Southwest Airlines - Case Study Example

Hong (Pam) Pham Livia Markoczy 13 March 2007 SOUTHWEST AIRLINES: A Case Analysis The competition among the local American airline industry – that is, being fought over by top airline carriers such as Southwest, United, Continental, Delta, and many others – is primarily a battle that is all about corporate strategic positioning where each company’s own competitive advantage plays a vital key to their success and becoming the market leader in the airline industry. Second, company management comes next with regards to this aspect because fostering an effective and well-managed company culture, especially to its human resource (which eventually was Southwest’s primary strength and one of the major contributor of their success), can further promote company loyalty among its employees which in return will definitely deliver not just great but rather, excellent customer service that will fully satisfy their customers. Southwest Airlines’ success story was definitely not an easy business venture to accomplish because, as a new entrant in the airline industry way back in the seventies, they had to battle out large and well-established airline companies such as Continental Air just to be able to gain shares in the market and also, they even have to unfortunately adhere on to (unfair) state policies, one of which was the so-called Wright Amendment, whose alleged intention was to slow down Southwest’s progress [“Southwest Airlines (A)” p.53]. But despite all the obstacles hindering their company growth, Southwest’s strategy in confronting this dilemma however, under the leadership of Herb Keller the company’s CEO, was to give more focus into improving its services more for their customers’ satisfaction and delight rather than be provoked and get depressed by the imposed threats of their competitors. Among the other winning strategies that Southwest have fostered, which eventually spring-boarded their competitiveness, were to fly to airports that are underutilized and close to a metropolitan area (convenient for tourists and especially for business travelers), frequent on-time departures and arrivals, non-stop flying (from point-of-origin to destination), faster turnarounds (meaning, more time flying in the air than being on the ground), of course having low-cost fares which obviously is very attractive to customers, and best of all, their unsurpassed quality customer service [“Southwest Airlines (A)” p.55]. But to give emphasis on the major competitive advantage of Southwest against all of their competitors is their cost-saving structure because of their longer or non-stop flying strategy than doing short-haul flying [“Southwest Airlines (A)” p.57], which means, whenever a Southwest plane takes off, it lands directly to its point-of-destination therefore, they spend less on gate handling costs compared to doing a stop over. In connection with that, Southwest also derives its cost advantage from the remarkable productivity it gets from its work force. Examples of these would be fewer people handling the gates of Southwest whenever it lands, seven people or even less, but accomplishing the same task with quality attached to it compared to twelve or more people doing the same kind of job on other airlines; Southwest’s pilots fly more hours in the air given a lesser compensation compared to other pilots from other airlines and they even help flight attendants clean the aircraft and check passengers at the gates; also, all of Southwest employees also routinely volunteer to help customers in whatever concern they have (e.g. taking good care of a passenger’s dog so he could have a good time on his holidays; or, even accompanying an elderly passenger to the next stop just to make sure he could change planes) [“Southwest Airlines (A)” p.57]. Stories like these about Southwest spread very quickly and these are the trait which makes up the “Southwest culture”. Good leadership in any kind of organization helps keep the company intact and focused on their goals. Under the Herb Kelleher, he always demonstrated a good sense of humor among all their employees therefore creating a work environment that is relaxed and having fun, because he believes by doing so, people are stimulated and they could work more productively [“Southwest Airlines (A)” p.59]. Of course, in able for them to accomplish that, Southwest hire the right people for the job – people who would want to share the passion and total commitment abounding in the Southwest family – that is why the company has a low turnover for many of years already [“Southwest Airlines (A)” p.61]. And aside from that, the company also provides constant training to all levels of employment in the company so as to update its work force in the fast-changing external environment they have to face or confront each day – a complete bonus to any employee [“Southwest Airlines (A)” p.62]. However, at present, when Southwest was able to dominate the airline industry, their competitors were starting to imitate their corporate strategy [“Southwest Airlines (A)” p.67]. But up to that extent, Southwest competitors seems to have fallen short or have underestimated Southwest that by imitating alone is not the solution to be at par with Southwest quality, because what they fail to realize was that the internal structure of the Southwest culture, which has stood for many years already, fostered an environment where there is full trust and cooperation among all of the employees (from top management to the lowest level of employment) and they all have the personal initiative to perform more than what is expected of them or more than what is written in their job description. That is the difference of Southwest that they can proudly boast and which their competitors does not have – therefore, making the Southwest organization a haven or a model of a one big family working together to achieve their (company) vision and mission [“Southwest Airlines (A)” p.66]. The Airline Industry, Not An Attractive One The airline industry is a billion dollar industry to say the least, because obviously it is a very expensive or a very costly business venture to start and if there is a new entrant in this kind of industry, vast amount of capital and progressive economies of scale is required in order to sustain its position in the industry. Since this is a billion dollar industry, new entrants should not be taken for granted as they would be having a hard time sustaining their capital and resources against the old-timers or the well-established ones in the airline industry. Potential new entrants are also grave threats to any company [Daft 283]. Take for example Southwest’s case, when they were a new entrant in the seventies, they were already perceived as a serious threat by the bigger airline companies and therefore did all they could to topple down Southwest in any way they can and as fast as they could, but fortunately, Southwest was able to manage to surpass all these (external) threats against them, and as well as to sustain their industry position (through their best-kept competitive advantage(s)) until they have achieved to become the market leader in the airline business. Another external threat which any company must take seriously is the bargaining power of (new-age) buyers. At present, modern customers are already well-informed because of technological innovations, and thus they are now empowered people free to choose whichever product or service that can best suit their needs and wants [Daft 284]. Back to the airline industry, buyers of this service oriented business would practically choose an airline that can totally satisfy their wants therefore giving them total satisfaction and delight and also value for their money. Southwest was fortunate enough to have addressed the wants of their customers that is why, they became the priority choice among American travelers giving low-cost airfare in a non-stop flight basis, frequent on-time departure and arrival, free travel benefits, and quality customer service (before-and-after sales). Competitor airlines of Southwest do not practically offer these kinds of services to their customers making these people have the initiative to choose an alternative choice which can at least satisfactorily fulfill their wants and give proper value for the money that they pay. The bargaining power of suppliers becomes a threat for any company if it is the only supplier who can provide the company with the supplies it needs to sustain the continuous operations of the business. Or even if there are substitute suppliers, if these substitutes cannot make their products and/or services be at par with the excellent quality produced by the leading supplier, then the leading supplier can still demand high prices from its buyers – making the economies of scale of the buying company inefficient as it would increase their cost (tremendously) against their revenues. In the airline industry, take for example, Boeing, it was then the only supplier of quality airplane carriers all over the world; without a competitor, Boeing can demand a very high price for an airplane that they will be selling and another high price for the services that they will render (i.e. maintenance) on the planes bought. In the case of Southwest, being the only airline company who can provide a low-cost airfare and quality customer service to its customers, it capitalized with that strength, maintaining their low-cost airfare policy and continuous but improving quality customer service in order to attract even more customers to fly with them and thus sustaining their market leadership against their competitors. Southwest in their early years became the substitute product threat to the leading airline companies such as Continental Air, Delta, etc. By offering a low-cost fare alone, an estimated half of the regular customers (who are becoming unsatisfied) with Continental and other leading airlines would somehow try-out Southwest’s quality services as a substitute for Continental. The end result of this would be a pure rivalry among competing airliners because each of which offers the same or different cost and product differentiation [Daft 284]. At present, when Southwest’s competitors do succeed in imitating their company strategy, an intense rivalry might erupt in this airline industry because of the lack of differentiation and high fixed costs imposed by all the airline companies – making each one of them an alternative choice, not a priority one by the customers. Southwest Airlines’ Strategy There were actually several strategies which Southwest has implemented. The following strategies were: 1) concentrating their daily flights to airports that are underutilized and close to a metropolitan area which by the way is very convenient for tourists and especially for business travelers; 2) flying fuel efficient aircrafts such as the Boeing 737 (the only type of aircraft it flies from then up to the present); 3) frequent on-time departures (and arrivals) as well as low-cost fares (no first class or business class, just a regular fare and an off-peak fare rate, and also, there is no heavy meal services, just light meal service of beverages, peanuts or crackers which can reduce a flight fare to as much as $40 per passenger) and non-stop flying – emphasizing point-to-point routes with no central hub which can avoid delays often associated with connecting flights therefore making short-haul trips more attractive to travelers who might otherwise consider driving; 4) faster turnarounds (meaning, more time flying in the air than being on the ground); and best of all, 5) Southwest’s unsurpassed quality customer service up to the present [“Southwest Airlines (A)” p.55]. In addition to these five strategies, Southwest also pioneered its own simple frequent flyer club system (that received criticisms from their competitors) or which they commonly call as the “The Company Club” – in which, free trips are awarded based on the number of trips flown, not by mileage. This kind of incentive, again, economizes on operating costs since it requires no effort to keep track of mileage therefore giving their customers free travels faster for much less money and without sacrificing or giving quality services [“Southwest Airlines” (A) p. 56]. However, among all these strategies mentioned, two of which highlighted Southwest’s strongest competitive advantage in the airline industry and these are being the lowest-cost provider and the remarkable productivity it gets from its work force. Herb Kelleher, the company’s CEO understood very well that by providing the lowest-cost on airline services could give them the leverage that cost advantage where most other costs are higher. Example, in table 1, it shows there that Southwest’s cost averaged roughly on 7.1 cents per mile while other airlines costs up to 10 cents or more per mile [“Southwest Airlines” (A) p. 56]. Table 1. Airline costs per available seat mile. 3rd Quarter 1993 3rd Quarter 1994 Southwest Continental United American TWA Delta Northwest USAir 7.13 7.64 8.11 8.06 9.23 8.66 9.36 10.94 7.03 7.56 8.32 8.08 8.66 8.95 9.79 10.74 Source: Southwest Airlines Company reports On the productivity cost advantage on the work force side, Southwest considers all of their employees as an extension of their low-cost competitiveness in the industry [“Southwest Airlines (A) p. 60]. This is all due credited to the Southwest culture of a more relaxed management atmosphere where employees are always stimulated to have fun in their jobs and to have the initiative to do more what was required of them, so in return, it could provided great productivity and quality customer service to all its passengers. They key to this remarkable performance is all because Southwest makes sure that at the beginning (recruitment phase), they would hire the right people who are more than willing to break the rules or draw outside the lines just to keep them focused on serving all the customers what they need to the best of their abilities – with no extra charge and the constant training it provides its workforce to update them on the ever-changing customer trends. Establishing a Low-cost Position, Fast Turnaround, and High Level of Customer Service Southwest Airlines’ competitive advantage is capitalized through their strategy of differentiation and cost-leadership. The primary and supporting activities of Southwest outlines as follows: For inbound logistics, first, in order for it to be able to establish a low-cost position in the industry the aircrafts it owns are all the same – Boeing 737 aircrafts. This gives them the advantage of saving on maintenance and training costs. Second, since it does not offer any regular meal during flights – a $40 value savings for passengers; this way they can save on storing costs because the only thing that needs to be chilled are the beverages. Third, during employee recruitments, they make sure that they hire people who share the same passion and dedication with them towards work, that way, turnover of employees would be low and training costs would be efficiently maximized. To support all of these, Southwest conducts procurement on everything by itself, in order to assure the quality standard they needed. Except for their work force, recruitment is a more appropriate term to use for hiring new employees. For its operations, the way it delivers its services to its customers is remarkably outstanding because they are not indifferent to the concerns of their passengers. All of Southwest’s employees work as hard as they could just to provide specifically what their customers really want and needs. This kind of quality customer service treatment happens before-and-after their services are rendered – that is why people loved flying with Southwest because they feel more secured and they get (even more than) the value of their money’s worth. All of these are supported by Southwest’s constant training and development to its new and existing employees so they could get updated on the changing customer trends. For outbound logistics, even though there are only few people handling Southwest gates during arrival and departure, they could even manage to perform faster compared and make the plane turnaround in as little as 15 minutes compared to their counterparts who have more men doing the same kind of job provided with the same kind of quality associated with. Fast turnaround of Southwest aircrafts means they could take off and fly more passengers daily which in turn will increase their revenues as per daily basis. Part of the people department (or human resource department in other companies) to provide research and development as well to the performance of their employees in connection with time as to strictly adhere on to Southwest’s standards of fast, efficient, and no delays on flights. For their marketing and sales, Southwest never compromised cheap advertisements just to be consistent with their cost-efficient strategy in this industry. Southwest’s advertisements are basically practical (a little expensive in some ways) but it sure is effective and it reaches its target audience the way it was intended to be [“Southwest Airlines (A)” p.55]. Therefore making more people get intrigued on what kind of experience can they feel if they would choose to fly Southwest Airlines. To support this activity, research and development also is needed in order to properly address what their customers need and how to create more ‘wants’ that could entice more customers to prefer flying Southwest more often. For services, as was mentioned in the previews section, this is where Southwest found its competitive advantage against their competitors. Demonstrating good courtesy is one quality that a customer service job is well-liked by a lot of people. This kind of warm and hospitable practice is not limited to flight attendants alone, even the front office personnel, ticketing staff, pilots, gate attendants, and upper management practices this kind of attitude towards their customers whenever they get the chance to interact with them in which they believe would make their customers much happier and satisfied before and after flying with them. Given this, customers would probably go for a repeat flying experience with them and possibly share their Southwest experience with their friends, family, or colleagues about the value-worthy flying with Southwest Airlines. Not only does Southwest support their employees with constant training and seminars, the attitude that the company wants its subordinates to foster also must come from the top management demonstrating attitudes that will most likely be imitated by all of its employees. Taking for instance Herb Kelleher, since he wants a more relaxed management atmosphere for Southwest (which depicts his personality), the initiative must come from him, showing his co-employees how fun, seriousness, and dedication can be intertwined in a fast-paced and pressured setting such as the airline industry. Sustaining Southwest Airlines’ Competitive Advantage The direct response to this question would be leaning more to a yes than a no, however, in order for its competitive advantage to become firmly sustainable, Southwest must find new and better ways in order to challenge itself again (as posed by the imitation of their corporate strategy by their competitors) more than it had before, because the enemy they are facing now is themselves actually. They must find new and much better ways to outpace what they already have right now so they could still be ahead on the competition. Southwest’s competitive advantage is sustainable at present even in the future because Southwest has already mastered this competitive advantage craft for their company. That gives them the leverage they needed to outpace or outrun their competitors. However, if their competitors would imitate everything they do, there is a possibility that their market share would go down or lessen because the same kind of services are offered not just by Southwest but also by other airline companies which could make them as an alternative brand. But undergoing through intensive innovation on their quality customer service approach, it could probably be the answer or the solution in order for this work force competitive advantage of Southwest be sustained in the future. With the imitating strategy of their competitors, they might be able to find their own ways on innovating Southwest’s original competitive advantage, however, this could hardly happen because not until the management of their competitors become alike with Southwest’s, they couldn’t fully imitate what Southwest could bring and deliver to their customers. Key Threats for the Sustainability of Southwest Airlines The external environment of the airline industry is fast changing in the present time. Potential new entrants in this industry can definitely affect Southwest directly because of product or service differentiation that this new entrant may offer and best of all, the cost leadership factor is the gravest threat for Southwest’s market sustainability. Emergence of cheap and easy accessible technologies could also become a threat if Southwest would not adapt to these changes – they will be sacrificing their cost-leadership advantage if that happens. Finally, another big threat would be the ever-and-fast changing demographics of the modern customer. Since the power of buyers in this new millennium is very powerful, companies should always be updated on what their customers demands from them or else, if they could not provide, buyers or customers could easily look for a substitute or an alternative brand which can suit their needs. Works Cited Daft, Richard. “Management” Seventh Edition. South-Western, a division of Thomson Learning. © 2005: 282-284. Heakal, Reem. “What Are Economies of Scale”. Investopedia page. 27 January 2003. . “Southwest Airlines (A)”. Stanford Graduate School of Business. 1995, revised ed. 05 April 2006. “Value Chain Analysis”. Tutor2u page. 2007. Read More