Southwest Airlines 2002: An Industry Under Siege

Harvard Business School: 9-803-133

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. After the Airline
Deregulation Act of 1978, Southwest adopted a polity that irregardless 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.

1). What is the competitive business environment

The airline industry has always been competitive. In an analysis of the most
profitably investments as per our class discussion, surprisingly, airlines come in at the
lowest return on each dollar invested at around 2.5%.

Southwest Airlines experienced 30 consecutive years of profit a mere two years

after it’s founding in 1971. Many airports began requesting Southwest service for their
passengers, but throughout Southwest’s expansion, the company aimed to maintain a
manageable growth rate and focus on their core competencies of low price fares that
would compete with the cost of driving to the destination.

In the mid 1990’s, the major carriers entered into price wars to undercut
competition. Although, these dealings did affect Southwest’s bottom line, Southwest still
manage to continue to turn a profit and expand due to their expansion into a reservation
system and their commitment to a culture and experience that passengers were drawn to.

2). What is the competitive advantage that the company obtained as discussed in the
case?
Southwest Airlines competitive advantages are their point-to-point services which
are generally targeting the frequent business traveler. With several regular flights per day,
if a passenger happens to miss their flight, they will be automatically booked onto
another flight. Secondly, Southwest strategically secured routes through secondary
airports which generally had lower fixed costs for the airlines and less congestions for
passengers ease. Finally, Southwest focused on quick, reliable turnaround time using
only one version of aircraft, allowing for familiarity among staff and greater efficiency in
turnaround. Passengers were not assigned seats, simply boarding sections, which allowed
for passenger loading to be conducted more efficiently.
The traditional airline model is the Hub and Spoke model, which in essence takes
most passengers from the origination, through the hub, and then transfers them to their
destination. Southwest’s point to point system was more reliable because it did not
depend on the on time arrival of an earlier flight for departure.
 Southwest also implemented the first and most simplistic frequent-flier program:
purchase eight flights and get one free. Southwest’s initially connected with four
computer reservation and ticketing systems and also the powerful SABRE system. This
allowed travel agents to view flight information and even print tickets. In 1994,
Southwest was only connected through the SABRE systems which pushed Southwest to
develop the “ticketless” travel program as well as Southwest.com.

3). What strategy and/or model was used or implemented in this case?

Bargaining Porter’s 5 Competitive Forces Model

power of Threat of
buyers substitute
Threa
ts

Southwest vs. All

other Airlines

Bargaining Threat of new

power of entrants
suppliers
Bargaining
Power

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 was the best in the industry until September
11th, which helped to prevent the threat of substitutes.

Southwest did face the threat of new entrants when People Express launched in
1980. It competed on low fares as well and grew rapidly. Ultimately, the company was
not able to sustain its growth and dissolved blaming larger competitors. Ryan Air
replicated Southwest Airlines in Europe and another low cost competitor now is Jet Blue
in the United States.
Southwest airlines does struggle against the threat of substitutes much like any
other airline and in this case the threat of substitutes is the decision to use an alternate
form of travel, such as driving or taking a train. The airline industry is sensitive to
“tragedy” such as when there is a plane crash or an event like 9/11; consumers tend to
switch to a substitute or chose not to travel in the first place. Southwest’s best defense is

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a strong PR campaign, which we saw after 9/11 when the company launched ads saying
that when America is ready to fly again, Southwest will be there.

Looking at the bargaining power of suppliers, Southwest relies heavily on its employees,
pilots and other “team” members. Employees were very loyal, and turnover was
significantly less than other airlines. Also, any union negotiations were taken very
seriously by management and generally handled by the CEO himself. Finally, Southwest
is vulnerable to variable changes in pricing at different airports for security, etc, but
Southwest always sought the lowest cost alternation or the least congested airport for
their passenger’s convenience. Southwest also negotiated fuel prices years ahead,
allowing them to maintain this fixed cost on an annual basis.

Finally, Southwest helped to counteract the threat of bargaining power of buyers

by giving passengers what they want . . . lower fares, reliable service and rapid rewards!
Southwest noted that one of passengers’ most frequent complaints was the fact that they
are not able to choose their own seat. According to Southwest’s website press release, the
company in currently looking into making changes to accommodate their clients. Again,
this is Southwest strategically counteracting a threat of bargaining power of buyers by
consistently monitoring and adjusting to consumer concerns.

4). What (IS/IT) solution was used or implemented in the case?

Southwest airlines remained competitive in the 1990’s during competitors’ price
wars by joining 4 computer reservation systems and also the SABRE system. This
presence allowed for travel agents to make reservations, and even print tickets for
passengers. Also, we’ll see after this case was written that Southwest will implement
electronic kiosk’s that allow for passengers to check in without having to check with an
agent. Also, Southwest will implement a website with reservation capacity and most
recently, the ability to check into a flight 24 hours ahead of time. These solutions assisted

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Southwest in their core competencies that the company instilled back in the 1970’s of a
quick turn around time and flexibility in travel. Unfortunately, after the tragedy of
September 11th, safety regulations began to hinder Southwest’s passengers and the
company quickly responded with these new technologies to help during the trying travel
times with heightened security regulations.

5). From your perspective what other solution(s) (strategy/model, IS/IT) might be
employed for the company?

Looking at Southwest airlines today four years after this case study was released,
it is challenging to say what other solutions should be implemented because I am aware
of the solutions that have been presented to date. Looking at Keen’s six stage
competitive advantage model though, if I didn’t know where Southwest moves after this
case study, I would recommend that Southwest adopt this model because their stimulus
for action would be the delays in security and the fact that the company has dropped to
second worst as far as on time departures. Southwest could take the first major move to
implement electronic kiosks for self check in, saving passengers time. These kiosks will
slowly build customer acceptance and other airlines will scramble to compete. Finally,
check in kiosks are now a commodity among all major airlines.
Keen’s Six-Stage Competitive Advantage Model

Stimulus for action: On time

performance slips to second to last.

First major move: Customer Self

Check in Kiosks

Customer acceptance

Competitor catch-up move First mover expansion move:

Southwest moves to online check in.

Commoditization: All major airlines

have check in kiosks.

6). Draw and explain how can the Information Systems Strategy Triangle be
employed in this case?

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 IT Strategy:
Business Strategy: SABRE
Low cost Business Kiosks
Reliability Strategy Website, online
Frequent flights ticketing.
Rapid rewards Online boarding
Culture passes

Organizational
Organizational IT Strategy
Strategy:
Strategy
Point-to-Point
Sustainable growth
“Teams”
“Culture”

The Information Systems Strategy Triangle demonstrates the balance that Southwest
airlines took to focus on business strategy, organizational strategy and IT strategy. The
following priorities fall under each strategy:

Business Strategy:
Low cost
Reliability

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Frequent flights
Rapid rewards
Culture

Organizational Strategy:
Point-to-Point
Sustainable growth
“Teams”
“Culture”

IT Strategy:
SABRE
Kiosks
Website, online ticketing.
Online boarding passes

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.

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

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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.

Managers at Southwest should move to inform passengers of new safety

restrictions and potential delays and encourage them to arrive earlier for their flights.
Southwest responded immediately after 9/11 with a patriotic message, and it would be
again appropriate to clarify to their passengers that the delays are for their safety. In the
meantime, Southwest should pay for additional personnel to help during security
procedures, and perhaps add an extra incentive in the Southwest Terminal such as free
coffee or chocolate chip cookies to help add value to the passengers who have to wait
longer for flights.

Also, looking back at the company’s history from their website, in 2002, facing
these delays, Southwest created check in kiosks. These computerized databases can
process customer information allowing for greater efficiency for passengers without
check in baggage. In addition, Southwest shortly thereafter implemented the 24 hour
check in procedure. By going online to Southwest.com, passengers can check in up to 24
hours ahead of their flight, reducing their airport time and confirming their seat ahead of
time.

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.

4). If you would recommend a resumption of previous growth rates, what form
should this growth take? For example, should it be achieved within the current
network or through an expanded network? By means of great proportion of long-
haul flights (over three hours in length) or not? Why?

I would recommend an increase in the long-haul flights. As long as Southwest

can still continue to maintain the point-to-point service, and they do not lose these core
competencies, than by all means, they should continue this growth. Southwest has
revolutionized the airline industry because the fast turnaround time, which in essence
means that you have more passengers in the air, thereby bringing in more revenues. The
point here is that if there is a shift between the number of full seats on a certain route, this
is when Southwest needs to look at readjusting their routes. However, if the seats are still

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full for shorter flights and longer flights, then by all means, continue to serve the
passengers accordingly.

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
profitably 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.

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,
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.

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.