Southwest Airlines: In a Different World Background After Southwest Airlines entered the airline industry in 1967, it soon became

a market leader by pursuing a low cost differentiation strategy. Southwest Airlines has been a strong growth company over the last 35 years. Using its slow-cost, passenger friendly, point-to-point operational strategy, Southwest has been able to sustain considerable growth year after year and remain profitable for 33 straight years. Southwest Airlines now has a market capitalization of $14 billion and is positioned as one of the strongest airlines in the struggling airlines industry. Over the last five years many airlines have reported record losses and five of the ten larges airlines have filed for bankruptcy, Southwest has been able to remain profitable and continue to grow. This strategy allowed them to charge 60% lower than the average coach fair and develop a consumer base around their excellent service. There are three primary reasons to why this strategy was successful in the past: 1. First, the company demanded process efficiency; 2. Second, the company developed a cheap almost inimitable culture of outstanding service; 3. Third, the company successfully engaged in fuel hedging (Fuel Hedging is a contractual tool some large fuel consuming companies, such as airlines, use to reduce their exposure to volatile and potentially rising fuel costs). Early in the companys existence, the Southwest Airlines saw the automobile as its primary competitor and not the other airlines in the industry. Their goal was to charge fares that were below the cost of driving an automobile. This goal drove them to be cost efficient and demanded maximum utilization of their assets. The Southwest Effect- A trend that indicated the success and profitability of Southwests business model less expensive than driving between two points in the early 1970s, during the first major energy cost crisis in the U.S. THE MAJOR ISSUES FACED BY THE COMPANY PROBLEM STATEMENT: Southwest Airlines has two problems at hand now: a)How to maintain the strategic coherence that it currently has and how to make them sustainable in the long term b)Find the best possible expansion strategy amongst the three options of routes

Expand within the system, add a new segment between Detroit and Phoenix Grow in Chicago by adding a route from Chicago to Dayton Establish base in east coast- kick off service from Baltimore ANALYSIS OF PROBLEM 1: SUSTAINING LOW COST DIFFERENTIATION STRATEGY Southwest Airlines strongly follows the strategy of low cost/differentiation strategy . They provide the lowest possible fare in the industry.This leaves South West with not much competition in the industry. At the same time South West focuses on differentiating itself on the basisof the service, operations, cost control, marketing, its people and corporate culture. They believe in providing customer focused services.They believe in adding fun element to their services. Their main aim is to offer great service at the lowest cost.

ANALYSIS OF ACTIVITIES THAT ARE CRITICAL FOR MAINTAINING THEIR STRATEGIC COHERENCE
1) MAINTAIN MOTIVATED PEOPLE FORCE

Southwest Airlines always relied on their people for carrying out most of their time saving and cost saving activities. None of them would be possible if the ground staff is not dedicated. To maintain the same amount of enthusiasm amongst the work-force to work efficiently even with wages lower than the industry average: Selection procedure of employees they should always look out for people who crave psychological satisfaction more out of a job than monetary satisfaction Most of the times it was the employees who gave them new ways of saving time and money, so always keep up the org culture of openness and employee involvement in major decisions Recognitions and awards should continue to make employees happy and more self confident
2) TARGET ONLY SMALL CITIES AND CONTINUE WITH THE CITY TO CITY HOPPING ROUTE

Save up time by selecting less congested airports Save up on costs by not following the hub and spoke model, saving fuel and time 3) TARGET CUSTOMERS: Their target customers mostly would be families who would be in the middle and lower middle class income range who would not mind a little fun while travelling
4) BRANDING THEMSELVES AS THE OFFICIAL HOLIDAY CARRIER:

Since they attract a lot of people during the vacations they should market themselves as the carrier that brings together the whole family during a vacation at a very low cost. They should start hitting on the emotional side 5) CONTROLLED EXPANSION: They should never go for any city that offers them a lot on revenue but where they might lose out due to badweather conditions or simply because of culture mismatch. They should foray into markets only after a study of their passengers The second dilemma was about their expansion strategy. South west had always followed a controlled expansion strategy and always wasknown for its deliberate and cautious moves to expand. Now they had three options at hand: a)Expand within system, add a new segment between Detroit and Phoenix- where the airport gate and landing fee would be higher than the average Southwest Standards b)Grow in Chicago by adding a route from Chicago to Dayton- the fee per passenger would be lower than their average in other airports, the airport was fairly uncongested and had room for further expansion c)Establish base in east coast- kick off service from Baltimore- airport fees was in line with the system. In assessing the best option we evaluated all the three options both qualitatively and quantitatively. We evaluated the risks as well as the returns in each of the three options separately and determined the best option. We forecasted the demand based on past growth rate. NPVand an calculation of the payback period for each of the options gave us an understanding of the returns that each project would provide us with. Risks are always based on the best case, worst case and expected case scenarios of the prices to be offered to the customers since Southwest had to maintain a cost lower than almost 60% of the industry average to be competitive in the industry. They could maintain their low prices only through their low operating costs. In the sensitivity analysis the final option seemed to go very well with the statement higher the risk higher the return which does not go very well with Southwests controlled expansion theory. The second option seemed to turn very bad in the worst case scenario in which south-west could operate due to entry of new competitors. The first option of expanding within the system was moderate and fared well in both the worst and best case scenario.Looking at it qualitatively the first option seemed lucrative since there were a lot of passengers already asking for the particular route to be established and this would improve the brand image of Southwest since they would be responding to customer.