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In the year 2001, the Airline Industry faced what would be its longest and deepest crisis to date many of the airline companies were losing hundred of millions of US dollars; several had collapsed entirely, whilst others had to be rescued by their government. This crisis was precipitated by the terrorist attack of September 11, 2001 in United States of America. Southwest Airlines, which had the enviable record of registering profit for 30 continuous years, was also badly hit by the developments post September 11 terrorist attack. Since 9/11 terrorist attacks, the aviation industry went into a period of panic and gloom. Situation was so bad that passenger numbers plummeted drastically for all airline companies, balance sheets were showing up in red and investors hammered down stock prices of each and every company. Immediate reaction to it was that almost all airlines companies had gone into massive lay-offs and route rationalization. This article will analyze the changes that have occurred in the business dynamics of the airline sector and its impact on Southwest Airlines as the focal point of discussion.
History of Southwest Airlines
In 1967, Rollin King and Herb Kelleher founded Southwest Airlines in response to a need for increased capacity within travel routes of major Texas cities. These routes were service by large carriers but the fares were high because almost all carriers used these routes as intermediate stops. The idea for Southwest Airlines to make it successful was through keeping costs low such that the fares for route between two Texan cities was less than cost of driving a vehicle over the same route.
THE GROWTH STORY (1967-2000)
Value Proposition of Southwest Airlines for the customer has always been the price and convenience. Some of the key aspects of strategy by which Southwest brought in the value proposition are captured below: Southwest Airlines was perhaps the best airlines success story ever scripted worldwide. It soon became the most widely implemented low cost solution in the premium industry across geographies. Once Southwest Airlines had entered into the market, it entirely changed how people in United States of America took to air travel. The value discipline that Southwest Airlines was following was to observe operational efficiency. Each of its practices and steps were cornered around this objective and this made it to attain and maintain market leadership.
Southwest Airlines shines above its competitors as the industry leader in low fare flights. They strive to give their customers that (positively outrageous service) POS that they are known so well for. Southwest Airlines discovered a niche market for air travelers who wanted an easy and affordable way to travel, Southwest flies making it easy for customers to travel within the states conveniently without all the hassles of a major airport or many transfer flights. Southwest was established in the time when economy flights were steadily increasing, more and more families wanted to travel in state but could not afford the high priced seats that Southwest's competitors, Continental, Alaska or United offered. This was a great opportunity for Southwest because they now had a chance to increase their market segmentation and create loyalty from these customers and new ones from the value they offer. By providing open seating coupled with a corporate culture of happy employees and spontaneous attitudes Southwest has truly taken the trend of economy flying to the next level.
Southwest Airlines has come up with a plan to offer its customers no in flight meals, which cuts costs for everyone, a first come first serve seating, and outstanding customer service to make the low cost experience feel like your flying first class to your destination. In 2002 Southwest introduced 250 new ticket dispensing kiosks throughout the airports, the goal with these kiosks was to reduce the time spent in line and improve airport experience since September 11 2001.
Throughout Southwest's history the only roadblock that they have encountered was in 1978 with The Airline Deregulation Act, which redefined the industry by eliminating the ability of the Civil Aeronautics Board (CAB) to set fares, allocate routes, and control entry and exit into markets. Companies had no ability to change fares, even if their costs were increasing. The only attempt to raise prices was through a petition to the CAB for a fare raise. A request commonly took up to 6 weeks to be processed. This effected Southwest since their business tends to be very cyclical in nature. In certain months people are likely to pay more than in other months. To fight this new law Southwest averaged their prices and went for a slow and steady growth business model, understanding that this will eventually land them in first place among their competitors.
Southwest's competitors include another low cost airline called Jet Blue. This airline is mimicking what Southwest is trying to do with its no frills flights. They could take customers from Southwest by creating new ways to innovate this industry. This could be concerning to Southwest customer base because they must always be aware of what they are doing in order to hedge against their new offers.
Other Airlines that contribute to taking Southwest's customer base are Continental, United, and American airlines. Of course these airlines offer a variation on the services to their customers, and are targeting different target segments.
Southwest Airlines have long since prided itself on a no frill low fare flights. This kind of service, in addition with their outstanding customer service, attracts mainly families and the traveler looking to save a few dollars. This demographic segmentation allows southwest to offer their target market the best possible service, and prices, by rewarding being early with a choice seat, and still offering that POS service. Since young families are their main customers Southwest offers promotional coupon with their flights in order to attract customers going on vacations. Such as they created an alliance with a Ski resort based in Utah, Southwest then offered a weekend of skiing on them, if you chose to fly on their airline. Also southwest targets travel agents, corporate travel managers along with their individual travelers.
Southwest Airlines is the leader in providing low cost in state flights for its customers. It consistently offers frequent flights, inviting cabins, realiable service, and amazing customer service. Since every Southwest airplane is operated by only 71 people, the lowest ever in their history, labor costs have decreased and those who are left are highly trained and specifically chosen out of thousands of applicants to reflect Southwest's customer oriented culture.
Since Southwest airlines has been the leader in low cost flights for the last 36 years, and have been profitable for 33 years, they use the strategy of purchasing the same airplane for their entire fleet. The Boeing 737 is their airplane of choice; they have chosen to have a single airplane because you only need to have your employees trained on one type of airplane and because of that their efficiency increases. All of these, low cost flights, smaller hubs, excellent customer service, and cost cutting techniques, have led to Southwest being the leader of its industry.
As per our expectation Southwest can get a profit of $2740714 for Detroit route, $570905 for Dayton route and $4146613 for Baltimore route. Though the expected profit is most for the third option but if we would see the range of worst to best situation; in the first option the possible revenue outcomes would be between $18, 59,289 net Profits in the worse situation and in the best case it is $37, 56, 708. For Dayton route, the Company can earn ($1, 92, 529) net profits in the worse situation and in the best case it is $15, 96, 325. For Baltimore route, the Company can earn $22, 55, 947 net profits in the worst situation and in the best case it is $63, 94, 353.
Hence It is clear that range is highest in third option so instead of highest expected revenue it has the highest risk. While second option has the least variation but the chances of giving negative returns in worst conditions is high. Hence first option seems to be best option.
They respond to customer requests and also keep up the "Luv Culture" - Better Brand image and better connect with customers
South west's competitive advantage rests with pricing or providing services at low fares. From the sensitivity analysis, we come to know that southwest can get the profit of $2740714 for Detroit route, $570905 for Dayton route and $4146613 for Baltimore route where the prices are quoted at $114, $49 and $87. If the price war occurs in these places by the competitors of south west, the company can go for worse fares and increase the revenue still in competing with their competitors. The reasons being:
Cost control activities adopted by South west such as- Cost cutting- Pilots contributing new ideas to save fuels, Fuel costs- Buying fuel from vendors who offer best prices by carrying inventory if possible, Gate costs and landing fee's- Average fee in small airports is $2.50, and in small airports it is $2.00, No of departures- Maximum productivity of passengers through 20 departures a day, Low cost service- Offering services at low cost as it was 7.3 cents per passenger
From NPV and break even analysis we get the third option as the best as it has least period for break even and highest NPV. The first option comes second and then the second at last. But this does not give us a holistic picture to make any suggestions right away. We should also analyse the risk in a certain investment along with the returns. Some factors which would arise as risk factors are follows:
Choosing the best option:-
After going through the risk and return part will choose the best option. From return point of view it is very clear that third option we should choose. It has $3.2 million NPV while first option has $2.4 million. Third option has only one major risk which is weather condition. Let see how significant it is. Normal "in and out" time is 15 minutes for southwest airlines. It helps to reduce cost and save time also. This is a big differentiating factor for them. In our options it is same expect for the last option which have 90 minutes time for "in and out". This delay in time by 6 times is very significant from cost as well as revenue point of view. Taking 10 O&D in place for one day, if 15 minutes is in and out time then time for total 10 O&D would be 15*10*2= 300 minutes. If it increases to 90 minutes because of bad weather condition, then it means in same day and same time we have only 300/90= 3 O&D is possible. It means decline of revenue to 1/3rd.
Due to more time for "in and out" there would be more fuel consumption which will lead to increase in cost. A flight from Detroit to phoenix, which is around 1000miles, takes 3 Â½ hours to cover. It means a flight covers around 5 miles in one minute. So if flight has to wait for 90-15=75 minutes more it means it will lost fuel equalling t0 75*5=375 miles.
It has given that per hour cost of operation of airline is $4000. So due to delay by 75 minutes operating cost will increase by 4000/60*75=$5000.
Â So after considering the risk part, third option gives negative returns as the revenue is declining and cost is increasing. So we will eliminate the third option
Southwest should Chose the first option of expanding within the system since this options gives positive return, is less risky and also will help the organization maintain its "Luv Culture". This option will also improve their brand image as an airline carrier that cares not only for its employees but its passengers as well.
This strategy also falls in line with their idea of controlled expansion.