Course Code: MGN 601 Course Title: Strategic Management

Course Instructor: Sir Tabrez Hassan

Academic Task No.: 2 Academic Task Title: Mini- Case writing

Date of Allotment: 18/09/2015 Date of submission: 02/11/2015

Student’s Roll no: B 51 Student’s Reg. no: 11400354

Evaluation Parameters:

Learning Outcomes: Learned the basic strategies adopted by the company to overcome the problems

that it was facing.

Declaration:

I declare that this Assignment is my individual work. I have not copied it from any other

student‟s work or from any other source except where due acknowledgement is made explicitly

in the text, nor has any part been written for me by any other person.

Student’s Signature: Rishabh Shankhdhar

Evaluator’s comments (For Instructor’s use only)

General Observations Suggestions for Improvement Best part of assignment

Evaluator‟s Signature and Date:

Marks Obtained: Max. Marks: …………………………

Southwest Airlines

Southwest Airlines Co. is a major U.S. airline and the world's largest low-cost carrier,

headquartered in Dallas, Texas. The airline was established in 1967 and adopted its current name

in 1971. The airline has nearly 46,000 employees as of December 2014 and operates more than

3,800 flights per day. As of 2014, it carries the most domestic passengers of any U.S. airline. As

of November 2015, Southwest Airlines has scheduled service to 97 destinations in 40 states,

Puerto Rico, and abroad.

Southwest Airlines has used only Boeing 737, except for several years in the 1970s and 1980s,

when it leased some Boeing 727 from Braniff. As of August 2012, Southwest is the largest

operator of the 737 worldwide with over 650 in service, each averaging six flights per day.

Southwest Airlines began with the March 15, 1967, incorporation of Air Southwest Co. by Rollin

King and Herb Kelleher to fly within the state of Texas.

Kelleher believed that by staying within Texas, the airline could avoid federal regulation. Three

airlines (Braniff, Trans-Texas and Continental Airlines) started legal action which was not

resolved for three years. Air Southwest prevailed in 1970 when the Texas Supreme Court upheld

Air Southwest’s right to fly within Texas. The Texas decision became final on December 7,

1970, when the U.S. Supreme Court declined to review the case, without comment.

Boeing 737-200 at William P. Hobby Airport in 1983

The story of Southwest’s legal fight was turned into a children’s book, Gumwrappers and

Goggles by Winifred Barnum in 1983. In the story, TJ Love, a small jet, is taken to court by two

larger jets to keep him from their hangar and to stop him from flying. In court, TJ Love’s right to

fly is upheld after an impassioned plea from a character referred to as "The Lawyer." While no

company names are mentioned in the book, TJ Love’s colors were those of Southwest Airlines,

and the two other jets are colored in Braniff and Continental colors. The Lawyer resembles Herb

Kelleher. The book was adapted into a stage musical, Show Your Spirit, sponsored by

Southwest Airlines and played only in cities served by the airline.

Southwest Airlines Boeing 727-200 at Phoenix Sky Harbor International Airport in 1984

On March 29, 1971, Air Southwest Co. changed its name to Southwest Airlines Co. with

headquarters in Dallas. Southwest began scheduled flights on June 18, 1971, Dallas to Houston

and Dallas to San Antonio with three 737-200s.

Main problem that are being faced by the company

1. Labor strife.

2. High cost.

3. Limitation on number of incoming calls.

Labor Strife

Labor strife has long roiled the airline industry, but not Southwest. The carrier never has laid off

workers or cut their pay, and has had only one strike in its history, a six-day mechanics' walkout

in 1980. But now Southwest is asking for some of the biggest contract changes ever from

employees in a bid to contain costs and some union leaders are furious. "We built this airline,"

says Randy Barnes, a union representative for Midway's ramp workers. Now, he says,

management is "tearing it down."

High cost

The CEO of Southwest emphasized the need for Southwest to adapt. High fuel prices, for

example, have forced Southwest to "pivot" from its longtime blueprint of offering short-haul

flights between midsize cities toward longer flights between bigger cities, which use fuel more

efficiently. Fuel last year accounted for 35% of Southwest's costs, more than double the share a

decade ago. That shift has required it to add larger planes, drop service to many small cities and

enter bigger markets while meddling with key traits like its first-come-first-served boarding

process.

"Not only has the world changed, but our relative position within the industry on costs has

changed," says Mr. Kelly, a 59-year-old Texan and former accountant who joined the company

28 years ago. "Now we just need to make sure our labor contracts are updated to reflect the

current reality."

With its growth stalled, Southwest can't hire as many new employees at the bottom of the pay

scale. From 2007 through 2012, Southwest's cost to fly a seat one mile rose 42%—more than any

other major U.S. airline, according to Massachusetts Institute of Technology data that adjust for

flight distance.

Its low fares, long the core pitch to customers, aren't so low anymore. Its average one-way fare

was $144 in the year ended in September, a 21% increase over the same period five years earlier,

when adjusted for inflation.

Many longtime customers remain loyal fans. "If there's a Southwest flight going to where I'm

going, I'll fly Southwest even if it's more expensive, says Dr. Joseph Coyle, a psychiatry

professor at Harvard Medical School."They treat everybody equally."

Limitation on number of incoming calls

Southwest's antiquated phone system limits the number of incoming calls, so some passengers

were met with busy signals. Southwest says it plans to soon replace those systems. Southwest

says it plans to soon replace those systems. "I've been waiting a long time" for the upgrades.

Perhaps Southwest's biggest challenge involves its 45,000 workers, who long have enjoyed

unparalleled job stability and compensation. About 83% of its workers are unionized, and

Southwest is currently in negotiations with nearly all of them over new contracts some of which

seek to freeze pay scales.

The average Southwest worker earned nearly $100,000 in 2012, including pension and benefits,

compared with about $89,000 at a traditional hub-and-spoke airline, according to MIT.

Southwest also shares profits with employees, paying them $228 million last year, or more than

6% of their pay.

"It is harder today for us to claim that we are the low-fare leader than it was before because our

cost advantage has been narrowed," Mr. Kelly says. "And that is exactly what we want to make

our employees understand." He says Southwest is seeking savings from increased productivity

and more flexibility in workers' contracts not from pay cuts.

For its nearly 17,000 ground workers and customer-service agents, Southwest wants to tighten

rules on sick time and largely hold compensation flat. In prior contracts, workers generally

received raises. It also ultimately wants 40% to be part-time, meaning their families would have

to pay more for health benefits.

Strategies Southwest have recently executed to resolve these problems

The company aims to fill new openings with part-timers, rather than forcing current employees

into part-time status. Still, unions blanch at the idea, saying they want to protect careers, not just

jobs. The ground-workers' union recently won a victory when the carrier backed off a proposal to

outsource a sizable number of jobs to outside vendors. Randy Babbitt, Southwest's senior vice

president of labor relations, says Southwest's existing contracts were designed for a smaller,

short-haul airline that didn't fly late at night or adjust service levels according to demand. For

example, Southwest now flies to Fort Myers, Fla., 20 times a day in the winter and 10 times a

day in the summer.

Southwest Airlines strategy of focusing on short haul passenger and providing rates as low as

one third of their competitors, they have seen tremendous growth in the last decade. Market

share for top city pairs on Southwest's schedule has reached 80% to 85%. Maintaining the largest

fleet of 737's in the world and utilizing point-to-point versus the hub-and-spoke method of

connection philosophy allowed Southwest to provide their service to more people at a lower cost.

By putting the employee first, Southwest has found the key to success in the airline business. A

happy worker is a more productive one as well as a better service provider. Southwest will

continue to reserve their growth in the future by entering select markets only after careful market

research.

The short haul traveler is the backbone in which Southwest was built upon. The market for short

distance airline flights was large enough to allow Southwest to maintain a profit for over 30

consecutive years. Shorter flight times allowed for more flights to take place per day. With the

industry average sitting at one or two flights per day, Southwest set itself leaps apart by

averaging 10 to 12. Maximizing utilization and minimizing ground time were the key

elements to Southwest's profitability.

Southwest's fleet consisted of 47 737-200s. This model of the 737 has been replaced over the

years with the 300, 500, and 700 series 737. Southwest's 737-200 had an average age of 17 years

per aircraft. Over the years, the gradual replacement of the 200 series gave Southwest the

opportunity to reduce their costs by increasing fuel efficiency and slashing maintenance.

Southwest Airlines has stood in a unique position in the airline industry since its inception.

Making profits and maintaining employee job satisfaction have been the strongest aspects of

their business. Southwest refuses to enter a market unless they can have at least 10 to 12 planes

operating there immediately.

Southwest current operational strategy is to operate point-to-point flights to highly profitable

destinations. The strategy has generated strong returns for Southwest but there are concerns

about the operational strategy’s longer term sustained growth potential. The only means for

growth under Southwest current operation strategy is to enter new markets and increase available

seat miles (ASM). Southwest has already entered many of the highest demand markets and

established its dominance on the most profitable routes. There is concern that as Southwest

expands into new markets, those new markets will not be as profitable.