PresentedBy: Sec B Group 6: Deepak Patil (11P072) Mohi Mittal (11P088) Nikhil Sethi (11P092) Palash Agarwal (11P095)

Saurav Labana (11P101) Sriram Vasireddi (11P114)

 American

airline characterized by high wages, stable prices and choreographed competition until the deregulation in 1978 Big airlines (Pan Am, Eastern) bankrupted; strikes and disruptions failed cost reduction attempts Majority of new competitors failed Industry losses in 1992 greater than cumulative profits till date The industry was again prospering

Faced several problems during its inception Stuck in legal and political battle with competitors Barniff, TransTexas, Continental after approval on Feb 20, 1968; Herb Kelleher, current CEO, put in efforts to get support of both Texas and US supreme courts Positioned itself differently as the Luv airline and campaigned around issue of time and airport location Three distinct growth period:

Proud Texan intrastate (1971-1978) Interstate Expansion to 14 other states (1978-1986) coincided

with the time of deregulation National Achievement (1987-1997)

Airlines value adding activities Aircraft procurement, aircraft maintenance, reservation system, schedule, route planning, in-flight services and after-flight services Other services: meal, advance seat assignment, different classes Three primary types of customers
Travel agents (leisure travelers price sensitive) Individual travelers (leisure travelers price sensitive) Corporate travel managers (business traveler convenience focused)

Two extreme routes type:

Point-to-point (fixed city pairs) Hub-and-spoke (complicated pricing allows more city pair options)

Three major competitor groups:

major national airlines Regionals Commuter or feed carriers (route less than 500 miles)

Capacity
Growth in low-cost, short-haul travel inverted and lowered cost curve

for low cost airlines Over-capacity favors low cost airlines and tests the ability of majors to manage cost Seating capacity and mileage being increased by replacing older planes

Taxes: New tax structure introduced on Aug 5, 1997

New tax structure: 7.5% tax with $1 per passenger per take-off ($3

from Jan 1, 2003) Short haul carriers argue over new tax structure which increased their tax burden

Profitability (=yield x load factor cost) depend on:

Cost (expenses to ASM) Yield (operating revenues to RSM) Load factor (ratio b/w RPM and ASM) By 1996, airlines returned to profitability and recovered from deregulation shakeout

Structural Characteristics:

Low concentration before deregulation Discrete markets served by limited number of carriers Price sensitive oligopolistic market Hub-and-spoke model resulted in highly complex systems High bargaining power of suppliers (Boeing & Airbus) Airlines lease aircrafts to increase revenues New entrants secured lower labor costs in comparison to old airlines contracted labor

Competitive Environment:
Deregulation eliminated CAB control Legacy issues - High labor costs, inefficient planes,

infrastructure and high cost structure New entrants cherry-picked large carriers most profitable routes which shacked the industry

 Mission And Objectives Mission focus Customer Service and Employee

commitment Goal Deliver basic service very efficiently Long-term financial objectives: Margin expansion as major goal
x x x x 15% operating margin 7.5%-8% net margin ROE 15% Debt/equity below 60%

Strategy to be cheapest in specific and most

efficient operator in specific domestic regional markets , while continuing to provide its customers with a high level of convenience and service leveraged off its highly motivated employees

Route structure:

Road transport considered as the main competition Avg. stage length in 1996 410 miles; avg. flying time 1 hour\ 400 non-stop routes ; 5 round trips per city Serving smaller less congested airports Selecting excellent weather condition routes Point-to-point strategy

Cost leadership:

Turnaround time: 15-20 min. compared to industry avg. of 55 min. Limited use of travel agents to reduce commission costs. Sells 60% tickets through travel agents, thus reducing commission by $2.5 per flight segment Purchases or leases gates at airport instead of renting the gates of other airlines, that also at secondary airports which are less crowded No connections offered to other airlines Simplified fare structure: only single type seating Customer Service: flight frequency and on-time performance and helpful staff Culture: Atmosphere of cooperation and team spirit with caring nature of management towards personnel

Marketing
Marketing mix is primarily focused on pricing Used sophisticated combination of advertising, public relations, and promotions in belief that once people fly by SWA, they are then hooked to it Focus on expansion through reduced prices

Labor:

Partnership between management and unions through profit sharing and participation Flies only Boeing 737 which allows it to develop favorable purchase terms with Boeing Standardized cock-pit for pilot convenience and reducing training costs DRAWBACK: dependency on single supplier

Fleet Composition:

Growth
Slow steady growth Enters markets after checking for favorable conditions like labor, local community, etc. Policy prohibits accepting incentives from city and airports Target markets that are underserved with high population density and have clear competitive advantage Avg. market share of 40% compared to 31% average

Structure:
Structured according to function Mechanical way of operations in airline industry as it aims for

efficiency and consistency Safety prime concern which requires following rigorous procedures and proper maintenance and training SWA characterized by high degree of formalization and standardization Employees encouraged to take wide degree of leeway but within tight rules and procedures Absence of large intricacies pertaining from international operations and hub-and-spoke model Operates in 51 cities in 25 states and employed 22944 people 8th in revenue and 5th in passenger boarding SW total ASM less than 25% of American Airlines Operates only 243 aircrafts

Size:

Adaptability:
Nimble, quick to react to opportunities, e.g., taking control of California market

Control and Culture:

on exit of American Airlines and USAir Flexibility due to outstanding labor relations Company newsletter to keep employees informed Fun at work: enhance community, trust and spirit Cooperative relationship between employee groups: team oriented culture Lowest employee turnover rate of 7% and highest level of customer satisfaction Stringent control in some areas like expense approval required for $1000 and above

HRM:
Highly selective hiring process with focus on cultural fit than skills Mission Statement focus on people, profitability, values and culture High emphasis on socialization and training Labor relations: 85% unionized; Kelleher convinced union members and officials to identify with the company No unnecessary perks to company officers but do have company stocks

Technology
Heavy user of computer related technology Marketing Support Manager, Kevin Krone, looked into internet

ISSUE: functional structures like Southwest was, designed to promote specialization and scale economies , often does so at the expense of teamwork and coordination Customer department headed by Colleen Barrett
Insists on details Internal management expert and handle complaints against SWA by

activities First to introduce ticketless system

customers

SWA centralized with very strong CEO, Herb Kelleher

Charismatic nature, friendly, participative, involved, caring Behind the scenes, he can be tough 16 hours x 7 days working which inspires SWA employees He replaced formal strategic planning with future scenario generation

 26

years of safe reliable operations Highest ranking for customer satisfaction (5 years of triple crown customer service) 5 consecutive years of profit and 24 years of profitability Employee satisfaction (Among top 10 in Best 100 companies to work for in America) Consistent Job provider Younger and fuel efficient fleet of planes

Financials
Free cash flow of equity -$172.79 million which was financed through

increased account payables and aircraft leasing ROE 13.48%, COE 12.87%, retention rate 96.79% and FCFE $172.79 million suggest aggressive reinvestment Positive spread indicates undertaking of successful projects Debt/capital 28.7% against industry avg. 43.61% indicating it can finance future growth well Highest stock return between 1972-1992 STOCK HAS SLUMPED AGAINST COMPETITORS IN 1995-1996 Market share of 60-70% in 80-90 of top 100 city pairs

Drawbacks
Few costs uncontrollable like fuel which was 21.8% in 1990 and 14% in

1995 Not able to hedge against future prices due to clientele and route structure

Growth Limitations
Saturation of historic markets with clear congested airports and clear

weather Poor weather conditions may prevent entry (e.g. Denver) Tripled number of above 1000 miles routes over 3 years; SWA creating hub in Nashville connecting major cities with Florida but the price niche will be lost against as there are many players on the route with competitive prices Complications arising out of Nashville hub, if it develops Need to invest in Technology as systems are inadequate to handle sudden increase in incoming volume

Growth Opportunities
SWA recognized saturation in historic markets and limited attractive

short haul routes It expanded into some low longer-haul routes (which usually have low ASM), entry in which was defended against new tax structure

 Internal

Challenges: Challenges:

Managing larger and more complex organization Single individual dependent culture
External

Imitation by competitors Limited size of shorter haul flight market (core

competency)
Will

SWA be able to continue its remarkable success or fall prey to emerging conditions?

Competition
Smaller player in short-haul market offering lower prices Pressure on congress to repeal the Wright amendment

which will increase competition in SWA routes Major players emulation of SW formula by other players to provide short haul service and transferring pilots from parent airline (though it had created divide between management and union) SWA has also grown though by entering long haul and non strategic routes Hub-and-spoke demands greater coordination and higher turnaround time which will lead to reduced efficiency

Succession Southwests success attributed to personality of CEO Herb Kelleher Kelleher faced with deteriorating health Employees dissatisfied with low compensation leading to rejection of new contract by 92% employees Kelleher expected to retire in 2003 Company formed Cultural Committee to institutionalize Kelleher effect The feeling of Kelleher is gone may impact organizational working Successor needs to tackle
x Competition x Weakened labor relations x Strain of national growth

Opportunities
Favorable tax structure and low ASM makes long haul routes lucrative

for expansion and focus more on Texas, Florida and California as connecting points for maximum returns Decrease dependency only on Boeing as currently the avg. aircraft age is low for SWA and can go on for some years to come

Labor Challenges
Falling stock prices made labor compensation structure undesirable Work on compensation structure again so that labor relations can be

maintained

Technology
Invest in new computer systems and upgrade existing systems for

meeting increasing demand Pilot test can be run on chosen airports and then implemented throughout Entry in long-haul requires new system by approaching experienced vendors currently providing service to the major airlines

Competition

Increase its operations in remaining 20 good weather locations and discover new city pairs for flights Focus more on increasing operational efficiency of existing routes so as to compete with smaller niche players and also nullify the effect of Wright Amendment Focus on core competency of providing superior customer service and lowest prices Establish long-haul travel as a separate subsidy of SWA so that people do not associate it with low cost airline Establish Nashville hub and keep its operations separate from the current short haul business Training of staff for long haul flights separately as they are not aware of operational complexities associated with long-haul travel Due to low debt/capital ratio, it can raise capital for spreading long haul travel business

Succession planning
Start handing over responsibilities from Herb Kelleher to other executives in the hierarchy Culture Committee to provide insights about Kellehers influence and who can be the best fit for it Colleen Barrett can be considered as a potential candidate as she is Kellehers right hand and responsible for company culture and customer service Start projecting a potential candidate in most of the companys decision so that SWA personnel can associate SWA with him/her