Southwest Case Study free essay sample

In 2009 Gary Kelly, the CEO of Southwest airlines, was contemplating what it would take for Southwest to survive the economic downfall, due to high oil prices and decline in demand, that was upon the airline industry. One might argue that in the face of many options Southwest both diversified in there solutions as well as stayed true to the brand they had created. We will argue they did both. They branched out in terms of expansion and customer service, while remaining true to their brand in terms of management style and their online presence, or digital strategy. Introduction This case study is the story of a small regional airline carrier applying southwest values to become a major industry force. Southwest airlines began its business nearly 40 years ago in Dallas, Texas. Out of the ashes of a regional airline fight, Southwest airlines flourished by applying its two key goals of simplicity and low costs. We will write a custom essay sample on Southwest Case Study or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page In 2009 (the time this case study was published), Southwest Airlines had decreasing revenues due to the financial housing/lending crisis, but was faring much better than many of its rivals. The 2009 10-K for Southwest Airlines does not list the direct competitors of the company. However, Yahoo’s financial website lists several of Southwest’s current competitors: Delta Airlines (DAL), Jet Blue (JBLU), and United Continental Holdings (UAL). Southwest Airline’s total revenues for FY09, FY08, and FY07 were $10,350MM, $11,023MM (11. 55% growth), and $9,861MM, respectively. A large percentage of these fluctuations in revenue can be explained in relation to passenger fares with FY09 average passenger fares of $114. 61, FY08 of $119. 16, and FY07 of $106. 60. As the economy took off from 2007 to 2008, so did the fares which also increased Southwest airlines total revenue. The opposite holds true as we entered the deepest parts of the recession in 2009, and average fares declined. Southwest airlines also has positive net income, which is in contrast to many of its competitors. See the table below for additional details: Table 1 Southwest’s Key Information Southwest (LUV) FY09 (in millions)FY08 (in millions)FY07 (in millions) Revenue$10,350$11,023$9,861 Op. Expenses$10,088$10,574$9,070 Net Income$99$178$645 Cash$1,114$1,368$2,213 Acct Rec$169$209 Inventory$221$203 CapEx$585$923$1,331 Southwest’s competitors were also on the move in FY09. In FY09, Delta Airlines was engaged in several alliances with international and domestic carriers to improve market penetration and cooperation of frequent flier mileage programs. Financially, Delta has reduced capacity and is interested in completing the merger with Northwest. JetBlue, on the other hand , is a smaller regional airline carrier, utilizes only electronic tickets, allows reservation specialists to work from home, utilizes similar aircraft (Airbus A320 EMBRAER 190) that are generally new, and maintains a strong position in the New York Area (40% of all domestic passengers at JFK). JetBlue was also hit by the recession s net income dropped in FY08, but rebounded in FY09. United Airlines, on the other hand, had a slight uptick in revenue, but lost money in FYs 08 09 (as evidenced in net income). To further compound the disastrous economic environment, the company suffered hedging losses as a result of oil climbing to $145/barrel and immediately collapsing to the $30/barrel range. United Airlines has a large international and domestic presence, while also carting cargo (3% of company’s total revenue). In summary, Delta and United are industry behemoths that fly both domestically and internationally and use the spoke and hub approach to air travel. Meanwhile, JetBlue is an upstart Northeast regional air carrier that employs a cost-conscious strategy similar as Southwest Airlines. In contrast, Southwest Airlines only fly’s domestically, and utilizes discount pricing and cost-efficient methods to pass savings on to customers. Problem Definition According to the U. S. Department of Transportation airlines can be categorized into four types of services: International, National, Regional, and Cargo (â€Å"The Industry Handbook,† n. d. ). Although Southwest started as a regional airline in 1971 it has grown to become one of the world’s largest low-cost carriers while still remaining a national service carrier, currently servicing only the United States. In 2008 the airline industry as a whole was facing slowing demand and an increase in fuel prices that, according to the International Air Transport Association (IATA), cost the industry US$5. 2 billion in lost revenues (â€Å"IATA Airlines to lose US$5. 2 billion in 2008 Slowing Demand and High Oil to Blame,† n. d. ). Southwest Airline faces intense competition in the airline industry due to common factors including but not limited to airport capacity, route structures, technology, cost of aircraft, weather, fuel costs and labor. The focus for this paper will be the strategy that they took in addressing management style, opportunity for expansion, enhancing customer experience and their digital strategy in terms of sales to get ahead, or stay ahead, of the competition. In Porter’s five forces analysis, as seen in figure 1, you can see that competition arises from both horizontal and vertical sources, other airlines, consumers and suppliers, respectively. Other airlines introduce the availability of substitutes, competitive rivalry and threat of new entrants which lends to Southwest’s considerations to expansion and management style. The consumers and suppliers introduce the power of the bargaining, hence the attention to enhancing customer service and online strategy. Figure 1: Porters Five Force’s Analysis Model In the â€Å"Enhancing Service at Southwest† case the 10% drop in passenger traffic along with the loss of revenues and profits is stated as being the root cause of concern for the airline, which is in line with what the industry was facing at that time. Southwest was in need of determining how it would handle the service decisions. The operating model for the airline had been focused on point-to-point travel without all the frills. They did not offer assigned seats, meal service, coordination between airlines or business class options and services, but was this a service strategy that could continue? Many airlines had been offering such services and it was time to decide if enhancing customer service by adding these services would fit into the Southwest strategy. Another strategy that could be adopted would be for Southwest to expand into international markets, being a national carrier at the time this was outside of their current structure and experience. International markets bring the necessity to look at the taxation, infrastructure, environmental and economic state of the countries that would be serviced. Could Southwest airlines successfully integrate into the international market? Southwest was one of the first companies to offer purchase of its services online, which allowed for lower overhead and ability to fill flights that had not sold out at the last minute using its DING! application. With the availability and use of the internet increasing, along with their competition employing similar capabilities, was it time for Southwest to upgrade? Although Southwest used the internet as a medium for passengers to manage their itineraries, check in before arriving at the airport, and even purchase tickets from their phone. In an age of information that was the value customers had come to expect (Johnson and Hall, 2009). Many airlines were now offering reward incentives, additional booking tools and other add-ons that no longer gave Southwest the competitive advantage they were used to. Similarly, the good spirited nature and playful anecdotes by employees along with pleasant customer service has become part of what was expected by Southwest customers. Although, other airlines did not offer quite the same experience that you would get by flying with a Southwest crew, they did offer other amenities that were lucrative to travelers, especially business travelers. Southwest management wanted to provide a working environment for their employees that was enjoyable, as this excitement would be passed down to their customers. Would the management style and operational strategy allow Southwest to stay above water when the demand started to increase? This was something that needed to be addressed by the management team that was keeping employees during the time of employee reduction throughout the industry. The questions related to service, expansion, digital strategy, and management performance will be addressed in this case analysis. Analysis A chief differentiator for Southwest Airlines is service. However, in the competitive landscape of the airline industry it is easy for a competitor to copy the strategy of another. Thus, it is important for Southwest to continuously innovate its approach to service. Chapter 2 of the textbook Operations and Supply Chain Management highlights several competitive dimensions of service (Jacobs and Chase, 2011): 1. Cost or Price 2. Quality 3. Delivery Speed 4. Delivery Reliability 5. Coping with Changes in Demand The case study highlights how Southwest Airlines adopts low cost coast to coast fares of $99. The market share for low cost air carriers has grown to nearly 30% of the entire market (Murakami, 2013). Whenever Southwest Airlines enters a market, there is a direct correlation between cost reductions of current incumbents and Southwest. However, full service airlines also fight back by â€Å"differentiating their services against those of LCCs or vice-versa, and eventually the airlines differentiating services gained the power to be able to control their price-cost margins† (Murakami, 2013). This is another reason for Southwest to continue to innovate its cost package. The year after the case study, Southwest tried to reduce cost by: salary freezes for upper management and the overall headcount, reduced capital expenditures on new aircraft, the addition of winglets to reduce drag on its airplanes, and by adding GPS to its airplanes opening air-routes by not relying on ground based information/data (â€Å"EDGAR ONLINE SOUTHWEST AIRLINES CO (LUV) 10-K 1/29/2010,† n. d. ). As the company rebounded from the depths of the recession, it has tried to maintain costs through: periodic engine washes, ground power for airplanes at gate, auto-navigation instrumentation to maintain optimum cruising speeds, lower engine idle speeds, and single engine taxiing (â€Å"EDGAR ONLINE SOUTHWEST AIRLINES CO (LUV) 10-K 2/7/2013,† n. d. ). In addition, to all of these cost-cutting methods, Southwest Airlines is in the process of converting several of its airplanes to be green. This means that parts of the airplane, such as the seat covers, will be made out of recycled parts. In return, Southwest earns credits in return that can be used to buy fuel as discounted prices and even pass more savings on to the consumer. Quality is paramount to business. Per the hybrid model study, â€Å"having developed high levels of quality capabilities significantly supports the development of delivery capabilities† (Hallgren, Olhager, Schroeder, 2011). The quality of Southwest’s service personnel speaks for itself. In a study performed by the Mays Business School, Southwest Airlines was ranked second only to JetBlue for: individual attention, helpfulness, courtesy, promptness, and overall satisfaction (Babbar Koufteros, 2008). This speaks mountains about Southwest’s ability to grow its market share through intense focus on servicing its customer. While examining opportunities to improve or cut costs related to service, Southwest undoubtedly considered service offshoring. The problem with service offshoring is that it can lead to cultural conflicts that ultimately lead to lower quality (Youngdahl, Ramaswamy, Dash, 2010). Southwest has stuck to its core values over time of only hiring the best employees (~1. 5% of applicants) in the markets that it serves. The problem is that the other airlines may eventually adopt this service emphasis. At the time of the case study, Southwest was interested in improving its service by: adding â€Å"Fly By† Security Lanes (priority access for top-tier customers), improved baggage tracking, call back service while waiting for customer support on the telephone, and outbound messaging which has allowed the company to send flight information to its customers (â€Å"EDGAR ONLINE SOUTHWEST AIRLINES CO (LUV) 10-K 1/29/2010,† n. Since the depths of the recession, Southwest has tried to improve service by: inflight internet live television, improved outbound messaging with the ability to be hang up and be re-connected later when an agent is available, and by giving gate agents hands free headsets so that they can better serve the customer at the gate (â€Å"EDGAR ONLINE SOUTHWEST AIRLINES CO (LUV) 10-K 2/7/2013,† n. d. ). Southwest also relies on providing its services (i. e.  , aircraft) with reliable speed to meet the market’s changing demands (points 3,4,5 above). By utilizing the same Boeing 737 airplanes across its entire business, Southwest obtains cost advantages in maintenance, spare parts, training of staff and utilization of pilots across any plane. Utilization of the same plane design also has advantages in decreasing the airline industry’s bottleneck: transitions. Per the case study, the average time for a transition is 60 minutes, while Southwest currently averages 25 m inutes. In order to minimize the impact from the bottleneck, Southwest has all employees both on and off the aircraft service it while it is docked. By understanding the layout of the plane, attendants are able to seamlessly communicate key transition steps. Throw in speedy boarding, and Southwest is able to minimize the transition time. Also, Southwest has historically maintained a new air fleet, which also cuts back on maintenance while adding to reliability. In the FY12 10-K, management discussed a strategy to modernize its aging fleet, â€Å"the Company has multiple efforts underway to replace its older aircraft with newer aircraft that are less maintenance intensive and more fuel efficient and that also have a greater range. The Company expects its long-term fuel efficient fleet modernization plan to provide substantial flexibility to manage its fleet needs in a variety of economic conditions† (â€Å"EDGAR ONLINE SOUTHWEST AIRLINES CO (LUV) 10-K 2/7/2013,† n. d. ). A second opportunity Southwest Airlines must consider is expansion. The case study highlights the use of a point to point framework, instead of the hub and spoke network that many other airlines use. Each of the points in the â€Å"point to point† network is a smaller airport on the outskirts of a larger metropolitan area. The use of these less congested airports has kept costs low while also permitting Southwest to expand without interference from major airlines. At the time of this case study, Southwest airlines was a regional company that flew from point to point within the United States. The downside of this strategy, is that in order to keep growing, it would need to reach out and adopt the strategies of other airlines by entering other major hubs and/or introducing international routes. The airline industry has changed drastically since the case study, with several airlines merging or acquiring partners. Delta has since merged with Northwest, Southwest has since acquired AirTran, and United Airlines has combined with Continental. From Table 3, all of the airlines are posting greater revenue, with Delta and United posting significantly larger revenue due to the combined revenue streams. However, while Delta is posting much larger net incomes after its merger with Northwest, United Airlines still has negative net income. This imbalance in net income may be attributed to the un-realized synergies from the merger with Continental, being on the wrong side of a furl hedge, or simply by being tied back to the competitive nature of the airline industry. Capital expenditures (CapEx) have also increased as the airlines strive to increase their fleets while the companies are on stable ground and interest rates are low. Southwest airlines conducts the majority of its business in the United States with soon to come destinations to Puerto Rico, Mexico, Jamaica, The Bahamas, Aruba, The Dominican Republic, and Bermuda (â€Å"EDGAR ONLINE SOUTHWEST AIRLINES CO (LUV) 10-K 2/7/2013,† n. d. ). Furthermore, Southwest Airlines will begin offering international service out of Hobby Airport in 2015. With the addition of AirTran, Southwest has picked up several key gates/hubs. Table 3 2012 Economic Data Southwest (in millions)Delta (in millions)JetBlue (in millions)United Airlines (in millions) Revenue$17,088$36,670$4,982$37,152 Op. Expenses$16,465$34,495$4,606$37,113 Net Income$421$1,009$128($723) Cash$1,113$2,416$182$4,770 Acct Rec$332$1,693$106$1,338 Inventory$469$1,023$36$695 CapEx$1,348$1,968$542$2,016 Southwest has taken a steady approach to expansion. Chapter 5 of the textbook Operations and Supply Chain Management highlights several ideas about capacity planning in services (Jacobs and Chase, 2011): 1. Time 2. Location 3. Volatility of Demand â€Å"A customer cannot be given a seat that was unoccupied on a previous airline flight if the current airline flight is full† (Jacobs and Chase, 2011). Thus, time is important to Southwest. As Southwest continues to expand its services it must re-evaluate the best routing for each plane to ensure that the planes are at capacity the majority of the time. Secondly, while expanding; Southwest must consider the locations of its future destination airports. If the airports are located far away from the metropolitan area, then it will challenge the customer to balance flight cost with the added cost of car rental and transit. Picking the right locations, instead of settling for any location, will permit Southwest Airlines to reap strategic monetary rewards (i. e. , lower costs of operation) Finally, it is important to consider the volatility of demand. Consumers drive the utilization of Southwest’s product. If South west airlines expands, but the demand is only present during specific times then there is a potential ding to Southwest’s bottom line. Per Southwest’s 10-K, typically the first and fourth quarters are the weakest demand periods (â€Å"EDGAR ONLINE SOUTHWEST AIRLINES CO (LUV) 10-K 2/7/2013,† n. d. ). Per IATA, â€Å"North American airlines saw demand rise 1. 7% over the 2012 period. This was a slowdown on October growth, which was 3. 6%. Capacity rose 4. 7%, causing load factor to fall 2. 2 percentage points to 77. 5%. Recent economic indicators have shown a solid fourth quarter, despite the disruption of the government shutdown in October. † (â€Å"IATA Passenger Demand Moderates in November,† n.d. ). With the acquisition of AirTran, Southwest is prepared to serve a growing economy in the Caribbean market segment. In preparation for future expansion, Southwest must cautiously evaluate demand such as to not take on unwanted debt (current debt levels of ~12. 3B) or assets (current debt levels of ~19. 3B). The previous analysis points have been based on the premise that Southwest was tak ing risks and venturing outside of their comfort zone to increase their market share, but they were also continuing some of their tried and true methods as well. By implementing a digital strategy in the form of online travel booking Southwest used this disruptive innovation to add value for consumers (â€Å"Shaping Strategy in a World of Constant Disruption Harvard Business Review,† n. d. ). Automated booking started in 1946 by American Airlines, by 1962 ReserVec started remote access automated booking for TCA, but these were all to be used by travel agents and not the general public. It was not until 1994 when Southwest started offering e-tickets that could be purchased directly by the consumer using the internet. By the end of the 1990’s more than half of all tickets were purchased online. In 2005 Southwest introduced their DING! Application, this allowed customers to access last minute and highly reduced fares. Again, Southwest was the first to roll out any such program. By staying ahead of the online boom they were able to offer customers value at the touch of a finger. By 2010 the DING! application was available on all mobile platforms for easy access (â€Å"Southwest Corporate Fact Sheet Corporate Fact Sheet Southwest Airlines Newsroom,† n.d. ). By maintaining and enhancing their online services they have been able to expand their website to include hotel booking, car rentals, cruises and complete vacation packages with the added benefit of receiving â€Å"reward points† for the completed reservation. â€Å"The heavy investment in these boundary-spanning systems creates an extended resource-based advantage that is difficult to replicate† (Lewis, Brandon-Jones , Slack, Howard, 2010). According to their yearly report. Southwest has maintained an 80% booking rate through their internet site from 2008 to the present. In 2006 they started their social media program, showing 12 million monthly visits. With computer savvy customers they offer a number of ways to provide customer feedback, as seen in figure 2, the success here is that they leverage their employees, clearly represent the brand, respect the employee story, they’re lean, efficient, focused and most importantly, they listen. Figure 2: Southwest Customer Feedback ((â€Å"2012SouthwestAirlinesOneReport. pdf,† n. d.)) The future of technology in the airline business includes location based services that will allow the passenger to track their baggage as well as the airline to track the customers. Electronic compensation and rebooking for overbooked flights, missed connections and cancelled flights, reducing the amount of time customers have to spend in lines. Mobile payments will allow the customer to pay for fares on their phone s and finally social media to provide the right feedback that can be acted upon in real time (â€Å"Amadeus-The-Always-Connected-Traveller-2011-EN,0. pdf,† n. d. ). With Southwest’s goal of making travel easier and more efficient for their customer they should no doubt be on the front end of the application development. Finally, by keeping the great customer service as an ongoing vision and purpose of the company Southwest has been a lead the industry in customer satisfaction with a meager 0. 25 complaints per 100,000 customers enplanements, as seen in figure 3. Figure 3: Customer Satisfaction (â€Å"2012SouthwestAirlinesOneReport. pdf,† n. d. ) Southwest airlines take a social management approach that encourages respect, community outreach and a caring attitude amongst other things. According to their 2012 yearly report Southwest reports that one of their Citizenship Goals, employee related goals, is to â€Å"win the hearts and minds of customers by delivering excellent customer service and fostering customer commitment† (â€Å"2012SouthwestAirlinesOneReport. pdf,† n. d. ). This is the underlying management goal to ensure that customers keep coming back. â€Å"Workplaces such as Yahoo, Southwest Airlines, Domino Pizza, Brady Corporation, Ben and Jerry, Odetics, Sun Micro System, and Kodak have encouraged use of fun and appropriate humor in the workplace and that culture seems to appeal to high-tech Millennials. Their stock prices have remained steady, comparatively speaking, in this volatile and turbulent economic environment† (Smith Khojasteh, 2014) In 2013 Southwest launched an internal vision to its employees to remind them of the foundation that the company was built on, connecting people to what’s important in their lives (â€Å"Southwest Airlines Motivates Its Employees With A Purpose Bigger Than A Paycheck Forbes,† n. d. ). In this way Southwest has stuck true to it’s vision. Even in times of recession, industry slowdown, and expansion Southwest has chosen not to reduce resources and encourage employees to participate in ongoing education so they are ready to take on whatever opportunity may come up. Recommendations â€Å"For instance, assume that a consumer has to purchase a ticket for an international flight. Airline Company A has the lowest price; Airline Company B has the best food and airline C is always on time. The consumer will clearly not buy 3 tickets from Company A and B and C in order to realize the benefit of these 3 attributes. The consumer will purchase only one airline ticket† (Ehrman, 2014). Southwest airlines differentiates itself on the attributes of simplicity and low costs. To stay competitive, Southwest must continue to push boundaries while sticking to these two simple attributes. This section of the case analysis will discuss recommendations for Southwest airlines as it heads into the next century of air travel (100 years on January 1, 2014). Southwest prides itself on the ability to provide superior service. By hiring the right employees (