Southwest Airlines

Bryan BrownJohn Bynum

Case Question

Southwest is experiencing financial difficulties following the expiration of their oil hedging contracts

Make a recommendation for the companies strategy for the next 5 years

Problems

Volatile fuel prices Inconsistent culture High cost of labor

Heavily unionized No longer the low cost provider

Core Competencies

Point to Point strategy 2 free bags No seating chart/ class 737 sole airframe Put the employee first, everything

else will follow

Financials

Operating Profit Margin

2010 2011 2012 2013 through Q2 2014

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

Southwest Operating Profit MarginDelta Operating Profit MarginAmerican Operating Profit MarginUnited Operating Profit Margin

*see Fig. 1

Rate Comparison

Southwest American US Airways0

100

200

300

400

500

600

700

800

900

1000

Raleigh - San An-tonioRaleigh - New YorkRaleigh - Jacksonville

Advertising

• Abandoned humorous advertising campaign

• Emphasizing that they care• Messages on carts and napkins• Positioning themselves as more

professional

Outward Culture

A warrior spirit A servant’s heart A “fun-luving” attitude Employee recognition program

Inward Culture

Shift in culture Employees first, the rest will follow Kelleher to Kelley

2007

Financials

National Comparative Advantage

National Comparati

ve Advantage

Factor conditions

Related and

Supporting Industry

Demand Conditions

Strategy, Structure,

Rivalry

Recommendation

Be a best cost provider Reduce Fuel Consumption Expand to Alaska/ Hawaii Hedge fuel Labor Relations

Lowering Fuel Cost

Fuel saving policy- top down Practice maintaining a higher cruise

altitude -40,000 ft. Glide down to airport 6,875 gal. * .01 = 68.75 gal. 68.75 * 3,400 Daily flights = 233,750

gal. 233,750 * 365 = 85,318,750 gallons 85,318,750 gal. * $3 = $255,956,250

National Expansion

Alaska/ Hawaii only serviced by one major carrier- Alaska Airlines

Fleet consists of exclusively Boeing 737’s

Higher profit margins on longer flights, more time in air, less time in terminals/ fewer terminal fees

*See Fig. 2

Alaska Acquisition

Push for increased presence in Western US

Seattle- Alaska headquarters Spokane Los Angeles Chip away at Alaska’s market share

*See figure 3

Alaska Acquisition

Shares: 132,631,936 Current Price: $55.42 Premium: $57.00 Total Cost: $7,560,020,352.00

Decision on Hedging

Labor

Have more transparency within the ranks

Satisfy the internal customer Go back to employee first,

everything else will follow

See Fig. 4

Timeline

2015 2016 2017 2018Today 2019

Dec 29 Airtran dissolves

Expand national operations in western US

Buy Alaska Airlines

Hedge fuel

Implement fuel saving practices

Alaska Airline fully integrated

References

Southwest Airlines- Fuel Hedging Case Analysis by Vishal Prabhakar

NASDAQ finance- Income Statements Southwest 2013 Annual Report Delta 2013 Annual Report COB Case packet Frank Miner- personal interview Boeing.com Ogj.com

Questions?