Dr. Chen, Information Systems – Theory and Practices John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices SouthWest Airlines

ã John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices

SouthWest Airlines 2002:An Industry Under Siege

Jason Chou-Hong Chen, Ph.D.

Professor of MIS

Graduate School of Business, Gonzaga University

Spokane, WA 99223 USA

[email protected]


Case Information

• Discipline: Service management• Description: The company's management is faced with long-

term questions regarding the rate and manner of growth in the wake of the 9/11 attacks and general industry malaise.

• Learning Objective: To understand ways of achieving and maintaining both a differentiated and a low-cost service offering.

• Subjects Covered: Competition, Corporate culture, Service management.

• Setting: United States; Airline industry; $4 billion revenues; 35,000 employees; 2002


Why Study the Case?• The case provides a vehicle for analyzing one of those rare

competitive strategies that literally change the rules of the game for an entire industry. Historic information suggests how the strategy was shaped. And detailed information in the case helps the reader to understand both how Southwest makes money while maintaining its low-cost advantage as well as its differentiation from its competition, the result of a well-crafted strategic value vision.

• The importance of effective leadership and a strong culture capable of adapting in the face of major competitive threats as well as external disasters, such as 9/11, is highlighted in the case. It provides the basis for assessing the conclusion of one major piece of research described in the next Exhibit, that Southwest Airlines has been able to preserve its competitive advantage primarily through its superior relationship management practices.


Data from the Southwest Airlines case:Flights per day = 2,800Daily aircraft utilization = 11 hours, 10 minutesCost per aircraft (new) = $40 million (a number lower than the $41 million list price)Current turnaround time = 27 minutesAverage turnaround time in industry = 57 minutes (as per Kelleher’s estimate of 30-minuteaverage Southwest advantage)Aircraft saved by faster turnaround than other airlines:2,800 flights - 355 aircraft = 2,445 daily plane turns (assuming that a plane turn is not associated with the first flight of the day)Minutes saved (compared to the average for other airlines) per plane turn = 30Daily minutes saved = 2,445 x 30 = 73,350Number of aircraft represented by minutes saved = 73,350 670 (minutes each aircraft is utilized each day)Total aircraft saved = about 109 737sFleet investment savings = 109 x $40 million = $4,360,000,000Pre-tax cost savings implied by saved investment = $4,360,000,000 x 8% = $349 million200l Southwest operating income (pre-tax) = $631 millionShare of operating income achieved through rapid turnaround = $349 million/$631 million = or more than halfCost of each minute of additional turnaround time = $349 million/30 = $11.6 million

Exhibit Estimate of the Importance of Turnaround Time as a Contributor to Southwest’s Operating Income and the Costs of Each Additional Minute of Turnaround Time for Southwest Airlines Aircraft, November 2002


Case Synopsis• Following the 9/11 terrorist attacks in the United

States, the senior management of Southwest Airlines is faced with both short- and longer-term challenges. In the short-run questions have arisen about what, if anything, should be done to raise Southwest’s reported on-time performance in the airline industry.

• Although it was a somewhat artificial measure based in part on scheduling decisions, the airline’s usually stellar on-time operating performance had fallen to the next-to-lowest among the eight largest airlines by September 2002. This was felt to be a result of the disproportionate effects of post-9/11 government security directives on Southwest’s operating practices.


Case Synopsis (cont.)• But if it continued, it could have the effect of

tarnishing the airline’s image among its customers. Longer-term, as Southwest emerged successfully from the post-9/11 setbacks to the airline industry, questions once again surfaced about whether and how the airline should resume its 10% to 15% annual growth rate prior to 9/11.

• In particular, to what degree should flights of over three hours connecting Southwest’s more distant terminals supplement the strategy of focusing on flights of 60 to 90 minutes on which the airline’s success had been built?


Executive Summary• Southwest Airlines in 2002 faced a serious of important

management decisions after the 9/11 tragedy in order to continue the record breaking company growth that Southwest had experienced since the 1970’s. Southwest Airlines revolutionized the airline industry with what is known as the Southwest Effect: low cost fares, point-to-point service, “10 minute turnaround” and an enjoyable friendly atmosphere.

• After the Airline Deregulation Act of 1978, Southwest adopted a policy that regardless of the profitability of expansion opportunities, the company wanted to commit to a manageable annual growth rate of about 10-15%. The following questions and discussion will address the historical challenges of Southwest airlines, the direction the company contemplated in 2002, and a brief look at the challenges of today.


What strategy and/or model was used or implemented in this case?

S.W. Airline

Other Airllines (USA routes only)

NEW MARKET ENTRANTS

SUPPLIERS

SUBSTITUTE PRODUCTS & SERVICES

CUSTOMERS

Threats

Bargaining power

N

• Switching cost • Access to

distribution channels

• Economies of scale

• Redefine products and services

• Improve price/performance

• Selection of suppler

• Threat of backward integration

• Buyer selection• Switching costs• Differentiation

• Cost-effectiveness• Market access• Differentiation of

product or service


• The Southwest airlines case can be analyzed with Porter’s five competitive forces model. Southwest airlines benefited after the airline deregulation in 1971, and were able to lay the groundwork for a successful airline.

• Throughout their growth, Southwest differentiated from the competition by taking a friendly, warm and welcoming approach to flying. Their low cost flights undercut the competition, which would fit under the threat of substitutes. Also, their reliability (differentiation) was the best in the industry until September 11th, which helped to prevent the threat of substitutes.


1). What is the competitive business environment

• The airline industry has always been competitive. In an analysis of the most profitably investments as per our class discussion, surprisingly, airlines come in at the lowest return on each dollar invested at around 2.5%.

• Southwest Airlines experienced 30 consecutive years of profit a mere two years after it’s founding in 1971. Many airports began requesting Southwest service for their passengers, but throughout Southwest’s expansion, the company aimed to maintain a manageable growth rate and focus on their core competencies of low price fares that would compete with the cost of driving to the destination.

• In the mid 1990’s, the major carriers entered into price wars to undercut competition. Although, these dealings did affect Southwest’s bottom line, Southwest still manage to continue to turn a profit and expand due to their expansion into a reservation system and their commitment to a culture and experience that passengers were drawn to.


2). What is the competitive advantage that the company obtained as discussed in the case?

• Southwest Airlines competitive advantages are their point-to-point services which are generally targeting the frequent business traveler. With several regular flights per day, if a passenger happens to miss their flight, they will be automatically booked onto another flight.

• Secondly, Southwest strategically secured routes through secondary airports which generally had lower fixed costs for the airlines and less congestions for passengers ease. Finally, Southwest focused on quick, reliable turnaround time using only one version of aircraft, allowing for familiarity among staff and greater efficiency in turnaround. Passengers were not assigned seats, simply boarding sections, which allowed for passenger loading to be conducted more efficiently.


2). What is the competitive advantage that the company obtained as discussed in the case? (cont.)

• The traditional airline model is the Hub and Spoke model, which in essence takes most passengers from the origination, through the hub, and then transfers them to their destination. Southwest’s point to point system was more reliable because it did not depend on the on time arrival of an earlier flight for departure.

• Southwest also implemented the first and most simplistic frequent-flier program: purchase eight flights and get one free. Southwest’s initially connected with four computer reservation and ticketing systems and also the powerful SABRE system. This allowed travel agents to view flight information and even print tickets. In 1994, Southwest was only connected through the SABRE systems which pushed Southwest to develop the “ticketless” travel program as well as Southwest.com.


3). What strategy and/or model was used or implemented in this case?

S.W. Airline

Other Airllines (USA routes only)

NEW MARKET ENTRANTS

SUPPLIERS

SUBSTITUTE PRODUCTS & SERVICES

CUSTOMERS

Threats

Bargaining power

N

• Switching cost • Access to

distribution channels

• Economies of scale

• Redefine products and services

• Improve price/performance

• Selection of suppler

• Threat of backward integration

• Buyer selection• Switching costs• Differentiation

• Cost-effectiveness• Market access• Differentiation of

product or service


3). What strategy and/or model was used or implemented in this case? (cont.)

• The Southwest airlines case can be analyzed with Porter’s five competitive forces model. Southwest airlines benefited after the airline deregulation in 1971, and were able to lay the groundwork for a successful airline.

• Throughout their growth, Southwest differentiated from the competition by taking a friendly, warm and welcoming approach to flying. Their low cost flights undercut the competition, which would fit under the threat of substitutes. Also, their reliability was the best in the industry until September 11th, which helped to prevent the threat of substitutes.


4). What (IS/IT) solution was used or implemented in the case?

• Southwest airlines remained competitive in the 1990’s during competitors’ price wars by joining 4 computer reservation systems and also the SABRE system. This presence allowed for travel agents to make reservations, and even print tickets for passengers. Also, we’ll see after this case was written that Southwest will implement electronic kiosk’s that allow for passengers to check in without having to check with an agent.

• Also, Southwest will implement a website with reservation capacity and most recently, the ability to check into a flight 24 hours ahead of time. These solutions assisted Southwest in their core competencies that the company instilled back in the 1970’s of a quick turn around time and flexibility in travel. Unfortunately, after the tragedy of September 11th, safety regulations began to hinder Southwest’s passengers and the company quickly responded with these new technologies to help during the trying travel times with heightened security regulations.


5). From your perspective what other solutions (strategy/model, IS/IT) might be employed for the company?

• Looking at Southwest airlines today four years after this case study was released, it is challenging to say what other solutions should be implemented because I am aware of the solutions that have been presented to date. Looking at Keen’s six stage competitive advantage model though, if I didn’t know where Southwest moves after this case study,

• I would recommend that Southwest adopt this model because their stimulus for action would be the delays in security and the fact that the company has dropped to second worst as far as on time departures. Southwest could take the first major move to implement electronic kiosks for self check in, saving passengers time. These kiosks will slowly build customer acceptance and other airlines will scramble to compete. Finally, check in kiosks are now a commodity among all major airlines.


Keen’s Six-Stage Competitive Advantage Model

Stimulus for action

First-mover expansion movesCompetitor catch-up moves

N

Commoditization

First major move

Customer acceptance


6). Draw and explain how can the Information Systems Strategy Triangle be employed in this case?

Organizational Strategy

Business Strategy

IS/IT Strategy

Business Strategy:• Sustainable growth• Low cost/ • Differentiation/• Innovation ???

IS/IT Strategy:• SABRE• Kiosks• Website, online ticketing.• Online boarding passes

Organizational Strategy:• “Teams”• Fun/Friendly Culture• Frequent flights• Rapid rewards• Point-to-Point


Suggested Study Questions

1). How does this company make money even when other airlines do not? What are the most important contributors to its financial success?

• Southwest Airlines has built its reputation on low cost reliable service. Over their tenure of 30 years in the airline industry, they have demonstrated 30 years of sustainable growth. The reason Southwest has remained financially viable is their commitment through point-to-point service with a quick turn around time. The more planes in the air and the less time on the ground is a profitably business model. Also, Southwest has tailored to the business traveler who is looking for reliability and less hassles. Also, Southwest has a generous rapid rewards system that is easy to comprehend and helps retain customer loyalty. In addition, Southwest hires the best people and rewards them accordingly, in a fun, enjoyable atmosphere. Finally, Southwest negotiates fuel prices for their airlines years in advance allowing the company to keep their pricing consistent.


2). How should management respond to the fact that Southwest Airlines has fallen to next-to-last place among major airlines in

on-time performance as of September, 2002?

• Management faced many challenges due to the increase in security regulations post-9/11. Southwest was fortune that it was a strong performer prior September 11th, but many of the security regulations that soon after would be implemented, directly contrast with Southwest primary core competencies. For instance, Southwest initially had the colored boarding cards, which were generic without passenger names. Due to highest security risk, passenger names had to be cross checked at the gate, causing delays.

• Also, Southwest’s motto, “You are now free to move about the Country” was directly targeting travelers who could walk onto the plane a few minutes before takeoff because Southwest would keep the doors open to allow for passengers to keep filing in. Again, this was against new security measures. Also, since many of Southwest passengers did not generally arrive as early as other airlines, more often than not, Southwest passengers would be subject to security searches. Also, random security searches were being conducted at the gates as well which Southwest actually stepped up to help mitigate delays by hiring more security personnel.


2) cont.

• Managers at Southwest should move to inform passengers of new safety restrictions and potential delays and encourage them to arrive earlier for their flights. Southwest responded immediately after 9/11 with a patriotic message, and it would be again appropriate to clarify to their passengers that the delays are for their safety. In the meantime, Southwest should pay for additional personnel to help during security procedures, and perhaps add an extra incentive in the Southwest Terminal such as free coffee or chocolate chip cookies to help add value to the passengers who have to wait longer for flights.

• Also, looking back at the company’s history from their website, in 2002, facing these delays, Southwest created check in kiosks. These computerized databases can process customer information allowing for greater efficiency for passengers without check in baggage. In addition, Southwest shortly thereafter implemented the 24 hour check in procedure. By going online to Southwest.com, passengers can check in up to 24 hours ahead of their flight, reducing their airport time and confirming their seat ahead of time.


3). Once operations are fully stabilized, would you recommend to the management of the airline that it resume its

historic growth rate of from 10? To 15? Per year? Why?

• I would recommend that Southwest continue to grow at 10 to 15 percent per year but no more. Companies such as Wal Mart and McDonalds, if their growth is too large, too quickly, their presence can be filled with resentment from customers because they have pushed out other competition.

• At 10-15 percent growth, airports and cities will still ask for Southwest to expand into their areas, and it will be a slow, calculated and sustainable growth, as opposed to one that moves the company away from its core competencies.


5)

• N/A since, a 10-15 % increased is recommended.


6). What are the implications for Southwest of the actual or threatened bankruptcies of other major U.S. airlines?

• Southwest is in a precarious position because they are profitable. Through 30 years of diligence, determination and strategic efforts, Southwest is a very popular and profitable airline. The trouble is that in the event of a government bailout of other airlines due to bankruptcy, then Southwest is almost hindered because the other airlines will be handed large government checks.

• The benefit here though to Southwest is the ability they have to continue to be profitable, continue to build investor relations and continue to reward their hard working employees. Since 9/11, many airlines have eliminated pensions, terminated employees and taken very drastic measures to stay afloat. Southwest has been fortunate, and although a bailout of other airlines may not seem fair, Southwest still is in the black and has the ability to continue to push forward to gain more market share and continue its excellent track record of profitability.


7). What is IS/IT role played in the case?

• The IS/IT role played in this case was one that kept Southwest competitive in a challenging industry. Southwest used a reservation system, website and check in kiosks (was the first airline used ticketless system), Southwest was able to help counter the challenges posed after September 11th.

• Southwest was revolutionary in the airline industry in many of their IT developments and were quick to move to the online e-commerce model as far as a reservation system and ticketing.


8) Why have profits for Southwest Airlines dropped recently? (Hint: in year 2008)

• Upon further review of Southwest Airlines website and other sites, I have been unable to find evidence that profits have dropped. Looking at their traffic and revenue numbers throughout 2008, it appears that traffic counts and revenue is up for Southwest however, Southwest has always negotiated their oil hedge prices years ahead.

• Perhaps due to drastic increases in oil prices, this could be hurting Southwest’s bottom line. Also, Jet Blue has gained popularity as a low cost alternative which may be threatening Southwest’s market share.


Question Eight Answer


Question Eight Answer


Southwest today

• Fleet consists of 547 Boeing 737’s• Employees nearly 35,000 people• Serves 72 cities in 37 states• Just experienced it’s 38th consecutive year

of profitability

Documents

Dr. Chen, Information Systems – Theory and Practices John Wiley & Sons, Inc. & Dr. Chen, Information Systems – Theory and Practices SouthWest Airlines