Final Southwest Paper

8/13/2019 Final Southwest Paper

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Gold Corp. ConsultancyDecember 6, 2004

Strategic Proposalfor

Southest !irlinesA response to the recent announcements of Shuttle by United

Prepared by"

#i$e %e&eune%isa #. #aniSpencer South

'en&amen S. (ebster


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)able of Contents

*. ++C-)*+ S-##!/6

**. *1)/D-C)*13

The Problems

7

***. C#P!1 +/*+(

Company History

8

Company Resources

95inancial

rgani7ational Capital

80Physical Capital

889uman Capital

82#ar$et 'ased

82

Resource Summary

13

Strengths

14

Weanesses

14

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*. S*)-!)*1!% !1!%S*S86

"eneral #$er$ie%

1&

'emographics(Culture )mo*erately +a$orable,

1&!ge


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)hreat of Substitutes alry


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**. C1C%-S*1/+C##+1D!)*1S;4

Possible Courses o+ ction

34

Recommen*ations

34Do not raise prices

;4!dd more flights on the a$land?ntario route

;4+Bpand /outes

;@

***. /+5+/+1C+S;6

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*. +Becuti>e SummaryGold Corp. Consultancy as recently hired by Southest !irlines to recommend

a strategic response for to actions being currently ta$en by their primary

competitor, Shuttle by -nited, in early 8@. Shuttle by -nited has announced"

*t ill be discontinuing its a$land?ntario California route beginning in!pril 8@ a route that has been the most hotly contested route flon byboth Shuttle by -nited and Southest. !nd

+ffecti>ely immediately, Shuttle by -nited ill be raising tic$et fares byE80.00 on e>ery flight, and e>ery class.

ur mar$et research suggests that SouthestFs lo?cost, lo?frills strategy is

the strongest strategy in the airline industry, ith signs of becoming an

increasingly popular strategy, both in California, and the rest of the -nited

States. (ith rising costs and increasing pressures to remain profitable, ma&or

airlines are see$ing ays to cut costs and be more competiti>e. !s such,

-nited launched their on >ersion of a lo?cost carrier, Shuttle by -nited, hich

cut hea>ily into SouthestFs California mar$et in the fourth uarter of 84.

-nitedFs efforts to attract the cost?conscience tra>eler ha>e or$ed to some

eBtent, hoe>er their recent decision to discontinue routes and raise fares is

not a result of trying to adapt to ne mar$et changes, but rather a response to

fiB their on internal financial problems.

-nited is eBperiencing some of their highest costs in four years, ma$ing it

harder for them to compete ith Southest through Shuttle by -nited. )hese

high costs are primarily due to offering more HeBtrasI on their Shuttle by -nited

flights such as" assigned seating, multiple classes, and operating out of

congested airports. *n addition, they must find ays to fund a >ery costly and

recent employee stoc$ offering of o>er E8 billion. *t is these reasons e that

-nited is ma$ing its changes.

Conseuently, e recommend Southest not raise prices, but remain at thesame fares to further detract potential competitors from entering a mar$et that

they financially can not replicate. !lso, add more flights on the a$land?ntario

route, after your current flights are filled to capacity. %astly, continue upon

your current groth strategy ithin California and the 1ortheast and Southeast

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-nited States. (e anticipate that the recent announcements of Shuttle by

-nited ill not detrimentally affect SouthestFs current strategy.

**. *ntroduction)he folloing report details a competiti>ely responsi>e strategic plan for

Southest !irlines, prepared by Gold Corp. Consultancy. (e ha>e sought to

suggest a >iable response for Southest in reaction to a mar$eting challenge

initiated by -nited !irlinesF Shuttle by -nited. (hile, Southest continues to be

profitable, their 4th uarter re>enues for 84 ha>e been cut by 43J as

compared to the same period in 8;. )he decrease in re>enue is directly

contributable to the ma&or carriers such as -nited ho ha>e introduced their

on >ersions of point?to?point flying. Shuttle by -nited has ta$en direct aim at

Southest in the California mar$et, initially pro>iding ; routes in directcompetition but soon adding another 6 and increasing their flight freuency.

Currently, 8;J of SouthestFs capacity o>erlaps ith Shuttle by -nited.

)he ProblemsDue to recent unanticipated changes made by Shuttle by -nited, Southest

must address the folloing issues in order to maintain the companyFs current

leadership position.

8. (hat has made -nited !irlinesF HShuttle by -nitedI decide to discontinueits a$land?ntario route, hich until recently had been the most hotly

contested of the nine here the to companies compete head to headK

2. (hy is -nited raising e>ery fare by E80 hen they had pre>iously

matched Southest on e>ery fareK

)he plan that follos here, discusses ho Southest !irlines should respond, if

at all, to these recent de>elopments and the factors that influenced our

recommendations.

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***. Company >er>ie

Company 9istorySouthest !irlines, as pioneered in 838 by /obin Ling, as an intra?)eBas air

carrier, establishing its base at %o>e 5ield in Dallas, )eBas. #r. Ling retained

9erb Lelleher as SouthestFs legal counsel, hom no in 8@, has ser>ed as

C+ of Southest for the past tenty?to years. *nitially, Southest faced

contention from the ma&or carriers, ho attempted to use legal means to thart

SouthestFs progress. !s a result, #r. Lelleher as forced to argue se>eral

cases on behalf of his airliner in the )eBas Supreme Court.

)he business model of Southest is focused on lo?cost, point?to?point, short

haul and high freuency carriage. )his strategy has pro>ed a highly successful

model, and has lead to continued profitability of the airline e>er since its

inception. Southest streamlines its operations, maintaining a fleet of only one

type of aircraft, the 'oeing 3;3, and cross?training its employees for multiple

&obs. )hese operational simplifications lead to decreased parts in>entory for

aircraft maintenance, as ell as simplified mechanic and pilot training, and

greater fleBibility of the labor pool. #ost of SouthestFs flights are less than

fi>e?hundred miles in length and are point?to?point routes, hich aid Southest

in minimi7ing time delays associated ith the hub?and?spo$e system.

ther pioneering features of Southest !irlines include"

)he first profit?sharing plan in the industry

)he first freuent flyer bonus program

)he first discounts for senior citi7ens8

(hile described as a lo cost, regional carrier, Southest should not be

mista$en for a small carrier. SouthestFs re>enue no totals o>er E8 billion,

and the airline no operates beyond its original southest region, flying point?

to?point routes all across the -nited States.

)he eBpansion strategy of Southest is a model of carefully planned systematic

groth into ne mar$ets. Southest !irlines has been $non to create

tremendous groth in cities it operates in, hich resulted in the nic$naming of

8!)( aards 20 years of eBcellenceMin short?haul airline. !ir )ransport (orld. Cle>eland"5ebruary 84, ;8


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this phenomenon, H)he Southest +ffect,I in a 8; Department of

)ransportation ery ma&or

airline in the -.S.I;

Company /esourcesSouthest utili7es its solid foundation to continue to outperform its competitors.

'ecause of this foundation and the airlineFs simplistic strategy and abundant

resources, Southest is ell situated to further ta$e ad>antage of an en>ious

competiti>e position. ! closer loo$ into SouthestFs specific resources follos

to identify a portion of the companyFs euation for success.

Financial Southest has loer operating costs than any of its competitors. *n an

industry ith eBtraordinarily high fiBed costs, Southest has an

enormous ad>antage o>er the ma&or carriers. *n 84, SouthestFs

3.0 cent cost per a>ailable seat mile

carriers. )he company achie>es these efficiencies by maBimi7ing the

utili7ation of the aircrafts and flying point?to?point routes. )he

company does not ha>e the additional costs associated ith a hub and

spo$e operation, hich reuires greater infrastructure and

necessitates a much larger ground staff to operate.

5rom 80 to 84, Southest has more than doubled its operating

re>enues and almost uadrupled its operating income. 84 as the

22nd consecuti>e year of profitability, ith a net income of E83.;

million on E2.6 billion in re>enue. )he airline is competing from a

position of financial strength hich is rare in the industry.

5eer than half of Southest reser>ations are boo$ed by tra>el agents,a means of distribution that is hea>ily relied on by larger carriers. )he

cost sa>ings on the commissions that ould otherise be payable, are

upards of E;0 million per year.

2See.southest.com;/eed, !rthur. Southest Style in +urope. !ir )ransport (orld. Cle>eland" !ugust 8@,;2


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SouthestFs management ratios are >ery strong, hich signals to

managementFs understanding of the industry. SouthestFs income

groth rate, return on total assets, and stoc$holdersF euity ere all

the highest of any -S air carrier during the first half of the 80s.

!s illustrated, Southest is ell positioned financially. )hough there ha>e been

a fe negati>e de>elopments recently hich are noted belo"

Southest is incurring increased airport costs. )his is a result primarily

of many of SouthestFs competitors being eliminated or entering into

ban$ruptcy. )here are fiBed costs that the airports pass on directly to

the airlines. (ith feer carriers to di>ide the costs ith, Southest is

ultimately left ith a larger share of the cost HpieI to absorb.

)he relati>ely recent launch of other airline?ithin?an?airline

competitors, namely -nited and Continental, ha>e had a negati>e

effect on earnings. )he ne competition as directly responsible for

net income falling 43J in the fourth uarter of 84, as compared to

the same uarter the pre>ious year.

Organizational Capital SouthestFs model is based on short?haul, lo fare, point?to?point, high

freuency routes, hich is an industry niche. >er 0J of SouthestFs

routes are less than fi>e?hundred miles. )he ma&or carriers are more

focused on long?haul routes, primarily because those routes had been

the most profitable prior to deregulation in 83. 'ecause of

SouthestFs shorter routes, often times the airlineFs direct competitor

may be the car, not other airlines.

Southest has an ability to HturnI airplanes much uic$er than the

industry a>erage alloing for more flights per day. #ore flights

translate into more profits. +ach Southest plane ma$es on a>erage

80 flights a day as compared to the industry a>erage @ flights.

SouthestFs efficient strategy is facilitated in part by ser>ing smaller

cities and less congested airports. )hese cities allo for less taBi time

and less circling before landing. 'ecause of the point to point routes,

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the baggage handlers do not incur the additional time of transferring

baggage to other airlines.

Southest sa>es time, money and resources by not offering seat

assignments. )here are no first, coach, or business class distinctions

made. Customers are boarded in groups, on a first come first ser>e

basis. 5ood and be>erage o>erhead is held don by limiting

refreshments to peanuts and soft drin$s.

Southest only flies 'oeing 3;3s. nly ha>ing one aircraft in the fleet

substantially reduces costs related to maintenance, training and

in>entory. )here is only one aircraft to store parts for and the

maintenance cre only has one type of plane to ser>ice and therefore

can concei>ably become eBperts on it. Pilots only ha>e to be trainedon one type of aircraft, hich is logistically strategic. *f a pilot that is

scheduled to fly is una>ailable at the last moment, any of SouthestFs

pilots could in theory ta$e o>er, as opposed to other airlines ho ould

ha>e to locate a pilot that $ne ho to fly that specific aircraft.

Southest consistently ran$s among the orldFs safest air carriers.

)his is largely attributable to the companyFs fleet of planes, hich is

among the youngest in the industry at 3.6 years.

Physical Capital *n the last @ years, total assets ha>e doubled from approBimately E8.4

billion to E2. billion.

!s mentioned earlier, Southest only flies 'oeing 3;3s due to the

efficiencies gained by reducing maintenance and in>entory costs and

ha>ing pilots that can control any plane in the fleet.

SouthestFs recent purchase of #orris !ir has increased the companyFsassets by 80J and the aircraft fleet by 8;J. )his acuisition also

added se>en ne mar$ets to SouthestFs ser>iced areas.

Southest has pioneered many of the technological inno>ations of the

airline industry including" tic$etless tra>el, internetebsite,

computeri7ed baggage chec$?in, in?flight faB, and e?mail.

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Human Capital

SouthestFs employees are one of its greatest assets and one of the

most important contributing factors to the airlineFs success. Southest

has >ery lo employee turno>er, hich reduces costs associated ith

training. Southest as the first airline to offer an employee profit?

sharing plan, and employees no on approBimately 80J of shares

outstanding. Surprisingly though, Southest remains 0J unioni7ed.

Southest focuses on hiring attitudes hen recruiting ne employees.

)he company ants ne hires that ha>e a sense of humor and that

li$e to ha>e fun on the &ob, but that are also customer ser>ice oriented.

)his attitude is >ieed to be more important than education.

#anagement belie>es as long as the employee has the right attitudethey can be trained the s$ills necessary for the &ob.

9erb Lelleher, C+, is one of SouthestFs largest assets.

Market Based *n 84 Southest had 4.4J mar$et?share based on re>enue

passenger miles flon >s. ContinentalFs .@J and -nitedFs 22.8J

ailable on more than one?third of the industryFs

total capacity. #any start?ups ha>e attempted to replicate the

strategy but the !llied Pilots !ssociation

approBimately 3J of all airline start?ups ha>e resulted in failure.

Southest has gron from less than ;J mar$et?share in 8, to @6J

in 84 ithin the California mar$et.

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/esource Summary! recap of SouthestFs resources using a 'arneyFs /esource 5rameor$ model

belo, illustrates three resources that Southest has, that can be considered of

parity ith the companyFs competitors"

)echnology

#ar$et?share

'rand name

5our specific resources can be considered temporary ad>antages o>er the

competition"

CompanyFs financial strength

Company efficiency

CompanyFs current management team

#ost importantly though, the model illustrates SouthestFs sustainable

competiti>e ad>antages"

Current employees

Strategy

%o?cost mar$et $noledge

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Strengths

*n summation, Southest has many strengths that aid tremendously in the

companyFs o>erall success. #ost notably are the companyFs"

#anagement

+mployees

Simplified, decentrali7ed organi7ational structure er, there are a fe >ulnerabilities or ea$nesses that Southest must

remain cogni7ant of. )here may be a perception among air tra>elers that

because Southest is most often the cheapest carrier in terms of price, that

perhaps it may not be as safe as other more eBpensi>e ma&or carriers.

9oe>er, as mentioned pre>iously, Southest continues to ran$ among the

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6alue

Rare

nimitable

#rganie*

Competition

5inancial Strength es es )emporary !d>antage

+mployees es es es esSustainable!d>antage

Strategy es es es es

Sustainable

!d>antage

+fficiency es es )emporary !d>antage

)echnology es 1o Parity

#ar$et?share es 1o Parity%o Cost #ar$etLnoledge es es es es

Sustainable!d>antage

#anagement es es )emporary !d>antage

(or$ en>ironment es es )emporary !d>antage

'rand 1ame es 1o Parity


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safest carriers in the industry. )herefore, it is the perception of the brand that

must be managed, continually reminding tra>elers of the companyFs safety

history.

!nother potential ea$ness for Southest may be the companyFs brand name

being percei>ed as the cheap airline e to some ma&or

carriers such as -nited. (hile the lo cost pro>ider image is attracti>e to the

cost conscious tra>eler, there is a segment of the mar$et that is more brand

conscious and may percei>e the airline as an Hoff brandI. 1e>ertheless, that

particular mar$et segment is not necessarily one that Southest should be

o>erly concerned ith, as it is not the companyFs target demographic.

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*. Situational !nalysis

General >er>ie+ach aspect of this industry eBamination loo$ed specifically at California, the

main area of competition. Conseuently, Gold Corp. as able to obtain a better

understanding of the characteristics of the actual region in>ol>ed, and ma$e

&udgments on the en>ironmental factors that affect the industry.

DemographicsCulture orable='y studying the demography and culture of the mar$et, e found ho the ideal

customers are and ho this group compares to the actual population ma$eup.

ur research eBamines four specific demographic and cultural categories" age,

race, income, and region. Data from each of these areas is presented and

analy7ed belo.

Age (neutral)

ge Comparison

Group Current #ar$et?share Pro&ected #ar$et?share *ndeB J C!

N2@ ; 8. ; ;.3J

2@?;4 83.2 84.; 6 83.;J

;@?44 22.; 24 80; [email protected]

4@?@4 [email protected] 2. 8@0 80.J@@?64 [email protected] 83.4 823 3.0J

6@?34 .3 .2 8 @.J

O3@ 3.6 3. 33 ;.J

!ccording to the indeB numbers in the abo>e table, the age group most prone

to fly consists of those people beteen the ages of ;@ and 64, ith the largest

tendencies in the 4@ to 54 group. )his cluster e

years. )his is a >ery influential group to the o>erall airline industry. /oughly,

;4J of CaliforniaFs population falls ithin this age category. (hile this

percentage if fairly large, CaliforniaFs largest age group is composed of those

younger than 2@, ho hold both the least amount of current mar$et?share and

has the least tendency to fly. )his lo mar$et?share among young fliers is

supposed to dindle e>en further in the coming years. (hile this statistic is

unfa>orable to airlines in California, e feel that the si7eable population in the

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;@?64 age brac$et counterbalances any age distribution disad>antages from the

under 2@ group. )herefore, e feel that the o>erall age aspect of the

demographics is neutral.

Race (a!ora"le)

!s compared to the entire -S population, California has an eBtraordinarily high

percentage of the HotherI race category, due to the large amount of immigrants

it has attracted o>er the years. )he graph belo compares the percentage of

race ma$eup in both California and the -nited States.

0

10

20

30

40

50

60

70

80

90

CA % US %

White

lac

#ther

(hile people classified as HotherI are currently fifty percent less li$ely to fly

than the a>erage customer, the sheer mass of their population in California

suggests them as a potential target mar$et in the future. 9oe>er, in thecurrent day, hites are far more li$ely to fly than either blac$s or HotherI races.

5ortunately for airliners in all parts of the country, hites are by far the largest

percentage of the population in both the -nited States and California. Since the

ideal mar$et group is also the most abundant, this aspect is >ery fa>orable to

the airline industry.

#ncome (neutral)

ust as California is $non for its di>erse population, it is also generally thought

of as a high income state. /elati>ely spea$ing, this is a fair generali7ation.California has an a>erage age per &ob statistic of E;8,; and a per capita

income of E22,4;, both of hich are higher than the national a>erage.

1e>ertheless, the a>erage income earner in California is still not the a>erage

flier. )he folloing table brea$s don each of the income groups ithin

California and their li$eliness to fly.

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Cali+ornias ncome rea*o%n

"roup n*e n*e)car,

N 20,000 48 ;8

20,000?2, 6 @8

;0000 ? ;, 36 2

40,000 ? 4, 88; 82;

@0,000 ? 6, 8@; 8@8

O 30,000 ;2 ;3

'ased on the table abo>e, those people ma$ing o>er E40,000 a year are the

most li$ely to use airplanes as a mode of transportation. *n fact, the group

ma$ing abo>e E30,000 is 22J more li$ely to fly than the a>erage person.

5rom a California perspecti>e, this means that the a>erage citi7en, based on

income, is much less li$ely to fly than the a>erage customer. Superficially, this

is a problem for airliners operating in this region. 9oe>er, this is actually asubtle ad>antage for airliners that use one of the folloing to strategies" lo?

cost or business class. *t is reasonable to assume that hen this a>erage

income demographic actually decides to fly, they ill probably put greater

emphasis on lo price as opposed to anything else. )hus, lo?cost carriers ill

reap the benefits from this lesser tra>eling but more populated group. n the

other hand, carriers can also target the less populated but higher tra>eling

group, the higher income tra>eler. )hey can appeal to the most li$ely tra>elers

by offering the luBurious amenities and all of the unnecessary, but pleasurable,

bells and histles. >erall, these uniue niches euali7e the unfa>orable

nature of the income distribution in California. +rgo, this demographic is

neutral to the airline industry.

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Region (a!ora"le)

(ith this case re>ol>ing around one particular region of the country, e felt it

necessary to eBamine regional flying tendencies throughout the -nited States.

n*e9 by Region

11!87 75

145

.

5.

1..

15.

!..

Region

1n*e9

1ortheast

#idest

South

(est

)he bar graph of indices suggests that both the est and northeast are the

most li$ely to fly. (ith the (est playing the lead role in this case, this statistic

is a definite ad>antage. 9oe>er, it is not enough to simply eBamine hich

region of the country is most li$ely to fly, because if this region consisted of

only ten people, then it ould ob>iously be unfa>orable for airlines in spite ofthe high indeB. 5or this reason, e also eBamined the -S population by region.

20%

24%

34%

22%Northeast

Midwest

South

West

)he (est holds 22J of the total population, hich is acceptable especially

hen considering that it is the fastest groing region in the -S, and that

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currently most regions seem to be ell di>ided. >erall, the regional

demographic for airliners operating in the (est is significantly fa>orable.

+conomy orable=)he financial condition of the airline industry as a hole is fragile due to many

years of lo profitability, hich can be attributed in large part to the folloing

three intrinsic factors"

9igh fiBed costs

1o shelf life

Dependency on fuel prices

Due to high fiBed costs it is >ery difficult to brea$ e>en in this industry. n the

other hand, if an airliner can someho manage to surpass the brea$e>en point,

profits may be earned uic$ly thereafter. ! further complication in controllingcosts is the industryFs inability to maintain a product in>entory. *n industries

such as retail, if a customer does not purchase a product, it simply sits on the

shelf for purchase later. -nfortunately, a seat on a plane flies regardless of

hether it is filled or not. )hus, a product is simply all cost and no profit in

many cases. (hile this is detrimental to the industry, perhaps the ris$iest issue

is the dependency on fuel.

5uel costs comprise a little o>er 84J of an airlineFs total costs. Combining the

lac$ of control o>er these prices ith their infamy of rapid price fluctuations,fuel as a large percentage of total cost, is an ob>ious hindrance to the industry.

)his industry is also affected by se>eral other eBternal factors. )he /e>enue

/econciliation !ct of 8; raised costs by increasing fuel 4.; cents per gallon,

hich could cost the !irline *ndustry as a hole an additional E@00 million

annually. *n addition, the go>ernment taBes the airlines hea>ily. )aBes amount

to o>er ;0J of a>erage fares. -nfortunately, the payments reuired of airliners

do not end here as airports enforce fees of their on. !s a business

themsel>es, airports ma$e some of their profit by assessing landing fees and

terminal rents. Conseuently, these fees, hich are passed on to the air

carriers, add to the amount of costs that plague the airline industry.

(ith such a bad economic situation, air carriers must cut operation costs by one

of to ays. )he first is to adopt a lo fare, lo frill methodology. +ssentially,

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this offers the loest tic$et fare possible but ithout all the unnecessary bells

and histles. )he other option is to manipulate one of the fe costs that an

airline has control of, labor. 9oe>er, this option is uite ris$y since a large

percentage of or$ers are unioni7ed, and there is alays the potential of

creating more problems by using this solution. (ith such limited options andlac$ of control o>er operating costs, the o>erall economic situation is highly

unfa>orable.

%egalPolitical orable=)he legalpolitical situation is also unfa>orable to the airline industry. ne of

the only fa>orable aspects is the !irline Deregulation !ct of 83. *t as this

act that enabled airlines to set their on routes and fares. !s a result, lo?cost

carriers such as Southest ere able to thri>e and gro their business.

Con>ersely, it as also this act that may ha>e lead to some of the struggles of

the industry due to o>ercapacity.

!nother influential piece of legislation as the 8; 1ational !irline

Commisssion, hich allos for foreign in>estment of up to 4J in air carriers.

(hile this may be an ad>antage for some carriers, it could pro>e detrimental to

loer capital carriers li$e Southest in the e>ent that this financial support be

allotted to its competitors.

%ocal go>ernments also pose a problem for sectors of the airline industry. )hey

often on and manage the airports in their region and therefore control $ey

bottlenec$s to airport ser>ices such as access to boarding gates and runays.

#ost local airport commissions allocate gates ithout a formal mar$et

mechanism, such as a bidding process and often reuire that the airline pro>e

that it ould operate in the best interest of the public. )he larger airlines ha>e

much more capital, such as -nited !irlines, hich gi>es them a competiti>e

ad>antage in the bidding process for such spots.

5inally, the aftermath of the Gulf (ar, has left the #iddle +ast in a state of

instability posing a serious thereat to oil prices since a large portion of oil is

imported from this region.

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(ith the threat of a spi$e in fuel prices combined ith detrimental articles of

legislation, the legal and political en>ironment is uite unfa>orable to the airline

industry.

1atural orable=Characteri7ed by strict regulations and the potential for unsafe ha7ards, the

natural en>ironment is also detrimental to airliners. !irline fuel is a finite

natural resource, and its continuous burning contributes to atmospheric

greenhouse gases, as ell as depletion of the o7one layer. !s a result, future

orries of fuel a>ailability and an o>erall global arming effect from o7one

depletion should be issues of concern.

+missions standards ha>e alays been a battleground beteen legislators and

the airline industry. Cuts in nitrogen oBide emissions ha>e forced aircraftbuilders to comply ith regulatory standards, raising the costs of building

airplanes. *ronically, the !ir )ransport !ssociation

airlines to cut bac$ on ser>ice, to reduce chemical emissions, ould send

customers or lost passengers bac$ to the roads dri>ing, here a notably higher

percentage of chemical emissions are produced. *n addition, glycol, a chemical

used in the deicing solution for aircrafts, is also sub&ect to federal regulation.

Glycol run?off from deicing one aircraft is the eui>alent to the daily asteater

of @000 people. Due the massi>e uantity of this run?off, 1orth !merican

en>ironmental regulation de>eloped rules for eBpelling these controlled fluids

into the en>ironment.

Chemical pollution as actually &ust one form of regulated contamination.

1oise pollution still is an issue of federal regulation for the airline industry.

!irlines at this time are >ulnerable to replacing aircrafts in their fleets that do

not meet noise as ell as emissions regulations. !lthough Southest !irlinesF

simplified fleet of 3;3 aircrafts is an economic ad>antage, it might be a se>ere

disad>antage in the e>ent these aircrafts not meet regulatory standards.

*t is also important to note that there are certain tradeoffs in pollution

regulation" for instance, uieter engines often create more emissions. !lso, a

lac$ of thorough deicing, ith chemicals, may lead to poor >isibility and

ha7ardous flying.

Page !!:;


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Surprisingly, ater supplies are also a si7eable issue for airlines and airports

considering both the a>ailability of ater as ell as the cleanliness of the ater

supply used on aircrafts and in airport facilities. *n addition, containment of

storm ater runoff, ith this storm ater containing deicing chemicals, fuel and

other pollutants, is also a safety issue at this time.

)echnological orable=Perhaps one bright spot of the airline industry is its technology. *n 84, some

members of the airline industry adopted tic$etless tra>el, or e?tic$ets. *n this

system, reser>ations are confirmed ith personal identification, ithout

issuance of hard copy tic$ets, through the use of self?ser>ice boarding

machines. 1ot only is this an ad>antage to the customer, but it also cuts

operating costs for the airlines. *n fact, Southest uoted a sa>ings of 2@

million dollars by instituting tic$etless flights. *n early 8@, about one?third of

SouthestFs passengers ere flying ithout hard copy tic$ets.

!irlines ha>e also made plans to begin ma$ing tic$etless tra>el accessible o>er

the internet. (ith this change, Southest estimates a potential sa>ings of 800

million dollars annually. )he industry is also inno>ating commercial faB and

data ser>ices for in?flight use, and data ports for use of laptops.

!irlines ha>e not restricted their technological inno>ations to &ust the customer.

*n 8@, the first airline ill ma$e use of a Hmulti?motionI cabin trainer to train

flight attendants. )his cabin trainer has full freedom of motion, compared to

most airline trainers that ha>e only Htilt motionI simulation. )hese trainers are

on hydraulic lifts, and allo for training flight attendants to maintain balance

and conduct or$ in potentially unstable, in?flight circumstances. >erall, the

technological en>ironment remains fa>orable.

Page !3:;


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*ndustry !nalysis

*ndustry >er>ie)he airline industry is a distinctly competiti>e industry here the eBisting

ma&or airlines are ri>aling for mar$et?share. )he threat of ne start?up entrants

is lo, but the threat of eBisting airlines mo>ing into the lo?cost, lo?frills

mar$et is >ery high. #ost of the bargaining poer lies ithin the hands of the

airline companies hen eBamining the supply chain of the o>erall industry. Due

to the nature of this industry, hich pro>ides a transportation ser>ice, the

threat of substitutes is eBtremely high, since different forms of transportation

ha>e eBisted for uite some time no.

$hreat o %o&'Cost ntry (moderate) )he threat of entry from ne start?up carriers is much higher than it

as prior to the Deregulation !ct of 83. )he act has made the

regulations and competiti>e structure much more fleBible, alloing

ne carriers and routes to open up.

)he cost to create a ne start?up lo?cost carrier is >ery eBpensi>e.

Costs such as airplanes, terminal fees, fuel, and eBperienced labor, all

ha>e to be bought and acuired prior to being able to open up for

business.

)he threat of entry from larger already established carriers is high.

Due to the e>ents of the early 80Fs hen Southest !irlines as

ma$ing profits, hile the rest of the airline industry suffered losses,

much more attention has been focused on SouthestFs successful

model. !s such, more large carriers ha>e been mo>ing toards an

airline ithin an airline model such as -nited !irlinesF Shuttle by

-nited, and ContinentalFs C!%ite.

upplier Bargaining Po&er (high) 1ormally in this industry, the bargaining poer of suppliers is lo to

moderate due to the large price tag associated ith airplanes. !ny

poer the suppliers do ha>e is due to the small amount of airplane

manufacturers in the industry.

Page !4:;


25/39

9oe>er, 'oeing has a significant amount of poer o>er Southest,

due to SouthestFs policy of operating the same fleet of aircraft, a

'oeing 3;3. 'oeingFs poer o>er Southest is therefore somehat

referent and reard poer, because Southest belie>es that by using

only 'oeing 3;3 airplanes on their fleet, they gain significantcompetiti>e ad>antages in maintenance and training costs.

Buyer Bargaining Po&er (lo&) Due to the large si7e of the airline industry, and the large number of

customers, each indi>idual customer has >ery little bargaining poer.

$hreat o u"stitutes (high) ther airlines such as C!%ite and Shuttle by -nited ha>e formed in

attempts to model the success of Southest, and ha>e becomeprimary substitutes to flying Southest.

Se>eral other secondary substitutes eBist. )hese include" dri>ing your

on car, car rentals, bus lines li$e Greyhound, passenger trains li$e

!mtra$, and cruise ships.

$hreat o Ri!alry (high) +ight other ma&or competitors eBist ithin this industry, ith no

o>erhelming concentration of mar$et?share oned by one company

or another. !s such the mar$et is >ery competiti>e, as airline

companies fight to capture their competitorFs mar$et?share.

Customer loyalty ithin the industry is fairly lo. !pproBimately 3@J

of customers choose an airline based upon price and flight schedule,

and as Southest eBpands its routes, the larger airlines ill be forced

to offer lo?price alternati>es to their on flights.

Page !5:;


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. Competiti>e !nalysis

Competiti>e %andscape)he lo?cost, lo?frills airline strategy represents approBimately 80?8@J of the

o>erall mar$et?share in the airline industry at this time, ith historic patterns

and signals to suggest that it ill continue to gro in popularity. )he folloing

graph details the brea$don of mar$et?share holdings of each of the nine ma&or

airline carriers in the industry"

Direct CompetitorsCurrently, SouthestFs direct competitors are ContinentalFs C!%ite and -nited

!irlinesF Shuttle by -nited, neither of hich has been as successful as

Southest to date. C!%ite has been plagued by customer complaints and flight

delays despite their attempts to emulate a lo?cost carrier. )he business

models for Southest and Shuttle by -nited are similar on many measures

since -nited de>eloped their model based on the Southest template. 'oth

airlines focus on"

Pro>iding lo fare, short haul and high freuency flights

Standardi7ed fleets of 3;3 aircrafts

%ight in?flight refreshments

Qany and colorful ad>ertising

Collegiality among employees and

#oti>ation and Henculturali7ationI classes for employees

Page !&:;


27/39

9oe>er, although most of their model is similar, the to airlines ha>e differing

strategies on ho to attract and retain customers. Shuttle by -nited maintains

more HeBtras,I such as"

/eser>ed seating Speciali7ed H(*%#!I boarding el agent reser>ations

! to?class fare system es

*n contrast Southest follos policies of"

5irst come, first ser>e seating

1o inter?airline baggage transfers

Stresses little to no tra>el agent reser>ations, by stressing online tic$etpurchases, cutting agent commission fees

! one class fare system and

! trip freuency program

'y stressing these aforementioned policies, as opposed to offering all of the

HeBtrasI that Shuttle by -nited offers, Southest is able to maintain a uic$er,

less costly, and more efficient tra>el system, hich in the end produces higher

route turno>er rates and higher profits. *n addition, Southest offers a trip

freuency program as opposed to a freuent flier miles program. Southest

based their program on the $noledge that approBimately @0J of customers

ne>er use their miles, especially for eBotic destinations. )hus, Southest gi>es

its customers a program that is useful to them, offering customers tic$ets to

destinations close to home, here their customers fly most often.

*t appears difficult for established carriers to restructure and achie>e the

fleBibility of a simplified firm such as Southest !irlines. Shuttle by -nited,

operating in the model of an airline ithin an airline, faces this fleBibility

problem. Southest has a fundamentally simplified administration, ith a

Hhands?onI C+, unli$e the bureaucratic en>ironment and more remote C+ of

-nited. Southest also has a simplified infrastructure that pro>ides fleBibility

particularly in operations and costs. Con>ersely, -nited continues to operate its

Page !7:;


28/39

shuttle ithin the infrastructure of a hub?and?spo$e operation ith higher

operating costs, including the need for a larger ground staff. -nited is also

plagued ith much higher time delays due to baggage transfers, speciali7ed

boarding, reser>ed seating, and aiting at hubs for connecting passengers, all

contributing to higher operating costs.

pportunities

*uick +pansion and Route Rollouts

Due to the folloing strengthsreasons, Southest has the opportunity to

eBpand uic$er ithin California and other mar$ets than their competitor

Shuttle by -nited, because their system is already established and or$ing.

Southest has a fundamentally simplified administration, unli$e the

steep management of -nited, ho only eBpects Shuttle by -nited togro no larger than 20J of their o>erall business.

Southest has a simplified infrastructure of a point?to?point system,

pro>iding them the opportunity to eBpand on more routes. (hereas,

-nited operates on a hub and spo$e system, here the operating costs

are higher and a larger ground staff is needed.

Southest has a cross?trained staff, alloing their employees to sitch

particular &ob?functions hen the needs arise. -nited has a history of

poor management?union relations, hich often hinders the companyFs

ability to adapt to changes.

5urther time delays in congested California mar$ets of San 5rancisco

and %os !ngeles ha>e been costly for Shuttle by -nited as of late. )his

ea$ness of -nitedFs, combined ith SouthestFs corporate fleBibility,

pro>ides Southest the opportunity to eBpand to more routes ithin

California that are not currently being offered by any other lo cost

carriers other than Shuttle by -nited this is assuming that Southestcan continue to replicate their high plane turno>er rates. )hese routes

are"

San 5rancisco to %os !ngeles

San 5rancisco to 'urban$

San 5rancisco to ntario

San 5rancisco to %as egas

Page !8:;


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San 5rancisco to Seattle

Market'share ,ro&th

Due to Shuttle by -nitedFs eBpected tic$et fare increase of E80 dollars per

tic$et, Southest has the opportunity to attract more customers bac$ to itsCalifornia business, hich it lost in the fourth uarter of 84, since price is a

large determinant among customers for airline choice. f course, this is

assuming that Southest $eeps its current prices loer than -nitedFs ne

suggested prices.

)hreatsSouthestFs sur>i>al and groth hinges on anticipating and managing the

folloing threats"

$hemsel!esContinued success in an unpredictable industry can lead people in the company

to become complacent, greedy, selfish, or smug characteristics that could

ultimately lead Southest to their on demise.

ur!i!al o Airports!irports must sur>i>e in order for the national air transportation system to

sur>i>e. *n order to do so, the airports must do li$e many of the airlines ha>e

had to and ma$e tough decisions to reduce o>erhead, defer or cancel capitalspending, and become more producti>e and profitable.

#ncreased Competition

Competitors are see$ing to loer labor costs through furloughs and increased

age and benefit Hgi>ebac$s.I (ith loer labor costs, competitors can reduce

tic$et prices and steal customers. *n addition, ne competition, in the form of

ne up?start lo?cost carriers, may threaten Southest by utili7ing ne

amenities and non?unioni7ed, loer?paid or$forces.

O!ercapacity

+Bcessi>e seat capacity in the industry relati>e to demand can dri>e o>erall

prices loer to fight for customers, reducing margins and mar$et?share.

Page !9:;


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#ndustry -ulnera"ility

)he industry itself is >ulnerable to uncontrollable factors, hich can reduce

demand and lead to o>ercapacity, such as" higher fuel prices, safety incidents,

terrorist acti>ities, etc.

Page 3.:;


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*. !nalysis of -nited !irlines

-nitedFs Strategy!n important step in this study to lead us to our recommendation as to

understand hat eBactly -nitedFs strategy is. )o put it simply, -nited is

attempting to emulate Southest. )hey adopted an Hairline ithin an airlineI

strategy by di>iding a portion of their airline into a lo?fare, lo?frill business.

)his di>ision, termed HShuttle by -nitedI, mimic$ed Southest by offering

short?haul flights using 3;3s at a minimal price. 9oe>er, for the sa$e of

product differentiation, they retained assigned seating and 8st class tic$ets,

among other things.

(ith such a de>iation from their original Hma&or carrier strategy,I itFs li$ely due

to poor financial producti>ity and profitability, as supported by the table belo.

:actor 1993 199! 1991

/! ?0.24 ?;.4 ?;.;6

/+ ?2.@ [email protected] ?20.;8

1et Profit #argin ?0.4; ?6.4 ?@.@

Producti>ity ity numbers,hich ran$ among the orst in the industry. n the other hand, Southest has

led the industry in producti>ity and continues to remain one of the fe airlines

ma$ing money during this industry dontime. )herefore, -nited felt that they

could remedy their problems by adopting a strategy that had been successful

for another airline. 5or a time, this ne strategy actually or$ed for -nited. 'y

flooding the (est coast ith short?haul routes, they immediately caused a 80J

mar$et?share loss in California traffic for Southest. *n fact, Southest added

siB aircraft and 62 daily flights in California &ust to try and combat Shuttle by

-nited. /ecently, -nited has decided to pull out of the most hotly contested

route, a$land?ntario, and mo>e prices higher by increasing all fares by ten

dollars.

-nderstanding hy -nited altered its strategies once again is the $ey to

formulating our recommendations for SouthestFs response. ne of the prime

Page 31:;


32/39

reasons for -nitedFs change as that they simply ha>e not been able to imitate

the Southest model successfully. *ronically, they adopted the lo?fare, lo?

frill model to impro>e producti>ity, but it actually resulted in a four year high of

.06 cents cost!S#. )his number as nohere near the SouthestFs 3.06

cents cost!S#. )his substantial difference is due in part to to factors" highercosts and ineffecti>eness in plane turno>er. Since Shuttle by -nited is

operating ithin a larger airliner, they incur higher fiBed costs that Southest

does not. *n addition, more tra>el agents are used to boo$ Shuttle by -nited

flights, hich resulted in higher commission costs. Shuttle by -nitedFs

efficiency is hindered because they choose to offer assigned seating and

because they fly to more congested airports.

(hile SouthestFs inimitability as a $ey factor in -nitedFs recent

announcements, the ultimate reason is that -nited could &ust simply not

compete ith Southest. *n the a$land?ntario route, -nited has a load factor

of ;2J, essentially meaning they are filling only ;2J of their seats.

Con>ersely, Southest has maintained a much larger load factor of @J. !s

e>ident from the competiti>e comparison chart belo, -nited does not ha>e

one resource that e>en resembles a competiti>e ad>antage hen using this

strategy.

6alu

e

Rar

e

nimitab

le

#rganie

*

Shuttle by

2nite*

South%est

irlines5inancial Strength es 1o Parity )emp. !d>antage+mployees es 1o Parity Sustainable !d>.

Strategy es 1o Parity Sustainable !d>.

+fficiency es 1o Parity )emp. !d>antage

)echnology es 1o Parity Parity

#ar$et Share es 1o Parity Parity%o Cost #ar$etLnoledge 1o Comp. Disad>. Sustainable !d>.

#anagement es 1o Parity )emp. !d>antage

(or$ en>ironment es 1o Parity )emp. !d>antage

'rand 1ame es 1o Parity Parity

n top of their inability to imitate and compete ith Southest, -nited is

currently faced ith the need to ma$e money uic$ly. *n 84, -nited incurred

a 8 billion dollar deficit in retained earnings and an /+ of ?24.;3J. )hese

numbers are a result of an agreement ith their labor union to distribute stoc$

Page 3!:;


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to employees in eBchange for a cut in pay. (ith such an immense deficit,

-nited is being forced to find ays to increase their cash flo fast. )hus, they

ha>e raised fares all around to increase their re>enues and profits.

'ased on this research, eF>e determined that -nited has made these recent

announcements to fiB some of their on internal financial struggles, not as a

response to mar$et changes that Southest is not aare of. 9a>ing this

$noledge eFre able to ma$e some >iable recommendations on ho to

respond.

Page 33:;


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**. Conclusion/ecommendations

Possible Courses of !ction)o simplify things e ha>e listed four specific and immediate responses on ho

Southest can respond to the recent actions of Shuttle by -nited. )hose are"

1; 'o nothing

!; Raise prices

3; ** routes an*(or +light +reely respond to the de>elopments in the

industry forced by Shuttle by -nitedFs decision to raise prices and drop theira$land?ntario route effecti>e in !pril, e recommend doing the folloing"

.o not raise prices

/aising prices may seem li$e an attracti>e strategy because in doing so,

Southest ill still be the loest fare carrier on the routes that it operates in

and ill bring in higher re>enues. 'ut ultimately hat ill happen in this

industry if Southest raises their prices is that it ill attract more companies to

the lo?fare mar$et. )his is &ustified by the facts that if prices are higher, other

companies belie>e they can compete ith that price, hich ill ultimately resultin a price ar. *n $eeping prices constant, it should attract more customers to

Southest, since 3@J of customers choose on the basis of price and flight

schedule.

Add more lights on the Oakland'Ontario route*n !pril, Shuttle by -nited ill be dropping 3 flights on this route, lea>ing

customers that ere pre>iously ser>iced, ithout a carrier. 5irst, an attempt

should be made to fill the empty seats on SouthestFs current flights on this

route. Secondly, more flights should be offered daily on this route by

Southest to ma$e up for the lost capacity of Shuttle by -nited. !ssuming that

these se>en additional flights can be filled to a capacity of 82@ occupants, at

E6 per tic$et, Southest stands to gain an additional E6,;3@day and E22,

0;6,3@year in re>enue.

Page 34:;


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+pand Routes

Southest should continue its long?term groth strategies. )he companyFs

cost!S# is the loest in the industry, and most other companies ha>e too

bureaucratic of a structure to be able to effecti>ely compete ith a lo?fare

pro>ider. )here is also an opportunity to eBpand into the San?5rancisco routes,since Southest is currently not operating ithin this airport. 9oe>er, this

strategy of eBpanding into San 5rancisco is only recommended if turno>er rates

can be replicated ithin this congested airport. 5urthermore, se>eral

opportunities eBist for Southest to eBpand nationide into the 1ortheast and

Southeast mar$ets here the company currently operates in >ery fe airports.

*n considering locations in these regions, Southest should continue to see$ out

less congested airports here current turno>er ratios can be repeated.

Page 35:;


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***./eferences!nonymous. anced 88J, but load factor asdon. e. Airfinance %ournal, 868, 8?28.

Cameron, Doug. er *C! en>ironmental regulations.


37/39

Lerin, /oger !.


38/39

F'rian, 'ridget. y going" ContinentalFs C!%ite hits some turbulence in'attling SouthestRairlineFs lo?fare ser>ice annoys many tra>elers, leads to alarge deficitR&et flights in odd places. The all Street %ournal1e or$, 1,eastern editionT, anuary 80, 8@, !8.

F'rian, 'ridget U /itter, Scott. antage through the effe. The Academy of Management #,ecuti"e,


39/39

Southest airlines using industryFs first cabin trainer.

Final Southwest Paper

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