SouthWest Airlines 2002: An Industry Under Siege

1. SouthWest Airlines 2002:An Industry Under Siege Jason Chou-Hong Chen, Ph.D. Visiting Professor, Mingchi University of Technology Professor of MIS Graduate School of Business, Gonzaga University Spokane, WA 99258 USA chen@jepson.gonzaga.edu

2. Case Information • Discipline: Service management • Description: The company's management is faced with long-term questions regarding the rate and manner of growth in the wake of the 9/11 attacks and general industry malaise. • Learning Objective: To understand ways of achieving and maintaining both a differentiated and a low-cost service offering. • Subjects Covered: Competition, Corporate culture, Service management, Strategy, Information Technology. • Setting: United States; Airline industry; $4 billion revenues; 35,000 employees; 2002

3. Why Study the Case? • The case provides a vehicle for analyzing one of those rare competitive strategies that literallychange the rules of the game for an entire industry. Historic information suggests how the strategywas shaped. And detailed information in the case helps the reader to understand both howSouthwest makes money while maintaining its low-cost advantage as well as its differentiation fromits competition, the result of a well-crafted strategic value vision. • The importance of effective leadership and a strong culture capable of adapting in the face ofmajor competitive threats as well as external disasters, such as 9/11, is highlighted in the case. Itprovides the basis for assessing the conclusion of one major piece of research described in the next Exhibit, that Southwest Airlines has been able to preserve its competitive advantage primarilythrough its superior relationship management practices.

4. IS/IT Strategy Triangle • Each group: • Complete the case using “Strategy Triangle” model

5. Business Strategy Organizational Strategy IS/IT Strategy Draw and explain how can the Information Systems Strategy Triangle be employed in this case? Business Strategy: Low cost Differentiation/ Innovation Organizational Strategy: Sustainable growth “Teams” Fun/Friendly Culture Frequent flights Rapid rewards Point-to-Point IS/IT Strategy: SABRE Kiosks Website, online ticketing. Online boarding passes

6. Executive Summary • Southwest Airlines in 2002 faced a serious of important management decisions after the 9/11 tragedy in order to continue the record breaking company growth that Southwest had experienced since the 1970’s. Southwest Airlines revolutionized the airline industry with what is known as the Southwest Effect: low cost fares, point-to-point service, “10 minute turnaround” and an enjoyable friendly atmosphere (all are with differentiation). • After the Airline Deregulation Act of 1978, Southwest adopted a policy that regardless of the profitability of expansion opportunities, the company wanted to commit to a manageable annual growth rate of about 10-15%. The following questions and discussion will address the historical challenges of Southwest airlines, the direction the company contemplated in 2002, and a brief look at the challenges of today.

7. What other Model can be Employed?

8. NEW MARKET ENTRANTS SUBSTITUTE PRODUCTS & SERVICES • Switching cost • Access to distribution channels • Economies of scale • Redefine products and services • Improve price/performance Other Airllines (USA routes only) S.W. Airline • Cost-effectiveness • Market access • Differentiation of product or service • Buyer selection • Switching costs • Differentiation • Selection of suppler • Threat of backward integration SUPPLIERS CUSTOMERS What strategy and/or model was used or implemented in this case? Threats Bargaining power N

9. The Southwest airlines case can be analyzed with Porter’s five competitive forces model. Southwest airlines benefited after the airline deregulation in 1971, and were able to lay the groundwork for a successful airline. • Throughout their growth, Southwest differentiated from the competition by taking a friendly, warm and welcoming approach to flying. Their low cost flights undercut the competition, which would fit under the threat of substitutes. Also, their reliability (differentiation) was the best in the industry until September 11th, which helped to prevent the threat of substitutes.

10. Suggested Study Questions 1). How does this company make money even when other airlines do not? What are the most important contributors to its financial success? • Southwest Airlines has built its reputation on low cost reliable service. Over their tenure of 30 years in the airline industry, they have demonstrated 30 years of sustainable growth. The reason Southwest has remained financially viable is their commitment through point-to-point service with a quick turn around time. The more planes in the air and the less time on the ground is a profitably business model. Also, Southwest has tailored to the business traveler who is looking for reliability and less hassles. Also, Southwest has a generous rapid rewards system that is easy to comprehend and helps retain customer loyalty. In addition, Southwest hires the best people and rewards them accordingly, in a fun, enjoyable atmosphere. Finally, Southwest negotiates fuel prices for their airlines years in advance allowing the company to keep their pricing consistent.

11. 2). How should management respond to the fact that Southwest Airlines has fallen to next-to-last place among major airlines in on-time performance as of September, 2002? • Management faced many challenges due to the increase in security regulations post-9/11. Southwest was fortune that it was a strong performer prior September 11th, but many of the security regulations that soon after would be implemented, directly contrast with Southwest primary core competencies. For instance, Southwest initially had the colored boarding cards, which were generic without passenger names. Due to highest security risk, passenger names had to be cross checked at the gate, causing delays. • Also, Southwest’s motto, “You are now free to move about the Country” was directly targeting travelers who could walk onto the plane a few minutes before takeoff because Southwest would keep the doors open to allow for passengers to keep filing in. Again, this was against new security measures. Also, since many of Southwest passengers did not generally arrive as early as other airlines, more often than not, Southwest passengers would be subject to security searches. Also, random security searches were being conducted at the gates as well which Southwest actually stepped up to help mitigate delays by hiring more security personnel.

12. 3). Once operations are fully stabilized, would you recommend to the management of the airline that it resume its historic growth rate of from 10? To 15? Per year? Why? • I would recommend that Southwest continue to grow at 10 to 15 percent per year but no more. Companies such as Wal Mart and McDonalds, if their growth is too large, too quickly, their presence can be filled with resentment from customers because they have pushed out other competition. • At 10-15 percent growth, airports and cities will still ask for Southwest to expand into their areas, and it will be a slow, calculated and sustainable growth, as opposed to one that moves the company away from its core competencies.

13. 5) • N/A since, a 10-15 % increased is recommended.

14. 6). What are the implications for Southwest of the actual or threatened bankruptcies of other major U.S. airlines? • Southwest is in a precarious position because they are profitable. Through 30 years of diligence, determination and strategic efforts, Southwest is a very popular and profitable airline. The trouble is that in the event of a government bailout of other airlines due to bankruptcy, then Southwest is almost hindered because the other airlines will be handed large government checks. • The benefit here though to Southwest is the ability they have to continue to be profitable, continue to build investor relations and continue to reward their hard working employees. Since 9/11, many airlines have eliminated pensions, terminated employees and taken very drastic measures to stay afloat. Southwest has been fortunate, and although a bailout of other airlines may not seem fair, Southwest still is in the black and has the ability to continue to push forward to gain more market share and continue its excellent track record of profitability.

15. 7). What is IS/IT role played in the case? • The IS/IT role played in this case was one that kept Southwest competitive in a challenging industry. Southwest used a reservation system, website and check in kiosks (was the first airline used ticketless system), Southwest was able to help counter the challenges posed after September 11th. • Southwest was revolutionary in the airline industry in many of their IT developments and were quick to move to the online e-commerce model as far as a reservation system and ticketing.

16. 8) Why have profits for Southwest Airlines dropped recently? • Upon further review of Southwest Airlines website and other sites, I have been unable to find evidence that profits have dropped. Looking at their traffic and revenue numbers throughout 2006, it appears that traffic counts and revenue is up for Southwest however, Southwest has always negotiated their oil hedge prices years ahead. • Perhaps due to drastic increases in oil prices, this could be hurting Southwest’s bottom line. Also, Jet Blue has gained popularity as a low cost alternative which may be threatening Southwest’s market share.

17. Southwest today • Fleet consists of 547 Boeing 737’s • Employees nearly 35,000 people • Serves 72 cities in 37 states • Just experienced it’s 38th consecutive year of profitability

18. Further Lessons Learned:SWA Case and Strategic Resource Model • One of the differentiation from SWA is its • “corporate culture” • What characteristics in Strategic Resource Model that are related to the “corporate culture” of SWA that improves/creates its competitive advantage • Non-imitable • Non-transferable • Rare • Exploitable