Service Marketing of Southwest Airlines - Case Study Example

Southwest Airlines Introduction Service is any act or performance that one party can offer to other that is essentially intangible and does not lead to the ownership of anything. It may or may not be tied to a physical product. Services offers could range from a tangible good with accompanying services to a purely intangible service. Services are inseparable, variable, intangible and perishable. To manage these characteristics, the service firms have to develop a differentiated offer and keep on introducing innovations. The example used for a service organisation here is Southwest Airlines which offers a major service with accompanying goods. It is one of the most profitable and successful airlines in the world. It is known as an unusual company because it does not operate in the same way as all the other airline companies. Southwest Airlines, Inc. is a low fare airline based in Dallas, Texas. It is the largest airline in the United States by number of passengers carried domestically for any one year. Southwest Airlines carried more customers than any other U.S. airline in August 2006, marking it the first time that Southwest Airlines topped the monthly list for combined domestic and international passengers. Southwest Airlines is one of the industry's most profitable airlines and in January 2007, posted a profit for the 34th consecutive year. Its reputation of having low prices and a fun filled atmosphere has made it an icon of pop culture. In May 1988, it was the first airline to win the coveted Triple Crown for a month - Best On-time Record, Best Baggage Handling, and Fewest Customer Complaints. Since then it has won the award thirty one times, as well as five annual Triple Crowns for 1992, 1993, 1994, 1995, and 1996. History In 1967, Southwest Airlines was a vision by an investment advisor Rollin King and his lawyer Herb Kelleher, they wanted to start a different kind of airline. Rollin King already had a small charter that ran between the smaller Texas cities. They began with one simple notion, If you get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and make certain that they have a good time doing it, people will fly your airline. This new airline at first was to fly between the three largest cities in Texas, Dallas, Houston, and San Antonio. Because of the fact that, U.S government was imposing very strict regulations regarding commercial airlines by regulating airline route entry and exit, passenger fares, mergers and acquisitions, and airline rates of return, the primary idea was to focus on a single state area (avoiding governments interfering) and to a substitute market (local) where major operators weren't giving the proper attention. The next year in 1968 the Texas Aeronautical Commission approved their planes to fly between the three major cities. In early 1971, Air Southwest changed its name to Southwest Airlines, and the first flight was on June 18, 1971. Its first flights were from Love Field in Dallas to Houston and San Antonio. It offered short hops with no-frills service and a simple fare structure, features that became the basis for Southwest's popularity and rapid growth in the coming years. In the next couple of years the company went off to a flying start and by the next couple of years it had acquired four planes and employed about 200 people. In the first year of operation the company lost over $3.7 million dollars. It wasn't until the next year and a half that it was able to turn a profit and ever since then has been doing tremendous. By 1978, Southwest was the most profitable airline in the industry, and had already carried its 5 millionth passenger. The stock for Southwest was listed in the New York Stock Exchange as "LUV." Herb Kelleher, in 1982 took over as President, CEO, and Chairman of the board. He was well respected in his position focusing on employee and customer satisfaction. By 1996 the market had added Florida and California to expand in their services. By the year 1999, in the summer Southwest had acquired 55 cities and 29 states that they operated out of, they flew more than 2400 flight a day. In 2006, Southwest was able to fly into Buffalo-Niagara International Airport, and became the the 5th largest in the industry. The success and profitability of Southwest's business model led to a common trend being named after the company: The Southwest Effect. Since Southwest's original mission in Texas was to make it less expensive than driving between two points (in the early 1970s, during the first major energy cost crisis in the U.S.), they developed a template for entering markets at rates that allowed the airline to be profitable, yet only on the basis of lean operations and high aircraft utilization. The key concept to the Southwest Effect was that when a low fare carrier (or any aggressive and innovative company) enters a market, the market itself changes, and usually grows dramatically. They fly only one type aircraft; the B-737. The average age of their fleet is only 8.4 years and they own over sixty percent of them. They have been an airline whose has led to the advancement of the commercial airline industry. They were the first airline with a frequent flyer program to give credit for the number of trips taken and not the number of miles flown. They have pioneered senior discounts, Fun Fares, Fun Packs, a same-day air freight delivery service, ticket less travel, and many other unique programs. Current service The mission of Southwest Airlines is dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit. It primarily provides short haul, high-frequency, point-to-point, low-fare air transportation. Southwest Airlines is a commercial airline that provides passenger and freight transportation in the Midwestern, South-western, and Western United States. The airline specializes in short-haul routes and targets business commuters. The company's most-travelled routes are intrastate flights in California and Texas. Its fleet consists of about 310 Boeing 737s. Passenger transportation generates almost all revenue; accounting for more than 96% of the revenue.Southwest serves 63 cities in 32 states, with over 3,200 flights a day. Southwest does not use the more traditional "Hub-and-Spoke" flight routing system of most major airlines, preferring the "Point to Point" system. It has notably large operations in certain airports. As part of its effort to control costs, Southwest tries to utilize secondary airports which generally have lower costs and may, or may not be, more convenient to travelers than the major airports to the same destinations. Southwest makes exceptions where necessary, and flies into some larger airports in major cities. Southwest had a "no frills" approach to services: reserved seating was not offered and meals were not served . Instead peanuts were given. Customers were handed numbered or colour-coded boarding passes based upon their check-in order. Seating was first come, first served. As a cost-saving measure, the colour-coded passes were reusable. The employees have a friendly approach and a jovial atmosphere is maintained. Reason for selecting Southwest Airlines Southwest Airlines is an example of a major service with accompanying minor goods, as a customer, besides a transportation service also gets some tangibles, such as peanuts and beverages.To manage variability factor of services, Southwest Airlines has a trained and qualified staff so as to provide the same level of service each time a customer flies on it. It has differentiated itself as a low cost , no frills airline. This airline has been very busy the past 27 years. Southwest is the team that everyone in the industry would want to play for. They have been a genuine American success story. Southwest is the only U.S. airline to earn a profit every year since 1973 maintaining a steady growth rate. This company has experienced 133% traffic growth over the past five years, ranging from 20 to 30 percent annually. Next is their outstanding stock performance. Up 300 percent since 1990, Southwest's stock has performed formidably. While airlines typically trade at typically at approximately ten times their earnings, Southwest has generally traded at twenty times earnings. Finally, Southwest continues to lead the industry with the lowest fares, market dominance, most productive workforce, low employee turnover, highest customer service rating and the youngest and safest fleet in the world. N Kelleher calls his company "NUTS!". Their approach towards their business is amazing. Approach and Evaluation Before analysing the approach of the company, the environment in which the company is operating has been looked at using Porter's Model. Few of their main competitors are Continental Airlines and American Airlines. Substitute products include the train (Amtrak) and bus (Greyhound) which cover long distances. While these alternates cannot offer the speed of travel, most of Southwest Airlines' customers are attracted to the low price. Suppliers include those who provide service/products necessary for Southwest Airlines to their business function. For Southwest Airlines, suppliers include mechanics (and other maintenance people), providers of fuel, food (the snacks that are offered). The suppliers do not have much bargaining power. Customers include both residential and commercial sectors. There is no bargaining power for customers, as there is no threat of backward integration; it is unlikely that customers of Southwest Airlines are going to build their own airplanes and fly themselves. Rivalry among competitors sets the price-Southwest Airlines is a discount airliner. Rivalry is increasing, as the market decreases, and competitors downsize, the competitors become more or less equal in size and capacity. This means that as economic conditions worsen, competitors downsize and then compete for the same remaining market. The threat of new entrants is low, the demand is not high. On top of that, there are hurdles, that is, Government regulations and restrictions imposed on those involved in this industry. Thus Southwest operates in an environment where the bargaining power of suppliers and customers is less. Competition is very tough among the already existing players and new entrants cannot enter easily due to stringent regulations. Southwest followed some major steps concerning the direction and the method of developing the organizations strategy. Product development on existing markets with new competencies ("Love field", new737, low fare, point-to-point, short hub delivery) Market Development into new markets, territories (Texas, then interstate, smaller market niches in time oriented and price sensitive customers) Diversification (no hub, point to point, 10 minutes turnaround, same airplanes, and multi-operational employees) Southwest operates in a differentiation strategy that makes competitors very difficult to enter. By offering, low fare (25% lower than every other company that tries to imitate), point-to-point delivery (no hub-and-spoke), plastic Boarding cards (to recycle back), and no designated seats, it has a powerful advantage to burry competitors. Market penetration Strategy has been adopted by Southwest Airlines wherein it has converted car users to use its services. Southwest understood that for short-haul destinations, surface transport (car) was a substitute of flying. By concentrating on the factors that lead people to choose one of these forms of transport over the other, and eliminating or reducing anything else, the southwest concept turned out to be a fast and cheap mode of travel. Also, to encourage the current users to use their services frequently, a frequent flyer program was introduced which was based on number of trips and not number of miles. Southwest Airlines values employees, initiating the first profit-sharing plan in the U.S. airline industry in 1974 and offered it ever since. In 2000, Southwest offered its employees a record-setting $138M in profit sharing. This tax-deferred compensation represented an additional 14.1 percent of each employee's annual salary. Southwest has very good relations with all their employees. Employees are either of independent unions or have flexible contracts which allow employees to work longer hours. Its employees work harder and smarter, in return for job security and a share of the profits. Pilots chip in between flights and clean the plane along side of the stewardess's to get the plane ready faster for the next flight. Pilots have even helped ground crews load luggage in order to speed along the flight process. Southwest does not have as many pilots and crew as other airlines and their crews work more hours than other airlines. Turnaround time -the time it takes to unload a waiting plane and load it for the next flight-was15 minutes for Southwest, compared with the industry average of 45 minutes. This time savings was accomplished with a gate crew 50% smaller than other airlines. Pilots sometimes helped unload bags when schedules were tight. Flight attendants regularly assisted in the cleanup of airplanes between flights. Part of their success is due to their focused group; Southwest Airlines serves only 29 states - a substantially smaller portion of geography, when compared to those who serve customers coast-to-coast. Southwest operates in small market niches, focus on people who want to fly in small routes (time oriented) and to those are price sensitive, knowing that this target market was consisting the biggest market share. Booking tickets online with the utilization of the internet, Southwest Airlines almost became a trend, a sort of an underground hit, bypassing travel agents and their fees. The benefit was passed on to the customers in the form of cheaper tickets. Southwest Airlines positions itself as a different kind of airline in many ways. Southwest distinguishes its services as customer based operation. They indicate they are in the customer service business. Southwest has built their customer service commitment into their official Contract of Carriage. Southwest has contributed more to this industry's advancement than its competitors, by instituting ticket less travel, same day freight delivery. These revolutionary contributions set Southwest apart. Southwest operates into a multi-divisional structure, as it is subdivided into units (divisions) on the basis of products, services, geographical area or the processes of the enterprise. This allows tailoring of the product/market strategy to the requirement of that SBU and improving the ownership of the strategy by divisional staff. The main advantage is the fact that Southwest was able to concentrate on the particular business (SBU) and opportunities of the environment. Southwest's culture is the glue that holds the airline together. It encompasses beliefs, expectations, norms, rituals, communication patterns, symbols, heroes and reward structure. Southwest's commitment to culture has blended three important ingredients to make their airline a thriving force: employees, customers and leadership. First of all, the employees at Southwest have an uncompromising dedication to a cause or movement that they deeply believe in. Secondly, Southwest has set the standard for low fares for the customers. They have made it possible for people all over the country to travel more conveniently and affordably. Finally, there is sound leadership to ensure that the employee/customer relations merge to instil faith and allegiance. It's done that by keeping to the cost-efficient principles on which it was founded, and by never confusing "cost-efficient" with "cheap." Relative to the other major airlines, Southwest had a "no frills" approach to services: reserved seating was not offered and meals were not served. Customers were handed numbered or color-coded boarding passes based upon their check-in order. Seating was first come, first served. As a cost-saving measure, the color-coded passes were reusable. Only (737) jets Southwest's policy of using a uniform fleet reduces the cost of training pilots, flight attendants, and maintenance personnel, as additional training on other types of aircraft is unnecessary. This leads to a great flexibility of crew allocation to flights. Secondly, maintenance is cheaper as spare parts can be ordered in large quantities, thus achieving economies of scale and minimizing stock. Third, the tooling equipment is also uniform. Each type of plane typically needs its own specific tooling equipment. Tools are expensive and the users of each tool must be trained. Therefore, airlines with only one set of tooling equipment save on mechanic training and on the purchase of equipment. Southwest only uses Boeing model 737 planes in their fleet making their mechanics and engineers more specialized to this particular aircraft. This gives the customer confidence that these Southwest employees are ensuring safe travel 100 percent of the time. Although their route structure might not serve as many points as the hub-and-spoke system of legacy airlines, it has the advantage of eliminating wasted time by interlining flights as there is no need to wait for passengers from delayed flights .Because they typically do not transfer baggage and cargo to connecting flights, Southwest saves the cost of these operations, too. On average, the pilots have a 60% salary base and receive the remaining 40% according to their performance. The staff is younger on average and motivated through stock option plans. Southwest's employees have been benefiting from the company's success since 1973 through a profit-sharing program. In contrast to legacy carriers, Southwest does not allocate seats, thus prompting passengers to hurry into the plane in order to gain preferred seating. Southwest's overall success (and that of low-cost carriers) from an operational standpoint. Southwest has a lower and more variable cost structure and a lower breakeven load factor, which allow it to react to a changing environment more quickly than conventional airlines. In addition, Southwest benefits from the migration of business and leisure travelers from full-service airlines to low-cost airlines. Financial markets appear to have more confidence in the flexibility and continued growth potential of Southwest than any of their full-service counterparts (which are treated as cyclical). Even though affected, low-cost carriers emerged from the 9/11 crisis in a stronger market position than their full-service rivals. Southwest is the most unionised airline in US Airline industry. Inspite of being highly unionised , southwest experienced little labour conflict as compared to its competitors. This was because it emphasised the importance of labour management partnerships. The respect shown by the managers for the employees and their elected representatives reinforced the trust of frontline employees for the company and increased their dedication towards the company's goals.In its history, Southwest had just one strike which indicates the healthy labour management relationship. Flying large numbers of passengers on high frequency. Avoid most congested major airports. Flexible work rules Cost-containment policy Southwest airline is described as an upside-down pyramid. The upper management is at the bottom and supports the front line employees , who are the experts. This is Herb Kelleher's unorthodox leadership style, in which management decisions are made by everyone in the organization, not just the head executives. The company is described to not have much emphasis on structure; instead employees are encouraged to think freely without constraints such as titles. Kelleher defined Southwest formula to success as to - Blaze new trails. Don't rest on the laurels of others. - Ask yourself how you can do it before you ask others how it's been done. - Become a "risk doctor:" help others recover from mistakes by accepting, encouraging and laughing. - Stand behind your commitment and those of your people. -Own mistakes, share mistakes, learn from mistakes and move on. - Play to win! Threats The greatest potential threat to Southwest, are the upcoming new low-cost entrants to the industry. Some of these start-ups were initiated by major airlines such as Delta Express, U.S airway's Metro Jet and Shuttle by United. These units sought to replicate Southwest's short-haul routes, low cost practices and fares. . A possible drawback is that because Southwest Airlines' strategy has proven so effective, it is duplicated and emulated by its competitors to a point where it would lose the originality. This could result in competitors offering low rates to the areas covered by Southwest and beyond, making Southwest Airlines' range and limitations more obvious. It would be very possible in the near future where a big company, with its hubs (something Southwest does NOT have), basically introducing Southwest Airlines' low-cost model to a wider market, encroaching and outdoing Southwest Airlines. Due to poor economic conditions suddenly Southwest Airlines' method of operation has become the ideal model for its competitors. While the publicity is beneficial in raising employee morale, and raising stock prices; Southwest Airlines is now target of competitors' focus and operators are trying to replicate their model. Other threat that Southwest faces is that other airlines have the capabilities to fly into and out of more cities and bigger airports. Southwest does not offer frequent flier mile programs that allow their customers to accumulate points and then qualify for free tickets to their destination. This could be used as a negative point against Southwest. Increased Airport fees The fees for the major airports are usually very high and are increasing day by day. For southwest, it is a major threat as it would not be able to increase its operations to these airports. Also if the fee for secondary airports also keeps on increasing, it would be forced to stop its flights from that particular airport. Cost of maintenance and spare parts are also increasing with time. After the deregulation of 1978, price has become a major competitive factor in the airline industry. This has led to some opposition as it is felt that airlines being a part of service industry should have players who compete on basis of better service and image. So in future, Government might consider setting a minimum price range for airlines. This could adversely affect Southwest Airlines basic strategy. The 9/11 terrorists attack has created doubts in the mind of people about airline safety measures. Southwest has to take some measures for the safety of its passengers. External Opportunities Southwest could look into getting the bigger jets, and while in this venture could look into flying overseas, with many of their competitors out of the game now with the economy this is a good opportunity from them to take a stab at this market Southwest Airlines could look at expanding the target market into other parts of the United States. As of now Southwest is mainly targeted towards the Southwest part of the country. Southwest has already been introduced into the New York and Florida market, so using this as a strong foundation could be a good base to grow on, it could be a start into expansion in to the east coast. Many of Southwest's competitors are losing markets and employees. This offers already trained personnel available to utilize in obtaining new jets that have the capacity to carry more passengers and fly longer distances, or employ them in other customer services operations where they could utilise their talent. With acquiring service to Buffalo-Niagara area, Southwest could offer in-flight meals, or perhaps a movie, or something along those lines to accommodate the length of the flight. This could increase the passengers' traffic. Suggestions A tactic that Southwest Airlines can do to inflict damage to competitors is to slash prices. This type of tactic is typical of a big company that has a monopolistic rule in an industry squeezing other competitors. This tactic is advisable when competitors are near bankruptcy or are in dire situations. Because competitors cannot match Southwest Airlines' prices, the most they can do is narrow the gap of the price difference. Southwest Airlines, which has consistently made a positive profit, can increase the price gap by lowering their prices. Southwest Airlines will incur losses from this move, but the goal of this move is to drag the competitors further into debt. Because this move affects both companies, this move is very risky and should not be done unless Southwest Airlines is sure that their competitor is near bankruptcy. Possible reasons for this move would be to eliminate the weakest competitor in the industry, which would free up the market held by that company. It is the time for Southwest airline to use its low price tickets to drive its competitors out of business and take over their market giving up some of the profit to cut the ticket price even lower and upgrade hardware. This can open Southwest Airline to a much larger market that will bring more profit in future. Implementations of cost saving technology such as internet is needed to lower the operation cost to give customers better deals. The reason for the creation of Southwest Airlines started when its founders saw an opportunity. Frequent trips between cities were exploited by providing a quicker form of transportation. Southwest Airlines has weathered through several crisis and has proven itself to have potential for to be a leader of its industry. The poor economic conditions have placed many airline companies in debt, while Southwest Airlines was able to make a profit. With its competitors weakened, Southwest can take the initiative and expand-not foolishly, but with the same drive and precise execution the company was founded under. The genius behind Southwest Airlines' success is location; and if researched properly, this can be applied to other areas. Many factors would have to be examined prior to adding a new service point. Would the existing facilities at the new airport provide adequate gate space With company philosophy on providing minimal turn around time, they would not provide service to a facility where they might have to wait on another carrier to clear a gate. Another factor that may influence selection of an expansion area is weather. The appeal of Southwest Airline is the cheap tickets, as they offer none of the luxuries (such as in-flight meals). Southwest Airlines' no frills approach may not be pleasing to all; it would be good for Southwest to make a few changes in which the aesthetics would be more accommodating. Upgrading seats may be a costly venture, but it would open Southwest Airlines to a larger market. The medium of choice for customer referral is the internet. Internet referrals have been the main source of customers (it further cut costs by charging a lesser fee to book seats through the internet than through a travel sales agent). With the saturation of discount websites, however, Southwest Airlines is losing the grip it held advertising on the internet. More websites offer competitive rates and special discounts-which if Southwest Airlines does not take immediate action can end up losing customers. Since advertising through the internet is risky, as people hate pop-ups or spam e-mails, Southwest should find ways to be listed on these price comparison websites. Before, there weren't many sites that offered price comparison and finding deals was difficult. With these sites, information is available at the fingertips of the web surfers who can make better informed choices. Southwest Airlines should ensure that their voice is heard through this medium, as it is sure to attract people in search of deals. Southwest Airlines serves only a few states and cannot compete against the bigger companies that serve nationally or even internationally. Furthermore, Southwest Airlines does not utilize a hub system that allows for bigger competitors to reach further out. It has to make plans to make a few arrangements in order to expand its services to other locations but keeping its unique approach intact. Southwest Airlines prefers using only Boeing 737s. Being limited to one type of airplane leaves them with little flexibility when the model receives a bad reputation or a critical flaw is discovered. Such would be a costly venture for this company, who've used only one type of airplane and in the face of a dire situation would face a costly venture of finding replacements or counteracting bad publicity. Conclusion First and foremost, Southwest Airline has developed a great low cost model for the past thirty year that fits today's economy the best. It has expanded from a tiny company with merely three aircrafts to one of today's major airliners that flies between 58 cities carrying over 60 million customers each year. Southwest Airline has been a big success. Now, it is given an opportunity to grow even bigger at this extremely hard and critical time for the airline industry. After the incident of September 11, Southwest Airline is one of the few airliners that remained profitable; other airline companies are losing millions of dollars due to the insurance raise, the security cost and lack of customers. Since 1971, this eccentric and outlandish company has established a consistent pattern of deviating from convention. When other airlines were creating big hubs, Southwest was flying point to point. Instead of serving expensive meals, flight attendants pass out nuts. Instead of wearing stuffy uniforms, they sport polo shirts and shorts. For these departures from convention, and many others, the world has become fascinated with the employees of this organisation whose unrestrained enthusiasm comes from the desire to make their lives and their company extraordinary. Somehow, while the competition was trying to figure out what this innovative company is trying to do; it was already successful in its mission and had surpassed several others who believed in the conventional approach to marketing. With the current pace, the company is sure to set some amazing records which would take the world by surprise. Bibliography Philip Kotler " Marketing Management", Prentice Hall, Aug 1994: pp.465-468 Baiada, R. Michael. "Southwest Airlines: Below the Surface." Airline Pilot, July 1994: pp. 19-22. Chakravarty, Subrata. "A Model of Superb Management: Hit'em Hardest with the Mostest." Forbes, September 1991: pp. 48-51. K. Freiberg & J. Freiberg, Nuts: Southwest Airlines' Crazy Recipe for Business and Personal Success (Austin, TX: Bard Press, 1996), p. 61. Jacob, Rahul. "Corporate Reputations." Fortune, March 1995 pp. 72-76. Jarboe, Jan. "A Boy and His Airline." Texas Monthly, April 1989: pp. 98- 103. Financial Performance of Low-Cost and Full-Service Airlines in Times of Crisis, The Canadian Journal of Administrative Sciences, Mar 2005 by Flouris, Triant, Walker, Thomas John [online] www.findarticles.com Southwest Airlines Information [online] www. wikipedia.org Read More