External Factors that Shape Airliners Strategy

Economic events that occur outside the airline industry can affect airline profits. Rising fuel costs due to political or economic events reduce airline profit. Weather conditions, such as snowstorms, can negatively affect air travel.

  • Political:

If any organization is trying to start up a business in a country then it should be accepted legally and politically. Government needs to approve that organization to survive.

From the very beginning U.S Airlines Industry is getting support from government and they had no legal restriction upon airlines industry, which helps the industry to grow. It supported the new form to introduce in the industry. For example, in early 1967 Kelleher field an application with the Texas Aeronautics Commission (TAC) for the new company (Southwest Airlines) to begin serving Dallas, Houston and San Antonio. The TAC approved the application to introduce the new airlines company due to the legal support.

 

More over law of USA also help the airlines industry to reduce unfair competition. Evidence says that Braniff and Texas International were engaging in tactics to harass Southwest’s operation. Southwest convinced the U.S government to investigate what it considered predatory tactics by the chief rivals. Later Braniff and Texas International were indicated by a federal grand jury for conspiring to put Southwest out of business, such conspiracy was violation of the “Sherman Antitrust Act”.

 

When congress passed the “Airline deregulation Act” in 1978 it helps the airlines industry to use the new route, specially Southwest got the opportunity to fly between Houston and New Orleans.

 

The commercial air travel systems in the United States was suddenly and unexpectedly shamble because of the terrorist attacks on the World Trade Center and the Pentagon on September 11, 2001. Adjustment to flight schedules at some airlines was further complicated by the fact that some nervous travelers and airline attendants were no longer willing to fly. So the U.S airlines industry was fall in great financial trouble. As a result government helped US airlines industry. Evidence show that in the weeks following the terrorist attacks, Congress passed a $15 billion aid package to assist airlines in coping with their financial crunch, the program involved $5 billion in cash grant to help airlines cover losses and negative cash flows stemming from traffic declines and $10 billion in loan guarantees.

 

More over government allowed financial support for specific airline company, like- Southwest gain a special pretax of $169 million and Boeing gain a special $58 million pretax charge from federal government.

 

Thus government and legal condition support US airline industry a lot to survive.

 

  • Economical:

Economic condition of a country needs to allow an industry to survive in that market. The purchasing power of USA people allow airlines industry to survive in that country. So the airline company targeted those places where the economy is already developed or economy is booming. So at the beginning Southwest airline company targeted California, where the economy was booming and major cities were far enough apart to make air travel and it was an attractive alternative to driving.

 

Normally the US economy is very stable and strong. But war and terrorist attack may cause an enormous disaster to the economic condition which incurs a great loss of Airlines Industry. Evidence shows that the airlines industry as a whole lost $3.5 billion in 1992because of the slowing economy due to Gulf War. Gulf War produced a slowdown in air traffic and the industry was expected to lose as much as $4 billion in 2001.

The terrorist attack of 11 September cause the unprecedented 3 days shutdown of flights, the sudden erosion of passenger traffic and strict new security measures threw major airlines into a financial crunch of huge proportions. After the terrorist attack the airline industry lose almost $1.5 billion due to slow down in the economy. On the first day of trading after the terrorist attack, investors worried about almost empty flight, higher costs from added security measures and a clouded financial future for the whole airline industry caused airline stock prices to plunge.

 

Airlines were unable to fly the same number of flights that were in place before the terrorist attack, new security measures were expected to slow passengers moving through terminals and to increase gate turnaround time, because of greater attention to baggage, check in of passengers at ticket counters. These procedures meant lengthening ground times and altering the duties. Adding 30 minutes to each stop would mean that a plane that would used to fly six 2 hours trips a day could fly only four or five.

 

In order to contain costs and detour need for more planes to accommodate prior flight schedules, many airlines respondent with immediate announcements of schedule cut back. In the last half of September, most major airlines announced cutbacks on international flights-Delta, American and TWA cut 40% of their international flights. Domestic flights were also cut with late night flights and flight on weak performing routes gearing the brunt.

 

The terrorist attack damaged the financial condition of the US airline industry. As a result most of the company cut flight schedule and layoff of employees. For example—American West eliminate of food service on all flights while adjusting to new security requirements, cut flight schedule by 20%, Layoff of 2,000 employees. As a result the economic condition of general USA people went down. Thus reduce the flight passenger of US airlines industry.

 

  • Social:

If organizations do such thing that doesn’t allow by the society, then it’s a barrier to the organization to survive in that locality and thus they need to change their strategy.

So airlines industry of USA usually do such things and promote their business in such way that easily accepted by the local people. So Southwest Airline Company decided to dressed its flight hostesses in colorful hot pants and white knee high  boots with high heels, because the people of USA is open minded and accept all these promotion.

More over there were no social obligation to take alcoholic beverage and Southwest got attention by giving passengers free alcoholic beverage during day time flights.

 

Again, southwest encourage the people of Houston, Dallas and San Antonio by saying that it’s a “love trianglewhich encourages the people of that locality to use southwest’s flight. Southwest began using the tag line now there’s somebody else up there who loves you”. Southwest’s planes were referred to as Love Birds, drinks became love potions, peanuts were called Love Bites, drink coupons were Love Stamps and tickets were printed on love machines.

 

The “love campaign set the tone for southwest’s approach to its customers and for its efforts to make flying southwest an enjoyable, fun, and differentiating experience and all those things are accepted by the local people and there were no social obligation for those promotions.

 

Southwest give preference social and cultural factor at the time of recruiting, so they hire people to fit into the local culture and they trained employees about the culture. Company believes that its growth is primarily a function at the rate at which it can hire and train people to fit into its culture.

 

  • Technological:

Before introducing itself in a country a company need to observe whether there is enough technological support is there or not. Airline industry itself is a high tech industry. It needs technological support for air craft, it needs ground equipment and wireless communication support. More over a company need strong financial support to maintain such sophisticated technology.

 

Company who doesn’t have such technical support may borrow parts from other airlines company but they have to maintain those technical facilities.

 

For example—the Southwest Airline Company was short of ground equipment and most of what it gad was used and worn. Plane maintenance had to be done at night when the planes were not flying and money for parts and tools was tight. So company personnel arranged to borrow needed parts and tools from the rival airlines company.

 

  • Citizenship:

A company should have some responsibility for the people of society as well as the employee’s family members. US airlines industry also maintains such strategy and many firms participate in charity programs. From the case we have found that southwest and its employees contributed almost $740,000 to help support Ronald Southwest Houses, including $3, 000 in cash donations from the company and $302500 in free air travel for families staying at Ronald Southwest Houses in cities served by southwest.

 

Again, South Carolina Company proposed holding a final three rounds arm- wresting contest, Kelleher accepted the offer and insisted on responding Southwest in the event. The loser of each round had to donate 5,000 to a charity of the winner. Kelleher lost, but the event gave southwest a good impression.

Attractiveness of Airlines industry

 

In order to find out weather the pasta industry is attractive or not, we have to go through a Porter’s five forces model.

 

Porter’s Five Forces model

 

Force 1: Rivalry within the industry:

If the number of competitors is large in number and they are very powerful, than rivalry increases, market share of each company goes down, profitability decreases and attractiveness of the industry goes down.

 

In the Airlines industry we have seen the similar scenario, which is discussed below through analyzing several factors of Porter’s five forces.

 

a) Price is an Issue for Airline Industry:

The product of airlines is the seats of airplane and by nature these are undifferentiated products. It is very difficult to differentiate among the features, quality of the seats of planes. To sell such products the airlines companies need to lower their price to attract customers. So it becomes difficult to make profit because the other airlines companies also reduce their price to sell their seats. For example, the South West had reduced their fares up to $13 and other competitors also started reducing their price of tickets. So attractiveness of the airlines industry goes down.

 

But some of the airlines take initiative to add some features and benefits to their services and differentiating their services from others and increased their sales and making profit.

For example, South West airlines had differentiated itself by offering low-fare, short-haul, and point-to-point strategy. The South West was the first to innovate 10 minutes turn round time to offload and on load passengers and thus provides quickest service to the passengers. They also introduced two-tier on-pick/off-pick pricing structure to reduce the price of the ticket.

 

b) Number of competitors & size of competitors:

The markets of USA for airlines industry don’t have enough traffic to support another air carrier, which means the number of competitors is very large in airlines industry. There are 10 large companies dominating the airlines industry of USA.

 

The Operating revenue of the TOP 10 U.S commercial airlines (revenue in million)

 

From the above scenario it can be seen that the size of competitors is also very large as each of them have high operating revenues.

 

More over each of these airlines companies have many planes, large number of employees. For example, South west have around 21000 employees and 353 gets flying over 58 airports and 57 cities.

 

As the number of competitors and size of competitors both are large, the rivalry within the airlines industry is very high and attractiveness goes down.

 

c) Growth of Demand:

Even if the growth is slow, negative or stagnant, there is a natural tendency that the industry will grow. The airlines industry of US was already mature enough and demand is growing very slowly.

 

But after the attack on World Trade center and the Pentagon on September 11, 2001 the growth of airlines industry was even worse. The unpredictable three days shutdown of flights, the sudden erosion of passenger traffic and strict new security measures effected the growth of the airlines industry negatively.

 

Estimation revealed that pre attack the airlines industry lost $1.5 billion in 2001 due to the slowdown in economy and the losses for US airlines in the wake of terrorist attacks could reach $7 billion in 2001 and the slack demand for air travel could last well into 2002.

 

So from the above discussion it can be said that, the growth of airlines industry of US was stagnant and even negative sometimes. The rivalry among competitors is very high due to that and industry becomes unattractive.

 

d) Airliners use price to sale volume:

The airlines seats are perishable products because if the flight takes off, the empty seats get expired and the airlines companies can’t make profit. For this reason the airlines companies try to sell the seats in volume to make as much profit as possible. To sell large number of seats the airlines companies need to reduce their air fares. As a result the profitability declines and the industry becomes unattractive. The U.S commercial airlines typically had to fill close to 65 percent of the available seats in order to break even. So to gain profit they had to sell their seats in large volume.

 

Two distinct types of travelers buy the tickets, the Time-sensitive business travelers and the Price-sensitive leisure travelers. The business people have inelastic demand, at what ever price they buyers the tickets but the leisure travelers are very much price sensitive.

 

On January 22, 1973, in an attempt to fill empty seats on its San Antonio-Dallas flights, South West cut its regular $26 fare to $13 for all seats, all day, all time. Other airlines companies also started to reduce their fares to sell their seats.

 

e) Existence Brand loyalty:

The airlines seat is such a product for which, the consumers most of the times may not have specific brand preferences. There are many airlines companies and the services are almost similar, this is why, consumers may choose any one of the airlines companies at any time depending on their price.

 

South West, at the beginning of their business, instituted $ 20 one-way fares to fly the golden Triangle, well below the $27 and $28 fares charged by rivals, than many of the price sensitive travelers started to buy tickets from them. From this incident it is clearly revealed that the customers don’t have any preferred airlines and brand loyalty doesn’t exist.

 

f) Exit cost vs. Staying in:

If any company is making a loss and want to shut down the company but can’t exit from the business because the company need to spend huge amount to get out of the business then the company decides to stay in the industry.

 

Even if the airlines industry is not doing that well after September 11 incident, they can’t exit from the business because they have invested a huge capital in airlines business and it will cost them a lot if they want to exit from this business. The airlines companies have invested huge amount in buying the planes, renting and leasing, in the promotional campaigns. So if they want to get out of the business it will be very difficult to sell the jet planes and other expenses will also waste.

This is why; the exit cost is higher than staying in the industry. As a result of the high exit cost the competitors in the industry increases, rivalry increases, profitability decreases and attractiveness of the industry goes down. 

 

Result:

The airlines sell undifferentiated product, the number and size of competitors is very high,  demand is growing very slowly, airlines use price to sell volume, brand loyalty doesn’t exist and exit cost is also very high. All this increases the rivalry among the existing competitors of the airlines industry, market share of each company goes down, profitability decreases and attractiveness of the industry goes down.   

 

Force 2: Threat of entry from new competitors

A) Existing entry barriers:

If the existing barriers are high, then the threat of entry from new competitors is low, rivalry within the industry is also low and thus the attractiveness of the industry goes up.

The following factors works as entry barrier to new competitors.    

 

a) Economies of scale:

The airlines companies have high fixed cost because the have to buy planes, ground equipments, rent or lease space for their planes. In order to distribute the fixed cost among each seats sold, the airlines companies need to achieve economies of scale. This means if they sell more seats, the fixed cost will be shared among the units produced and thus the fixed cost will be reduced.

 

But to achieve economies of scale is not easy. The new companies can’t sell large number of seats at the beginning of their business. For example, at the beginning the South West’s passenger loads were disappointingly insufficient on a number of the flights, some days the total number of passengers on all 18 flights would be fewer than 250.

The economies of scale act as an entry barrier for the new companies, who want to enter in the industry.

 

b) Learning curve effect:

The more one company get experienced the less mistakes it will do, efficiency will increase, and as a result their cost will go down, profitability raise.

To achieve efficiency, South West has recruited talented CEO, senior stuffs, who are innovative and unconventional. They have also given importance to increase their labor productivity. One study found that South West had an average of 2.2 station personnel per 1000 passengers in 1994 versus an industry average of about 4.2. South West has average 83.4 employees per plane compared to the average of 121.7 of South West’s 8 largest U.S rivals.

 

With the help of this efficient and productive stuffs South West was able to offer 10 minute turn round time to off-load and on-load passengers. In later years as passenger volumes grew and many flights were filled to capacity, the turn round time expanded to 15 minutes and then 20 minute, but even so the turn round times at South West were still short than the 40-60 minutes typical at other major airlines.  For the learning curve effect South West was able to become successful and became profitable.

 

The airlines industry has learning curve effect and it acts as a barrier to the new competitors, the threat of new entrance goes down; the attractiveness of the industry goes up for existing companies.

 

c) Brand preference/ customer loyalty:

If the customers are brand loyal, than even if new companies come up with new products, the customers will stick to their old brand. So the new competitors find it difficult to achieve a market share in that market.

 

But the buyers of plane tickets are not brand loyal. They want to buy the tickets which are low in price or easily available. As the Brand loyalty doesn’t exist in airlines industry, the threat of new entrance goes up, the competition increases and the attractiveness of the industry goes down for existing companies.

 

d) Capital requirement:

The airlines industry by nature requires high capital investment. For example, the investors of South West contributed $543,000 initially, then again in 1971 another $7 million to start up the business. More over the expenditures and the maintenance cost of the airlines companies are also huge. The airlines companies have to pay salaries and benefits to the large number of employees, the aircraft fuels are also very expensive, they also have to spend a lot in renting and leasing.

 

The South West had budgeted $700,000 for advertising in the first year of its operation. More over, after the 11th September, the airlines companies had to spend about $220 million per day in cash to cover ongoing expenses.

 

As the airlines industry requires high investment, the threat of new entrance goes down, the competition decreases and the attractiveness of the industry goes up for existing companies.

 

e) Access to distribution channels:

The travel agents, the airports are the distributors of airlines who help them to sell their tickets and operate flights.

 

The airports are few in numbers and sometimes creating pressure on the airlines. For example, when South West refused to move its flights from Dallas’s Love Field to newly opened Dallas-fort Worth (DFW) airport, the officers of DFW became furious and file a case on South West.

 

The travel agents play an important role as a distributor. In 2000 about 30 percent of South West’s tickets were sold through travel agents. But after introducing the company website, through which the customers can reserve and purchase tickets, South West was able to by pass the costs paid to travel agents.  But the companies which don’t have this facility face pressure from the travel agents.

 

The new companies in airlines industry don’t get proper access to the distribution channels after entering the industry, than the threat of entry from new competitors goes down, the competition decreases and the attractiveness of the industry goes up for existing companies.

 

f) Regulatory policies:

The government of US has introduces Airlines Deregulation Act in 1978 and also taken initiative to improve the condition of airlines companies by providing incentives after the September 11, 2001 incident.

 

When South West filed an application with Texas Aeronautics Commission (TAC) to start their airlines business, TAC approved their application without any obligation. After that when Texas International filed a case against South West, TAC also provide a rule in South West’s favor.

 

From above scenario it can be said that, the U.S airlines companies don’t face any regulation from government, which may hamper the entrance of new competitors in the industry, than the threat of entry from new competitors goes up, industry become unattractive for existing companies.  

 

B) Reaction from existing players:  

The existing players of the airlines industry severely protest the entrance of the new companies. For example, when South West wanted to start their airlines company, the three airlines- Braniff, Continental and Trans Texas obtained a temporary court order that prohibited TAC to issue South West a certificate to fly. For the severe reaction of the existing competitors South West couldn’t start its service before June 17, 1971 even though they had plan to start it in 1967.

 

More over, when South West wanted to fly into Harlingen Airport, a market served primarily by Texas international (TI), TI forcefully opposed South West.

Due to the severe reaction of the existing players, the airlines industry becomes unattractive for the new competitors. The threat of entry from new competitors goes down, airlines industry become attractive for existing companies.  

 

Result:

The airlines industry needs to achieve economies of scale, learning curve effect also exists, needs high capital requirement, access to distribution system is inadequate and the reaction from existing players is severe. All this acts as an entry barrier to the new companies in airlines industry and threat of new entrants is low, even though no brand preference and negative regulatory policies were there to hamper the entry of new competitors.

 

Force 3: Pressure from substitute products

 

As far as intrastate airline industry in U.S. is concerned there was always a pressure from substitutes. However, in the given case there was no direct evidence that airline companies are facing pressure from substitute options of traveling considerable distance. In the case of Southwest Airlines, when Rollin King came up with the business venture of starting Southwest Airlines operating in San Antonio, Dallas and Houston, the most cost and time effective transportation in that particular region was by driving automobile. His core idea was to provide customers with an airline which gives them a low fare, and convenient scheduling for traveling. Here Southwest was arranging an alternative for travelers who were used to use automobile for distance traveling. It is the same for all the airlines companies in service in the region. Although people of the particular territory is preferring more on the services of these airlines, the option of driving automobiles still exists. The price of substitute like automobile is always attractive compared to price of airline traveling and that is why Rollin King wanted to be a pioneer in airline industry by competing against automobile traveling by providing a competitive fare of air tickets. Almost all air travelers did not distinguish between automobile traveling and air traveling, their only concern was price and convenience and at the same switching to the automobile traveling was not at all a problem for travelers.

 

However, for interstate airline industry in U.S. there was no pressure from substitute because usually distances between two different cities in two states are very long. So, it was not time effective and cost effective for travelers to avail automobile journey from one state to another.

 

Results:

So as far as intra-state airline traveling is concerned some pressure from substitute was there. On the other hand for inter-state airline industry pressure from substitute was not available. As a result, overall pressure from substitutes on airline industry was moderate. Due to low or competitive fare of air tickets, industry was moderately attractive.

Force 4: Pressure from suppliers bargaining power

 

There are lots of suppliers of airline companies. Among them fuel suppliers and the aircraft manufacturers are the major suppliers of the companies. The other rest is usually ground equipments suppliers. These suppliers effect the airlines companies significantly in terms of there cost of service.

The numbers of major aircraft producers are very limited. So as an airline company there is less opportunity to choose suppliers from. Limited suppliers meant higher price of the aircrafts for the airline companies. Moreover they don’t have the liberty to go to other producers and buy the aircrafts as they are pricing almost the same as there competitors.

The other major input of the airline companies are the fuel. In the case it is clearly indicated that in the recent past the price of airplane fuel has shoot up and the suppliers are pricing the airline companies quite high for the fuel. Furthermore the companies have no choice but to buy the fuel to run their aircrafts.

 

  • Collaborative partnership with suppliers:

There was no clear evidence about the airline companies building any collaborative partnership with their suppliers. Although in the case, there was an incident were the Southwest Airlines bought three 737-200 from Boeing at a discounted value of $4 million where the original price was $5 million. Moreover being the launch customer the Southwest Airlines bought different models of 737 for discounted value. So there were some indications of relationship between the suppliers of the airline and the airline company itself.

 

Result:

After analyzing the case it can be said that airline companies has no control over their suppliers of aircrafts and fuel. As a result, pressure from suppliers bargaining power was very high in airline industry which eventually implying that attractiveness of airline industry is low.

 

Force 5: Pressures from buyer bargaining power

 

It is a very simple knowledge that the numbers of consumers of airline companies are vast. Although the case focused on the time and price sensitive consumers, they are also very large. They play a great role in determining the attractiveness of the total industry.

 

a) The size and the numbers of buyers:

As discussed earlier the numbers of the customers are quite large. In recent years, almost every people take airline as a convenient transportation whenever they get the opportunity. So the share of the customer is pretty high for the airline companies. As for the size of the customers, they are usually small in nature. So automatically the customers loose the power to bargain with the provided service by the airlines companies.

b) Buyers are well informed about seller products and costs:

As modern era is more shifting to a more technological state, people are getting more knowledgeable about almost everything. It is seen in the case that the airline companies are so much in promoting and marketing their service that customers are well-informed about the company and the service. Because they are well-informed they are not easy to be misguided in deciding.  This ultimately enhances the power of bargaining of customers and choosing the best airline for their own convenience.

 

c) Zero threat of Backward link from Buyer:

The size of the customers are quite small as per the case is concern. Moreover setup costs of airline companies are pretty high. So it is impossible that the small size customers would opt to backward link and build an airline company for their convenience. In this aspect the customers could not pressurize the companies of the airline industry.

 

Results:

As far as buyers’ bargaining power is concerned, in airline industry buyers have less or no bargaining power. Because number of buyers of airline industry is huge and there is no threat of backward-link from buyers. However, buyers are well informed about the airline company as a whole. So, it can be said that from the buyers’ bargaining power point of view airline industry is attractive.

 

 Findings of Porter’s five forces:

 

After accomplishing the industry analysis with the help of Porter’s five forces, the following conclusions are established.

 

  • There is fierce rivalry among competitors which predicts that the attractiveness of the airline industry is low.
  • The threat of new entrants is low. So the attractiveness of the industry from this perspective is high.
  •  Pressure from the substitute is moderate to low. This suggests that the airline industry is attractive.
  • The airline industry in unattractive as suppliers bargaining power is quite significant.
  • Because of high number, the bargaining powers of consumers are low. So the attractiveness of the airline industry is high.

 

Comments:

Considering all the elements and facts of the porter’s five forces it can be concluded that the attractiveness of the airline industry is moderate to High. Although the rivalry within the airline industry and bargaining power of suppliers are high and making the industry moderately unattractive, however, other factors like buyers’ bargaining power, threat from new entrants, and threat of substitute products are low and making industry attractive. As a result, these attractive factors supersede the two unattractive factors and eventually making U.S. airline industry attractive.

 

Southwest Airline’s Strategy

 

As far as airline industry in U.S. is concerned it has been observed that competition among airline companies was severe. Each and every airline companies were involving themselves into immense competition as far as fare of air ticket is concerned. Airline companies were deadly trying to provide lowest possible fare for their customers. To achieve competitive advantage over rival airliners airlines companies were formulating and following different strategies. Southwest airline was one of the top leading strategic airliners. Southwest airline had followed different small dynamic strategies with the ever dynamic airline industry. However, Southwest’s core strategy was ‘Low Cost Provider’ strategy and over its thirty year of operation it also followed other strategies to strengthen its low cost strategy. Southwest’s strategy is next subject to discussion.

 

Southwest’s Low Cost strategy:

From the very beginning Southwest airline was following low cost strategy. To achieve low cost objectives Southwest took all measures necessary. In the case it has been observed that in 1966 a dynamic entrepreneur, Rollin King, came up with a plan to start a low cost/ low-fare airline that would shuttle passengers between San Antonio, Dallas, and Houston. His business concept for Southwest was to attract passengers by flying convenient schedules, getting passengers to their destination on time at lowest possible fares, and making sure they had a good experience. Southwest Airline started its operation in 1971 and its target market was time sensitive business travelers and price sensitive leisure travelers who wanted low fares. Southwest was successful in achieving its low cost objectives and eventually in 2001 Southwest Airlines was the only major short-hop, low-fare, point-to-point carrier in the U.S. airline industry. How Southwest Airlines was successful with its low cost strategy is discussed below.

 

A) Undercut competition through price:

Among two options of low cost strategy Southwest Airlines was undercutting competition through price. Its fare was always lower than the going fares charged by rival airlines. For example, initially, Southwest Airlines instituted $20 one-way fares to fly the ‘Dallas-San Antonio-Houston’ golden triangle, well below the $27 and $28 fares charged by its competitors. For San Antonio-Dallas route Southwest Airlines charged its passengers as low as $13 per seat. As a result, its competitors failed to compete with Southwest Airlines as far as fare is concerned. Not only Southwest Airlines kept its fares low but also it had kept its overall cost structure low by controlling different cost drivers.

 

B) Control cost drivers:

 

a) Economies of scale:

As being a large scale airline company Southwest Airlines had to have economies of scale in its operations and it had it. Like other airline companies Southwest was also carrying huge fixed cost components in its business like large number of aircrafts, big number of ground facilities. In 2000, Southwest Airlines was operation 356 jets in 58 airports trough out United States which indicates Southwest Airlines’ huge fixed cost components. So, to survive with these huge fixed costs it had to achieve economies of scale by getting as much as passengers possible and Southwest Airlines just did that. In 2000, it had served 60 million passengers. As a result, Southwest Airlines not only superseded its costs but also made huge revenue of $5 billion. So, by getting huge number passengers Southwest Airlines lowered its overall fixed cost and hence achieved healthy economies of scale.

 

b) Learning & experience curve:

Learning & experience curve plays a vital role in almost every kind of business. It helps a company to enhance their productivity by reducing mistakes and wastage of both time and money. Specially for the firms who are following “low cost” strategy, it is a must to smoothen the business. In the case, Southwest Airline frequently used their experience to achieve the competitive edge over competitors and the new entrants. Initially in January 1971, Lamar Muse was appointed as the CEO of Southwest Airlines. He was an aggressive and self-confident airline veteran who understood the airline business well and had the entrepreneurial skills to tackle various challenges. Because he was a veteran and had lots of experience in the airline industry, he was able to transform the company from a new entrant to an efficient business unit. Moreover to farther strengthen the company,   he recruited lots of talented senior staffs of other carriers who lost their jobs during the slumps in the airline industry in late 1970. As both the company and the employees became more experienced and competent, new and effective ideas were also bobbling up. Bill Franklin, the head of Southwest’s ground operations figured out that the time it was taking to off-load passengers and baggage, refuel the plane, clean the cabin and restock the gallery, on-load passengers and baggage, do the necessary preflight checks and paper works and push away from the gate was too long. From his experience he calculated that if the ground and the flight crews work efficiently they can do all the above things within 10 minutes. In the end he was able to achieve the goal which helped the airline company save precious cost of taxing in the airport for long. Time and time again they were able to fight with the competitors and all kinds of hazards with the help of their experienced top management and employees.

 

c) Cost of Key Inputs:

For Southwest Airlines key inputs are aircrafts, labor, fuel, airport and administrative facilities. Southwest was successful in keeping costs of these key inputs low. Southwest Airlines had followed some unique strategies while pursuing ‘lower key input costs’.

 

  • Southwest Airline’s aircraft fleet consisted entirely of Boeing 737s. Having one type of aircraft minimized the need and cost of spare parts inventories and also improved proficiency and speed in maintenance work. Furthermore, Southwest Airlines was the launch customer of Boeing’s 737-300, 737-500, and 737-700 models of aircrafts. As a result it got aircrafts from Boeing at favorable prices. It had also bought three Boeing’s 737-200 model aircrafts, which pilled into Boeing’s unsold aircraft inventory, at a discounted price.

 

  • Southwest Airline had very low labor cost compared to other rival airliners by having less number of labor. It did not employee extra labor for cleaning aircraft between gaps of two flights. When passengers deplaned flight attendants were responsible for cleaning up trashes and make plane ready for next flight. On occasion, pilots pitched in to help attendants with facilitating turnarounds. Southwest Airlines always emphasized on high labor productivity. In 2000, according to Air Transport Association, Southwest Airlines had one employee for 2145 passengers, whereas, industry average was 1119 passengers per employee. So, by having less number of labors Southwest had been able to keep its labor cost low.

 

  • Southwest Airlines was also successful in reducing its ground and administrative costs. In its ticketing system it has both electronic ticketing (through website) and travel agents. However, Southwest Airline encouraged electronic ticketing because it reduces use of paper tickets which involves costs of designing and printing tickets. It had decreased its commission rate on ticket purchase from travel agents and on paper ticket purchase. As a result, ticketless travel increased for over 80% of all sales, which significantly reduced paperwork and back-office processing. In another case, Southwest Airlines installed 800 new computers for a new reservation center and saved $1 million installation cost by assembling the PCs on their own.

 

  • Southwest Airlines tried to steer clear of congested airports, instead serving airports relatively near major metropolitan areas and in medium-sized cities. This helped reduce the fuel costs associated with planes sitting in line on crowded taxiways or circling airports waiting for clearance to land. It also allowed Southwest Airlines to avoid paying the higher landing fees and terminal gate costs at high traffic airports.

 

d) Link with other activities in the company or industry value chain:

A company can always strengthen their strategy and lower cost by linking activities of all the departments. It helps to create a synergistic effect among departments. In the case there was a minor evidence of this phenomenon. Southwest Airlines introduced free alcoholic beverages during daytime for marketing purpose. But the management also kept in the mind that most of the passengers of those day flights are business people and the possibility of them drinking in the flight is slim. As a result they are actually saving cost by opting to serve the alcoholic beverage in the daytime. Ultimately Southwest Airline was able to fulfill the purpose of marketing as well as saving the extra cost for the company.

e) Benefits of vertical integration:

Vertical integration refers to a state of a company where the company participates in all the parts of value chain. It is usually carried out to reduce costs. There were no direct or clear evidence that Southwest Airline tried to vertically integrate, but they have taken some steps vertically to reduce cost. The company always encouraged the customers to buy the tickets from the website. They tried to bypass travel agents and act as a distributor to sell tickets in their websites. It helped the company to reduce the cost of paying the travel agents for handling the ticketing process and reducing the personnel needed to staff Southwest’s own reservation centers. Moreover they outsourced by signing several contracts of with Boeing in buying the aircraft at a discounted rate.

 

Although Southwest Airlines was a low cost provider but it was also undertaking approaches to differentiate it from other airliners. For example, Southwest Airlines had created some sort of image in the industry through marketing and promotion activities. Southwest dressed its flight hostesses in colorful hot pants and white knee-high boots with high heels and provided free alcoholic beverage to its day time passengers, which eventually attract passengers to some extent. Southwest also did used tag line “Now somebody else up there who loves you” as another image creating scheme. These activities made Southwest Airlines an airline where love is everywhere. The “Love” campaign set the tone for Southwest’s approach to its customers and for its efforts to make flying enjoyable, fun, and differentiating experience. Southwest Airlines also intended to ensure value for its customers’ money and provide best possible service. Southwest Airline’s Former CEO Kelleher said:

“Everybody values a very good service provided at a very reasonable price.”

Along with Southwest Airline’s low cost strategy its differentiation approach and best possible service is further strengthening its position in the U.S. Airline industry.

 

Recommendation

 

A) Explore new market segment:

 

Southwest Airlines has become one of the most successful national passenger carriers in US market. As time passes every company requires growth in their sales and market share. In the case of Southwest Airline, they are facing the problem of stagnant growth in the US market. So the logical extension is to go internationally. In the last 30 years they have gathered enough experience and competency to penetrate different markets and operate successfully.

 

B) New Strategy:

 

It has been observed that Southwest Airlines is following “Low Cost Provider” strategy. However, one of the important problems with this strategy is that low cost leadership is not sustainable. So, to avoid this risk Southwest should this of differentiating its service through extensive R&D work. Southwest should introduce new class in an aircraft. Currently, Southwest Airlines is providing only one class in every flight. So, if it introduce first class and luxurious business class with high and attractive features these will attract passengers from high end of the society. As a result, Southwest will be available with more number of customers then it has right now.

 

C) Dynamic in-flight service:

 

The target markets of Southwest Airlines are time sensitive business travelers and price sensitive leisure travelers. Meanwhile, it has been observed that Southwest Airlines is providing informal in-flight service towards its all travelers. Southwest should divide its in-flight service in two different formats. One in-flight service will provide business travelers a formal atmosphere in the jet and another in-flight service will provide leisure travelers a casual atmosphere in the plane. This combination of formal and informal in-flight approach will enable Southwest Airlines to have a dynamic image among its travelers. Moreover, this dynamic in-flight service will allow Southwest to have a dynamic flight scheduling for two different consumer groups.

 

D) Collaborative partnership with the suppliers:

 

As far as suppliers bargaining power is concerned in airline industry suppliers like fuel suppliers and aircraft suppliers have immense power over its buyers like different airline companies. So, Southwest Airlines should overcome this problem by going in collaborative partnership with its aircraft supplier namely Boeing to reduce the cost of aircraft. This partnership will be a win-win situation as the suppliers can cut down the inventory cost and the Southwest will buy the aircraft at a cheaper rate.

 

External Factors that Shape Airliners Strategy