Southwest Airlines 2002: An Industry Under Siege
Government regulations and directives that were passedforced Southwest to adjust and even totally revamp their original strategies drastically which proved difficult for them. Regulations on baggage handling, for example, required Southwest to add crews simply to meet its turnaround requirements and abandon its cost-savvy plastic boarding passes for purposes of tracking customers which ultimately goes against their strategy of free seating.
These changes affected the way the airline operates in a way that management was left with alternatives which would, in one way or another,force Southwest to drift away from its hallmark strategies and/or core competencies (e.g. open seating, late arrivals by passengers, etc.).
On a more positive note, the Wright Amendment, one of those deregulation measures which politically restricted interstate flights out of Love Field, Dallas to states adjacent to Texas, has recently been repealed in 2006. This made possible a nationwide service for Southwest.
3. How is Southwest Airlines compared to competition (especially to imitators and like airlines)?
Southwest Airlines did fairly well as compared to competition. The 30 consecutive years of sustained profitability is a proof of this.
The airlines’ low turnaround in 2001 was at a competitive edge at 24 minutes-30 minutes faster than the entire industry. This turnaround time enabled Southwest’s aircrafts to fly more trips, and more trips meant more revenues.
How profits were targeted is also a major point of comparison with the competition. People Express, an imitator, though it grew rapidly, failed to meet its profit targets and were not able to cope up. Major airlines that came up with their low-cost brands also failed at this as they inherited management and cultural problems which their full-service airline faced.
Economically and socially, the customers to whom Southwest catered to were price-sensitive-mostly business and pleasure fliers and Southwest catered to them exceptionally well.
4. Why has Southwest been so much more successful than its competitors?
Southwest offered unique alternatives in response to competitors who clearly wanted to engage in price wars. Southwest did engage in price wars (e.g. with Braniff International with its $13 offer), but it competed not merely on the basis of price but also of value proposition (e.g. giving incentive in the form of gifts to customers who paid $26 instead of $13). These alternatives were embraced by Southwest passengers.
The things Southwest did not do proved to be one of their most significant key success factors. For instance, it did not adopt the hub-and-spoke route system (which almost every airline adopted)since it would be inconvenient for their passengers who preferred point-to-point flying.Their also refrained from connecting with other airlines, using interline baggage checking as these do not support their low-cost strategy, and implementing the conventional assignment of seatsto provide further convenience to passengers.
Southwest was very successful at cost reduction measures whilst competitors struggled to make their own measures as effective. The reduction of turnaround timeand innovation in other operational processes (e.g.automated ticketing) also paid off for Southwest in this regard. More notably, Southwest negotiated the price of its fuel to suppliers, thereby saving several more millions.
Innovations were not limited to operational processes. They implemented promotional programs (e.g. frequent-flier program which was the world’s first) that entice customers and give them more reasons to keep coming back.
As Michael Porter himself said, Southwest’s strategy involves a whole system of activities and not merely a connection of parts. The airline’s processes are closely-knit together such that they complement each other making it systematic and more importantly very hard to imitate. Competitors clearly could not expect to win on the basis of imitation.
Internally, Southwest employees contribute to its competitive advantage as they are not merely employees, but employees satisfied with their job and have attitude.
5. What kinds of things over which Southwest’s management has some control could go wrong, and what should be done to make sure that it doesn’t?
Management would have greatest control over its workforce and failure to address critical employment concerns could pose serious threats.
Through the leadership of Barret, Southwest has evolved into a culture-rich workplace where the core philosophies are inculcated deeply into the minds of the employees. Management could endanger this favourable status-quo by appointing less qualified top managers such as CEO, etc. Therefore, decisions regarding succession must be made carefully and not hastily.
Politically, laborunions were proliferating in the industry.While Southwest values its employees greatly, management could also go wrong in dealing with them regarding compensation they receive especially since they belong to such unions. Also, Southwest employees are paid less than those of other airlines despite sustained profitability; therefore favourable contracts must be negotiated by management to keep them satisfied and motivated.
6. How should management respond to the fact that Southwest Airlines has fallen to next-to-last
place among major airlines in on-time performance as of September, 2002?
Since new regulations and directives were implemented particularly from baggage inspection to security searches, delays would naturally occur especially because Southwest passengers are accustomed to coming in last minute.
Therefore, management should respond constructively to this statistic by proposing a new policy to its passengers regarding arrival. They could impose that they (especially those with heavy luggage) be at the airport ahead of time (e.g. an hour) before departure given the lengthy procedures on security. This could be easily justified to passengers as having implications on their own safety as well.
Of course, Southwest could also use a technological solution to this problem which they have recently done-an electronic check-in system via Southwest.com which would save passengers’ time by allowing them to board without having to check with an agent.
7. Once operations are fully stabilized, would you recommend to the management of the airline that it resume its historic growth rate of from 10% to 15% per year? Why?
I recommend a resumption of previous growth rates but it should be achieved by maintaining its current network and developing it from there as opposed to expanding to a greater proportion of long-haul flights.
I take the same stand as the Wall Street analyst who concluded that Southwest could maintain, even double, its size even without opening a new station.
Even if it does not take the opportunity to expand this way, Southwest is not left without opportunity. It must be noted that there are more than 100 cities wanting to experience the “Southwest effect” and nothing could be more opportunistic for Southwest as of the moment. It would be more “prudent” of Southwest to stick to their core competencies of point-to-point, low-cost, no-frills, high frequency flights for which they are most known for. Otherwise, they might as well join the sea of airlines out there that are neither unique nor differentiated.
Lastly, if growth is the objective, then Southwest better achieve it in a slowly-but-surely manner, as opposed the investing highly in an expansions whose effectiveness is not even guaranteed.
8. What are the implications for Southwest of the actual or threatened bankruptcies of other
major U.S. airlines?
Actual or threatened bankruptcies are most likely going to favour Southwest in that it would decrease rivalry among competing firms-the most powerful of the five competitive forces.
As bankruptcies, actual or threatened, increase, Southwest is presented with opportunities of expansion. The cookie-cutter way of expanding is through acquisition of a struggling competitor. However, it can simply be just Southwest expanding its routes to an entirely new set of states where competitors halts services.
However, firms threatened with bankruptcies do not simply discontinue their operations. They could easily seek for government bailout just like all other firms in other industries resort to when threatened. Southwest, being profitable, clearly did not qualify for this benefit from the government, save for a certain $278 million from the amount allocated for aviation providers based on seat miles.
Moreover, since the government, in a way, is extending service to the airline industry (e.g. bailouts, added government security to airports, it would have a right to tax airlines. This would not be fair to Southwest since it received only minimal government support but will be subjected to same taxation policies as that of its struggling competitors.