Southwest Airlines Case Analysis

I. Executive Summary

A. Problem Statement

Southwest Arilines has been facing direct competition in 9 routes of the intra-Califonia market with United Airlines and their "Shuttle By United." Shuttle By United was designed to be a high-frequency, low fare, minimal amenity, short-haul flight operation initially serving destinations in California and adjacent states who's intent wsa to "match Southwest's strategy." In the four months since Shuttle By United's inception competition has been fierce resulteing in Southwest and United slashing prices and envoking a merkteting blitz in this 9 route area. Recent news highlighted that Shuttle By United intended to discontinue some service (perticularly the Oakland-Ontraio route) and raise fares $10.00 per ticket. Southwest's respons to this and the coninued threat of losing market share to United should be:

o Continue targeted advertising to the 9-route Intra-California market and weatehr the initial

storm by Unted and await their withdrawal (Continental airlines tried to directly compete with Southwest and lasted 16 months before completely pulling out of the "point-tp-point" market. United's recent actions could demonstrate an inability to compete long-term and they are only in their fourth month).

o Match United's rate increase of $10.00 per ticket

B. Summary Recommmendation:

o Continue targeted advertising to the inra-California routes that are directly affected by the Shuttle By United and maintain current pricing strategy.

I. Industry Analysis

A. Description of Industry and Segments

 Deregulation for 16 years (1978) has resulted in an icnrease of domestic carriers from 36 in 1978 to 100 in 1985.

 Major carriers route system is either "point-to-point" (Southwest) or "hub-and-spoke" (Delta).

 Characterized by price wars, low margins, and acquisitions.

 Excessive labor cost has resulted in ariline worker job cuts.

 Highly price competitaive and segmented into three catergories:

1. Major carrier: > $1B in annual revenue (most relevant segment to SouthWest Airlines.)

2. National carrier: < $1B but > $100M annual revenue

3. Regional & commuter carrier: < $100M in revenue

&#61607; Major carrier segment contains nine competitotrs and accountants for more than 95% of domestic passengers.

&#61607; Makret share and annual revenue below:

III. Company Analysis

A. Relevant company information

&#61607; Operates short-haul, low-fare, high frequency airline with point-to-point routes and miniaml amenities.

&#61607; Twenty-two consecutive years of profitable operations which is unmatched in the US airline industry.

&#61607; Eith largest airline carrier in US based on the number of revenue passenger mles fown.

&#61607; Invented the the "airline-witin-an-airline" concept which allowed them to compete with hub-and-spoke carriers.

&#61607; Operates 199 Boeing 737's and operates in 44 cities. Capacity by geographic location is listed below:

&#61607; Four company pillars that make the Southwest model:

1. Customer Service:

&#61607; Winner of the unofficail "triple crown" of the airline industry: on-time performance, baggage handling, customer satisfaction.

2. Efficient Operations:

&#61607; Able to turn aircraft (moment arrived to when it was pushed back to leave) in 15-20 minutes or less. Indsutry turn time averaged 55 minutes.

&#61607; Use smaller less congested airports allowing less taxi time and less airport circling while awaiting landing.

&#61607; Fewer than 50% of all reservatons booked through travel agents, resulting in annual savings of $30M in agent commission fees.

&#61607; Flew only one type of jet (Beoing 737) which reduced maintenance costs.

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