Frank Cusumano

February 10, 2016

Management Johnson

Southwest Airlines

Southwest is experiencing some turbulence in the Airline market. The

only question is if it will be for the remainder of the flight. The carrier is
recently having increases in their costs per customer per mile. Previously,
Southwest boasted their lower costs and fares for their customers as one of
the ways that the company had a strategic advantage over other carriers.
According to the case, their expansion began slowly at first from the Texas
intrastate market (it took 4 years to get out of court), to eventually becoming
the seventh largest national airline. However, due to this rapid expansion,
there are some external issues arising from this expansion such as bottom
feeder low-fare airlines, the slimming and modernizing of other similar
competitors, as well as the internal issue of the aging of their own fleet.
In this analysis, we will lay out a prospective plan we believe addresses
the competitive challenges confronting Southwest. Before laying out our
recommendations, we will first undertake a brief analysis of current industry
trends detailing their impact on the future profit potential of the piano
business. Such an analysis should allow us to identify a strategic positioning
for Steinway which will defend the company from the threat of rivalry and

deploy this firms unique capabilities in order to maximize the return on

investment.
When Southwest first began, it was still during the period before the
airline deregulation in the 1970s, and there were very few carriers that
offered lower prices than competitors due to price fixing on a cost plus basis.
Southwest was able to ride out the storm of the deregulation with their
business model. They purchased Boeing 737s and continued to grow beyond
the Texas State border. They specifically purchase the smaller versions of the
planes to save costs in several ways. The smaller plane allows for lighter
weight which allows for better range and lower fuel costs. The size also
eliminates the need for more flight attendants. Southwest uses a point-topoint system of flying, going directly to the destination instead of flying from
the original point to the hub airport and then to the destination. They have
now become the largest air carrier according to the U.S. Department of
Transportation's most recent data, Southwest Airlines is the nation's largest
carrier in terms of originating domestic passengers boarded. Now, many
years after it has been introduced, the niche that Southwest had over the
others is starting to wane.
Many competitors such as JetBlue and Spirit are competing with
models that are similar to but not entirely mirrors of Southwest. JetBlue does
a similar strategy in that JetBlue only flies simplified domestic routes and
focuses on lowering costs per customer per mile, enhancing customer
satisfaction at a lower price. JetBlue share many of the same destinations

that Southwest has in a similar style. They boast free snacks and nonalcoholic beverages, the largest amount of legroom in coach out of any air
carrier, and a younger, more fuel-efficient fleet. The average age of their
fleet is now 8.8 years. Spirit Airlines is also another competitor that focuses
on lowering the costs per customer by removing as many extras that airlines
usually add into the cost of a regular ticket. By offering this low bare fare,
they are able to get some of Southwests market share. Spirit also has
modernized their fleet making the average age about 5.3 years old for every
plane. This threatens the original strategy that Southwest had during their
expansion. Another problem is that other high-end competitors such as Delta
and U.S. Airways are starting to slim up their costs by modernizing their
fleets to fuel-efficient planes and have the dominant hub airports to decrease
some costs.
Another problem is that Southwest has expanded into all of the
markets that they can capture the most market share. As Southwest grows,
they may have more difficulty trying to find new areas to expand into.
Southwest has focused on a point-to-point model, whereas other carriers
such as Emirates and Delta are hub and spoke. As Southwest expands,
they may have a problem maintaining this model because they are
eventually going to be stretched out internationally and have a hard time
flying direct. Another problem is that they are eventually going to run out of
secondary airports to fly out of. However, they are able to negate this
problem by using their 737s multiple times a day. They still carry the highest

average number of flights per aircraft. The added bonus of their entire fleet
being 737s is that they have the right number of repair crews with all
uniform fleet parts necessary to get the plane off the ground.
Southwest should be able to regain the lead they once had, all
depending on how they take the future. Boeing is releasing a new 737 MAX
airliner, which is a more fuel efficient version of what Southwest currently
flies. As an added bonus, it is larger, which allows for greater revenue
potential for a minute increase in operating costs. If they purchase the new
aircraft they will have newer planes for their customers, thus increasing the
brand perception. The case showed how they were able to make the planes
watershed into the fun atmosphere of Southwest by decorating them with
themes from around the country. New planes should assist this image. This
will decrease their costs, and possibly lower the now comparatively high cost
per customer per mile. Thanks to lower fuel costs in most recent markets,
their fuel costs will decrease as well.
Another edge that Southwest still has over its competitors is their
employees and customer base. Southwest, even with its expansion, has been
able to retain most of their employees. They still retain one of the lowest
employee turnover rates. Some of the employees state that they could get
jobs with higher pay at another airline, but prefer to work at Southwest
because they find the culture and work both rewarding. There is the point
that JetBlue is still not unionized, and Southwest is, so there might be some

employee competition among the two companies later on, but as of now,
they keep their employees.
The case mentions that Southwest has two choices for expansion. They
can either open a Chicago-Dayton route or a Detroit-Phoenix. The ChicagoDayton route has several advantages. Southwests expansion into Dayton
fulfills the CEOs promise to the mayor of Chicago, and it brings Chicagos
Midway Airport further into Southwests route network. The Dayton route has
had stable growth. However, the Detroit-Phoenix route carries its own
advantages. It has the potential for more growth and there is clearly a
demand for it since 500 letter writers in each city requested that the
company establish a route. The final option that would expand Southwest
into Baltimore is not a good option. The airline had recently pulled itself out
of Denver because of weather inconsistencies. These inconsistencies would
affect the rest of their flight network, and the costs would be compounded
due to the chain reaction. Southwest is expecting to use Baltimore as the
entrance for the Northeast markets of the United States. This argument is
shaky because the Northeast is well-known for extreme changes in weather,
even more in Baltimore. Baltimore looks good as a target because of its
relative smaller size, keeping in the strategy of Southwest to use secondary
airports with less traffic. Another problem with the Baltimore route is that it is
a larger distance to Washington D.C. than Dullas Airport. Another concern is
the competition from the other large competitors. Delta and United have
both heavy traffic control over New York Airports as well as the hubs in

Washington D.C. It would be quite difficult for Southwest to enter such a

market

To determine what Southwest should do going forward, we have to first understand

what determined their success in the first place. In particular, what was the original
logic of Southwest's strategy and how did it create a competitive advantage?
Historically, Southwest's cost per passenger mile was far below the industry
average, but this has begun to change. Why?
Southwest had lower costs per customer per mile. Are competitor airlines becoming
more efficient? If so, what does this mean for Southwest? Can they regain the lead
they once possessed? If so, how?

Their competitors are getting more fuel efficient aircraft. There are also new airlines
cropping up in certain regions.