HULT5

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Hult International Business School *

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Management

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Feb 20, 2024

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The Case of Southwest HULT

The Reason for Southwest Airline’s Success Southwest success could be attributed to an efficient use of their asset, the cheapest service, and reliable service for customers. For this, Southwest should maximize aircraft operational excellence and differentiated themselves from other competitors through an effective marketing. I try to explain more about this from now on. The key factor on success of Southwest was their low-cost model. Firstly, Southwest used one type of air plane, the Boeing 737 series. This resulted in all kinds of cost-saving: maintenance cost, training cost for their mechanics and pilots. It also gave Southwest flexibility to move their aircrafts throughout the route network without reconfigurations. Secondly, Southwest improved profitability by minimizing turnaround time and kept low fares by selecting spider-web system that enable point-to-point flying, instead of hub-and- spoke system that needed more geographic coverage. Lastly, Southwest’s no-frills policy and contracting for some of their work was helpful for keeping low fare and providing their own value for customers. It was “frequent, reliable, on-time flights, and very low prices” (Goldstein, Rungtusanatham, Schroeder, 2011, p. 439). In the marketing side, Southwest did a differentiated and effective marketing. They positioned them themselves in fun image, the concept of LUV, and this “served to reinforce Southwest’s lively image among its employees and encouraged them to pass it on to passengers” (Goldstein et al., 2011, p. 440). Southwest’s the lowest prices offering appealed to many people who were not interested in additional in-flight services or wanted to avoid busy airports. Southwest thoroughly put a price from a profit perspective at the same time, not a just cheap price; they fully considered all kinds of cost and then found a solution to meet the twin goals of offering low fare to customers and securing profitability to company.

Southwest’s success was due to their focused group ㅡ defining target customers and searching new market. Southwest used an effective promotion policy that could entice their target customers, regular business commuters, such as sweetheart stamp. When Southwest decided to enter new market, they chose “only the ones that fit their business model” (Goldstein et al., 2011, p. 441). In corporate culture, familial atmosphere and collaborative management-union relationship resulted in a high sense of unity and strong trust in the company. This was driving force of high morale and low employee turnover. The 10 to 15 Minutes Turnaround Time of Southwest Airlines Southwest turned their airplanes round 10 to 15 minutes from the time it arrives at the gate until it leaves. This minimized the time that airplanes sat on the ground and this quick turnaround allowed their airplanes to be in the air more. This quick turns enabled Southwest to increase fright per airplane. Southwest airplanes were able to be in the air for more time each day than a similarly sized competitor. Southwest’s airplanes were in the air for 12 hours per day, whereas industry average was 8 hours per day. As a result, this meant growth of productivity of finite resources compare to their competitors and this must also lead to revenue increase. Challenges Facing Southwest and Response The competition in low-fare market is getting fierce. Many low-fare carriers such as JetBlue, AirTran Airways, and Frontier Airlines appeared. These competitors copied and improved upon Southwest’s model. Unlike Southwest, new competitors offered more amenities such as luxurious leather seat and in-seat audio video entertainment, they also used “leading-edge technology to streamline operations” (Goldstein et al., 2011, p. 445). For

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example, JetBlue offered preassigned seats, fright service throughout the US. For this reason, Southwest should rethink their operation model as customers and circumstances change. In fact, Southwest renovated interiors and exteriors of their airplanes and adopted technology to streamline their operation. Management turnover and labor issues ㅡ increased tension between labor unions and management ㅡ are also emerging. I think that Herb Kelleher’s excellent leadership and the united organization culture that he set was a source of competitive advantage. Southwest’s real potential energy comes also from this. So, Southwest should try to maintain harmonious relationship with their employees and find improvement point in labor issues such as communication and a rational wage structure. What Should Their Business and Operations Strategy Be for the Future? Low-fare is not Southwest’s own merit any longer, competitors provided services beyond just low-fare and customers’ range of choice widened. In pierce competition, the absence of differentiated service would lead to loss their customers to competitors. I think that Southwest need to rethink their no frill policy, otherwise they should be able to provide very low-fare service beyond the competitors. But when considering Southwest business structures including wage, price competition seems to be difficult. I think that Southwest need to enlarge their market to secure a proper profitability because their traditional market is filled with many other competitors. For this, Investment ㅡ replacing the old airplanes and building IT infra to cover larger market and improve efficiency ㅡ is needed because Boeing 737s are outdated and so inefficiency in operating occurs: high fuel consumption and maintenance cost, low capacity, and inflexibility of

customer service. On the other hands, competitors such as JetBlue or AirTran have newer and more efficient planes that require less maintenance and young and lower paid workers. So they can provide improved services with maintaining low-fare. Investment and upgrading facilities may be costly venture, but it would be a gateway to the larger market and the high operational efficiency if that investment is well combined with the strength of Southwest organizational culture. New CEO and Profitability in the Unique Culture CEO Gary Kelly warned high costs are a danger airline. He also said that many majors such as Pan Am went bankrupt because of high cost, not customer service. Attending to costs is one of the top priority tasks but Southwest labor and fuel costs continue to rise, especially in labor cost. Human resources are the most important factor in the business. Southwest are proud of hardworking and motivated employees. Their employees helped other works than their own work. For example, a pilot also helped the ground staff in moving the passenger’s luggage. This corporate culture helped high labor productivity. In addition to this, the peaceful labor relationship was also a cost advantage to Southwest. If this core base is collapsed, Southwest’s unique service practice may lose its merit and bring great difficulties in overcome competition. So, it is needed to maintain this cooperative culture for keeping high level of labor productivity in Southwest. But, it seems that new HR system that can accurately reflect actual labor productivity are required for evolving to match future situation. If this compensation is build up, Southwest must be continue their success. Southwest value proposition is still very robust in the eyes of many.

Reference Goldstein, Susan Meyer and Schroeder, Roger G. and Rungtusanatham, M. Johnny. (2011). Operations Management: Contemporary Concepts and Cases, 5th Edition . ISBN #978-0-07-340338-0

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