Strategy analyses and Choice Swot Analyses

Strengths 1. Low fare 2. Listed as top five major carrier 3. First airline to establish a website 4. Employees motivation , no layoff 5. Strong financial position 6. Small fields favored over major airports 7. Single type of planes 8. Fuel Hedging Opportunity SO Strategies 1. Start operations in More than 100 new 100 new cities by cities have utilizing its strong encouraged southwest financial position to offer flight service. (S5,O1) International 2. Hire experienced expansion to Canada employees of and Mexico. As there competitors that are laid off. (S2,O6) is increased demand 3. Encourage the for international employees to strive travel. for the 1st position in Only operating in 63 Airline Service cities and 32 states. Provider. (S4,O7) Can expand into other cities such as New York and Atlanta. Introduction of better security system. To cope up with security threats. Growth in 40-64 years old by 17% in 2007. The frequent Weakness 1. Conservative Strategy 2. No international flights 3. Vision statement not mentioned 4. No flights to Atlanta, Newyork 5. No Reserved seats

WO Strategies 1. Start operations internationally (W2,O2) 2. Start domestic flights in major cities such as Atlanta and Newyork. (W4, O1 O3) 3. Provide reserved seats for elders with ages between 40-64 years (W5,O5)

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SOUTHWEST AIRLINE flyers according to Southwest are 45-54. Lay off of experienced staff. 21% in Delta and 44% in United Airline. Reach the top ranking in Airline service provider. Currently ranked 8th. Threats Jet blue is the noteworthy competitor of Southwest Airline. The introduction of new tax system that is hurting low fare carriers. As the ticket fare is increasing. Rise in security issues after 9/11 attack. Decrease in Customer Air travel due to security threats. As there were more terrorist attacks. More security regulations by government caused delays and longer check-ins. Lead to increase in airline security cost. Increase in energy cost. There was fluctuating Fuel Oil price and increase of 11% was witnessed in St Strategies 1. low fare, strong financial position ( s1,s5)

CASE PRESENTATION

Wt Strategies

2. Fuel Hedging (s8)

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SOUTHWEST AIRLINE 2006. Introduction of new rail service from Dallas to Houston. Increase of new substitutes. Competitors are adopting Southwest Airline strategy to win more customers. Competing online ticket system.

CASE PRESENTATION

3.Small fields preferred over major airports (s6)

1.No vision statement (w3)

2.Conservative strategy, no international flights, no flights to Atlanta ( w1, w2,w4)

3. No reserve seats (w5)

SPACE MATRIX for Southwest Airline

The Space matrix is a management tool used to analyze a company. It is used to determine what type of a strategy a company should undertake. SPACE matrix tells us that our company should pursue an aggressive strategy. Our company has a strong competitive position it the market with rapid growth. It needs to use its internal strengths to develop a market penetration and market development strategy. This can include product development, integration with other companies, acquisition of competitors, and so on.

Financial Strength
Return on Asset. Southwest Airline has the highest ROA comparative to its customer that is 3.7% in 2006 Profitability. The company profitability is increasing over period of time. That is higher than competitor Leverage. The leverage position is better that is 1.08 ROE of southwest airline is 7.3% that is higher than the competitor among which the highest is 4.1%

Rating
3

4 3 4

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CASE PRESENTATION

Environment Stability
Technological Changes. Airline industry have to face many technological changes. Like in this they have to adapt to new security measures Risk Involved in Business is high in airline industry -2

-2

Barriers to entry are high in airline industry.

-1

Price range of competing firm is 15-20 % higher than Southwest Airline

-1

Competitive Advantage
Customer loyalty. Customer are satisfied with the services. They have low turnaround time. Technological knowhow. Southwest introduce the first airline website. Large Market Share domestically. Second largest player with over 20% of intrastate market. Lower prices. -3

-3

-2

-2

Industry Strength
Profit Potential. Various expenses and un certainties can cause Profit to decline Growth Potential. There are various market to expand in. there are both domestic and International market Ease of entry into market. There are 2 major barriers such as high investment cost and competition in airline industry Technological Know how. 3

Financial Strength average: 3.50

Environmental Stability average: -1.50

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SOUTHWEST AIRLINE Competitive Advantage:- 2.50 Industry Strength: 4.50

CASE PRESENTATION

FIG.3

GRAND STRATEGY MATRIX:

The southwest Airline has Strong Competitive Position and is working in Rapid Growth Market thus it lies in Quadrant 1 and should focus toward Market Penetration, Market development related diversification. etc

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SOUTHWEST AIRLINE
Rapid Market Growth Quadrant II Quadrant I

CASE PRESENTATION
Market Development Market Penetration Product Development Forward, Backward and Horizontal Integration Related Diversifaction

Weak Competitive Position

Strong Competitive Position

Quadrant III Slow Market Growth

Quadrant IV

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CASE PRESENTATION

I.E MATRIX OF SOUTHWEST AIRLINE

The IFE Total Weighted Score Strong 3.0 to 4.0 High 3.0 to 3.99 I Average 2.0 to 2.99 II Weak 1.0 to 1.99 III

Medium The EFE Total 2.0 to 2.99 Weighted Score

IV

VI

Southwest

Low 1.0 to 1.99

VII

VIII

IX

Hold and Maintain

Southwest Airline has an IFE score of 2.83 and EFE score of 2.77. This means Southwest would lie in Quadrant 5 and thus according to it southwest should Hold and Maintain. Market Penetration and Product Development are two commonly employed strategies for these type of division.

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SOUTHWEST AIRLINE

CASE PRESENTATION

Possible Strategies

The possible strategies that Southwest should adopt should focus toward Market Penetration. Development, Product Development. Integration or Diversification. Based on this Southwest should do the following: Expand into New Cities Acquire International Airline

Expand into more Cities Key Factors Opportunities 100 cities encouraged Southwest to offer flight service International Expansion to Canada & Mexico Domestic expansion into cities like Newyork. Currently operating in 63 cities and 32 states Focus toward faster growth strategies. Utilize experienced staff layoff by delta and United. Delta 21% and United 44% Introduction of better security system. Achieve first rank in Airline Service. Currently ranked 8 Growth in people between 40-64 by 17%. Frequent flyers are 4054. Threats Rising competition. Jet Weight AS TAS

Acquire an International Airline AS TAS

0.04

0.16

0.08

0.08 0.09

1 4

0.08 0.36

4 1

0.32 0.09

0.1 0.02

4 -

0.4 -

3 -

0.3 -

0.08 0.03

0.07

0.08

0.24

0.32

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SOUTHWEST AIRLINE Blue Introduction of new tax system raising the ticket price. Rise in security issues after 9/11 leading to low air travel. More government security regulations causing delays Introduction of new rail service from Dallas to Houston and introduction of other substitutes. Increase in energy cost. Increase in fuel price by 11% Competitors adopting fast growth strategy and winning customers. Competing online Ticket System. Total Strength Low fare (15%-25% less) Listed as top five major carrier (1991-2006) Fuel hedging (Fuel Pricesincreased by 11%) First airline to establish a website (revenue increased from 65% to 70%) High Employees motivation , no layoff (employees priority over customer) Single type of planes ( turnaround time was 20 mins or less)
0.2 0.02 0.01

CASE PRESENTATION

0.07

0.09

0.07

0.06

0.24

0.06

0.06

0.05

0.15

0.20

0.03 1.00

0.05

0.1

0.15

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SOUTHWEST AIRLINE Strong financial position (net profit in 2006 was 5.9%, ROA was 3.7%, Roe was 7.7%) Small fields favored over major airports. Weaknesses
Conservative Strategy ( 100 cities asked to provide service) No international flights ( narrow market) Vision statement not mentioned No flights to Atlanta, Newyork No Reserved seats 0.09

CASE PRESENTATION 4 0.36 2 0.18

0.11

0.07

0.28

0.07

0.03 0.08 0.04 0.05

1 3 -

0.03 0.12 2.42

4 1 -

0.12 0.04 1.51

Total

1.00

According to QSPM the best looking strategy is to expand into new cities. As the total score shows it is a better looking strategy than Acquiring international Airline.

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CASE PRESENTATION

RECOMMENDATIONS

Based on QSPM, the best looking strategy would be the market penetration expanding geographically market to mare cities that are currently with out Southwest Airline flight such as Atlanta and New York. It is recommended Southwest penetrates its flights to more cities both in domestic and internationally. In expanding domestically, Southwest should continue its focus strategy of providing frequent, "point to point" flights. The expansion into new cities should be at a moderate pace to ensure adequate coverage of new markets. Ideal new cities will allow for non-stop flights. As the range of the aircraft expands, the potential markets will also expand. Southwest should continue to embrace new technologies such as ticketless travel and PC reservations. New technology also includes a commitment to new aircraft, which will result in a young, safe fleet of jets with longer range. All of these new technologies will permit Southwest to contain costs, to expand to more markets, and to maintain its image as a safe and reliable carrier. Secondly the major weakness we see in Southwest Airline is its conservative growth strategy which should be now converted into Fast Growth opportunities. As if in future the fast growth strategy is opted by its competition than it would hurt them Expanding into new cities would be less costly than expanding internationally. Southwest has gained lot of awareness and appreciation by the consumer that we think its the time for it to launch its services internationally.

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CASE PRESENTATION

References

Air Transport Association, [online] http://www.air-transport.org. David, Fred R., Strategic Management: Concepts & Cases (7th edition). Upper Saddle River, NJ: Prentice Hall, Inc., 1999. Edgar Online, [online] http://www.edgar-online.com "'Irreverent' Air CEO Speaks". CNNfn Online, [online] http://www.cnnfn.com. Johnson, Cynthia. "Industry Snapshot: Airline". Hoover's Online, [online] http://www.hoovers.com. Market Guide, [online] http://yahoo.marketguide.com. www.yahoo finance.com www.southwest.com Strategic Management Concepts and Cases 10thedition.

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