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Case study MBA - C
Team A
11/14/2009 1Annie, Luigi, Myra, Wichai, Yonggang MBA -C
US Airline Industry Before 1978 derogation …Civil Aeronautic Board regulated airline route 2-3 carriers provided the service in a given marketcost passed along to customers, no price
competition
After derogation…many new firms enter the market
Fuel crisis of 19791981 air traffic control strike=more industry
difficulties More than 150 bankrupt carriers during the 1st
decade of deregulation
11/14/09 2Annie, Luigi, Myra, Wichai, Yonggang MBA -C
US Airline Industry
1980s: financial debts increase due to expanded demand brought about by low fares
1990s: new aircraft orders lowered (not profitable market) to avoid debts
Mid-1990s: increase demand, from 200 million (1974) to 500 million(1995)
In 1999, global improvement of airline industrySeptember 11, 2001 attack= chaos in the market
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New Pressures on Airline Industry
Security : need to increase war risk insurance Customer dissatisfaction: service problem, call for
regulation Labor costs: pressure expected to increase Aircraft maintenance : higher
maintenance/replacement costs, stricter government regulation for older planes
Debt servicing: airline industry debt load exceeded US industry averages
Fuel cost: big impact on the total cost was uncertain
Air traffic delays: due to higher travel, airport congestion=negative influence on profitability.
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Southwest Airlines Background 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-point flights, 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 in 2002 2003: 4th largest US airlines in terms of domestic
passengers carried
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Southwest Performance Passenger load factor
is the percentage filled with paying passengers.
Revenue passenger miles one paying passenger flown one line
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Analysis with Porter´s 5 Force Model
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Power of Suppliers
The market is dominated by a few large airplane suppliers
As for the catering, gift services and other indirect materials, there are many fragmented sources and therefore their power is of almost no significance
The cost (maintenance and training) of switching from Boeing 737 to Airbus A320 is very high
The suppliers' customers are fragmented, so their bargaining power is low
There is the possibility of the supplier integrating forwards in order to obtain higher prices and margins
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Power of Customers Travel agents buy large volumes, there’s a concentration of
buyers, therefore their switching to a different supplier might have larger impact on the profits
Individual buyers usually act as individuals and therefore have no strong bargaining power
Switching to an alternative product is relatively simple and is not related to high costs
Customers are either price-sensitive, or time-oriented The product is not of strategic importance for the customer
because there are many other short distance transportation means
There is the possibility for the customer (travel agent only) integrating backwards
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Threat of New Entrants Economies of scale: Southwest is # 7 in market share in 2000, thus has
reached sufficient economies of scale High initial investments and fixed costs: New entrants difficult to
compete financially with profitable Southwest Brand loyalty of customers: SW reputation makes it hard to win SW
customers Scarcity of important resources: (e.g. qualified expert staff) To train
people for technical skills is possible, but to imitate SW culture is very difficult
Distribution channels: SW has no special control over distribution channels
Legislation and government action: Not so difficult to set up airline company in the US
Operational efficiency: many imitators failed to compete with SW‘s... the highest passenger miles per employees ratio lowest employees per aircraft ratio debt-to-equity ratio is much lower than the industry average
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Treat of Substitutes Brand loyalty of customers…so customers are unlikely to switch
to other transportation means, such as trainSouthwest provides low price or time-optimized tickets good service, care fun to their customers
Switching costs for customers to train/car for the Southwest routes…
requires more travel timescause a lot of inconvenience
Relative price for performance of substitutes…Price for trains, or gasoline cost for self-driving are comparable to
the price of Southwest ticket for the same route, not much cheaper.
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Rivalry in the industry There are many players of about the same sizePlayers have similar strategies All players have their own customer intimacy programNot much differentiation between players and their
products, hence, there is much price competitionOnly visible differentiation is in the scope of the service
offering, age of airplanes, trainings of the staff, and heartiness of flight attendants where SW ranks very high
Low market growth rates (growth of a particular company is possible only at the expense of a competitor)
Barriers for exit are high (e.g. expensive and highly specialized equipment)
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Business Strategies/Service Models
Short –haul (less than 500 miles)Point to point flightOnly Boeing 737 High frequency flightsLow fareNo international flights
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Business Strategies/Service Models
Two-tiered pricing structure ($13 or $26 w/ free bottle of liquor)
Consistent with their primary focus (531 miles average trip length of 1.35 hours, 2,800 flights/day to 58 cities, 8 flights/plane, 12 working hours/plane)
Operation without major hubs=customer convenience, time-saving
Uses “no frills” approach to services (first come first serve seating, color-coded passes)
Online booking (no need for travel agents)
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Human Resource Management Strategies “Positively Outrageous Service” (customer service exceeds the
norm) Communication and camaraderie highly valued Unique new employee orientation (Wheel of fortune game show,
scavenger hunts, company videos) Regular training for advanced employees “Leading with Integrity” classes for newly promoted
managers/supervisors “Walk-a-Mile Day” program to promote respect for co-workers and
increase company awareness Mentoring program
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Human Resource Management Strategies
Employee initiative supported by management Emphasis on cooperative labor relations Employee own 10% company stocks Average age of Southwest employee was 34 years SW among the highest paid employees in the industry
and the company Enjoyed low employee turnover relative to the airline
industry More than 1,000 married couples (2,000 employees)
worked for the airline
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New Employees Hiring Strategies
In 2001, Southwest reviewed 194,821 resumes and hired 6,406 new employeesUnique: Peers screened candidates and conducted interviews (e.g. pilots hired pilots, gate
agents hired gate agents)To better understand what the company sought in
candidates, Southwest interviewed its top employees in each job function (e.g. pilots, gate agents, baggage handlers, ground crew) and identified their common strengths, then used these profiles to identify top candidates
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Southwest spirit employees first
“If they’re happy, satisfied, dedicated, and energetic, they’ll take real good care of the customers. When the customers are happy,
they come back.And that makes the shareholders happy.”
Herb Kelleher, Southwest CEO and Founder
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By second half of 1994 many imitators
One third of the total industry capacity
Almost was start up airlines
Main Shuttle by United, Continental Line (CaLite)
Morris Air, first competition after “take over “
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increase productivity, frequency of flight
Reserved seating - Lower fare rate
Hub congestion - cost of delays
Fee travel agents - commission fee
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Interesting and unique position
Good financial status/stability
Increase operation in Northeast
Provide additional service (Wi-fi on all plane 2009)