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Southwest Airlines

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Southwest Airlines Strategic issues: Controlled growth is essential. Meeting Growth Objectives while maintaining Focus Option 1: New route between Detroit ... – PowerPoint PPT presentation

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Title: Southwest Airlines


1
Southwest Airlines

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Southwest Airlines
  • Strategic issues
  • Controlled growth is essential.
  • Meeting Growth Objectives while maintaining Focus
  • Option 1 New route between Detroit
    and Phoenix
  • Option 2 Initiating service to Dayton
  • Option 3 Initiating service to
    Baltimore

6
Southwest Airlines
  • Southwests Business Level Strategy
  • LOW COST LEADERSHIP
  • no meals
  • no seat assignments
  • standardized fleet of 737 aircraft
  • no hub-and-spoke system
  • short-haul (avg. 65 min.) and high
    frequency
  • avoids large, congested airports
  • no baggage transfers
  • no connections with other airlines

7
Southwest Airlines
  • Southwests Business Level Strategy
  • LOW COST LEADERSHIP
  • Limited use of travel agents
  • Automatic ticketing machines (avoids
    travel agents commissions)
  • 15-minute gate turnarounds
  • Higher productivity
  • Flexible union contracts
  • High level of employee
    stock ownership

8
Southwest Airlines
  • Southwests strategy involves a whole system of
    activities.
  • Southwests activities complement and reinforce
    one another in ways that create real economic
    value.
  • Further competitive advantage built around
    systems are more likely to
    be sustainable.

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Southwest Airlines
  • Company profile in April, 1993
  • Seventh largest (in terms of passengers)
  • Served as far North as Chicago
  • Served as far East as Cleveland
  • Number 1 intrastate carrier in California
  • Effectiveness
  • Fewest complaints
  • Fewest delays
  • Fewest mishandled bags
    (per 1,000 customers)

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Southwest Airlines
  • Southwest Business Model
  • Service
  • Operations
  • Cost Control
  • Marketing
  • People
  • Corporate Culture

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Southwest Airlines
  • Service
  • The airlines management went to great lengths to
    encourage good relations between employees and
    passengers.
  • Family Fun as Differentiation

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Southwest Airlines
  • Operations
  • Did not use computerized ticketing systems such
    as Sabre and as a result only 55 of Southwests
    seats were booked through a travel agent in
    contrast to a 90 average for the industry.
  • Non-stop origin to destination
  • Non-congested airports of
    smaller cities

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Southwest Airlines
  • Operations
  • Flew into smaller, less congested airports of
    larger cities
  • Midway in Chicago
  • Detroit City Airport in Detroit
  • Reduced taxi time
  • Fewer gate holds
  • Less in-air waiting
  • Love Field in Dallas

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Southwest Airlines
  • Operations
  • No meals
  • Flexible union rules (even though 84 unionized)
  • Doesnt coordinate its services with other
    airlines
  • Only 737 Boeing jets (150 planes averaging 1,500
    trips per day)
  • Interchangeability (pilots, parts, mechanics)
  • Commitment to short-hauls

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Southwest Airlines
  • Operations
  • Boeing 737s seated 137 passengers and had an
    average life of 20 years. (New plane price was
    approximately 27 million)
  • Average age of Southwests fleet was 7 years, one
    of the lowest averages in the industry.
  • Turns in 15-20 minutes (as opposed to the
    industry average of 55 minutes).
  • Do you think this is a fair comparison?
  • VALUABLE?
  • RARE?
  • COSTLY TO IMITATE?

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Southwest Airlines
  • Cost Control
  • Input from pilots to save on fuel costs
  • Buying fuel from a variety of vendors
  • Gate fees about 2.50 per passenger
  • Costs per passenger mile was 7.3 cents in 1993

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Southwest Airlines
  • Southwest
  • Operating margin 10.84
  • Cost per ASM .0703
  • Wages, per ASM .0235
  • Industry Average
  • Operating margin -3.72
  • Cost per ASM .0935
  • Wages per ASM .0332
  • Note
  • ASM Airplane Seat Mile

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Southwest Airlines
  • Marketing
  • Emphasize price, convenience, and service.
  • Public relations Smart Campaign
  • People
  • Rigorous interviewing (peer hiring)
  • Low turnover of employees (7)
  • Recognition, and internal promotion (80)
  • Flexible working hours
  • Profit sharing employee stock options

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Southwest Airlines
  • Corporate Culture
  • Compassionate to customers
  • Positive attitude
  • Want to work and use common sense
  • Have a great sense of humor (humor diffuses
    stress)
  • You cant be an elitist SERVICE
  • VALUABLE? RARE?
  • COSTLY (DIFFICULT) TO IMITATE?
  • SUSTAINABLE ADVANTAGE?

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Southwest Airlines
  • Expansion
  • GROWTH STRATEGY
  • 85 of expansion internal (within current route
    structure)
  • Opportunity to move into Midway Airport in
    Chicago
  • Gates with options to expand
  • Ability to hire Southwest-type
    people in region

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Southwest Airlines
  • Immediate Expansion Decision
  • Option 1 Detroit to Phoenix
  • projected demand (load factor of 65)
  • longer flight
  • Airport gate and landing fees would be slightly
    higher than the Southwest system average of 2.50
    per passenger
  • (2.75 in Phoenix and
    3.25 in Detroit)

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Southwest Airlines
  • Immediate Expansion Decision
  • Option 2 Enter Dayton
    Market (population?)
  • 226 miles to Chicago Midway
  • Contribute to growth goals in Chicago
  • Un-congested airport
  • Airport gate and landing fees of 2.00
  • However, lowest demand
    (Exhibit 13)

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Southwest Airlines
  • Immediate Expansion Decision
  • Option 3 Enter Baltimore Market
  • population of 2.4 million (highest demand)
  • highest growth options (exhibit 13)
  • geographic separation
  • Southwest-type employees?
  • Weather conditions?
  • Flights over 3 hours experienced 20-25 lower
    total costs (e.g., efficient use of jet fuel)
  • Option to Wait? Lease jets
    with reasonable return

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New Leadership
  • Herb Kelleher was replaced in June 2001 by James
    F. Parker and Colleen C. Barrett became
    President, who both were long-time lieutenants
    (promotion from within)
  • Barrett has been in charge of service company
    culture since 1990, and this has not changed
  • Parker unexpectedly retired in the summer of 2004
    was replaced by long time CFO Gary Kelley,
    possibly due to intense labor union negotiations
    declining profitability
  • Gary Kelley, (Former CFO) who is focused
    on discipline and schedules. Current
    approval rating according to Forbes
    is 32 higher than any other
    airlines CEO

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Other Effects from Airline Industry
  • Overall employee level has dropped from 32,847
    employees at the end of 2003 to 31,011 a year
    later, lowered through slow hiring and generous
    severance packages
  • However, Southwest is one of the only airlines
    still hiring (1,706 new employees were hired in
    2004)

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Expansion through ATA
  • December 2004, SWA paid 40 million for some ATA
    assets at bankruptcy auction
  • Leasehold rights to six ATA Chicago Midway
    Airport gates
  • Leasehold rights to an aircraft maintenance
    hangar at Midway
  • To boost growth in Chicago
  • First Quarter 2005, SWA began first code-share
    arrangement (w/ATA)
  • SWA may market and sell tickets for certain
    flights on ATA and vice versa
  • Involve connecting service between a Southwest
    flight and a flight operated by ATA
  • Agreement could result in additional revenues
    of 25 million to 50 million per
    year

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Whats New (1993-2005)?
  • Still flies any plane as long as it is Boeing 737
  • currently flies 429 Boeing 737 jets compared to
    150 in 1993
  • Introduced Ticketless Travel in 1994, today 90
    to 95 ticketless.
  • Southwest.com bookings account for about 65 of
    total revenue
  • Currently flies to 60 cities in 31 states,
    approximately 3,000 flights a day (1,500 flights
    a day in 1993)

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Whats New (1993-2005)?
  • Southwests turnaround time increased to 27
    minutes due to increased regulations, which is
    well below average in the industry.
  • The average aircraft trip length is 596 miles
    with an average duration of more than 1 hour and
    45 minutes for 2005
  • Southwest aircraft fly an average of about 7
    flights per day, or about 12.5 hours per day
  • More investment in IT new plane tracking system,
    self-service check-in, ticketless travel,
    streamlined decision support system

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Financial Highlights 2004 vs. 1992
2004 1992
Net Income 313 million 91 million
Total Assets 11.3 billion 2.3 billion
Total passengers carried 70.9 million 27.8 million
Size of fleet 429 141
Passenger load factor 69.5 64.5
Total operating revenue 6.5 billion 1.68 billion
Total Operating Expenses 5.9 billion 1.5 billion
ROA 4.61 4.4
ROE 8.85 11.7
Debt to Equity 0.33 0.45
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Success Formula-Low Costs
  • Operating Cost Per Available Seat Mile (Cents)

2004 2003 2002 2001 2000
Southwest 7.77 7.60 7.41 7.54 7.73
AMR (American Airline) 10.80 11.07 12.05 12.27 11.38
Delta 12.07 10.66 10.45 10.47 9.75
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Success Formula- Profit
  • Net Income(Loss) Dollars in millions

2004 2003 2002 2001 2000
Southwest 313 442 241 511 625
AMR (American Airline) (761) (1,228) (3,511) (1,762) 813
Delta (5,198) (773) (1,272) (1,216) 828
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