Case Study No.

17 – Southwest Airlines

[Area: Network, Technology and Information]

Southwest Airlines has been consistently successful as a service operation because of two aspects of the way it
operates. Southwest is often quoted as the ‘fun’ airline, with cabin crew encouraged to be creative about the way
they carry out their duties, sometimes playing games with the passengers during the flight. Southwest could deliver
what became known ass its ‘luv’ strategy because it was founded on sound operational principles, an emphasis on
tight cost control, and careful expansion of the network. Each time Southwest acquired a new plane, a decision had
to be made as to whether it would be directed to an existing route, where demand volumes were predicted to rise, or
to develop the network, by adding a non-stop
non stop service between cities previously requiring passengers to take more
than one flight.

The airline’s pricing strategy has been a key factor in influencing

influencing the volume of demand on any given route.
Southwest made a policy of pricing against the cost of ground transport, not against other airlines. This could lead to
total demand for air transport increasing as much as four or five times the level prior
prior to Southwest’s entry. As
Southwest grew, so this pattern of market growth was repeated many times over.

This allowed the route planners to develop a simple demand growth model to indicate the level of capacity growth
required over time. The entry of Southwest
uthwest into a market could be expected to stimulate a significant demand, which
then drops back to a sustainable level. In the early 1990s Southwest expected to become the sole carrier after two or
three years.
Passenger numbers: Baltimore Providence market mar

As the other airlines responded to Southwest’s approach, the airline could no longer be guaranteed this total
dominance, but as the sample figures from the Baltimore Providence market demonstrate, both growth and market
share are impressive. From entry
ntry in 1996 passenger numbers increased from just over 1,500 per quarter to over
21,000 per quarter in 2000 (see Figure above
above),
), and from the beginning Southwest’s share has been approximately 70
per cent of the market. Another factor in making capacity expansion decisions was the number of expected flights
per day. Investment in a new destination required investment in departure gates. Although prepared to commence
operations with ten departures a day, Southwest wanted to expand rapidly to 20 departures a day to use two gates
effectively. Another important criterion in Southwest’s route strategy was the availability of people to fit in with
Southwest’s distinctive culture. Southwest found that this aspect of location decision making had a significant
impact on its success.

Questions

1. What type of competitive action would have a significant impact on Southwest’s forecast market growth
curve?
2. Which would be the limiting factor in Southwest’s growth: availability of routes or availability of people to
fit into Southwest’s culture?