7/27/2019 Southwest Case study solution

1/12

7/27/2019 Southwest Case study solution

2/12

Southwest airlines-Pricing

Kumar Kushagra- 12MBA0128

Gaurav Sharma- 12MBA0039

Roopali Singh- 12MBA

Pushkar Sinha- 12MBA0116

7/27/2019 Southwest Case study solution

3/12

About southwest airlines

1967: Herb Kelleher and Rollin King founded SW

1970: management team built

June 18,1971: 1st fly in Texas-Houston, Dallas, San Antonio

(Golden Triangle) with 3 Boeing 737s aircrafts and 25 employees

Operation focus: short-distance flights (>500 miles), point-to-pointflights, only 737 Boeing, high frequency flights, low fares, no

international flights

1st national carrier to sell seats online ($1 per booking)

1st airline to use ticketless travel (January 31,1995)

2000: biggest aircraft order (94 737s Boeing) >>> 355 fleets in2002

2003: 4th largest US airlines in terms of domestic passengers carried

7/27/2019 Southwest Case study solution

4/12

What Pricing Strategies does Southwest

Airline Employ to compete against otherairlines?

7/27/2019 Southwest Case study solution

5/12

Low-Cost LeadershipSouthwest understand that it is low costs

that they can profitability offer low fare.

They control expenses by; offering cheap snacks than most other

airlines. operates a single type of aircraft the Boeing

737one aircraft type significantly simplifiesscheduling, maintenance, flight operationsad training activities.

7/27/2019 Southwest Case study solution

6/12

focused on increasing employeeproductivity currently employ 71employeeper aircraft.

there marketing strategy remains short-

flight and domestic route thus 85% flightsare 750miles or less.

They serve airports that are readilyaccessible rather than large international

airports, it help in reducing the long delay. southwest also increase aircraft average

time in air i.e 11hour per day, compared to8hours for other airlines.

7/27/2019 Southwest Case study solution

7/12

Cost structure of airlines

Variable costs Maintenance

Fuel

Labor

Fixed costs

Fees

Lease payments for airports Other costs( food, entertainment etc.)

7/27/2019 Southwest Case study solution

8/12

Cost control

7/27/2019 Southwest Case study solution

9/12

What Southwest does.

Single aircraft type-Boeing 737

Flights to and from secondary airports

Add-on services at an extra charge

Low employee turnover

7/27/2019 Southwest Case study solution

10/12

What Southwest should do.

Utilizing the seating capacity of the plane

Use derivative instruments based on crudeoil, heating oil, or jet fuel to hedge their fuel

cost risk. Plain vanilla instruments to hedge their jet fuel

costs

Swaps Futures

Call options (including average price optionswhich are a type of call option)

collars (including zero-cost collars).

7/27/2019 Southwest Case study solution

11/12

Outsourcing of maintenance and ITprofessionals.

Use of better technology and parts for

planes.

7/27/2019 Southwest Case study solution

12/12

Internet and Southwests

Pricing Sold tickets directly to customers

online.

Deletion of travel agents and toll free

numbers. Saved $80 million

Generated 25% of revenue online