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SouthwestAirlines
Group2(Management/Marketing)

I.Introduction
A.TeamMembersandmanagerialfunctions
1.HartleyGrimm(Management)
2.KristenBarson(Marketing)
3.NickKrynski(Management)
4.JesseCoad(Management)
5.DanielleDevine(Marketing)
6.JoyceJackson(Management)
B.PerspectiveofGroupinReportOurgroupisanalyzingSouthwestAirlineswithaconcentration
onitsstrategyasitrelatestothecompanyscompetitivenessinrelationtoitsrivals.

II.IndustryDescription(HartleyGrimm)
A.HistoryoftheAirlineIndustrySinceitsinceptiontheairtransportationindustryhasbeena
dynamicallychangingindustry.Fromtheleapsandboundsthattechnologyhasbroughton,through
theterroristattacksin2001,therearemanychallengesthattheairtransportationindustryhasfaced.
Wewillbelookingatthepost9/11worldoftheindustryandhowithasgrownsincethattime.From
1970through2001airtransportationgrewandafastrate.In1970theairlinesweretransporting
nearly172millionpassengers,growingto615millionintheyear2000.Unfortunatelyforthe
financiallytightairlines,therecessionandterroristactivitiesonSeptember11thimmediatelycut
passengerlevelsbacktotheir1995equivalents.Amovethatallcompanieswithintheindustrywere
notanticipating,settingmanyupforbankruptcy.
B.CharacteristicsoftheAirlineIndustryTheAirlinesaregroupedinmanyways,includingtheir
sizeandwhattheytransport.Themostcommonclassificationsforairlinesarethemajorpassenger
airlines,lowcostcarriers,airfreight,andregionalorcommutercarriers.Themajorairlinesare
composedof14majorairlines.Threeofwhichhaveapriorityoncargotransportation.Sixofthese
inthiscategoryareoftenreferredtoasthe"Big6"howeveraftertheeventsofSeptember11th,there
hasbeenashuffleandnotsuchahighlabelingforthetopsixairlines.Themajorairlinestypically
operateatraditionalhubandspokeservice.Theseflightsarethetypemanypassengersare
accustomedtoo.Therearemain"hubs"thatareatfewairportsacrossthereservicingarea.Thesesare
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largerairportsthatcanaccommodatemuchlargeraircraftandtrafficvolumes.Offofthesehubsare
smallerrouteswithsmallerplanesthatmakeupthespokes.TogetfrompointAtopointBusually
revolvesaroundatriptoahubasaconnectionbeforereachingyourfinaldestination.Incontrastto
operatingoftheBig6majorairlinesthereareadozenorsolowcostandlowfarecarriers.In
contrasttothehubandspokesystem,carrierssuchasSouthwestutilizeadirectflightroute.The
downfallmanycriticshaveclaimedistheirlimitedtravelavailabilitytospecificcities.Despitethese
negativereportsofthelowfarcarrierstheyhavethrivedandcontinuetoseenewentrantsinthis
highlycompetitiveareaoftheairtransportationsector.Thisisinpartduetotheirtargetaudienceof
leisuretravelerswhoarefocusedonroutesofunder500miles.Withoutthemanyintertwining
flightsandsimplifiedschedulestheyareabletoattracttheirtargetmarketwiththeirlowerfares.
C.TheCurrentStateoftheAirlineIndustryTheregionalandcommutersectionisarapidly
changingsectorintheairtransportindustry.Therearejustover25suchcarriersinthecountry.
Manyoftheseareownedbyindependentcompanies,buthavebeencontractedoutbythemajor
carriersandcarrythenameslike"USExpress."Thesecompaniesfocusonconnectingfromsmaller
airportstothemajorairlineshublocations,helpingtoexpandtravelavailabilityforthelarger
airlines.Themajorchangeinthissectorisstemmingfromtheregionaljetphenomenon.Dueto
passengerperceptionofthesafetyofturboproptypeaircraft,manycompaniessuchasContinental
Expressareonahighprioritymissiontoconverttoallsmallerregionaljets.Theaircargoorair
freightsegmentsmakeupasubstantialportionoftheindustryaswell.Cargosectionsarethosethat
holdscheduledflightsforshipmentofcargo.Cargocanbecarriedoncargoportionsofpassenger
aircraftaswellasspecificallydesignedaircraftthatcarryonlycargo.Thesearenotthedestination
deliveryoptions,butthissectiononlyincludestheairtransitpart.Thissectorishometosomeofthe
mostprofitablecompaniesintheairtransportcategory.Despitetheextremesuccessthe1990's
broughttotheairlineindustry,manycompanieshaveenteredintoadownwardspiral.Withhighdebt
ratiosridingthebalancesheetsofmanycompanies,thedownturnofpassengertravelhasmanyof
eventhemajorairlinesscramblingforsurvival.Restructuringhasbecomethecommonpracticein
thepost9/11eraintheairlineindustry.NearlyalloftheformerBig6majorairlineshavefiledfor
bankruptcyorlookedforgovernmentassistance.Dwindlingprofitsareexpectedtoriseamongmajor
airlinesasthelowcastcarrierscontinuetolurethepassengersfromthestrugglinggiants.
Encompassedwiththeextremecostsfacingmajorairlinesitisatruefightfortheirlife.Laboristhe
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keytothesecompaniesastheircostsareaccountedforonaverageof40%goingtolabor.Despite
thebleaklookfortheindustry,thereishopeonthehorizon.Thekeyisinproperstrategic
managementoftheirassets,cashflow,labor,andscheduling.Theindustryisalreadyseeingan
increaseintravelthatisexpectedtocontinue.Unfortunatelyduetothemanyfactorsfromterrorism
togovernmentregulationscloudingtheview,itistoughtomakesoundpredictionsforanyspecific
airline.Itisforsuretosaythatdomestictravelbyairisheretostayforthebusinessandleisure
travel.Wemayseenewstrategiesandsectorsemergewithintheairtransportindustryduetothe
struggleforsurvivalhowever,theywillservethefundamentalneedsofthepassengersandcargo
thatneedtoreachtheirdestination.

III.CompanyDescription(KristenBarson)
A.SouthwestMissionStatementThemissionofSouthwestAirlinesisdedicationtothehighest
qualityofCustomerServicedeliveredwithasenseofwarmth,friendliness,individualpride,and
CompanySpirit.
B.CompanyBackground
1.TheEarlyYearsIn1966,aplanwasbroughtintoHerbKelleherslawofficebyaman
namedRollinKing,anentrepreneurwhoownedasmallcommuterserviceinSanAntonio.
TheplanwastostartalowcostairlinethatwouldtakepassengersbetweenSanAntonio,
Dallas,andHouston.Kinghadasimplebusinessconceptthatwasprettystraightforward.
Thisconceptwassimplytoattractcustomersbyflyingconvenientschedules,gettingthemto
theirdestinationsontime,presentingverylowfares,andbesuretopresentthebestcustomer
servicepossible.In1967,paperswerefiledtoincorporatethenewairline.January1971,an
aggressive,selfconfidentairlineveterannamedLamarMusewasbroughtinasCEOof
SouthwestAirlines.OnJune18,1971,theairlinestartedservice.Theflightsinclude6trips
betweenDallasandSanAntonio,and12tripsbetweenHoustonandDallas.Southwest
chargedtwentydollars,whichwaswellbelowrivalfares.Eventhoughthepricesofflights
wereastealthenumbersofpassengersonflightswerefewerthan250onallofthe18
flights.Oneconclusiontoattractmorecustomerswastodresstheflighthostessesincolorful
hotpantsandwhitekneehighboots,startgivingpassengersfreealcoholicbeveragesduring
thedaytimeflights,setupalovecampaignwhereflightsfromHouston,DallasandSan
AntoniowereknownastheLoveTriangle.Anotherideawastoaddanoutofstateserviceto
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addmoreflightstotheLoveTriangle,bypurchasingafourthBoeing737.Customerservice
andsatisfactionwasatoppriorityforMuse.Hemadeitapointtoquestiontheflight
attendantsaboutwhatcustomersweresayingsothathecouldgetabetterideaofwhatmore
heneededtodoinordertostriveforcompletecustomersatisfaction.Musealsospent25to
30hourseverymonth,ridingontheflightshimselfsohecouldpersonallyinteractwiththe
customersandcheckoutwhatwashappeningintheterminals.Musecameupwithapricing
structure.Weekdayflightsdepartingbefore7pmweretwentysixdollars,andallotherseats
ontheotherflightswereonlythirteendollars.
2.TheHerbKelleherYearsIn1972,trafficdoubledimmediatelywhenSouthwestdecidedto
moveitsflightsfromHoustonIntercontinentalAirporttoitsnewlocationattheHouston
HobbyAirport.March1978,MuseendedupresigningfromCEOand,HerbKelleherwas
soonappointedpresident,CEOandchairmanoftheboard.Kelleherwantedtokeepupthe
lowfare,shorthaulairlinethateveryoneknewaboutalthough,hedidwanttomakeone
change.ThischangeconsistedofaddingadditionalcitiesoutsideofTexas.Southwest
becamethedominantcarrierinBaltimore/Washington,LasVegas,KansasCity,andChicago
Midway.ItwasalsotheleadingcarrierinCalifornia,TexasandFlorida.Eventhoughthere
havebeenmanyobstaclesthrowninthepathofSouthwestbycompetitors,HerbKellehers
fighttosurviveonlygrewstronger,whichtrulycreatedSouthwestscultureandmadethem
theairlinetheyaretoday.
3.SouthwestTodayRecently,Southwestairlinesannouncedits31stconsecutiveyearof
profitabilityandbeganofferingonlineboardingpassesviasouthwest.com.Thisonlinefeature
providesadditionalconveniencetoCustomersbyallowingthemtoproceedtotheirdeparture
gatewithoutstoppingattheticketcounter,skycap,orselfservicekiosk.OnMay9,2004
SouthwestAirlineslaunchedservicetoPhiladelphia,its60thairport.Withtheadditionofits
Philadelphiaservice,Southwestnowoperates2,800dailyflightsto60airportsin59cities
acrosstheUnitedStates.

IV.CompetitiveEnvironmentoftheAirlineIndustry(NickKrynski)
A.DominantEconomicTraits
1.MarketsizeTotalrevenuewas$81.6billionfortheairlineindustryfor2003.

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2.ScopeofCompetitiveRivalrySellerrivalryisprimarilynational,butcompetitiondoes
occurregionallyandinternationallyaswell.
3.RivalsThereexistsabout12majorairlinesintheUnitedStates.Therealsoexistsanumber
ofsmallernationalandregionalairlinesthatcompeteonasmallerscale.
4.CustomersCustomersincludemostlyindividualtravelersandorganizations.
5.VerticalIntegrationNorealsignificantbackwardorforwardintegration
6.EaseofEntryFairlystrongbarrierstoentryexistintheformofcapitalrequirementsfor
investinginequipmentandregulations.Also,thereexistssomemarketsaturationin
certainmarketsthatdiscourageentry.
7.TechnologyandInnovationServicetechnologyissomewhatslowtotechnologicalchange
useofnewtechnologyhaschangeddistribution(etickets).
8.ProductDifferentiationTheactualserviceoftransportingpassengersfromonelocationto
anotherisfairlystandardized.Differentiationexistsincustomerserviceandthe
locationsinwhichanairlineflies.
9.ScaleofEconomiesModeratetoHighOnaccountofthis,airlinesaretryingtolessentheir
planesgroundtimestogetmoreRPM(RevenuePassengerMiles).Thelesstimea
planeinidleonthegroundandthemoretimeitsactiveintheair,generallyresultsin
moreflightsandmorerevenuefrompassengers.
10.CapacityUtilizationLoadfactorwas74.2%(2003),showingthatasanindustry,about3/4
ofcapacityisbeingused.
11.IndustryProfitabilitySomewhatlowthereislimitedmarketcapacitywithineachcitys
airports.Also,risingsecuritycostsanddepressedfares(inanefforttoattractcustomers
after9/11/01)arepreventingprofitability.Addedtothisistheunpredictablenatureof
fluctuatingoilprices.
B.CompetitiveForces
1.RivalryamongSellersModeratetoStrong.Airlinesprimarilycompeteonpriceand
servicehowever,toalesserextenttheydocompeteonfrequencyofflights,frequent
flyerprograms,reliabilityofflights,andotheramenities.Inrecentyears,pressures
havesomewhateasedasestablishedcarriershavestayedwithintheirexisting
geographicalareasofdominance,concentratingmoreonreturningtoprofitabilitythan
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expansion.However,therehavebeenpressuresfromlowcostcarriers(Southwest,
JetBlue)whomhavebeeninastateofexpansion.
2.PotentialNewEntrantsWeaktoModerate.Lowtrafficlevels(since9/11/01)andalackof
desirablegateaccessinairportshascontributedtotheindustriesbarriersofentry.Also,
thecapitalintensive,laborintensive,andenergyintensivenatureoftheindustrycan
causedifficultiesfornewentrants.
3.SubstituteProductsModerate.Passengerraillines,busservices,andpersonal
transportation(cars)areallsubstitutesthatexistinrelationtoairtravel.Theyare
generallylowercostandconsideredmoreconvenientforshorterdistancetravel
however,airtravelintheU.S.seemstobepreferredforlongerdistances.
4.SupplierBargainingPowerModeratetoStrong.Foranairlinecompany,aircraftsarecostly
andvitalpiecesofequipment.Withregardtocommercialpassengeraircraft
manufacturers,therearereallyonlytwosuppliersthatexist:BoeingandAirbus.The
limitednatureofthisindustrygivestheseaircraftsuppliersgreaterpowerinsetting
prices.Airtravelisalsoafuelintensiveindustry,thusmakingtheairlinesvery
sensitivetoswingsinfuelpricesofferedbyfuelsuppliers.
5.BuyerBargainingPowerWeak.Buyersofairlineticketsincludemanyindividualsand
organizations.Withsuchalargepoolofseparatecustomers,littlepowerisexertedby
thebuyersasacohesivegroup.
C.DriversofIndustryChange
1.TheRiseoftheInternetEconomyTheinternetandecommercehascompletelyalteredthe
airlinesdistribution(thebookingandticketingofpassengersforairtravel).Withtheadvent
ofetickets,travelerscanbookticketsontheirflightsthroughtheairlineswebsitesorathird
partywebsite(Orbitz,Travelocity,Expedia).Thishasallowedairlinestobypasstravel
agentcommissions,nearlyeliminatewastefulpaperwork,andreduceairlinestaffs.
2.GlobalizationGrowthpotentialintheglobaltravelmarkethasledtoadrivefor
globalizationintheairtravelindustry.Tofacilitateinternationalgrowth,U.S.airlinesare
lobbyingforopenskiestreatiesbetweentheU.S.andothernations.Thesetreatiesare
bilateralagreementsthatessentiallyderegulatetravelbetweentheinvolvedcountries,thus

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openingupcertainmarketstocompetition.TheU.S.currentlyhassignedmorethan60open
skiestreatieswithnationsaroundtheglobe.
3.LowcostCompetitionTheriseofthelowcostcarriershasforcedachangeinthe
competitiveenvironmentoftheairtravelindustry.Southwest,JetBlue,andAirtran,among
others,operateoffoflowcoststrategiesthatallowthemtoofferrelativelylowairfares.
Theselowfaresputpressureupontheentireindustryandareforcingrivalstolowertheir
costsanddecreasetheirfaresinordertostaycompetitive.
D.KeyFactorsforCompetitiveSuccess
1.LocationsthatanairlineservicesTheservicingofparticulargeographicalmarketsare
essentialinthenatureoftheairlineindustry.Airlinesneedtoofferroutesbetweenmarkets
thataredesiredandutilizedbycustomers.
2.CoststructureofanairlinesoperationsThecoststhatareinherentintheoperationsofan
airlineareareallimittohowlowairfarescanbe.Costsincludemaintenance,fuel,labor,fees
andleasepaymentsforoperatinginairports,andvariousothercosts(food,entertainment).
Thoseairlinesthatareabletocontrolcostscanattractcustomerswithlowerfaresandcan
improveoverallprofitability.
3.AnairlinesworkforceanditsinteractionwithcustomersTheworkforceofanairlinecan
definethecustomersperceptionsoftheairlinesimage.APleasantworkforcecanencourage
repeatbusiness.Asullenworkforcecandrivecustomersawaytorivals.
4.ReliabilityofServiceAnairlinewithareputationforreliableservicehasbeenshownto
developapositiveimageamongcustomers,whichcanleadtomorerepeatbusiness.
Reliabilityintheairtravelindustryismeasuredbyseveralelements:reportsofmishandled
baggage,theontimearrivalofflights,involuntaryboardingdenialsfromoverbooking
flights,andpassengercomplaints.Thoseairlinesthatareabletocontroltheseelementsare
saidtoprovidebetterservicetothecustomer,andthusoffermorereliableservice.

V.Competitors(JesseCoad)
A.LowCostRivals
1.JetBlueAirwaysJetBlueisbasedoutofForestHills,NYandcurrentlyhad4,704
employees.JetBlueAirwaysCorporationisalowfare,lowcostpassengerairlinethatserves
pointtopointroutesbetween22destinationsin11statesandPuertoRico.TheCompany
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focusesonservingunderservedmarketsand/orlargemetropolitanareasthathavehigherthan
averagefares.Theyhaveageographicallydiversifiedflightschedulethatincludesbothshort
haulandlonghaulroutes.JetBluecommencedserviceinFebruary2000andestablishedits
primarybaseofoperationsatNewYork'sJohnF.KennedyInternationalAirport.OnAugust
28,2001,itbeganserviceatitsWestCoastbaseofoperations,LosAngeles'LongBeach
MunicipalAirport.Inearly2004,JetBluelaunchedservicefromLoganInternationalAirport
inBostonto5citieswithatotalof11dailydepartures.AsofFebruary2004,JetBlue
operates108weekdayflightsbetweentheNortheastandFlorida,66weekdayflightsbetween
theEastCoastandwesternUnitedStatesand48weekdayshorthaulflights.JetBluehad
revenueof$1,070,000,000in2003andhadanunprecedentedrevenuegrowthof57.20%.
Theyhadanetincomeof$101,730,000in2003and$0.94earningspersharein2003as
well.Theirfinancialstabilityandmanagementeffectivenesswillshowinthecomingyears
thatJetBluewillbecomeamajorthreattoSouthwestAirlinesandtheentireairlineindustry.
2.ATAHoldings,Inc.ATAHoldingsCorp.isbasedoutofIndianapolis,INandcurrentlyhas
7,900employees.ATAHoldingsCorp.ownsATAAirlines,Inc.whichisapassengerairline
intheUnitedStates.Theyareaprovideroflowcostscheduledairlineservices,commercial
charterservices,andpassengerairlineservicestotheU.S.military.AtDecember31,2003,
ATAandChicagoExpressAirlines,Inc.,awhollyownedsubsidiaryofATAHoldings,were
certifiedtooperateafleetof82aircraft.TheCompanyoperated2LockheedL101150
aircraft,4LockheedL1011500aircraft,32Boeing737800aircraft,15Boeing757200
aircraft,12Boeing757300aircraft,and17SAAB340Baircraft.ATAmainlyoperatesout
ofChicagoandIndianapolisairportsandfliesmainlytomajorUScitiesandpartsofMexico
andPuertoRico.In2003ATAhadanetincomeof$15,792,000whichisanimprovement
overthelasttwoyearswhichbothhadnegativenetincome.ATAisstartingtogettheirname
intothemainstreamlightiftheairlineindustryandwelookforthemtovastlyimproveover
thenextfewyears.
3.AirtranHoldings,Inc.AirtranHoldingsINC.isbasedoutofOrlando,FLandcurrentlyhas
5300employees.AirtranisalowfareairlineintheUS.TheCompanyoperatesscheduled
airlineserviceinshorthaulmarketsprincipallyintheeasternUnitedStates,primarilyfrom
itshubinAtlanta,Georgia.Airtranoperates75Boeing717(B717)aircraftmaking
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approximately436scheduledflightsperdayto45airportsacrosstheUnitedStates,serving
morethan60communitiesin21statesandtheDistrictofColumbia.TheCompany'sproducts
includecompetitivefares,advancedseatassignment,businessclass,consumerdriven
automationsuchasonlinecheckin,ByePassairportselfservicekiosksandAPlusRewards,
whichisacustomerloyaltyprogram.In2003Airtranhadanetincomeof$100,517,000
whichisavastimprovementoverthe2002netincomefigurewhichwasaround
$10,000,000.Airtranisanotherupandcominglowcostairlinethatislookingtobeyet
anothercompetitiveforceinthenearfuture.
B.LegacyCarriers
1.AmericanAirlinesAmerican(AMR)isbasedoutofFortWorth,TXandcurrentlyhas
96,400employees.Itprovidesjetservicetoapproximately150destinationsthroughout
NorthandSouthAmerica,theCaribbean,EuropeandthePacific.AMRisalsoanairfreight
carrier,providingarangeoffreightandmailservicestoshippers.AMREagleHolding
CorporationisawhollyownedsubsidiaryofAMR,whichownstworegionalairlines:
AmericanEagleAirlines,Inc.andExecutiveAirlines,Inc.AMRalsocontractswiththree
independentlyownedregionalairlines,whichdobusinessastheAmericanConnection
carriers.TheAmericanEaglecarriersandtheAmericanConnectioncarriersprovide
connectingservicefromeightofAmerican'shightrafficcitiestosmallermarketsthroughout
theUnitedStates,CanadaandtheCaribbean.In2003AMRhad$17,830,000,000inrevenue
andan8.80%revenuegrowthrate.AMRalsohadanetincomeof$349,000,000anda
2.206earningspershareratioin2003.AMRisalsostrugglingfinanciallyandhaving
managementproblemsaswell.AmericanAirlinesholdsamajorityoftheoverallmarket
shareoveritsfellowcompetitors.
2.UnitedAirlinesUnitedisbasedoutofElkGroveTownship,ILandcurrentlyhas63,000
employees.Unitedtransportspeople,propertyandmailthroughouttheUnitedStatesand
aroundtheworld.Ithas1,600dailydeparturestoover110destinationsin23countriesand2
U.S.territories.UnitedhasapartnershipwithUnitedCargowhichoffersdomesticand
internationalshippingandtheyalsohelpedformtheStarAlliancein1997whichisaglobal
integratedairlinenetwork.In2003Unitedhadarevenuegrowthof11.50%,anetincomeof
$1,930,000,000,andan18.223earningspershareratio.UnitedAirlinesisnotinverygood
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financialpositionandismainlyduetopoormanagementandothersecuritycoststhatcame
aboutafterSeptember11,2001whichforcedthemtolayoffover20,000employees.In2004
UnitedaddedanewlowfarecarriercalledTedthatservesselectleisuremarketsinorderto
reachnewcustomers.
3.DeltaAirlinesDeltaisbasedoutofAtlanta,GAandcurrentlyhas70,600employees.Delta
AirlinesprovidesairtransportationforpassengersandcargothroughouttheUnitedStatesand
tovariouspartsaroundtheworld.AsofMarch2004,DeltaAirlinesanditswhollyowned
subsidiaries,AtlanticSoutheastAirlines,Inc.andComair,Inc.served206domesticcitiesin
47states,theDistrictofColumbia,PuertoRicoandtheUnitedStatesVirginIslands,aswell
as48citiesin32countries.Deltaunlikeotherairlinesismanagedasasinglebusinessunit.
DeltahashubairportsinAtlanta,Cincinnati,Dallas/FortWorthandSaltLakeCity.Eachof
thesehuboperationsincludesDeltaflightsthatgatheranddistributetrafficfrommarketsin
thegeographicregionsurroundingthehubtoothermajorcitiesandotherDeltahubs.
Financially,Deltalikeitsfellowcompetitorsthusfar,isalsoinfinancialdismay.Deltahad
$13,440,000,000intotalrevenuein2003andhada0%revenuegrowthsince2002.They
hadanetincomeof$707,000,000andhada5.773%earningspersharein2003aswell.
Delta,likeitsothercompetitors,isstrugglingwiththeirmanagementpracticesrightnowand
hadtolayoff13,000employeessince9/11/01.Recently,DeltaAirlinesCEOGerald
Grinsteinannouncedaplantorestructurethecompanytokeepthemfrompossiblyfilingfor
chapter11bankruptcy.
4.ContinentalAirlinesContinentalAirlinesisbasedoutofHouston,TXandcurrentlyhas
37,680employees.ContinentalAirlines,Inc.isaUnitedStatesaircarrierengagedinthe
businessoftransportingpassengers,cargoandmail.TogetherwithExpressJetAirlines,Inc.,
fromwhichContinentalAirlinespurchasesseatcapacity,anditswhollyownedsubsidiary,
ContinentalMicronesia,Inc.(CMI),theCompanyserves228airportsworldwideasof
December31,2003.ContinentalAirlinesfliesto127domesticand101international
destinationsandofferedadditionalconnectingservicethroughallianceswithdomesticand
foreigncarriers.Theydirectlyserved16Europeancities,7SouthAmericancities,TelAviv,
HongKongandTokyoin2003aswell.Continentalalsoprovidesserviceto31citiesin
MexicoandCentralAmerica.In2003Continentalhad$9,100,000,000inrevenuesanda
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5.60%revenuegrowthrate.Theyalsohadapositivenetincomeof$135,000,000anda
$1.71earningspershareratio.Continentalisahealthierfinanciallythanitsothercompetitors
mentionedthusfarandthattrendwillmostlikelyimproveinthefuture.Howevertheyhave
laidoff12,000workerssince2001.

VI.SouthwestAirlinesSWOT(DanielleDevine)
B.StrengthsAnunderstandingofacompanysinternalresources(strengthsandweaknesses)and
externalmarketopportunitiesandthreatsisextremelyimportanttogoodstrategymaking.Inthe
caseofSouthwestAirlines,asanewcompany,theyhadtoevaluatethemarket.Theysawwhatthere
competitorswerenotofferingandcreatedacompanythatreachedthoseunmetneeds.Thefirstthing
Southwestdidwascomeupwithacompetitiveapproachasalowcostleaderintheairlineindustry.
Withthatmainobjectivetheywereabletocreatethemostsuccessfulairlinecompanyinthehistory
ofaviation.Thatsuccessgeneratedfromgreatstrengthswithinthecompanythatenhancedit
competitiveness.Southwestsexpertisewasinprovidingconsistentfun,enjoyable,uniquecustomer
service.Theyachievedthisbymakingjokes,playinggamesintheterminals,andofferingfree
alcoholicbeverages.Theairlineputemployeesfirst,makingthemfeellikevaluableassets.Inturn,
theydidtheirjobenergetically,treatedcustomerswithrespect,andmakeflyingonSouthwestairlines
auniqueexperience.Peopleenjoyedthelightatmosphereitwouldhelptoreducetheanxietyof
nervousflyers.Southwestwasknownforitsstewardesssinkneehighbootsandcolorfuluniforms.
Alongsidetheemployees,Southwestsdistinctivecompetencewasitsshorterandcheapertravel
time,whichbeatoutallmajorcompetitors.Southwesthadthelowestcost/lowprice/nofrills
strategythatofferedasingleclassofserviceatthelowestprice,makingairtravelmoreaffordable.
Now,theycapturedmoreofthemarketthatotherwisewouldnotbetargeted.Creatingmillionsof
newcustomersthatwouldeventuallyturnintoloyalcustomers.Southwestwasthefirstairlineto
introduceticketlesstravel.Customerswereabletoorderticketsonlineandsimplyusetheirdrivers
licenseattheairporttoconfirmtheirreservation.Thisinnovativetechnologyledtonolinesatthe
ticketcounterandmoreontimeflights.Inadditiontothetimecuttingstrategies,Southwestswhole
operatingsystemwaseventhefastest.Theyusedapointtopointsystemofschedulingthatwas
morecostefficientthanthehubandspokesystemusedbyrivalsresultinginhigherutilizationof
aircraftandterminalfacilities.Plus,theyhad10minuterapidturnsatthegatewithallstewardesses
pitchingintohelpcleantheplane.Allthecohesiveworkbetweenjobtitlesledtoaunifying
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companythataimedtopleasetheircustomerswiththecheapest,fastest,andmostreliableaircraftin
theindustry.ThatwasSouthwestgoalfromtheverybeginning.Theymaintainedthatstrategyand
continuedtogrowasoneofthemostreputableairlinesinthemarket.
Lowfaresarecompetitivewithtravelbyautomobile
CustomerServiceisdescribedasenjoyable,fun,andunique
Rapidturnsatgates(1020minutes)
Twotieronpeak/offpeakpricingstructure
Reliabilityofontimeservice
Lackoflinesattheticketcounter
Firstairlinetointroduceticketlessairtravel
Flexiblestrategicplanning
Pointtopointsystemofflightroutesandschedulinghasbeenshowntobemorecostefficient

thanthehubandspokesystemusedbyrivals.Thishasresultedinhigherutilizationof
aircraftandterminalfacilities.
Employeesfirstmentalityhasresultedinhappierworkersservingcustomers
Attractivefrequentflyerprogram.

C.WeaknessesEverysuccessfulcompanyhassomethinglacking,whethertheproblemisbigor
small,thereisalwaysroomforimprovement.Intheinitialstagesofcompanydevelopment,
Southwesthadtogotocourtseveraltimes,drainingtheirbudgetandfinancialresourcestheywere
goingtouseforinitialinvestments.Thisledtoaslowstartagainstcompetition.Theotherbig
disadvantageisthelackofcustomerservice.Duetothelowcostoftickets,Southwesthadtocuta
lotofothercostsassociatedwiththeairlines.Forstarters,thereisnoassignedseatingcheckinison
afirstcomefirstservebasis.Customerseitherhadtocomereallyearlytogetspecificseatingorbe
unsatisfiedwiththeseatingtheyendedupwith.Thereisnofirstclassseatingso,businesstravelers
thatneededspacetodoworkwereleftunsatisfied.Unfortunately,therewasnomealincludedonany
Southwestflights,justpeanuts.Peoplearenotveryfriendlywhentheyaretravelingandhungry.
Duetothelowfares,nopersonalconveniencefortheairtravelerwasincluded.IfaSouthwest
customerhadaconnectingflight,theyhadtopersonallygettheirownbagsinthebaggageclaim
then,checktheluggagebackintothenextflight.PeoplearenotgoingtowanttotravelSouthwest
forlongtripsduetothehugebaggageinconvenience.Alongwithunhappycustomerscamesome
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unhappyemployees.Southwestpilotsflewmorehoursamonththanindustryaverageandgotpaid
less.Thisledtodisputeswithinthecompanyandtheirownunion.Inaddition,therewasstaff
shortagesincertainlocations(toholddownlaborcosts)andemployeeswouldhavetodoseveral
jobsatonce,leadingtoastressfulenvironment.TheseweaknessesmakeSouthwestcompetitively
vulnerableinthatthecompetitionsatisfieseveryoneoftheneedsairpassengersarelackingwith
Southwest.MostoftheweaknessescannotbeovercomebySouthwestbecauseofthecost
restraints.Theychoosetohavethosedisadvantages,whichwilleithermakethemorbreakthemin
thefightforcompetitiveedge.
Courtbattlesleftsmallinitialinvestments
Absenceofassignedseatinghasleadtoafirstcome,firstserveprocedure,whichisa

sourceofsomefrustrationtocustomers.
Flightattendantsarerequiredtoperformextraduties(trashpickup,cleanplane)inorderto

facilitatequickturnarounds.
Nofirstclasssection
Nomealservice,justpeanutsareoffered.
Baggageisnottransferredtoconnectingflights,thuscausinginconvenienceforcustomersin

ahurry.
Southwestpilotsflewmorehoursamonththantheindustryaverageandhavebeenpaidless
Staffshortagesexistincertainlocationsinanefforttoholddownlaborcosts.
Southwestsdependenceonunionlabormayofferresistanceforfutureplans

D.OpportunitiesNowthatwehadalookinsidethecompany,itistimetolookoutsideatmarket
opportunitiestocreateacompetitiveedge,andstrategy.Itislikelythatacompanywouldwantto
pursueeveryopportunityforgrowth,buttherearecertainchoicesafirmhastomakethatmatchtheir
ownresourcestogetthebestcompetitiveedge.Themarketopportunitiesthataremostrelevantto
Southwestarethosethatofferdistinctchannelsforprofitablegrowth,andmostpotentialfor
advantage.Southwestchosetolandinsmallerairportsclosertobigcitiesmakingitmoreconvenient
forthecustomer.Thetraveltimeisgreatlyreducedinasmallerairportwithfewerplanes,and
Southwestcangetmoreairpassengerfromcitytocity.Aftertheairlinesderegulated,theylet
SouthwestflyoutsideTexas,whichledtogradualexpansionintodomesticmarkets.Whentheystart
todominatearouteandthecompetitionbacksout,Southwestpicksupmoreflightroutesandgains
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themarketshareatthatairport.EventuallySouthwestshouldconsideranallianceorjointventure
withaEuropeanairlineandcreatedthesometypelowcosttraveloverseas.Therearemanycitiesin
EuropethatarewithinhundredsofmilesthatSouthwestcanprovidecheap,enjoyable,uniqueflying
experience.Nowthattheyhavedominatetheshortrouteswiththesmallplanes,Southwestcanget
somebiggerplanesandmakecrosscountryorinternationaltripsforalowcost.Theycouldalways
buyoutthecompetitionthatwentundertoaddadditionalplanes.Iftheywantedtotargetnew
customers,theycouldcomeupwithastrategytotargetfamilieslike,eachadditionalpersonget$10
off,encouragingseveralpeopletotraveltogetherforthediscount.
E.ThreatsEventhoughtthereismanyindustryopportunitiesforSouthwestthattieintotheir
strategy,threatsarealwaysaproblemabusinessneedstoface.Itismanagementsjobtoidentifythe
externalthreatstothecompanyandevaluatewhatstrategicactionscanbetakentominimizetheir
impact.OnethreatfacingSouthwestistheturnoverofitsCEOanduppermanagement.Notall
peoplehavethesameskillsandethicsasHerbKelleherwhichcausesadifferentleadershipteam
everytimemanagementturnsover.Thiscanbeamakeorbreakforasuccessfulcompany.People
canalwaysgotohermodesoftransportationlikebus,train,car,andboatiftheydonotliketheway
thingsarerunningatSouthwest.Competitivethreatsamongsttheairlineswouldbefarewars.There
areseveralbigairlinesthatcanacquirethesameplanesandtryandduplicatewhatSouthwesthas
beensosuccessfulatdoing.Eventuallyairlinesaregoingtostartcompetingwiththelowfares.
ThereareafewairlinesthatalreadystartedwiththeirowncheaperversionlikeJetBlue,and
US3000.GrantedtheydonothavethereputationthatSouthwestoccupiesbut,theycangradually
acquiremoremarketshareifSouthwestletsthem.Thatiswhyitissoimportanttohaveastrategy
fortheupcomingproblems.Afewthreatscomingfromtheenvironmentthattheindustryhasno
controloveraresuppliers.Thereareonlytwomainjetsupplierswhocontrolthecostofthemarket.
Optionsarelimitedforairlinesthatneedtobuyplanes.Theyhavetopurchaseatwhateverthe
suppliercharges.Also,theairlineindustryasawholeisvulnerabletoeconomiccyclesandbig
swingsinbottomlineperformance.Iftheconsumersdonothavethemoneytospendduetoan
economicslowdown,airlinestakeamajorhitinfillingreservations.Forexample,9/11causedhuge
lossesfortheindustry.Peoplewereafraidtofly,airlineswentintodebtandevenbankruptcy,and
scheduledrouteswerelimited.Sincetherewasahugelossinbusiness,airlineshadtojackupthe
pricestotryandstayafloat.Newgovernmentregulatoryrequirementcausesanadditionalchargeon
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ticketsduetoincreasedsecurity.Nottomentionthestringentsecuritymeasuresatravelerhastogo
throughattheairport,beforeevenboardingtheplane.
Fairlyrecentlowcostentrants(JetBlue)aregainingmarketsharewithsimilarstrategies
Airlineindustryasawholeisvulnerabletoeconomiccyclesandbigswingsinbottomline

performance
Terroristthreatssince9/11/01havedrivenawaysomecustomers
Legacycompetitorsaredevelopingtheirownlowcostcommuterservices
Newgovernmentsecurityregulationscausefrustrationtocustomers,increaseairfares,and

discourageleisuretravelers.

VII.SouthwestsCurrentStrategy(JoyceJackson)
A.CurrentStrategyEffectivenessSouthwesthassuccessfullyprovenitselftobethebestlowfare
airlinerintheindustry.Itsstrategyissimple,toprovidethebestpossibleserviceforitscustomers
andemployees.Theeasiestwayforacompanytoevaluatetheircurrentstrategyisbyputting
togetheraCompanySituationAnalysis.ThisanalysiswillrevealifthecurrentstrategySouthwestis
usingiseffective.Itwillalsonarrowdownwhatchangesneedtobemadeinordertostay
competitive.

B.CompetitivePositionComparedtoRivalsSouthwestssuccessisdirectlyrelatedtoitsperceptive
understandingofthekeysuccessfactorsrelatedtoit.Asyoucanseebelow,Southwestdominates
thecustomerservicequalityKSF,andasaresulttheyhavewontheTripleCrownforlowest
customercomplaints,mostontimearrivals,andhighestqualitybaggageserviceseveraltimesina
row.

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C.StrategicIssuesSouthwestFaces
1.Howcanthecompanycontinuetogrow?
2.Howcanthecompanystaycompetitive?

VIII.SouthwestsFutureStrategies
F.AlternativePossibleStrategies
1.Expandingintointernationalmarkets(DanielleDevine)
a.Advantagesofexpansion
Internationalalliancesarecrucialtoachievingprofitsonoverseesflights.
Byfacilitationsmootherconnectionsandstimulatingtrafficandalliancecan

dramaticallyloweritscost,cutfares,andincreaseflightfrequencywithout
requiringsubstantialinvestmentinadditionalaircraft,facilitiesandroute
authority.
ForU.S.basedairlines,internationalrevenuepassengermilesincreasedmore
thandomestictravel.ThemarketisgrowingoverseasandSouthwestneedsto
bringtheiruniqueservicetobeaninnovatorandgainmarketsharebeforetheir
U.S.competitorsdo.
Alliancesutilizecostsavingsbysharingcargoandpassengerterminalfacilities

andintegratingfrequentflyerprograms.
Thegovernmentispursuinganopenskiestreatyitisabilateralagreement
thatdecreaseseconomicregulationofairlinesandallowsalliancesandpartial
ownershipdealsbetweeninternationalcarriers.
b.Disadvantagesofexpansion
RightnowinEuropeandU.S.noforeigncompanycandominatethedomestic

flightsintheothercountry.
Initialmarketmaybechaoticandleadtoadecreaseinticketsalesandincrease

inflights,possiblyleadingtoinitialsteeplosses.
Canbehardtogetlandingslotsandterminalspacewithallnewforeign

competition.
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ForeignmarketsaredifferentthanU.S.,alongwithspendingandtravelpatterns

ifSouthwestdoesnotdoanindepthforeignanalysis,theycouldbeginonthe
wrongfoot.
WouldmostlikelybeforcedintousingaformoftheHubandSpokesystemfor
internationalconnections.
2.GrowingSouthwestintoSmallerMarkets(KristenBarson)Therearemanyadvantagesand
disadvantagesofstayingasmall,noninternationalairlinesuchasSouthwest.Since
Southwestisashorthaulcarrier,theaveragetriplengthis425miles.Inordertokeepup
competitionwithgroundtransportation,keepingextremelylowfaresistheonlywaytogo.
Smallerairlineshaveconvenientflyingschedulesandtheydonotflyoutoflargeairport
hubs,sopassengerscantraveltotheirdestinationsontime.Whileonboardofsmaller
airlines,customerservicefromtheflightattendantsisalwaysfriendlierthanlargerairlines
duetotherebeingfewerpeopleonboardthesmallerairline.Anotherimportantfactorin
remainingasmallairlineishavingsmallerplanes.Whileusingsmallerplanes,thiscuts
downthecompaniestraining,inventorycosts,andmaintenanceontheplanes.Smallerplanes
arealsomorefuelefficientthanlargerjets.Thepotentialthreatofnew,lowcost,entrantsto
theindustryarealwaysontherisesuchas,DeltaExpress,USAirwaysMetroJet,andShuttle
byUnited.ThesecompaniesaremainlytryingtocompetewithSouthwestslowprices,
betterturnaroundtimes,andcustomerservice.Limiteddestinationsarealsoabigconcernif
acompanyistryingtoremainsmall.Therearealsolimiteddaysoftheweek,timesanddates
thatthetravelercanonlychoosefrom.However,largerairlineshavejustaboutanyflightthe
passengerislookingfor,anditisaloteasiertogettheflighttheindividualrequested.
3.GrowingSouthwestintoaLargerAirline(JesseCoad)Southwestairlineswouldbeto
investinbiggeraircraftsforcrosscountrytravel.CurrentlySouthwestusesonlyBoeing
737sinallofitsflights.WebelievethatifSouthwestinvestedinafewlargerjets,they
wouldbemorecostefficientoverall.Biggerjetsaremadetoholdmorepassengersandare
builttowithstandlongerflightsonaconsistentbasisbetterthanthe737stheyarecurrently
using.ThiswouldallowSouthwesttogainevenmoreofthemarketshareforcrosscountry
travelersbyaddingmorenonstopflightsandreducinglayoverstoregionalairports.By
offeringcrosscountry,nonstopairtravelatreasonablepriceswouldmakeSouthwesteven
moreofathreattotheairlineindustry.ThemaindrawbackstoSouthwestbuyingbiggerjets
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wouldbenotbeingabletomakethepriceofthecrosscountryflightsappealingtoits
customers.Thiswouldresultincrosscountryflightsthatarenothaulingthemaximum
numberofpassengersthejetsareabletocarrythuslosingmoneyfortheairline.
4.GrowththroughAcquisition(NickKrynski)Southwestcouldgrowththroughasensible
acquisitionsstrategy.Thecompanycouldpenetratecertaindomesticmarketswhereitis
lackingapresence.Possiblegeographicareaswherethisexpansioncouldtakeplaceinclude
theGreatPlains(NorthDakota,SouthDakota,Minnesota,Iowa&Nebraska),theRocky
MountainStates(Colorado,Montana,&Wyoming),andtheDeepSoutheast(SouthCarolina
&Georgia).Southwestcouldbenefitfromtheacquisitionofasmallerregionalairline
becausethecompanywouldquicklygainapresenceinthemarketsservicedbytheacquired
companyanditwouldhopefullyabsorbtheairlinescustomers.However,thecompanymust
thoroughlyresearchatargetedacquisitiontomakesurethatitcanassimilatetoSouthwests
friendlyculture,thatitcanadheretothecompanysstrictcostdiscipline,andthatit
possessescertainmarketlocationsthatwouldbenefitSouthwestsbottomlinewithout
distractingfromitsimage.AnexampleofapossibletargetacquisitioncouldbeAccessAir
basedoutofDesMoinesIowa.Thiscompanyflies737s,whichmatchSouthwestsfleet,and
theyserviceanareawhereSouthwesthasnopresence.Southwestcoulddoanindepth
analysistodetermineifAccessAir,orasimilarairline,wouldbeasensibleandbeneficial
acquisitionopportunity.
G.RecommendationWebelievethatSouthwestwouldbestbeservedbypursuingastrategythat
stressesinternationalexpansion.Expansionintosmallermarketsorgrowingintoalargerairlinewith
largerjetscouldallowthecompanytopenetratecertaincustomersegmentsandgeographicmarkets
however,thecompanymayhavetosacrificemanyelementsoftheirstrategythathaveproven
successfulresults,likeitslowcoststructure.Growingthecompanythroughacquisitionscouldhelp
thecompanypenetratecertainneglectedmarkets,butitcouldalsonegativelyimpactSouthwests
currentfriendlycorporatecultureandcertainmarketsmaybeneglectedbecauseoflowtraffic
possibilities.Incontrasttothesestrategies,thereexistsgreatgrowthpotentialintheglobaltravel
industryandtherearestrategicdecisionsthatanairlinecouldmaketominimizethenecessary
investmentandcomplications.Southwestshouldinitiallypursueanalliancewithlowcostcarriersin
marketssuchasEuropeandLatinAmerica.Foreignlowcostcarriers,suchasEasyJetintheUnited
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Kingdom,couldbenefitSouthwestbyofferingsmoothconnectionsforoverseastravel,amatchin
operationalphilosophies(coststructure,employeefocus),andapartnerinconfrontingforeign
regulationsandpolitics.Overtime,Southwestcouldbegindirectlyinvestingintoopensky
counties,suchastheNetherlands,andprovidingtheirtrademarkpointtopointsystembetween
internationaldestinations.IfSouthwestcaneffectivelyinstillitsfriendlyculture,itsstrictcost
controls,anditsreliableserviceoverseas,itcouldbecomeamajorforcearoundtheworld,justasit
hasalreadywithintheUnitedStates.

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