A Case On: Presented By, Group - 6

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The key takeaways are that Southwest Airlines was able to remain profitable after 9/11 while its major competitors suffered huge losses by having the lowest operating costs and $1 billion in cash reserves. It also did not cut flights or lay off employees unlike other airlines.

In its early years, Southwest Airlines gained a foothold in the market by charging lower fares than competitors, reducing turnaround times to 10 minutes to add more flights without buying more planes, and offering promotional $10 fares on Friday nights which were very popular.

Southwest Airlines succeeded through policies like paying employees 10% above industry average, having the first profit sharing plan in the industry where employees owned 10% of shares, and never laying off employees since inception despite one strike in 1980.

A case on

Presented by,
Group - 6
Airlines Industry aftermath 9/11
• 20 % falloff in airline traffic in the Q4 of 2001.
• 1 lakh of the 5 lakhs employees in the industry was laid off.
• US carriers lost a combined $8 billion in 2001.
• But in Southwest Airlines – no flights were cut and no employees were laid
off.
• It had the lowest operating cost of any airlines and it had $1 billion in cash.
• In Q4, 2001 Southwest reported a profit of $63.5 million and a profit of
$511.1 million for the whole year.
• It remained profitable in 2002 though its eight biggest US rivals reported a
loss of more than $11 billion.
History of Southwest Airline
• Formed in 1966 as a low fare airline by Rollin King
• Business Concept – Attract passengers by flying convenient
schedules, get passengers to their destination on time, make sure
that they have a good experience, Charge fares competitive with
travel by automobile
• Rivalries were blocking Southwest from commencing operations by
filing cases against them but they won it with the help of Herb
Kelleher who had invested $10000
• Philosophy of Southwest – we do whatever we have to do to get the
job right
Gaining a Market foothold
• In June 1971, Southwest initiated its first flights

• It charged fares of $20 less than $27 & $28 charged by


the rivals but it attracted only small number of
passengers

• Initially the company ran out of funds as they were short


of ground equipments but their morale and enthusiasm
remained high
Market Visibility
• Management decided to have airhostesses dressed in colorful hot
pants with white knee high boots wit high heels
• Give alcoholic beverages to the passengers during daytime flights
• They started using “LUV” as their first name for all the products,
places etc…
• In order to add more flights without buying more planes, Southwest
reduced the turnaround time to 10 minutes
• Lumar Muse, CEO came up with the idea of offering a $10 fare to
passengers of the Friday night flight and it got a great response
Airhostesses
Contd…
• He came up wit two tier on-peak and off-peak pricing structure
• In 1972, Southwest decided to move its flight to a different airport
where it saved more time
• In early 1973, in an attempt to fill entire seats, it cuts its regular fare
to $13
• Their rival Braniff international also reduced the fare to $13 in a
move to push Southwest out of the business
• Southwest began to offer regular $26 fare with some attractive gifts.
75% of people preferred Southwest
Legal and Regulatory hurdles
• Refusal to move its flight to the new location
• Rival airlines protested Southwest’s application of serving small
cities in Texas
• Again Southwest prevailed
• Southwest convinced the US government what is considered as a
predatory tactics by its chief rivals
• In 1975, Braniff and Texas international was indicted by the federal
grand jury for conspiring to put southwest out of business
Southwest Airline’s Strategy
• From day one it pursued a low cost/low fare strategy
• Its tag line was “Freedom to Fly” as its low fare approach was affordable to
wide segment of population in the US
• It entered the Florida market with an introductory fare of $17, the total
number of passengers using this flight route increased 50% percent
• As a general rule, southwest did not initiate service to an airport unless it is
envisioned the potential for originating at least eight flights a day
• Southwest uses point to point system as opposed to rivals hub-and-spoke
system. It minimized connections, delays etc…
Achieving low operating costs
• The company operated only one type of aircraft – to minimize the
spare parts inventory, simplify the training procedures
• Southwest encouraged customers to make reservations and
purchase tickets at its website, therefore bypassing the
commissions paid to the travel agents.
• It moved its flight from the congested airports in metros to the less
congested airport in nearby cities
• Flight attendants were responsible for cleaning up trash left by the
deplaning passengers and otherwise getting the plane presentable
for passengers to board for the next plane
Contd…
• Southwest offered passengers no baggage transfer
services to other carriers

• In 2001, southwest implemented a new software that


significantly reduced the time required to generate
optimal crew schedules and help improve on-time
performance

• It converted its seats from cloth to leather, thus


increasing the durability and easy handling
Focusing customer satisfaction
•They ensured passengers had a
positive, fun flying experience

•Gate personal entertain passengers


by asking trivia questions and
conducting contest such as “Who
has the biggest hole in his/her
socks”

•Airhostesses crack jokes with


passengers
Marketing & Promotions
• Ads and billboards were made very attractive
• Others promoted their performance as “The Low Fare Airline”
or “The All Time On-Time Airline”
• Special fares on special occasions
• Car rental and hotel partners also participated in the
promotion
• They distributed gifts to passengers on their 30-year
celebration
• In 2002 they changed the look of the planes
Bill boards
Other Strategy Elements
• Followed simple fare structure which is easily perused from the
website
• Gradual expansion into new geographic markets
• Adding flights in areas where rivals were cutting back service
• An attractive frequent flier program
• Adding longer non stop flights to the route system
• Putting strong emphasis on safety, maintenance and reliable
operations
People management culture and practices

• Their principle is “Employees come first and Customers


come second”
• Southwest thesis : “Keep employees happy, then they
will make customers happy”
• Employees were given full freedom in voicing their
opinion.
• It changed the Personal department to People
department
Recruitment
• They preferred unskilled person with a good
attitude to a skilled person with bad attitude

• Modes: Newspaper ads, Career fairs, Internet


Job listing

• Traits needed was team work, judgment skills


Selection
• Presentation about themselves

• Three person panel interview

• Decision on the candidate selection


Training
• Training is given through Southwest university operating
under People department

• Courses offered are leadership, safety, communication,


stress management

• Orientation courses were given based on the employees


influx

• Promoted employees were given training based on the


levels (Middle, top)
Compensation
• 10% above the industry average

• Profit sharing plan – first in the industry

• Employees owned 10% of the company’s


outstanding Shares
Employee Relations
• 80% belonged to unions
• Teamster union – mechanics, clerks, cleaners etc…
• Transport workers union – flight attendants, ground crews, baggage
handlers etc…
• In house union – Southwest pilots association which is represented
by pilots
• It had only one strike in 1980 by mechanics
• It has never laid off any employees since inception
Awards and recognitions
• In 1991 Southwest was ranked no.1 in customer
satisfaction among other major US airlines

• In 1998, fortune named Southwest no.1 in the list of 100


best companies to work in America

• In 2001, Business Ethics included Southwest Airlines on


its 100 best “Corporate Citizen” list
Aftermath of September 11
• Flights are cancelled for three days
• Changed flight schedules

• Airline industry lost $220 million a day


• Airline stock prices reduced
• Major players cut 40% of their international flights

• Routes served by Full size jets were replaced by


commuter jet service
Southwest’s situation
• It continued to fly its full schedule though the load factor was very
less
• It reduced its hiring until January 2002
• It deferred non essential capital spending and operational costs
• In January 2002, Southwest reported its 29th consecutive year of
profitability
• Then in early 2002 Southwest announced that it would begin
expanding its flight schedule during the February-June 2002 period
Rival’s situation
• Every passenger Airlines lost money in 2002 except
south Airlines

• US Airways filed for Chapter 11 bankruptcy in August


2002

• United Airlines filed for Chapter II bankruptcy in


December 2002 and was in dire straits

• United Airlines cut its daily flights by 25 percent and laid


off about20,000 employees.

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