CASE ASSIGNMENT

SOUTHWEST AIRLINES
SUBMITTED BY

SUBHAM CHAKRABORTY

PGDM SAP

Q1. How would you characterize the business model of Southwest Airlines?
How does this differ from the business model used at many other airlines
such as United and American Airlines?
Southwest Airlines, being a Low Cost Carrier (LCC), is famous for its uniquely competitive
low fares, which are often some 30% lower than most of its major rivals. They have achieved
this low cost leadership position in their industry by emphasizing on: Faster than average
gate turnarounds to yield higher utilization rates. One class of seating. No meals or
movies on flight. One type of airplane – Boeing 737. Point-to-Point flight routes. High
employee productivity.

*A very successful fuel hedging program (long-term contract with oil companies to buy fuel
equivalent to $51 per barrel through 2009 that has reduced a major fraction of its operating
expense).

*Serves relatively less-congested airports to achieve high asset utilization and reliable on-
time performance .

Q2. Identify the resources, capabilities, and distinctive competencies of

Southwest Airlines.
Resources:

*Southwest Airlines had always managed its resources well including the financial
resources. In 2012, Southwest returned $422 million to Shareholders through repurchasing
$400 million of common stock (approximately 46 million shares) and distributing $22 million
in dividends. It made money every year and earned a Return on Invested Capital (ROIC) of
5.8%. Even in 2008, an awful year for the airline industry it made a profit and earned an
ROIC of 4%.

*Hiring at the rate of only 3% of the job applicants interviewed, Southwest Airlines has the
most thorough recruitment process which equips it with the most competent workforce.
Apart from this the company culture of teamwork is influential in efficient handling of
operations.

*The Airline’s Employee Profit-sharing plan which makes atleast 25% of the employee’s
share of the plan invested in Southwest Airlines stock, acts as a major motivating factor of
the workforce making it more flexible and productive.

*Southwest Airlines excludes meals and provides for light snacks as inflight refreshment, so
as to minimize the overhead expenses and save the resources.

Capabilities:

Southwest Airlines focuses mainly on point-to-point service, rather than the hub-and-spoke
service provided by major US airlines. Point-to-point service allows for direct nonstop
routing by minimizing connections, delays and total trip time. As a result, approximately
71% of Southwest Airlines’ customers flew nonstop in FY2011. During the year, the
company's average aircraft trip stage length was 664 miles with an average duration of
approximately 1.8 hours. This service also enables the company to provide its markets with
frequent, conveniently timed flights and low fares. The management of Southwest Airlines is
considered to be the most dynamic of all time. The policies introduced by Southwestern
Airline’s top management is considered to be intuitive and effective by many industrial
analysts. Even as its general expansion strategy has been more of an organic growth. In May
2011, the company acquired AirTran Holdings, the parent company of AirTran Airways, one
of the largest low cost scheduled airlines in the US. The transaction was valued at
approximately $1.4 billion.

Distinctive Capabilities:

There are many distinctive capabilities of Southwest Airlines that makes it a different and
the most successful carrier: -They operate 1 type of aircraft Boeing 737, which lowers
maintenance, training and inventory costs to a huge extent. -They hedge aggressively on
fuel which allowed them to be profitable when other airlines were losing money, Southwest
have maintained a cost per seat mile of $0.12, which is around 25% cheaper than its
competitors. -They have a strong domestic network. - Their philosophy is to treat their
employees well and put them ahead of their customers. The benefits it gives it employees,
include: profit-sharing and empowering employees to make decisions. The logic is if the
employees are valued, they will treat the customers well and that will spread the reputation
of the Airlines further. -The airline employs a fun and casual work environment. Southwest
Airlines is popular for asking its candidates one time to change from suit clothing to
Bermuda shorts.. - No formal hierarchy is enforced. It’s not uncommon to see the pilots
assisting the flight stewards in helping them check the passengers in the plane or cleaning
the plane. This helps in achieving the swiftest turnaround of the aircraft.

Q3. How do Southwest’s resources, capabilities, and distinctive competencies

translate into superior financial performance?
Southwest’s top management has cleverly made these three factors to their advantage. At
one point they have stressed on maintaining a lower cost structure by keeping a
standardized fleet with minimal inflight meal and entertainment amenities, a workforce
motivated for quick aircraft turnaround and an aggressive fuel hedging program, however at
the same time they have equally stressed on winning customer satisfaction which is seen by
their stupendous customer retention. They have respected the basic requirement of any
passenger i.e. – to reach on time, by maintaining a decent record of on schedule flights. On
average there are 94 employees per Southwest aircraft in contrast to competitors who have
130, and the Southwest staff serve on average 2500 passengers per year compared to
competitors 1000. Keeping the workforce number minimal, they have cut off a major
fraction of labor costs incurred generally by other carriers, whilst not letting any
shortcoming come in smooth running of operations. When the pilots of the other carriers
are affiliated to Unions which have restricted working hours at for one period, Southwest
Airlines pilots are not unionized under such regulations which allows them to work smoothly
unhindered. With the innovative profitsharing plan, they have wittily made each and every
employee his/her own performance appraiser, ensuring that no employee falters behind the
line.

Q4. How secure is Southwest’s competitive advantage? What are the barriers
to imitation here?
Looking at the developments in the aviation industry till recent, it would be safe to say that
Southwest enjoys the most secure competitive edge than any other carrier. Its strategy,
right from having standardized fleet to having minimal but motivated employees while
wittily introducing cost-cutting initiatives like fuel-hedging and employee profit-sharing plan,
have helped it gain a benchmark position which cannot be easily touched by any of its
competitors. With its punctual flight record, pleasantly approachable staff, impressive
Customer service, despite the fact that it offers no-frills, there is still a high degree of
customer satisfaction that continuously builds customer loyalty for the company. This is one
of the reasons why, even in the aftermath of the 9/11 terror attacks, when the entire
aviation industry was reeling under the disastrous consequences of running empty flights,
Southwest Airlines not only was successful in maintaining fully seated flights but also earned
an ROIC of 5.8%. Its hiring process which lays stress on applicants possessing teamwork skills
and optimistic outlook has helped it shape a dynamic and motivated workforce which not
only helps in smooth functioning of an informal horizontal organization but also promotes
accountability among the employees not just as individual but as a team.

However even while being an epitome of success in the Aviation industry, it has been
unfeasible and impossible for Southwest’s rival carriers to imitate its business model due to
following factors:

*Southwest Airlines, in order to cut its maintenance, training and inventory costs had
standardized its fleet by Boeing 737 aircrafts; something which its rival cannot think of
doing. Its Cost Leadership is one of its vital factors which it has been able to stay ahead of its
rivals.

*Southwest Airlines has a unique, thorough and highly selective hiring process which
ensures that its workforce has the requisite motivation at par with the spirit of the Airlines.
Now, this cannot be as easily applied by its rivals which are mostly very hierarchical and
formal.

*Southwest Airlines innovated the strategy of fuel hedging for a long time, something
which its rival cannot start and reap short-term benefits.

Hence, we can see how Southwest Airlines was successful in able to maintain both Cost
effectiveness as well as Customer loyalty and retention, through its innovative and
foresighted strategies.