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Just Plane Smart

Harvard Business School Case Study Summary

Abhishek Mehra

Balaji P

Saruabh Ranadive

Sarang Bhutada

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The setting

Its summer of 1993

Southwest is expecting delivery of twouncommitted planes

McGlade needs to find a way, to put

these planes in operation, keeping the

organizational objectives are intact

Final decision would have to preserve

the Southwest culture and spirit

About Southwest

Started as a intra-state operator in

Texas

Budget airline philosophy, survived

a severe price-war

Operating out of Dallass Love Field

airport, hence the ticker LUV

7th largest in the country by April

1993

Expanded to become a nationalcarrier, serving major cities

Short-haul, high-frequency, low-

cost strategy

12 time winner

of the covetedtriple crown

award

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The Southwest Model

Use non-conventionalmodels for

low-cost

Have FunTogether

Treatemployees as

family

Hire peoplewho form the

fit

Involveemployees

Controlled,Solid growthfor the airline

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Hiring

- Identify attitudes rather than skills- Rigorous interviewing

- Peer hiring

People skills of Southwest

Structure

-Centered on team-building

- Cross-training encouraged

- Broad latitude offered

- 10% of stock held by employees

Advancement

-Recognition, an important element

- Celebrations quite common

- Most promotions internal

Compensation

-Varied with position

- At par with industry norm

- Pension through a profit-sharing

plan

Culture

-H A Patina of Spirituality

-ugs common across office- Casual dress code

- Field visits

- Strong guidelines to everyone

- At par with industry norm

- Pension through a profit-sharing

plan

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After lengthy deliberation at the highest executive levels, and extensive

consultation with our legal department, we have arrived at an officialcorporate response to Northwest Airlines Claim to be number one in Customer

Satisfaction

Liar Liar. Pants on Fire

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Product:

Southwests product is travel

Competition - not just other airlines

but any mode of transportation.

1. frequent, conveniently timed

flights and low fares.2. point-to-point route system as

compared to hub-and-spoke

3. direct nonstop

Target Market:

Market Segmentation

cost- and value-conscious

consumers. mostly male

small business executives

travel short distances

prefer low cost fares

frequent schedules

The other half consists of

value-conscious consumers (male,

female, families, and senior

citizens)

best value for their dollars

Senior citizens are a sub-segment that

receives special attention

than a loyal customer - customer

evangelist

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Competitors and Competition

11 major carriers (2003):

1. Alaska Airlines2. Aloha Airline

3. America West

4. American Airlines

5. Continental Airlines

6. Delta Airlines

7. Northwest Airlines

8. TWA

9. United Airlines

10. U.S. Air

11. Southwest Airlines

Southwests brand exudes an element

of fun: Obviously Fun

Love Theme,

Love Potions(on-board drinks)

Love Machines( ticket writing

machines)

Product Positioning

only low-fare

short-haul

high-frequency

point-to-point carrier

fun to fly

Average cost of serving meals perpassenger in the industry - $5

For Southwests -20 cents

Seemingly weird things-

Not assigning seats

Weird Color Scheme

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Product Positioning

Example of Southwest Airlines

nuttiness -use of the word love

One ad titled "How Do We Love

You?" - flight schedule.

Another ad titled "We'reSpreading Love" - the rapid

growth of the airline.

Word "love - dedication to

customer service

Marketing Strategies

Southwest offers a travel product that is

built around flights targeted to specific

demographics and ticket pricing that issimplified so that passengers know

exactly what they are getting for what

they pay.

Building Brand Loyalty

What is the Southwest Effect?1. Air fares go down

2. Tourist traffic increases

3. Economic mini-boom ensues

Marketing Blitz !!!!

- Smart Campaign

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Pricing Strategies

1. Charge the lowest possible fare

2. Compete with all other forms oftransportation, including

automobiles

Instead of increasing fares when

market gets busier and morepeople are flying, it simply

increases the number of flights.

Distribution and Promotion

Product Distribution StrategiesSWA does not rely on travel agents

Travel bookings - direct marketing

Does not interline or offer joint fares

with other airlines

Southwest's Internet ticketing saves it

$50 million a year, or 1% of revenue

"We're not competing with other airlines. We're competing with ground

transportation"

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Promotion Strategies: Marketing Mix

Southwest Airlines wants to

differentiate itself from other airlines asthe airline that can get passengers to

their destinations when they want to

get there, on time, at the lowest

possible fareswhile having fun.

Frequent Flyer AwardsRapid Rewards-based on number of

trips taken

Way of showing Southwests

philosophy that every customer isequally important as the other and

making ALL passengers feel special.

Advertising

Dont believe the hype.

Fares offered by other discounters

and airlines on the Web are not good

buys.

Southwest attempts to do three

things in their advertising:1. intrigue

2. Entertain

3. persuade

Wed like to match their new fares

but wed have to raise ours!!"

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Television Sports Advertising

1. Sports television programming2. Reaching the corporate set via

sports and other venues

3. In 2000, Southwest renewed its

multi-year sponsorship agreement

with the National Football League

(NFL).

Public Relations

1. Aims for Free publicity

2. Triple Crown Award for the fifth

time in a row

3. Named a plane Triple Crown One

and painted 24,000 employee

names on it

Internal Marketing

Core Business - Customer Service

businessthey just happen to provide

airline transportation

Southwests philosophy - Service for

Smiles and Profits

Encourages employees to treat

customer service as the most

important aspect of their job

CEO Kelleher, "We want people who

do things well, with laughter and

grace."

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OPERATIONS

Did all of its ticketing (not makingseats available through

computerized systems)

Did not operate in the hub-and

spoke route system

Flew into uncongested airports of

small cities, less congested

airports of large cities

Did not transfer baggage directly

to other airlines

Only drinks and snacks often

peanuts served on board

Travel agents had to contact the airlinesdirectly to book seats

SWA passengers flew non-stop origin to

destination. Did not promote

connecting services

Savings in reduced taxi time, fewer gate

holds and less in-air waiting time

It doesnt coordinate its services with

other airlines

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OPERATIONS

Usually do not share the ground

handling crew until unavoidable

Other airlines flew variety of jet

aircrafts, as many as 5 distinct ones

including McDonnell Douglas, Airbusand Boeing

737s had average life of 20 years

US industry average was 55 mins.

84% unionized labor force but its

labor relations were excellent

Only flew Boeing 737 - Fleet of

150 and avg of 1500 trips per day.

Average age of SWA was 7

years(lowest in the industry)

Differentiation in terms ofturnaround time , 2 out of 3 planes

were turned-around in 15 mins.

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Pilots contributing new ideas to save fuels

Cost Cutting

Buying fuel from vendors who offer best prices :Carry inventory if possibleFuel costs

Average : $2.50 pp,

Small airports: $2.00 pp, Large airports: $6 - $8 ppGate costs &landing Fees

Maximize productivity of people and machinery .Atleast20 departures per dayNo. of

Departures

Offering great service at low cost : SWA cost perpassenger was 7.3 cents in 1993.Low cost

service

COST CONTROL

Airlines dont have revenue problems, they have cost problems

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GROWTH STRATEGY

Conservative Growth Strategy : Expansion within the current route structure was the

first priority (85% expansion was internal)

External expansion was opportunity driven: After the collapse of Midwest Airlines in

1991, Southwest moved to Midway Airport in Chicago and anchored there.

Scheduling department decides the appropriate market: They dont do a lot of

market research. Choose a market, negotiate for gates and look for controlled growth.

Growth with consistency: When they enter a new city they want to make sure that

they do the business which is consistent throughout the system.

GroundEconomics

In-airEconomics

TotalEconomics

Spiritualaspect

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MARKET ENTRY STRATEGY

How the company prices its new routes?

They look to grow in the market when they enter the city(quadruple and quintuple the number of passengers in a particular route)

Pricing against the ground transportation as much as against existing air service

(atleast 60% below competitive fares)

Low operating costs

They think slightly differently about load factors:

Initially higher than average load factors

Low price expand market faster than they can add equipment

Demand outpaces supply

Competitors drop prices that stimulates demand further Keep adding more service to balance out demand and supply

Eventually leads to maturing of load factors

On the Oakland-Burbank route, SWA quadrupled the passenger market within two

years and drove out USAir and United in 3 years time.

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South west

North west

Number of employees

Revenue

speremployee

Revenue Vs. Employees ( DEA )

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Wages as % of total expenses 29.78% ( Industry average = 35.17%)

Lowest among Non-Chapter11 Airlines for the year 1992 . How was it possible ?

0

0.5

1

1.5

2

2.5

3

3.5

4

0 20 40 60 80

Marginal emp reqd per

departure

Employeerequiredper

eachadditionaltrip

Number of departures from a city

Ground Crew Staffing Levels based

on number of departures at an

Average Southwest city

Departures People

Marginal emp

reqd per

departure

10 35 3.5

20 45 1.5

30 60 1.5

60 120 2

Ground crew staffing efficiency

Competitors runs with at least three times as much staff .

E.g., South-West effect on BurbankOakland market.

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0

500

1000

1500

2000

2500

3000

3500

USAir

Inc.

106

Alask

a106

Ameri

caWest

Avera

ge

UALC

orp106De

ltaTW

A

Conti

nental

Ameri

caWest

South

west

North

west

106

RPM peremployee(000)

ASM per

employee(000)

ASM+RPM

ASM: Average Seat Mile ; RPM : Revenue Passenger Mile

Employee productivity (1992)

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South West Airlines built numbers on its culture where as most

competitors let the culture to shape up by their focus on numbers

NUMBERS

CULTURE

SCHEDULING

STRATEGY

CULTURE

SCHEDULING

STRATEGY

NUMBERS

Other large Airlines

F

O

C

U

S

CONCLUSION

FOC

US

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Thank You