Southwest Airline case study
Competitive advantage is a position of a company in a competitive landscape that allows the company earning return on investments higher than the cost of investments. Competitive advantage should be relevant, unique and sustainable. Therefore sustainable competitive advantage, it’s a long-term competitive advantage that a company own over others in the same sector that is not easily duplicated or surpassable by its competitors (wikipedia, 2009).
Competitive advantage can also be seen as a superiority gained by an organization when it can provide the same value as its competitors but at a lower price or can charge higher prices and providing greater value through differentiation (Porter, 1985) For a company to sustain its competitive advantage its must possess a core competence which is a unique ability that he as develop over time that cannot be imitated by its competitors. Core competence is what gives a company one or more competitive advantage, in creating and delivering value to its customers in its chosen field.
The sustainability of competitive advantage depends on three conditions, the first is the particular source of the advantage, secondly sustaining advantage requires change, it demands that a company exploit, rather than ignore industry trends, it also demands that a company invest to close off the avenue along which competitors could attack and lastly, to sustain its position a firm may have to destroy old advantages to create new higher ones. (Portal, 1990) For the purpose of this study we shall be taking southwest airline as a case study, Southwest Airline is a major U. S. airline that primarily provides short haul, high frequency, point- to point, low fare service. Southwest was incorporated in Texas and commenced operations on June 18, 1971 with three Boeing 737 aircraft serving three Texas cities- Dallas, Houston, and San Antonio. Today Southwest operates nearly 400 Boeing 737 aircraft to 59 U. S. cities. Southwest has the lowest operating cost structure in the domestic airline industry and consistently offers the lowest and simplest fares (wordpress. com, 2012). Southwest also has one of the best overall customer service records.
Southwest is an entrepreneurial “frame-breaking” company that has chosen to play by a different set of rules in the airline industry. Some of its major rules are: -Having one type of aircraft(boewing 737) -Keeping cost as low as possible -Great customer service -Reward programme -Employee’s benefit and salaries -Utilization. Southwest Airline uses only one type of aircraft which is boewing 737, with this system they only need to train all their mechanics on only one types of airplane thereby reducing the cost of labour from manpower.
Because they fly on on type of plane through all their routes they keep inventory for that type of airplane, if they need to swap a plane for maintenance at the last minute the plane is changeable on the spot without the stress of incurring extra cost that may arise as a result of swapping planes and time wasting. Southwest airline major business strategy of lowering cost is that they concentrating on airport that are underutilized and close to metropolitan areas thereby reducing airport charge cost and brings service close to their customers.
The fleet of aircraft they use is fuel efficient boewing 737s, aside the fact that they reduce mechanic maintenance cost they also reduce fuel consumption cost by using boewing 737 aircraft. Unlike other airline rewards programs, which credit points for each mile traveled, the Southwest Rapid Rewards program awards credits for each leg of a trip. Once you reach the equivalent of 8 roundtrip legs in any 2-year period, you’ll earn a credit for a roundtrip flight between any two operating cities.
Another key to Southwest Airline success is there employee’s salaries and benefits, southwest airline employee’s are paid lower than most of its competitors in the airline industry but they work more hours, pilots and flight attendants are paid by trip but seniority brings higher salaries. You get paid according to your grade and level. Southwest airline run a program that allow its employee’s to own its share on a discounted price, 85-90% of its employee’s own southwest airline stock, i. e 12% of its total stock is owed its employee’s because of the discount purchase program put in place by the management. Mostly importantly, another very important strategy adopted by southwest airline is utilization. Each plane in the fleet flies extra flights per day, saving on maintenance and training costs. Utilization of cost effective revenue streams have been critical to their success. Southwest were one of the first airlines to have a website in early 1995. In 2006 70% of Southwest’s revenue were generated from bookings online.
Southwest gained a reputation for outside the box thinking and proactive risk management, including the use of fuel hedging to insulate against fuel price fluctuation. From a cost point of view, Southwest have maintained a cost per seat mile of $0. 12, which is around 25% cheaper than competitors. Aircraft turnaround time is 15 minutes, this is facilitated by multi tasking crews, with pilots and air crew cleaning the plan while on the ground. On average there are 94 employees per aircraft in contrast to competitors who have 130, and the south west staff serve on average 2500 passengers per year compared to competitors 1000.
Another major strategies used by Southwest Airline to sustain competitive advantage and to maintain its market share was its fuel hedging strategy and passenger friendly technology which was introduced by Gary C. Kelly. The executives of southwest airline Know that its impossible to pass higher fuel prices on to passengers by raising ticket prices due to the highly competitive nature of the industry. The fuel hedging strategy was employed to reduce amount spent on jet fuel per annual. 2008 was a bad year for the airline industry in general, but not too bad for Southwest. During 2008, the cost of fuel fluctuated greatly, as the price of a barrel of crude oil soared from near $100 in January 2008 to almost $150 in July 2008, south west was able to maintain a reasonable production because of its fuel hedging strategy. Compare and contrast between the strategies adopted by Southwest Airlines and those of other airlines in the industry. Southwest as adopted a major strategy which as differentiate its operation from other airline in the industry.
Why other airline uses different types of aircraft, southwest adopted the strategy of using just one aircraft (boewing 737) for all its route. Southwest operates a single aircraft type – the Boeing 737. This lowers personnel training and maintenance expenses for the airline. Costs related to spare part inventory management are also lower for one aircraft type compared to multiple aircraft types. Additionally, the use of a single aircraft type simplifies scheduling, flight operations and training activities.
In the case of Southwest, the airline could employ an all Boeing 737 fleet as its operations are primarily focused on the domestic U. S. market with no long haul international flights. Thus, the Boeing 737 which is a short-to-medium range airplane is sufficient to serve its current flight operations. Problem solving: At most airlines (and many other businesses), when problems arise, everyone wants to avoid the blame. With that goal in mind, nobody likes to be the bearer of bad news. As usual, Southwest turns this around to its advantage.
Southwest employees are openly encouraged to report problems as soon as they become aware of them so everyone can get involved in figuring out the best way to solve it. Just this subtle change has a huge impact on the quality of the communication taking place. “When something goes wrong, according to a Southwest pilot: ‘We figure out the cause of the delay. We do not necessarily chastise, though sometimes that comes into play. It is a matter of working together. No finger pointing, especially here, and I’m sure that’s the case elsewhere at Southwest.
A Southwest station manager explained his philosophy: ‘If there’s a delay, we find out why it happened. Say there was a 10-minute delay because freight was excessive. If I’m screaming, I won’t know why it was late. The freight handlers will think, ‘He’s an idiot. If only he knew. ’ Then they’ll start leaving stuff behind or they’ll just shove it in and I won’t know. If we ask, ‘Hey, what happened? ’ then the next day the problem is taken care of. You have to be in that mode every day. There’s no one person who can do it. We all succeed together – and all fail together.
You have to truly live it. I think we do here’. ” (Gittell, 2003, p. 8). Southwest airline offers a free luggage checking to its customer why other airline charges for luggage checking. Southwest airline operates a 15minutes turnaround time which makes them fast than most airlines in the industry. While southwest operates a No sit reservation policy, which makes all its sits fully occupied before flight takeoff, other airline tickets are purchase based of sit. Southwest’s open-seating policy encourages passengers to get aboard faster and this also saves turnaround time.
Southwest airline uses new technology of self checking and counters and boarding gate, to reduce the number of people standing in queue and to hold down the wait time in the ticket counter line. Contrary to most airlines, Southwest Airlines was able to withstand the shock from the September 11 attack. Describe the major steps taken by its management to make this possible. Lower fare as always been the biggest competitive advantage, driving passenger traffic and increasing market share for southwest airline.
Lower fares have been critical in allowing southwest to post its 39th consecutive year of profits in 2011 and have helped the carrier in the past decade when the events of 9/11occur the low fare strategy was fully implemented. Southwest airline was able to withstand the shock from 9/11 through lower airfare. In 2002 after the September 11 terrorist customer level reduced greatly due to the fear of flying by customers, one way south west hope to retain customer trust was through lower airfare.
In 2002 no airfare was more than $399, the company reduced airfare even further by lowering last minute fare to the minimum to further stimulate travel. In 2003 south west was offering fare as low as $39, they keep ticket price as low as possible to increase demand. Aside lower fare southwest was able to gain customer trust during September 11 attach by working with congress, the DOT, FAA and the law enforcement agencies to enhance maximum security of passengers. Security onboard board and anti-weapon system were put in place to guarantee passenger security.
With this security measures put in place, southwest airline was able to gain customers trust. Another strategy used southwest to withstand the 9/11 shock, was continue streamlining and automation, this was an important strategy for south west to cut cost and maintain its competitive advantage. Southwest expanded it ticket counters and security checkpoints and has increased airport workforce. Southwest airline streamline its board process by replacing the traditional plastic boarding system with an automated one, and plan to introduce the new self check technology to reduce boarding times and reduce queuing in boarding gates.
Critically evaluate the threats faced by Southwest Airlines and the airline industry in general. Illustrate how to overcome these possible threats. Weather Uncertainty: As we have seen most recently with Hurricane Sandy, natural disasters can cause major losses in business for the airlines, and because Mother Nature is so unpredictable, there is always major uncertainty revolving around the company Immense Competition: The airline industry is incredibly competitive, and the race to get the consumer’s business often leads to margin contraction.
The major competitors of southwest are JetBlue Airways and US Airways JetBlue is significantly smaller than southwest and directly competes with Southwest in most of their core markets. Jetblue will continue to be a major threat for southwest because the fly different type of airplane that are more spacious and offer first class facility to the same locations as southwest, almost at the same price.
Vulnerability to Rising Oil Prices: When jet fuel prices rise, airline companies are faced with the decision of passing the pain onto their customers and possibly losing business, or swallowing the costs and ruining their margins Exposure to Shaky American Economy: The Company operates mainly in the United States of America, and thus any economic slowdown exclusive to the American economy could drastically hurt Southwest’s business, while other international companies possess the ability to weather the storm.
Other major threat faced by southwest is Threats of new airline security measures, terrorist attacks, and stricter airline industry regulations are affecting all firms throughout the industry and southwest is no exception. Southwest is faced with increased war risk, insurance and passenger security laws and directives. The three greatest threats that Southwest faces are the decrease in air travel, the increase in competition and security threats.
Southwest faces competition from low fare airlines with similar business models. Because southwest has been a leader in the industry forging the groundwork for low-cost airlines, many other airlines have emulated its business model. This is causing a significant threat for Southwest because the decrease in commercial air travel has lessened the opportunities for airline service.
One of the way to Neutralize these threats is by increasing its customer service and building on customer loyalty, and introducing rewards programs to attract more customer and ease of use for booking flights. Conclusion Conclusively the management of southwest airline should take advantage of the new fuel-efficiency technologies, which will help to reduce the fuel consumption of their aircrafts and thereby reducing cost of flying an aircraft.
A reduction in operating cost will lead to further reduction in the prices of ticket. They should also try as much as possible to increase the capacity of some long-haul fights, and expanding their discreet collection of ancillary fees. Aside the current reward program management should introduce other programs, like promotion (buy two, get one free) ticket or buy a round trip ticket and get 10% offer your next purchase.