Market Values of Southwest Airlines - Assignment Example

1. As we would expect for any successful company, Southwest Airlines fulfills market values for users, buyers, and payers. For the most part, these values are fulfilled at the Universal level. For the user, Southwest Airlines provides transportation -- basically, the ability to get from City A to City B. Significantly, Southwest views this value in both a broader and a narrower sense than do conventional airlines. Southwest's service is narrower in the sense that it does not attempt to enable its customers to travel easily from anywhere to anywhere; instead, it offers its customers a selection of individual city-to-city routes that do not connect with other airlines' long-haul routes, and indeed do not necessarily connect conveniently to one another. Southwest does not even offer its customers the ability to check baggage through to the final destination of a multi-flight trip; and some 80% of its travelers fly nonstop to their final destination. Further, Southwest's service is "narrow" in the sense that only "no-frills" transportation is offered: only light snacks and drinks are served on board, and only a single coach class is available. At the same time, Southwest views its services broadly in two important and closely related ways: First, it realizes that its competition does not consist solely of other airlines, but includes ground-based transportation. Since many of Southwest's routes are relatively short, potential customers could drive instead of flying. Second, Southwest understands that even though the service it directly provides consists of aerial transportation from an airport terminal in one city to an airport terminal in another city, the customer's experience of the trip includes the time required to get to the departure airport and from the destination airport to his/her actual destination. Thus, by favoring airports in smaller cities as well as smaller airports in or near large cities, Southwest can often provide more convenience and shorter total travel times than conventional airlines. At an individual level, Southwest makes a concerted, and generally successful, effort to provide its users with excellent and courteous service despite its "no-frills" reputation. Its flights almost always run on schedule; and its baggage handling system, kept simple by avoiding multiple-flight check-through, functions almost without a hitch. This focus on excellent delivery of a limited range of services has made Southwest's customers the happiest in the industry. At the buyer level, Southwest offers simple but good service, with frequent flights between the city-pairs it serves. For payers, Southwest offers prices that are hard to beat. Realizing that its competition is not restricted to other airlines, Southwest keeps its prices low even on routes that other airlines do not serve. 2. Southwest Airlines does not appear to tailor its marketing efforts individually to a wide variety of market segments. Instead, the company focuses its marketing on its low prices, its excellent customer service, and its convenient flight schedules. Since these aspects of Southwest's service offering appeal equally well to commercial and recreational travelers, there is no particular need to provide different messages for different groups of potential customers. Since Southwest does not offer anything other than point-to-point, meal-less, coach-class transportation at low prices, there would be no point in complicating its marketing mix; just as its simplified product offering permits high efficiency and low prices, a simple and consistent marketing strategy provides the company with good results. 3. Southwest Airlines is a transportation provider, and appears to view the services it provides in essentially utilitarian terms. The real value of a trip on Southwest Airlines consists of whatever awaits the passenger at his/her destination, not the pleasures of the flight itself. Accordingly, Southwest's dominant marketing strategy consists of "push" -- in particular, appealing to payers based on price. Of course, Southwest devotes a great deal of effort to maintaining high standards of customer service, and in parallel devotes a substantial portion of its marketing effort to promoting its image as a friendly and efficient service provider. However, this aspect of Southwest's marketing campaign does not fully qualify as "pull" marketing, as the airline clearly does not expect people to book flights simply to enjoy a package of peanuts and accurate delivery of their suitcase. Still, marketing that focuses on Southwest's good service, convenient flight schedules, and user-friendly airports could be viewed as something of a "pull" strategy; while such marketing may not create demand for travel that did not exist already, it does offer potential users some positive reasons for choosing Southwest other than its low prices. 4. Confronting both conventional airlines' inconsistent, and often dismal, financial performance and Southwest's amazingly consistent record of growth and profits, United Airlines apparently felt that it could not afford to miss out on the one segment of the American air transportation industry that seemed disaster-proof. The case indicates that United felt that its new "airline-within-an-airline" could ultimately grow to 20% of the airline's domestic operations; but the case does not clarify how (or if) United planned to integrate Shuttle By United into its operations. Assuming that United's management had thought the issue through, there are two general directions it could have chosen. One would be to create a fully separate, autonomous "clone" of Southwest Airlines that would function on its own with no special connection to United's standard route structure. Such an entity could well be made to turn a profit, since the basic formula for Southwest's success was well known. However, success for Shuttle By United along these lines might well be a mixed blessing for its parent, since a fully separate budget airline would only increase the competition threatening United's traditional business. Accordingly, United's management more likely envisioned Shuttle By United as a semi-autonomous adjunct to the traditional airline, adding new point-to-point routes while also replacing some of the "spokes" in the existing route structure. The latter approach, while seemingly rational for an airline like United, would by its very nature face challenges that would likely prevent Shuttle By United from competing successfully with Southwest Airlines on its own terms. After all, Southwest had been successful in large part precisely because it was built from the ground up not to fit into the route structure of a traditional airline. If Shuttle By United was intended to support multiple-flight baggage check-through and serve large metropolitan airports to connect with United's long-haul routes, its costs would be higher and its convenience lower than Southwest's. While Southwest Airlines had been consistently profitable, it is easy to forget that it achieved these results with a rather low profit margin. With a 1994 yield of 11.56 cents per revenue passenger mile and a load factor of 67.3%, its passenger revenue per available seat mile was 7.78 cents; this compared to its cost per available seat mile of 7.08 cents -- the lowest among major American carriers, more than 20% below United's cost. Looking at Southwest’s results from the top down, its 1994 operating income was $317 million, produced by just under 200 airplanes, each flying about 6 1/2 flights per day on average. (The latter figure was derived by dividing total seat miles by the number of airplanes times the number of seats per airplane times the rough average flight distance of 500 miles.) Each flight, then, earned about $676, or $7.35 per passenger and 1.5 cents per passenger mile. All this means that even slightly higher costs would make it impossible for a competitor to operate profitably while meeting Southwest’s prices. A competitor with cost per available seat mile of 8 cents—still very low by industry standards—would just barely break even, assuming its load factor and all its other numbers were the same as Southwest’s. This does much to explain Shuttle By United’s difficulty in competing with Southwest: Unless the new “airline-within-an-airline” could meet its target of 7.5 cents per available seat mile, it would not be profitable. In fact, as of early December 1994, Shuttle By United had not met this target; “Sky” Margary announced that the new operation was “better than halfway there”, but that likely meant that its cost per available seat mile was at least 8.5 cents, and perhaps as high as 9 cents. (The latter figure is based on United’s previous cost per available seat mile of 10.5 cents for short-haul flights; “better than halfway” to 7.5 cents would mean the December 1994 cost had dropped below 9 cents.) In short, Southwest had set a very high bar for potential competitors; to match its prices and still turn a profit, they would need to keep their expenses extremely low, without compromising safety, reliability, or customer service. Under these circumstances, it is not at all surprising that United found it difficult to match Southwest’s performance. Read More