Airlines industry analysis

Source
The case needs to be looked at with
this industry back drop and the
organisation’s passion to serve as
low cost but high quality leader
 The hub and spoke operation

Vs

Point to point operation

Southwest free Seating promotes quic
k turnaround
 2007 upgrades is South West
 To improve its product. Southwest, which
launched a sweeping set of boarding and
seating changes said it will test Internet
service on four of their A/C
 The sweeping changes, include its higher-
priced Business Select tier, which has
been well-received by passengers. That
program alone triggered a $7 million
increase in revenue
 Southwest. It saved the carrier $300 million in the fourth
quarter and $727 million for the full year by fuel hedging
Kelly said.

 The carrier had more than 70 percent of its fuel hedged

for 2008 based on a $51-a-barrel price of oil.

 It also had that price locked for 2009 but percentage of

fuel covered drops to 55 percent.

 Southwest has less than 30 percent of its fuel hedged at

$63 per barrel in 2010.

 It has more than 15 percent of its fuel hedged at $64 per

barrel in 2011 and $63 per barrel in 2012
 Core competency in hedging

Southwest's history of financial strength

is it's been able to hedge aggressively.

Southwest has been the most profitable

carrier in the USA and it's the only U.S.
airline with an investment-grade credit
rating from Standard & Poor's and other
rating services.
 It has the cash and the access to lines of
credit to pay the upfront premiums required
to hedge.

 Its credit rating means the oil producers and

financiers with which it makes those
hedging deals don't worry about
Southwest's ability to come up with more
cash.

 A second factor in Southwest's hedging

success, is the carrier's philosophical
commitment to hedging.
 Core competence
 Southwest has for a decade locked in the prices
it pays for large amounts of jet fuel months and
even years ahead of time..
 Since 1998, it has saved $3.5 billion which is
equal to about 83% of the company's profits
over the last 9½ years.
 To illustrate spot market, jet fuel sold at an
average price of $3.95 a gallon for the week
ended 24.7.2008. American Airlines paid an
average $3.17 a gallon last quarter. Delta,
$3.13.
 And Southwest? Its recent estimate was about
$2.35 a gallon.
 Introduction of baggage charge
 When American said that it would begin
charging for a single checked bag because of
fuel costs, Southwest quickly responded by
saying that it was doing “everything” to boost
revenue, “but it’s not our goal to nickel and dime
our customers.”
 “We want to assure you that Southwest Airlines
still allows you to check up to two free bags
when you travel with us,” the airline said on its
website. “We look forward to seeing you
onboard very soon. And bring your luggage!”
SUCCESS IN A
“NUTSHELL”
 Profitable 37 years
 Steady Growth
 Conservative Balance
Sheet
 Stock Performance
 Low Fare Leader
 Market Dominance
 Productive Employees
 Low Turnover
 No Layoffs
 Effective fuel hedging
 Best Safety Record
 Most Emulated
 Free to Have Fun
Mission
Mission Statement
Statement of
of Southwest
Southwest
Strategy
Strategy
Low Costs
Positively
Outrageous
Service

Growth
and
Profits
Southwest Airlines’ activity system

No meals
No baggage
Focused transfer
passenger No connect-
service ions
No seating

Frequent,
Short,
reliable
direct routes
departures between midsize
Only
cities &
Boeing 737
aircraft
secondary
20-minute Low (base) airports
Limited gate turn- pay for all
specialization arounds employees
of tasks
Very low Limited use
prices of travel
Flexible agents
Employee High aircraft
union
contracts stock utilization
ownership

Adapted from: Michael E. Porter:

What would a balanced score card look like? What Is Strategy? Harvard Business
Review. November-December: 73.
 Elements of a balanced scorecard for
Southwest Airlines

Strategic Theme:
Strategic Theme: Objectives Measures Targets Initiatives
Operating Efficiency
Operating Efficiency
Profits and
Financial RONA • Profitability • 30% CAGR
Grow • Grow Revenues • 20% CAGR
Fewer planes
Revenues
• Fewer planes • 5% CAGR

Attract & Retain

Customer More • More Customers •# Customers • 12% growth • Customer
Customers loyalty program
• Flight is on -time • FAA On Time • Ranked #1
On-time Lowest • Quality
Service prices
• Lowest prices Arrival Rating • Ranked #1
• Market Survey management

Internal • Fast ground • On Ground Time • 20 Minutes • Cycle time

Fast ground
turnaround • On-Time • 90% optimization
turnaround Departure

Learning • Ground crew • % Ground crew • yr. 1 70% • Ground crew

alignment trained yr. 3 90% training
Ground crew yr. 5 100%
alignment
• % Ground crew • ESOP
stockholders

Source: Kaplan & Norton (2007)

Activity Mapping: Southwest Airline’s Low Cost
Competitive Advantage

Courteous, but limited

passenger service

Lean, productive Competitive Short haul, point-to-point

employees Advantage: routes, often to secondary
Low Cost airports

High aircraft Frequent, reliable

utilization schedules
Standardized fleet of
Boeing 737 aircraft
Activity Mapping: Southwest Airline’s Low Cost Competitive
Advantage

Courteous, but limited

passenger service

•No seat assignments

•No baggage transfers
•Automated ticketing machines
•No meals
Activity Mapping: Southwest Airline’s Low Cost Competitive
Advantage

Short haul, point-to-point

routes, often to secondary
airports

•Lower gate costs at secondary airports

•High number of flights, reduces employee idle time between flights
Activity Mapping: Southwest Airline’s Low Cost Competitive
Advantage

•High number of flights reduces employee idle time between flights

•Saturate a city with flights reducing administrative costs per
passenger for that city

Frequent, reliable
schedules
Activity Mapping: Southwest Airline’s Low Cost Competitive
Advantage

•Pilot training on only one type of aircraft

•Reduced maintenance inventory required because of only
one type of aircraft
•Excellent supplier relations with Boeing has aided
financing
•Average age of fleet 9years

Standardized fleet of
Boeing 357 aircraft
Activity Mapping: Southwest Airline’s Low Cost Competitive
Advantage

•Flexible employees and standard planes aids scheduling

•Flexible union contracts
•Maintenance personnel trained on only one type of aircraft
•20 minute gate turnarounds

High aircraft
utilization
Activity Mapping: Southwest Airline’s Low Cost Competitive
Advantage

•High level of stock ownership

•Hire for attitude, then train
Lean, productive
•Good employee compensation
employees •Empowered employees
•Automated ticket machines
 Give People the Freedom to be Themselves
Hire for Attitude,Train for Skills
Provide a Learning Environment
Career Development and Growth Opportunities
Don’t Keep Employees Who Don’t Fit the Culture
Communicate

Forgive Mistakes
Be Flexible Do the Right Thing
Recognize, Reward and Everything!
Encourage People to Act Like Owners
SOUTHWEST
SOUTHWEST AIRLINES
AIRLINES
EMPLOYEE
EMPLOYEE PROFILE
PROFILE

Customer Focused
Team Player
Self Motivated
Takes Initiative
Open and Flexible to Change
Sense of Humor
Takes Pride in Work
Southwest Airlines in July told about 8,500 employees:
We love you, but if you go away, we won't mind.
And here are some lovely parting gifts.

Southwest said the costs -- $25,000 flat payments, plus

continuing medical and dental coverage and travel
privileges, would bring a $25 million charge against third-
quarter earnings.

But it will save an estimated $20 million a year through

2012, it told investors. Meanwhile, the departing
employees have option to stay back.
Fuel hedging can be a double edged sword
 Current scenario
Southwest reported a net loss of $120
million in the third quarter 2008, its
first quarterly loss since first quarter
1991 and the biggest quarterly loss in
its history.

The airline made money on an

operating basis, but it was pushed
into the red by $238 million in
accounting charges that reflected the
decreased value of the fuel derivative
contracts and other hedging impacts.
 OCTOBER 16, 2009

Southwest Airlines Results Signal

Clearer Skies.
 Southwest Airlines Co. kicked off the third-quarter 2009
earnings with a small loss, but provided evidence that the
worst days may be behind the recession-wracked
industry.
 It booked a net loss of $16 million. A year earlier,
Southwest posted a loss of$120 million.
 The loss was airline's fourth in the last five quarters after
cash-strapped consumers and corporations cut back on
 Distinctive competence

 Outstanding
human resource
policies
 Imaginative fuel
hedging
 All pervasive cost Distinctive
consciousness value chain
advantages