Upload
fazlan-yusof
View
218
Download
0
Embed Size (px)
Citation preview
8/13/2019 Final Southwest Paper
1/39
Gold Corp. ConsultancyDecember 6, 2004
Strategic Proposalfor
Southest !irlinesA response to the recent announcements of Shuttle by United
Prepared by"
#i$e %e&eune%isa #. #aniSpencer South
'en&amen S. (ebster
8/13/2019 Final Southwest Paper
2/39
)able of Contents
*. ++C-)*+ S-##!/6
**. *1)/D-C)*13
The Problems
7
***. C#P!1 +/*+(
Company History
8
Company Resources
95inancial
rgani7ational Capital
80Physical Capital
889uman Capital
82#ar$et 'ased
82
Resource Summary
13
Strengths
14
Weanesses
14
Page !:;
8/13/2019 Final Southwest Paper
3/39
*. S*)-!)*1!% !1!%S*S86
"eneral #$er$ie%
1&
'emographics(Culture )mo*erately +a$orable,
1&!ge
8/13/2019 Final Southwest Paper
4/39
)hreat of Substitutes alry
8/13/2019 Final Southwest Paper
5/39
**. C1C%-S*1/+C##+1D!)*1S;4
Possible Courses o+ ction
34
Recommen*ations
34Do not raise prices
;4!dd more flights on the a$land?ntario route
;4+Bpand /outes
;@
***. /+5+/+1C+S;6
Page 5:;
8/13/2019 Final Southwest Paper
6/39
*. +Becuti>e SummaryGold Corp. Consultancy as recently hired by Southest !irlines to recommend
a strategic response for to actions being currently ta$en by their primary
competitor, Shuttle by -nited, in early 8@. Shuttle by -nited has announced"
*t ill be discontinuing its a$land?ntario California route beginning in!pril 8@ a route that has been the most hotly contested route flon byboth Shuttle by -nited and Southest. !nd
+ffecti>ely immediately, Shuttle by -nited ill be raising tic$et fares byE80.00 on e>ery flight, and e>ery class.
ur mar$et research suggests that SouthestFs lo?cost, lo?frills strategy is
the strongest strategy in the airline industry, ith signs of becoming an
increasingly popular strategy, both in California, and the rest of the -nited
States. (ith rising costs and increasing pressures to remain profitable, ma&or
airlines are see$ing ays to cut costs and be more competiti>e. !s such,
-nited launched their on >ersion of a lo?cost carrier, Shuttle by -nited, hich
cut hea>ily into SouthestFs California mar$et in the fourth uarter of 84.
-nitedFs efforts to attract the cost?conscience tra>eler ha>e or$ed to some
eBtent, hoe>er their recent decision to discontinue routes and raise fares is
not a result of trying to adapt to ne mar$et changes, but rather a response to
fiB their on internal financial problems.
-nited is eBperiencing some of their highest costs in four years, ma$ing it
harder for them to compete ith Southest through Shuttle by -nited. )hese
high costs are primarily due to offering more HeBtrasI on their Shuttle by -nited
flights such as" assigned seating, multiple classes, and operating out of
congested airports. *n addition, they must find ays to fund a >ery costly and
recent employee stoc$ offering of o>er E8 billion. *t is these reasons e that
-nited is ma$ing its changes.
Conseuently, e recommend Southest not raise prices, but remain at thesame fares to further detract potential competitors from entering a mar$et that
they financially can not replicate. !lso, add more flights on the a$land?ntario
route, after your current flights are filled to capacity. %astly, continue upon
your current groth strategy ithin California and the 1ortheast and Southeast
Page &:;
8/13/2019 Final Southwest Paper
7/39
-nited States. (e anticipate that the recent announcements of Shuttle by
-nited ill not detrimentally affect SouthestFs current strategy.
**. *ntroduction)he folloing report details a competiti>ely responsi>e strategic plan for
Southest !irlines, prepared by Gold Corp. Consultancy. (e ha>e sought to
suggest a >iable response for Southest in reaction to a mar$eting challenge
initiated by -nited !irlinesF Shuttle by -nited. (hile, Southest continues to be
profitable, their 4th uarter re>enues for 84 ha>e been cut by 43J as
compared to the same period in 8;. )he decrease in re>enue is directly
contributable to the ma&or carriers such as -nited ho ha>e introduced their
on >ersions of point?to?point flying. Shuttle by -nited has ta$en direct aim at
Southest in the California mar$et, initially pro>iding ; routes in directcompetition but soon adding another 6 and increasing their flight freuency.
Currently, 8;J of SouthestFs capacity o>erlaps ith Shuttle by -nited.
)he ProblemsDue to recent unanticipated changes made by Shuttle by -nited, Southest
must address the folloing issues in order to maintain the companyFs current
leadership position.
8. (hat has made -nited !irlinesF HShuttle by -nitedI decide to discontinueits a$land?ntario route, hich until recently had been the most hotly
contested of the nine here the to companies compete head to headK
2. (hy is -nited raising e>ery fare by E80 hen they had pre>iously
matched Southest on e>ery fareK
)he plan that follos here, discusses ho Southest !irlines should respond, if
at all, to these recent de>elopments and the factors that influenced our
recommendations.
Page 7:;
8/13/2019 Final Southwest Paper
8/39
***. Company >er>ie
Company 9istorySouthest !irlines, as pioneered in 838 by /obin Ling, as an intra?)eBas air
carrier, establishing its base at %o>e 5ield in Dallas, )eBas. #r. Ling retained
9erb Lelleher as SouthestFs legal counsel, hom no in 8@, has ser>ed as
C+ of Southest for the past tenty?to years. *nitially, Southest faced
contention from the ma&or carriers, ho attempted to use legal means to thart
SouthestFs progress. !s a result, #r. Lelleher as forced to argue se>eral
cases on behalf of his airliner in the )eBas Supreme Court.
)he business model of Southest is focused on lo?cost, point?to?point, short
haul and high freuency carriage. )his strategy has pro>ed a highly successful
model, and has lead to continued profitability of the airline e>er since its
inception. Southest streamlines its operations, maintaining a fleet of only one
type of aircraft, the 'oeing 3;3, and cross?training its employees for multiple
&obs. )hese operational simplifications lead to decreased parts in>entory for
aircraft maintenance, as ell as simplified mechanic and pilot training, and
greater fleBibility of the labor pool. #ost of SouthestFs flights are less than
fi>e?hundred miles in length and are point?to?point routes, hich aid Southest
in minimi7ing time delays associated ith the hub?and?spo$e system.
ther pioneering features of Southest !irlines include"
)he first profit?sharing plan in the industry
)he first freuent flyer bonus program
)he first discounts for senior citi7ens8
(hile described as a lo cost, regional carrier, Southest should not be
mista$en for a small carrier. SouthestFs re>enue no totals o>er E8 billion,
and the airline no operates beyond its original southest region, flying point?
to?point routes all across the -nited States.
)he eBpansion strategy of Southest is a model of carefully planned systematic
groth into ne mar$ets. Southest !irlines has been $non to create
tremendous groth in cities it operates in, hich resulted in the nic$naming of
8!)( aards 20 years of eBcellenceMin short?haul airline. !ir )ransport (orld. Cle>eland"5ebruary 84, ;8
8/13/2019 Final Southwest Paper
9/39
this phenomenon, H)he Southest +ffect,I in a 8; Department of
)ransportation ery ma&or
airline in the -.S.I;
Company /esourcesSouthest utili7es its solid foundation to continue to outperform its competitors.
'ecause of this foundation and the airlineFs simplistic strategy and abundant
resources, Southest is ell situated to further ta$e ad>antage of an en>ious
competiti>e position. ! closer loo$ into SouthestFs specific resources follos
to identify a portion of the companyFs euation for success.
Financial Southest has loer operating costs than any of its competitors. *n an
industry ith eBtraordinarily high fiBed costs, Southest has an
enormous ad>antage o>er the ma&or carriers. *n 84, SouthestFs
3.0 cent cost per a>ailable seat mile
carriers. )he company achie>es these efficiencies by maBimi7ing the
utili7ation of the aircrafts and flying point?to?point routes. )he
company does not ha>e the additional costs associated ith a hub and
spo$e operation, hich reuires greater infrastructure and
necessitates a much larger ground staff to operate.
5rom 80 to 84, Southest has more than doubled its operating
re>enues and almost uadrupled its operating income. 84 as the
22nd consecuti>e year of profitability, ith a net income of E83.;
million on E2.6 billion in re>enue. )he airline is competing from a
position of financial strength hich is rare in the industry.
5eer than half of Southest reser>ations are boo$ed by tra>el agents,a means of distribution that is hea>ily relied on by larger carriers. )he
cost sa>ings on the commissions that ould otherise be payable, are
upards of E;0 million per year.
2See.southest.com;/eed, !rthur. Southest Style in +urope. !ir )ransport (orld. Cle>eland" !ugust 8@,;2
8/13/2019 Final Southwest Paper
10/39
SouthestFs management ratios are >ery strong, hich signals to
managementFs understanding of the industry. SouthestFs income
groth rate, return on total assets, and stoc$holdersF euity ere all
the highest of any -S air carrier during the first half of the 80s.
!s illustrated, Southest is ell positioned financially. )hough there ha>e been
a fe negati>e de>elopments recently hich are noted belo"
Southest is incurring increased airport costs. )his is a result primarily
of many of SouthestFs competitors being eliminated or entering into
ban$ruptcy. )here are fiBed costs that the airports pass on directly to
the airlines. (ith feer carriers to di>ide the costs ith, Southest is
ultimately left ith a larger share of the cost HpieI to absorb.
)he relati>ely recent launch of other airline?ithin?an?airline
competitors, namely -nited and Continental, ha>e had a negati>e
effect on earnings. )he ne competition as directly responsible for
net income falling 43J in the fourth uarter of 84, as compared to
the same uarter the pre>ious year.
Organizational Capital SouthestFs model is based on short?haul, lo fare, point?to?point, high
freuency routes, hich is an industry niche. >er 0J of SouthestFs
routes are less than fi>e?hundred miles. )he ma&or carriers are more
focused on long?haul routes, primarily because those routes had been
the most profitable prior to deregulation in 83. 'ecause of
SouthestFs shorter routes, often times the airlineFs direct competitor
may be the car, not other airlines.
Southest has an ability to HturnI airplanes much uic$er than the
industry a>erage alloing for more flights per day. #ore flights
translate into more profits. +ach Southest plane ma$es on a>erage
80 flights a day as compared to the industry a>erage @ flights.
SouthestFs efficient strategy is facilitated in part by ser>ing smaller
cities and less congested airports. )hese cities allo for less taBi time
and less circling before landing. 'ecause of the point to point routes,
Page 1.:;
8/13/2019 Final Southwest Paper
11/39
the baggage handlers do not incur the additional time of transferring
baggage to other airlines.
Southest sa>es time, money and resources by not offering seat
assignments. )here are no first, coach, or business class distinctions
made. Customers are boarded in groups, on a first come first ser>e
basis. 5ood and be>erage o>erhead is held don by limiting
refreshments to peanuts and soft drin$s.
Southest only flies 'oeing 3;3s. nly ha>ing one aircraft in the fleet
substantially reduces costs related to maintenance, training and
in>entory. )here is only one aircraft to store parts for and the
maintenance cre only has one type of plane to ser>ice and therefore
can concei>ably become eBperts on it. Pilots only ha>e to be trainedon one type of aircraft, hich is logistically strategic. *f a pilot that is
scheduled to fly is una>ailable at the last moment, any of SouthestFs
pilots could in theory ta$e o>er, as opposed to other airlines ho ould
ha>e to locate a pilot that $ne ho to fly that specific aircraft.
Southest consistently ran$s among the orldFs safest air carriers.
)his is largely attributable to the companyFs fleet of planes, hich is
among the youngest in the industry at 3.6 years.
Physical Capital *n the last @ years, total assets ha>e doubled from approBimately E8.4
billion to E2. billion.
!s mentioned earlier, Southest only flies 'oeing 3;3s due to the
efficiencies gained by reducing maintenance and in>entory costs and
ha>ing pilots that can control any plane in the fleet.
SouthestFs recent purchase of #orris !ir has increased the companyFsassets by 80J and the aircraft fleet by 8;J. )his acuisition also
added se>en ne mar$ets to SouthestFs ser>iced areas.
Southest has pioneered many of the technological inno>ations of the
airline industry including" tic$etless tra>el, internetebsite,
computeri7ed baggage chec$?in, in?flight faB, and e?mail.
Page 11:;
8/13/2019 Final Southwest Paper
12/39
Human Capital
SouthestFs employees are one of its greatest assets and one of the
most important contributing factors to the airlineFs success. Southest
has >ery lo employee turno>er, hich reduces costs associated ith
training. Southest as the first airline to offer an employee profit?
sharing plan, and employees no on approBimately 80J of shares
outstanding. Surprisingly though, Southest remains 0J unioni7ed.
Southest focuses on hiring attitudes hen recruiting ne employees.
)he company ants ne hires that ha>e a sense of humor and that
li$e to ha>e fun on the &ob, but that are also customer ser>ice oriented.
)his attitude is >ieed to be more important than education.
#anagement belie>es as long as the employee has the right attitudethey can be trained the s$ills necessary for the &ob.
9erb Lelleher, C+, is one of SouthestFs largest assets.
Market Based *n 84 Southest had 4.4J mar$et?share based on re>enue
passenger miles flon >s. ContinentalFs .@J and -nitedFs 22.8J
ailable on more than one?third of the industryFs
total capacity. #any start?ups ha>e attempted to replicate the
strategy but the !llied Pilots !ssociation
approBimately 3J of all airline start?ups ha>e resulted in failure.
Southest has gron from less than ;J mar$et?share in 8, to @6J
in 84 ithin the California mar$et.
Page 1!:;
8/13/2019 Final Southwest Paper
13/39
/esource Summary! recap of SouthestFs resources using a 'arneyFs /esource 5rameor$ model
belo, illustrates three resources that Southest has, that can be considered of
parity ith the companyFs competitors"
)echnology
#ar$et?share
'rand name
5our specific resources can be considered temporary ad>antages o>er the
competition"
CompanyFs financial strength
Company efficiency
CompanyFs current management team
#ost importantly though, the model illustrates SouthestFs sustainable
competiti>e ad>antages"
Current employees
Strategy
%o?cost mar$et $noledge
Page 13:;
8/13/2019 Final Southwest Paper
14/39
Strengths
*n summation, Southest has many strengths that aid tremendously in the
companyFs o>erall success. #ost notably are the companyFs"
#anagement
+mployees
Simplified, decentrali7ed organi7ational structure er, there are a fe >ulnerabilities or ea$nesses that Southest must
remain cogni7ant of. )here may be a perception among air tra>elers that
because Southest is most often the cheapest carrier in terms of price, that
perhaps it may not be as safe as other more eBpensi>e ma&or carriers.
9oe>er, as mentioned pre>iously, Southest continues to ran$ among the
Page 14:;
6alue
Rare
nimitable
#rganie*
Competition
5inancial Strength es es )emporary !d>antage
+mployees es es es esSustainable!d>antage
Strategy es es es es
Sustainable
!d>antage
+fficiency es es )emporary !d>antage
)echnology es 1o Parity
#ar$et?share es 1o Parity%o Cost #ar$etLnoledge es es es es
Sustainable!d>antage
#anagement es es )emporary !d>antage
(or$ en>ironment es es )emporary !d>antage
'rand 1ame es 1o Parity
8/13/2019 Final Southwest Paper
15/39
safest carriers in the industry. )herefore, it is the perception of the brand that
must be managed, continually reminding tra>elers of the companyFs safety
history.
!nother potential ea$ness for Southest may be the companyFs brand name
being percei>ed as the cheap airline e to some ma&or
carriers such as -nited. (hile the lo cost pro>ider image is attracti>e to the
cost conscious tra>eler, there is a segment of the mar$et that is more brand
conscious and may percei>e the airline as an Hoff brandI. 1e>ertheless, that
particular mar$et segment is not necessarily one that Southest should be
o>erly concerned ith, as it is not the companyFs target demographic.
Page 15:;
8/13/2019 Final Southwest Paper
16/39
*. Situational !nalysis
General >er>ie+ach aspect of this industry eBamination loo$ed specifically at California, the
main area of competition. Conseuently, Gold Corp. as able to obtain a better
understanding of the characteristics of the actual region in>ol>ed, and ma$e
&udgments on the en>ironmental factors that affect the industry.
DemographicsCulture orable='y studying the demography and culture of the mar$et, e found ho the ideal
customers are and ho this group compares to the actual population ma$eup.
ur research eBamines four specific demographic and cultural categories" age,
race, income, and region. Data from each of these areas is presented and
analy7ed belo.
Age (neutral)
ge Comparison
Group Current #ar$et?share Pro&ected #ar$et?share *ndeB J C!
N2@ ; 8. ; ;.3J
2@?;4 83.2 84.; 6 83.;J
;@?44 22.; 24 80; [email protected]
4@?@4 [email protected] 2. 8@0 80.J@@?64 [email protected] 83.4 823 3.0J
6@?34 .3 .2 8 @.J
O3@ 3.6 3. 33 ;.J
!ccording to the indeB numbers in the abo>e table, the age group most prone
to fly consists of those people beteen the ages of ;@ and 64, ith the largest
tendencies in the 4@ to 54 group. )his cluster e
years. )his is a >ery influential group to the o>erall airline industry. /oughly,
;4J of CaliforniaFs population falls ithin this age category. (hile this
percentage if fairly large, CaliforniaFs largest age group is composed of those
younger than 2@, ho hold both the least amount of current mar$et?share and
has the least tendency to fly. )his lo mar$et?share among young fliers is
supposed to dindle e>en further in the coming years. (hile this statistic is
unfa>orable to airlines in California, e feel that the si7eable population in the
Page 1&:;
8/13/2019 Final Southwest Paper
17/39
;@?64 age brac$et counterbalances any age distribution disad>antages from the
under 2@ group. )herefore, e feel that the o>erall age aspect of the
demographics is neutral.
Race (a!ora"le)
!s compared to the entire -S population, California has an eBtraordinarily high
percentage of the HotherI race category, due to the large amount of immigrants
it has attracted o>er the years. )he graph belo compares the percentage of
race ma$eup in both California and the -nited States.
0
10
20
30
40
50
60
70
80
90
CA % US %
White
lac
#ther
(hile people classified as HotherI are currently fifty percent less li$ely to fly
than the a>erage customer, the sheer mass of their population in California
suggests them as a potential target mar$et in the future. 9oe>er, in thecurrent day, hites are far more li$ely to fly than either blac$s or HotherI races.
5ortunately for airliners in all parts of the country, hites are by far the largest
percentage of the population in both the -nited States and California. Since the
ideal mar$et group is also the most abundant, this aspect is >ery fa>orable to
the airline industry.
#ncome (neutral)
ust as California is $non for its di>erse population, it is also generally thought
of as a high income state. /elati>ely spea$ing, this is a fair generali7ation.California has an a>erage age per &ob statistic of E;8,; and a per capita
income of E22,4;, both of hich are higher than the national a>erage.
1e>ertheless, the a>erage income earner in California is still not the a>erage
flier. )he folloing table brea$s don each of the income groups ithin
California and their li$eliness to fly.
Page 17:;
8/13/2019 Final Southwest Paper
18/39
Cali+ornias ncome rea*o%n
"roup n*e n*e)car,
N 20,000 48 ;8
20,000?2, 6 @8
;0000 ? ;, 36 2
40,000 ? 4, 88; 82;
@0,000 ? 6, 8@; 8@8
O 30,000 ;2 ;3
'ased on the table abo>e, those people ma$ing o>er E40,000 a year are the
most li$ely to use airplanes as a mode of transportation. *n fact, the group
ma$ing abo>e E30,000 is 22J more li$ely to fly than the a>erage person.
5rom a California perspecti>e, this means that the a>erage citi7en, based on
income, is much less li$ely to fly than the a>erage customer. Superficially, this
is a problem for airliners operating in this region. 9oe>er, this is actually asubtle ad>antage for airliners that use one of the folloing to strategies" lo?
cost or business class. *t is reasonable to assume that hen this a>erage
income demographic actually decides to fly, they ill probably put greater
emphasis on lo price as opposed to anything else. )hus, lo?cost carriers ill
reap the benefits from this lesser tra>eling but more populated group. n the
other hand, carriers can also target the less populated but higher tra>eling
group, the higher income tra>eler. )hey can appeal to the most li$ely tra>elers
by offering the luBurious amenities and all of the unnecessary, but pleasurable,
bells and histles. >erall, these uniue niches euali7e the unfa>orable
nature of the income distribution in California. +rgo, this demographic is
neutral to the airline industry.
Page 18:;
8/13/2019 Final Southwest Paper
19/39
Region (a!ora"le)
(ith this case re>ol>ing around one particular region of the country, e felt it
necessary to eBamine regional flying tendencies throughout the -nited States.
n*e9 by Region
11!87 75
145
.
5.
1..
15.
!..
Region
1n*e9
1ortheast
#idest
South
(est
)he bar graph of indices suggests that both the est and northeast are the
most li$ely to fly. (ith the (est playing the lead role in this case, this statistic
is a definite ad>antage. 9oe>er, it is not enough to simply eBamine hich
region of the country is most li$ely to fly, because if this region consisted of
only ten people, then it ould ob>iously be unfa>orable for airlines in spite ofthe high indeB. 5or this reason, e also eBamined the -S population by region.
20%
24%
34%
22%Northeast
Midwest
South
West
)he (est holds 22J of the total population, hich is acceptable especially
hen considering that it is the fastest groing region in the -S, and that
Page 19:;
8/13/2019 Final Southwest Paper
20/39
currently most regions seem to be ell di>ided. >erall, the regional
demographic for airliners operating in the (est is significantly fa>orable.
+conomy orable=)he financial condition of the airline industry as a hole is fragile due to many
years of lo profitability, hich can be attributed in large part to the folloing
three intrinsic factors"
9igh fiBed costs
1o shelf life
Dependency on fuel prices
Due to high fiBed costs it is >ery difficult to brea$ e>en in this industry. n the
other hand, if an airliner can someho manage to surpass the brea$e>en point,
profits may be earned uic$ly thereafter. ! further complication in controllingcosts is the industryFs inability to maintain a product in>entory. *n industries
such as retail, if a customer does not purchase a product, it simply sits on the
shelf for purchase later. -nfortunately, a seat on a plane flies regardless of
hether it is filled or not. )hus, a product is simply all cost and no profit in
many cases. (hile this is detrimental to the industry, perhaps the ris$iest issue
is the dependency on fuel.
5uel costs comprise a little o>er 84J of an airlineFs total costs. Combining the
lac$ of control o>er these prices ith their infamy of rapid price fluctuations,fuel as a large percentage of total cost, is an ob>ious hindrance to the industry.
)his industry is also affected by se>eral other eBternal factors. )he /e>enue
/econciliation !ct of 8; raised costs by increasing fuel 4.; cents per gallon,
hich could cost the !irline *ndustry as a hole an additional E@00 million
annually. *n addition, the go>ernment taBes the airlines hea>ily. )aBes amount
to o>er ;0J of a>erage fares. -nfortunately, the payments reuired of airliners
do not end here as airports enforce fees of their on. !s a business
themsel>es, airports ma$e some of their profit by assessing landing fees and
terminal rents. Conseuently, these fees, hich are passed on to the air
carriers, add to the amount of costs that plague the airline industry.
(ith such a bad economic situation, air carriers must cut operation costs by one
of to ays. )he first is to adopt a lo fare, lo frill methodology. +ssentially,
Page !.:;
8/13/2019 Final Southwest Paper
21/39
this offers the loest tic$et fare possible but ithout all the unnecessary bells
and histles. )he other option is to manipulate one of the fe costs that an
airline has control of, labor. 9oe>er, this option is uite ris$y since a large
percentage of or$ers are unioni7ed, and there is alays the potential of
creating more problems by using this solution. (ith such limited options andlac$ of control o>er operating costs, the o>erall economic situation is highly
unfa>orable.
%egalPolitical orable=)he legalpolitical situation is also unfa>orable to the airline industry. ne of
the only fa>orable aspects is the !irline Deregulation !ct of 83. *t as this
act that enabled airlines to set their on routes and fares. !s a result, lo?cost
carriers such as Southest ere able to thri>e and gro their business.
Con>ersely, it as also this act that may ha>e lead to some of the struggles of
the industry due to o>ercapacity.
!nother influential piece of legislation as the 8; 1ational !irline
Commisssion, hich allos for foreign in>estment of up to 4J in air carriers.
(hile this may be an ad>antage for some carriers, it could pro>e detrimental to
loer capital carriers li$e Southest in the e>ent that this financial support be
allotted to its competitors.
%ocal go>ernments also pose a problem for sectors of the airline industry. )hey
often on and manage the airports in their region and therefore control $ey
bottlenec$s to airport ser>ices such as access to boarding gates and runays.
#ost local airport commissions allocate gates ithout a formal mar$et
mechanism, such as a bidding process and often reuire that the airline pro>e
that it ould operate in the best interest of the public. )he larger airlines ha>e
much more capital, such as -nited !irlines, hich gi>es them a competiti>e
ad>antage in the bidding process for such spots.
5inally, the aftermath of the Gulf (ar, has left the #iddle +ast in a state of
instability posing a serious thereat to oil prices since a large portion of oil is
imported from this region.
Page !1:;
8/13/2019 Final Southwest Paper
22/39
(ith the threat of a spi$e in fuel prices combined ith detrimental articles of
legislation, the legal and political en>ironment is uite unfa>orable to the airline
industry.
1atural orable=Characteri7ed by strict regulations and the potential for unsafe ha7ards, the
natural en>ironment is also detrimental to airliners. !irline fuel is a finite
natural resource, and its continuous burning contributes to atmospheric
greenhouse gases, as ell as depletion of the o7one layer. !s a result, future
orries of fuel a>ailability and an o>erall global arming effect from o7one
depletion should be issues of concern.
+missions standards ha>e alays been a battleground beteen legislators and
the airline industry. Cuts in nitrogen oBide emissions ha>e forced aircraftbuilders to comply ith regulatory standards, raising the costs of building
airplanes. *ronically, the !ir )ransport !ssociation
airlines to cut bac$ on ser>ice, to reduce chemical emissions, ould send
customers or lost passengers bac$ to the roads dri>ing, here a notably higher
percentage of chemical emissions are produced. *n addition, glycol, a chemical
used in the deicing solution for aircrafts, is also sub&ect to federal regulation.
Glycol run?off from deicing one aircraft is the eui>alent to the daily asteater
of @000 people. Due the massi>e uantity of this run?off, 1orth !merican
en>ironmental regulation de>eloped rules for eBpelling these controlled fluids
into the en>ironment.
Chemical pollution as actually &ust one form of regulated contamination.
1oise pollution still is an issue of federal regulation for the airline industry.
!irlines at this time are >ulnerable to replacing aircrafts in their fleets that do
not meet noise as ell as emissions regulations. !lthough Southest !irlinesF
simplified fleet of 3;3 aircrafts is an economic ad>antage, it might be a se>ere
disad>antage in the e>ent these aircrafts not meet regulatory standards.
*t is also important to note that there are certain tradeoffs in pollution
regulation" for instance, uieter engines often create more emissions. !lso, a
lac$ of thorough deicing, ith chemicals, may lead to poor >isibility and
ha7ardous flying.
Page !!:;
8/13/2019 Final Southwest Paper
23/39
Surprisingly, ater supplies are also a si7eable issue for airlines and airports
considering both the a>ailability of ater as ell as the cleanliness of the ater
supply used on aircrafts and in airport facilities. *n addition, containment of
storm ater runoff, ith this storm ater containing deicing chemicals, fuel and
other pollutants, is also a safety issue at this time.
)echnological orable=Perhaps one bright spot of the airline industry is its technology. *n 84, some
members of the airline industry adopted tic$etless tra>el, or e?tic$ets. *n this
system, reser>ations are confirmed ith personal identification, ithout
issuance of hard copy tic$ets, through the use of self?ser>ice boarding
machines. 1ot only is this an ad>antage to the customer, but it also cuts
operating costs for the airlines. *n fact, Southest uoted a sa>ings of 2@
million dollars by instituting tic$etless flights. *n early 8@, about one?third of
SouthestFs passengers ere flying ithout hard copy tic$ets.
!irlines ha>e also made plans to begin ma$ing tic$etless tra>el accessible o>er
the internet. (ith this change, Southest estimates a potential sa>ings of 800
million dollars annually. )he industry is also inno>ating commercial faB and
data ser>ices for in?flight use, and data ports for use of laptops.
!irlines ha>e not restricted their technological inno>ations to &ust the customer.
*n 8@, the first airline ill ma$e use of a Hmulti?motionI cabin trainer to train
flight attendants. )his cabin trainer has full freedom of motion, compared to
most airline trainers that ha>e only Htilt motionI simulation. )hese trainers are
on hydraulic lifts, and allo for training flight attendants to maintain balance
and conduct or$ in potentially unstable, in?flight circumstances. >erall, the
technological en>ironment remains fa>orable.
Page !3:;
8/13/2019 Final Southwest Paper
24/39
*ndustry !nalysis
*ndustry >er>ie)he airline industry is a distinctly competiti>e industry here the eBisting
ma&or airlines are ri>aling for mar$et?share. )he threat of ne start?up entrants
is lo, but the threat of eBisting airlines mo>ing into the lo?cost, lo?frills
mar$et is >ery high. #ost of the bargaining poer lies ithin the hands of the
airline companies hen eBamining the supply chain of the o>erall industry. Due
to the nature of this industry, hich pro>ides a transportation ser>ice, the
threat of substitutes is eBtremely high, since different forms of transportation
ha>e eBisted for uite some time no.
$hreat o %o&'Cost ntry (moderate) )he threat of entry from ne start?up carriers is much higher than it
as prior to the Deregulation !ct of 83. )he act has made the
regulations and competiti>e structure much more fleBible, alloing
ne carriers and routes to open up.
)he cost to create a ne start?up lo?cost carrier is >ery eBpensi>e.
Costs such as airplanes, terminal fees, fuel, and eBperienced labor, all
ha>e to be bought and acuired prior to being able to open up for
business.
)he threat of entry from larger already established carriers is high.
Due to the e>ents of the early 80Fs hen Southest !irlines as
ma$ing profits, hile the rest of the airline industry suffered losses,
much more attention has been focused on SouthestFs successful
model. !s such, more large carriers ha>e been mo>ing toards an
airline ithin an airline model such as -nited !irlinesF Shuttle by
-nited, and ContinentalFs C!%ite.
upplier Bargaining Po&er (high) 1ormally in this industry, the bargaining poer of suppliers is lo to
moderate due to the large price tag associated ith airplanes. !ny
poer the suppliers do ha>e is due to the small amount of airplane
manufacturers in the industry.
Page !4:;
8/13/2019 Final Southwest Paper
25/39
9oe>er, 'oeing has a significant amount of poer o>er Southest,
due to SouthestFs policy of operating the same fleet of aircraft, a
'oeing 3;3. 'oeingFs poer o>er Southest is therefore somehat
referent and reard poer, because Southest belie>es that by using
only 'oeing 3;3 airplanes on their fleet, they gain significantcompetiti>e ad>antages in maintenance and training costs.
Buyer Bargaining Po&er (lo&) Due to the large si7e of the airline industry, and the large number of
customers, each indi>idual customer has >ery little bargaining poer.
$hreat o u"stitutes (high) ther airlines such as C!%ite and Shuttle by -nited ha>e formed in
attempts to model the success of Southest, and ha>e becomeprimary substitutes to flying Southest.
Se>eral other secondary substitutes eBist. )hese include" dri>ing your
on car, car rentals, bus lines li$e Greyhound, passenger trains li$e
!mtra$, and cruise ships.
$hreat o Ri!alry (high) +ight other ma&or competitors eBist ithin this industry, ith no
o>erhelming concentration of mar$et?share oned by one company
or another. !s such the mar$et is >ery competiti>e, as airline
companies fight to capture their competitorFs mar$et?share.
Customer loyalty ithin the industry is fairly lo. !pproBimately 3@J
of customers choose an airline based upon price and flight schedule,
and as Southest eBpands its routes, the larger airlines ill be forced
to offer lo?price alternati>es to their on flights.
Page !5:;
8/13/2019 Final Southwest Paper
26/39
. Competiti>e !nalysis
Competiti>e %andscape)he lo?cost, lo?frills airline strategy represents approBimately 80?8@J of the
o>erall mar$et?share in the airline industry at this time, ith historic patterns
and signals to suggest that it ill continue to gro in popularity. )he folloing
graph details the brea$don of mar$et?share holdings of each of the nine ma&or
airline carriers in the industry"
Direct CompetitorsCurrently, SouthestFs direct competitors are ContinentalFs C!%ite and -nited
!irlinesF Shuttle by -nited, neither of hich has been as successful as
Southest to date. C!%ite has been plagued by customer complaints and flight
delays despite their attempts to emulate a lo?cost carrier. )he business
models for Southest and Shuttle by -nited are similar on many measures
since -nited de>eloped their model based on the Southest template. 'oth
airlines focus on"
Pro>iding lo fare, short haul and high freuency flights
Standardi7ed fleets of 3;3 aircrafts
%ight in?flight refreshments
Qany and colorful ad>ertising
Collegiality among employees and
#oti>ation and Henculturali7ationI classes for employees
Page !&:;
8/13/2019 Final Southwest Paper
27/39
9oe>er, although most of their model is similar, the to airlines ha>e differing
strategies on ho to attract and retain customers. Shuttle by -nited maintains
more HeBtras,I such as"
/eser>ed seating Speciali7ed H(*%#!I boarding el agent reser>ations
! to?class fare system es
*n contrast Southest follos policies of"
5irst come, first ser>e seating
1o inter?airline baggage transfers
Stresses little to no tra>el agent reser>ations, by stressing online tic$etpurchases, cutting agent commission fees
! one class fare system and
! trip freuency program
'y stressing these aforementioned policies, as opposed to offering all of the
HeBtrasI that Shuttle by -nited offers, Southest is able to maintain a uic$er,
less costly, and more efficient tra>el system, hich in the end produces higher
route turno>er rates and higher profits. *n addition, Southest offers a trip
freuency program as opposed to a freuent flier miles program. Southest
based their program on the $noledge that approBimately @0J of customers
ne>er use their miles, especially for eBotic destinations. )hus, Southest gi>es
its customers a program that is useful to them, offering customers tic$ets to
destinations close to home, here their customers fly most often.
*t appears difficult for established carriers to restructure and achie>e the
fleBibility of a simplified firm such as Southest !irlines. Shuttle by -nited,
operating in the model of an airline ithin an airline, faces this fleBibility
problem. Southest has a fundamentally simplified administration, ith a
Hhands?onI C+, unli$e the bureaucratic en>ironment and more remote C+ of
-nited. Southest also has a simplified infrastructure that pro>ides fleBibility
particularly in operations and costs. Con>ersely, -nited continues to operate its
Page !7:;
8/13/2019 Final Southwest Paper
28/39
shuttle ithin the infrastructure of a hub?and?spo$e operation ith higher
operating costs, including the need for a larger ground staff. -nited is also
plagued ith much higher time delays due to baggage transfers, speciali7ed
boarding, reser>ed seating, and aiting at hubs for connecting passengers, all
contributing to higher operating costs.
pportunities
*uick +pansion and Route Rollouts
Due to the folloing strengthsreasons, Southest has the opportunity to
eBpand uic$er ithin California and other mar$ets than their competitor
Shuttle by -nited, because their system is already established and or$ing.
Southest has a fundamentally simplified administration, unli$e the
steep management of -nited, ho only eBpects Shuttle by -nited togro no larger than 20J of their o>erall business.
Southest has a simplified infrastructure of a point?to?point system,
pro>iding them the opportunity to eBpand on more routes. (hereas,
-nited operates on a hub and spo$e system, here the operating costs
are higher and a larger ground staff is needed.
Southest has a cross?trained staff, alloing their employees to sitch
particular &ob?functions hen the needs arise. -nited has a history of
poor management?union relations, hich often hinders the companyFs
ability to adapt to changes.
5urther time delays in congested California mar$ets of San 5rancisco
and %os !ngeles ha>e been costly for Shuttle by -nited as of late. )his
ea$ness of -nitedFs, combined ith SouthestFs corporate fleBibility,
pro>ides Southest the opportunity to eBpand to more routes ithin
California that are not currently being offered by any other lo cost
carriers other than Shuttle by -nited this is assuming that Southestcan continue to replicate their high plane turno>er rates. )hese routes
are"
San 5rancisco to %os !ngeles
San 5rancisco to 'urban$
San 5rancisco to ntario
San 5rancisco to %as egas
Page !8:;
8/13/2019 Final Southwest Paper
29/39
San 5rancisco to Seattle
Market'share ,ro&th
Due to Shuttle by -nitedFs eBpected tic$et fare increase of E80 dollars per
tic$et, Southest has the opportunity to attract more customers bac$ to itsCalifornia business, hich it lost in the fourth uarter of 84, since price is a
large determinant among customers for airline choice. f course, this is
assuming that Southest $eeps its current prices loer than -nitedFs ne
suggested prices.
)hreatsSouthestFs sur>i>al and groth hinges on anticipating and managing the
folloing threats"
$hemsel!esContinued success in an unpredictable industry can lead people in the company
to become complacent, greedy, selfish, or smug characteristics that could
ultimately lead Southest to their on demise.
ur!i!al o Airports!irports must sur>i>e in order for the national air transportation system to
sur>i>e. *n order to do so, the airports must do li$e many of the airlines ha>e
had to and ma$e tough decisions to reduce o>erhead, defer or cancel capitalspending, and become more producti>e and profitable.
#ncreased Competition
Competitors are see$ing to loer labor costs through furloughs and increased
age and benefit Hgi>ebac$s.I (ith loer labor costs, competitors can reduce
tic$et prices and steal customers. *n addition, ne competition, in the form of
ne up?start lo?cost carriers, may threaten Southest by utili7ing ne
amenities and non?unioni7ed, loer?paid or$forces.
O!ercapacity
+Bcessi>e seat capacity in the industry relati>e to demand can dri>e o>erall
prices loer to fight for customers, reducing margins and mar$et?share.
Page !9:;
8/13/2019 Final Southwest Paper
30/39
#ndustry -ulnera"ility
)he industry itself is >ulnerable to uncontrollable factors, hich can reduce
demand and lead to o>ercapacity, such as" higher fuel prices, safety incidents,
terrorist acti>ities, etc.
Page 3.:;
8/13/2019 Final Southwest Paper
31/39
*. !nalysis of -nited !irlines
-nitedFs Strategy!n important step in this study to lead us to our recommendation as to
understand hat eBactly -nitedFs strategy is. )o put it simply, -nited is
attempting to emulate Southest. )hey adopted an Hairline ithin an airlineI
strategy by di>iding a portion of their airline into a lo?fare, lo?frill business.
)his di>ision, termed HShuttle by -nitedI, mimic$ed Southest by offering
short?haul flights using 3;3s at a minimal price. 9oe>er, for the sa$e of
product differentiation, they retained assigned seating and 8st class tic$ets,
among other things.
(ith such a de>iation from their original Hma&or carrier strategy,I itFs li$ely due
to poor financial producti>ity and profitability, as supported by the table belo.
:actor 1993 199! 1991
/! ?0.24 ?;.4 ?;.;6
/+ ?2.@ [email protected] ?20.;8
1et Profit #argin ?0.4; ?6.4 ?@.@
Producti>ity ity numbers,hich ran$ among the orst in the industry. n the other hand, Southest has
led the industry in producti>ity and continues to remain one of the fe airlines
ma$ing money during this industry dontime. )herefore, -nited felt that they
could remedy their problems by adopting a strategy that had been successful
for another airline. 5or a time, this ne strategy actually or$ed for -nited. 'y
flooding the (est coast ith short?haul routes, they immediately caused a 80J
mar$et?share loss in California traffic for Southest. *n fact, Southest added
siB aircraft and 62 daily flights in California &ust to try and combat Shuttle by
-nited. /ecently, -nited has decided to pull out of the most hotly contested
route, a$land?ntario, and mo>e prices higher by increasing all fares by ten
dollars.
-nderstanding hy -nited altered its strategies once again is the $ey to
formulating our recommendations for SouthestFs response. ne of the prime
Page 31:;
8/13/2019 Final Southwest Paper
32/39
reasons for -nitedFs change as that they simply ha>e not been able to imitate
the Southest model successfully. *ronically, they adopted the lo?fare, lo?
frill model to impro>e producti>ity, but it actually resulted in a four year high of
.06 cents cost!S#. )his number as nohere near the SouthestFs 3.06
cents cost!S#. )his substantial difference is due in part to to factors" highercosts and ineffecti>eness in plane turno>er. Since Shuttle by -nited is
operating ithin a larger airliner, they incur higher fiBed costs that Southest
does not. *n addition, more tra>el agents are used to boo$ Shuttle by -nited
flights, hich resulted in higher commission costs. Shuttle by -nitedFs
efficiency is hindered because they choose to offer assigned seating and
because they fly to more congested airports.
(hile SouthestFs inimitability as a $ey factor in -nitedFs recent
announcements, the ultimate reason is that -nited could &ust simply not
compete ith Southest. *n the a$land?ntario route, -nited has a load factor
of ;2J, essentially meaning they are filling only ;2J of their seats.
Con>ersely, Southest has maintained a much larger load factor of @J. !s
e>ident from the competiti>e comparison chart belo, -nited does not ha>e
one resource that e>en resembles a competiti>e ad>antage hen using this
strategy.
6alu
e
Rar
e
nimitab
le
#rganie
*
Shuttle by
2nite*
South%est
irlines5inancial Strength es 1o Parity )emp. !d>antage+mployees es 1o Parity Sustainable !d>.
Strategy es 1o Parity Sustainable !d>.
+fficiency es 1o Parity )emp. !d>antage
)echnology es 1o Parity Parity
#ar$et Share es 1o Parity Parity%o Cost #ar$etLnoledge 1o Comp. Disad>. Sustainable !d>.
#anagement es 1o Parity )emp. !d>antage
(or$ en>ironment es 1o Parity )emp. !d>antage
'rand 1ame es 1o Parity Parity
n top of their inability to imitate and compete ith Southest, -nited is
currently faced ith the need to ma$e money uic$ly. *n 84, -nited incurred
a 8 billion dollar deficit in retained earnings and an /+ of ?24.;3J. )hese
numbers are a result of an agreement ith their labor union to distribute stoc$
Page 3!:;
8/13/2019 Final Southwest Paper
33/39
to employees in eBchange for a cut in pay. (ith such an immense deficit,
-nited is being forced to find ays to increase their cash flo fast. )hus, they
ha>e raised fares all around to increase their re>enues and profits.
'ased on this research, eF>e determined that -nited has made these recent
announcements to fiB some of their on internal financial struggles, not as a
response to mar$et changes that Southest is not aare of. 9a>ing this
$noledge eFre able to ma$e some >iable recommendations on ho to
respond.
Page 33:;
8/13/2019 Final Southwest Paper
34/39
**. Conclusion/ecommendations
Possible Courses of !ction)o simplify things e ha>e listed four specific and immediate responses on ho
Southest can respond to the recent actions of Shuttle by -nited. )hose are"
1; 'o nothing
!; Raise prices
3; ** routes an*(or +light +reely respond to the de>elopments in the
industry forced by Shuttle by -nitedFs decision to raise prices and drop theira$land?ntario route effecti>e in !pril, e recommend doing the folloing"
.o not raise prices
/aising prices may seem li$e an attracti>e strategy because in doing so,
Southest ill still be the loest fare carrier on the routes that it operates in
and ill bring in higher re>enues. 'ut ultimately hat ill happen in this
industry if Southest raises their prices is that it ill attract more companies to
the lo?fare mar$et. )his is &ustified by the facts that if prices are higher, other
companies belie>e they can compete ith that price, hich ill ultimately resultin a price ar. *n $eeping prices constant, it should attract more customers to
Southest, since 3@J of customers choose on the basis of price and flight
schedule.
Add more lights on the Oakland'Ontario route*n !pril, Shuttle by -nited ill be dropping 3 flights on this route, lea>ing
customers that ere pre>iously ser>iced, ithout a carrier. 5irst, an attempt
should be made to fill the empty seats on SouthestFs current flights on this
route. Secondly, more flights should be offered daily on this route by
Southest to ma$e up for the lost capacity of Shuttle by -nited. !ssuming that
these se>en additional flights can be filled to a capacity of 82@ occupants, at
E6 per tic$et, Southest stands to gain an additional E6,;3@day and E22,
0;6,3@year in re>enue.
Page 34:;
8/13/2019 Final Southwest Paper
35/39
+pand Routes
Southest should continue its long?term groth strategies. )he companyFs
cost!S# is the loest in the industry, and most other companies ha>e too
bureaucratic of a structure to be able to effecti>ely compete ith a lo?fare
pro>ider. )here is also an opportunity to eBpand into the San?5rancisco routes,since Southest is currently not operating ithin this airport. 9oe>er, this
strategy of eBpanding into San 5rancisco is only recommended if turno>er rates
can be replicated ithin this congested airport. 5urthermore, se>eral
opportunities eBist for Southest to eBpand nationide into the 1ortheast and
Southeast mar$ets here the company currently operates in >ery fe airports.
*n considering locations in these regions, Southest should continue to see$ out
less congested airports here current turno>er ratios can be repeated.
Page 35:;
8/13/2019 Final Southwest Paper
36/39
***./eferences!nonymous. anced 88J, but load factor asdon. e. Airfinance %ournal, 868, 8?28.
Cameron, Doug. er *C! en>ironmental regulations.
8/13/2019 Final Southwest Paper
37/39
Lerin, /oger !.
8/13/2019 Final Southwest Paper
38/39
F'rian, 'ridget. y going" ContinentalFs C!%ite hits some turbulence in'attling SouthestRairlineFs lo?fare ser>ice annoys many tra>elers, leads to alarge deficitR&et flights in odd places. The all Street %ournal1e or$, 1,eastern editionT, anuary 80, 8@, !8.
F'rian, 'ridget U /itter, Scott. antage through the effe. The Academy of Management #,ecuti"e,
8/13/2019 Final Southwest Paper
39/39
Southest airlines using industryFs first cabin trainer.