SouthWest Airlines Case Study
Executive Summary Thousands of people travel by air; Southwest Airlines provides low-fare
air transportation service among 58 cities in the United States. Although the industry
suffered a major blow from the terrorist attack of September 11th, the company is still
holding strong; while other airline companies are in debt. The information was majority
gathered and analyzed from the internet; sources such as "News Week," and "Wall Street
Journal." According to the acquired knowledge of Southwest, the company maintains steady
sales. The major success to their continued success is due to their low-cost model and
competitors are aware that they cannot match Southwest Airlines low prices therefore, by
dropping the price even lower; Southwest Airlines can force a company to go bankrupt.
Introduction In 1971, Rollin King and Herb Kelleher started an airline service with one
simple notion: "If you get your passengers to their destinations when they want to get
there, on time, at the lowest possible fares, and make darn sure they have a good time
doing it, people will fly your airline." They were right about that. Southwest Airline is now a
major airline, in fact, the fourth largest airliner in the United States that is trading under the
Symbol LUV on NYSE.
The mission of Southwest Airlines is dedication to the highest quality of customer service
delivered with a sense of warmth, friendliness, individual pride, and company spirit. It
primarily provides short haul, high-frequency, point-to-point, low-fare air transportation
service among 58 cities (59 airports) in the United States.
Here are some numbers that will give a brief idea how the company is operating: Net
income: $241 million Total passengers carried: 63 million Total RPMs: 45.4 billion Passenger
load factor: 65.9 percent Total operating revenue: $5.5 billion The airline industry has been
hit hard by the terrorist attack of September 11th. There is a 13% insurance raise for the
airlines and the government is enforcing fees regarding security problems. The operation
cost increases dramatically and there are less people traveling by air. Most of the airliners
are losing money expect a few. Southwest is one of those airlines which have remained
profitable.
Organization of Southwest Airlines is described as an upside-down pyramid. The upper
management is at the bottom and supports the front line employees (~35000), who are the
experts. This is Herb Kelleher's unorthodox leadership style, in which management decisions
are made by everyone in the organization, not just the head executives. The company is
described to not have much emphasis on structure; instead employees are encouraged to
think freely without constraints such as titles. Kelleher, for example, is said to know the
names of virtually all his employees.
Southwest Airlines is characterized as a C-corporation with duration distinguished as a
normal perpetual existence. The shareholders are not normally liable for debts of the
corporation and they preserve an operation that is normally more structured, requiring
more meetings and (in some states) more reporting requirements. Management is very
centralized through the board of directors (elected by the shareholders) and the officers
(elected by the directors). The corporation is taxable entity, although the income which
would normally be taxed at the corporate level can normally be paid out in salaries (and in
other deductible ways) so that there is in fact no tax at the corporate level. As far as
transferability of interest, it is normally fully transferable and raising capital is in the choice
of public companies.
Southwest Airlines values employees, initiating the first profit-sharing plan in the U.S.
airline industry in 1974 and offered it ever since. "In 2000, Southwest offered its employees
a record-setting $138M in profit sharing. This tax-deferred compensation represented an
additional 14.1 percent of each employee's annual salary.
Methodology In order to explore Southwest Airline's corporate structure, the method in
which we obtain our information is a critical component in our mission. Therefore, this
analysis describes a methodology that utilizes Southwest Airline's official website to attain
background history, company particulars and financial statistics. In addition, the library's
electronic journals, business research databases (Wall Street Journal, Business Week) and
accredited search engines on the Internet such as Yahoo! are also major resources for our
investigation in conducting a fundamental SWOT analysis and acquiring information
regarding the company's main competitors and customers.
Our research will not be limited to just Southwest Airline, our research involves Boeing 737
as well as a few of the opposing companies. Research on these additional topics will be
specific, material that pertains or assists in elaborating our recommendations for the
company of Southwest.
Results According to the attached figure covering the past four years of Southwest Airlines'
financial progress, they have maintained steady net sales. In 1999, they had total net sales
of $4,735 million which had risen to $5,585 million. Their slight drop in 2002 to $5,521
million was due to the September 11th incident. However, this is nothing compared to other
major airline industries where they have lost so much more. Many have even gone bankrupt
and been forced to close down. In fact, Southwest Airlines was the only major US air carrier
to remain profitable since then; albeit Southwest Airlines were affected by the poor
economic conditions. Few of their main competitors are Continental Airlines and American
Airlines. Substitute products include the train (Amtrak) and bus (Greyhound) which cover
long distances. While these alternates cannot offer the speed of travel, most of Southwest
Airlines' customers are attracted to the low price.
Suppliers include those who provide service/products necessary for Southwest Airlines to
their business function. For Southwest Airlines, suppliers include mechanics(and other
maintenance people), providers of fuel, food(the snacks that are offered). The suppliers do
not have much bargaining power.
Customers include both residential and commercial sectors. There is no bargaining power
for customers, as there is no threat of backward integration; it is unlikely that customers of
Southwest Airlines are going to build their own airplanes and fly themselves.
Rivalry among competitors sets the price-Southwest Airlines is a discount airliner. Rivalry is
increasing, as the market decreases, and competitors downsize, the competitors become
more or less equal in size and capacity. This means that as economic conditions worsen,
competitors downsize and then compete for the same remaining market.
The threat of new entrants is low, the demand is not high. On top of that, there are hurdles,
not necessarily the greatest; the FAA. Government regulations and restrictions imposed on
those involved in this industry. Such would be government sanctions consequent of
international issues.
At a glance, the company's source of competitive advantage is its low price tickets. Most of
its customers are people who are willing to forego in-flight meals, direct routes and fancy
seats if that would mean for a cheaper ticket. Not to imply that Southwest doesn't provide
direct flights, but that is offered at a higher price. Southwest Airlines was in better shape
than its competitors after recent attacks on September 11 for a simple reason: their lowcost
model.
Terrorist attacks on the World Trade Center had a devastating effect on the airline industry,
particularly because the instrument of destruction of these attacks was hijacked airplanes.
The public lost faith in the airline industry immediately following September 11th, and for
many airline companies this meant going into severe debt or even declaring bankruptcy.
Even after some time, the majority of the airline industry experienced lower profits and
massive downsizing. However, for smaller companies like Southwest, they were able to turn
a profit and were in a more enviable position than the larger counterparts.
The reason for Southwest Airline's success is due to their low-cost model. The Southwest
Airlines consists solely of Boeing 737s and offers only coach seats (there is no business or
first class). Southwest Airlines also do not offer in-flight meals, only peanuts and other
snacks. Southwest is simple and direct at the goal of their service; "a primarily short-haul
airline that flies directly from city to city, with just one type of plane--the Boeing 737 - and
the lowest costs". With a simple goal, Southwest has excised many of the "luxuries" that
competitors have offered, such as luxury seats; this is made evident by their decision to
enforce a rule for passengers who could not fit into the seats to purchase an additional seat.
This rather unpopular move (whereas other airlines would have suggested a more luxury
class seat) is simple in its purpose-get passengers from point A to point B. Services, such as
in-flight meals and luxury seats, which have become standard to competitors, have been
seen as unnecessary for an airline that provides a short-haul trip from city to city at the
lowest cost. To have opted for a first class, business class, or any form of luxury class seat
would have been excess baggage; most people would prefer to do without it if it meant for
cheaper ticket price.
While Southwest Airlines offers no frills, Southwest Airlines do meet customer expectations
when it comes to service. They base their model on the motto, which states that "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,"
Southwest has very good relations with all their employees. Employees are either of
independent unions or have flexible contracts which all
SouthWest Airlines Case Study
Executive Summary Thousands of people travel by air; Southwest Airlines provides low-fare
air transportation service among 58 cities in the United States. Although the industry
suffered a major blow from the terrorist attack of September 11th, the company is still
holding strong; while other airline companies are in debt. The information was majority
gathered and analyzed from the internet; sources such as "News Week," and "Wall Street
Journal." According to the acquired knowledge of Southwest, the company maintains steady
sales. The major success to their continued success is due to their low-cost model and
competitors are aware that they cannot match Southwest Airlines low prices therefore, by
dropping the price even lower; Southwest Airlines can force a company to go bankrupt.
Introduction In 1971, Rollin King and Herb Kelleher started an airline service with one
simple notion: "If you get your passengers to their destinations when they want to get
there, on time, at the lowest possible fares, and make darn sure they have a good time
doing it, people will fly your airline." They were right about that. Southwest Airline is now a
major airline, in fact, the fourth largest airliner in the United States that is trading under the
Symbol LUV on NYSE.
The mission of Southwest Airlines is dedication to the highest quality of customer service
delivered with a sense of warmth, friendliness, individual pride, and company spirit. It
primarily provides short haul, high-frequency, point-to-point, low-fare air transportation
service among 58 cities (59 airports) in the United States.
Here are some numbers that will give a brief idea how the company is operating: Net
income: $241 million Total passengers carried: 63 million Total RPMs: 45.4 billion Passenger
load factor: 65.9 percent Total operating revenue: $5.5 billion The airline industry has been
hit hard by the terrorist attack of September 11th. There is a 13% insurance raise for the
airlines and the government is enforcing fees regarding security problems. The operation
cost increases dramatically and there are less people traveling by air. Most of the airliners
are losing money expect a few. Southwest is one of those airlines which have remained
profitable.
Organization of Southwest Airlines is described as an upside-down pyramid. The upper
management is at the bottom and supports the front line employees (~35000), who are the
experts. This is Herb Kelleher's unorthodox leadership style, in which management decisions
are made by everyone in the organization, not just the head executives. The company is
described to not have much emphasis on structure; instead employees are encouraged to
think freely without constraints such as titles. Kelleher, for example, is said to know the
names of virtually all his employees.
Southwest Airlines is characterized as a C-corporation with duration distinguished as a
normal perpetual existence. The shareholders are not normally liable for debts of the
corporation and they preserve an operation that is normally more structured, requiring
more meetings and (in some states) more reporting requirements. Management is very
centralized through the board of directors (elected by the shareholders) and the officers
(elected by the directors). The corporation is taxable entity, although the income which
would normally be taxed at the corporate level can normally be paid out in salaries (and in
other deductible ways) so that there is in fact no tax at the corporate level. As far as
transferability of interest, it is normally fully transferable and raising capital is in the choice
of public companies.
Southwest Airlines values employees, initiating the first profit-sharing plan in the U.S.
airline industry in 1974 and offered it ever since. "In 2000, Southwest offered its employees
a record-setting $138M in profit sharing. This tax-deferred compensation represented an
additional 14.1 percent of each employee's annual salary.
Methodology In order to explore Southwest Airline's corporate structure, the method in
which we obtain our information is a critical component in our mission. Therefore, this
analysis describes a methodology that utilizes Southwest Airline's official website to attain
background history, company particulars and financial statistics. In addition, the library's
electronic journals, business research databases (Wall Street Journal, Business Week) and
accredited search engines on the Internet such as Yahoo! are also major resources for our
investigation in conducting a fundamental SWOT analysis and acquiring information
regarding the company's main competitors and customers.
Our research will not be limited to just Southwest Airline, our research involves Boeing 737
as well as a few of the opposing companies. Research on these additional topics will be
specific, material that pertains or assists in elaborating our recommendations for the
company of Southwest.
Results According to the attached figure covering the past four years of Southwest Airlines'
financial progress, they have maintained steady net sales. In 1999, they had total net sales
of $4,735 million which had risen to $5,585 million. Their slight drop in 2002 to $5,521
million was due to the September 11th incident. However, this is nothing compared to other
major airline industries where they have lost so much more. Many have even gone bankrupt
and been forced to close down. In fact, Southwest Airlines was the only major US air carrier
to remain profitable since then; albeit Southwest Airlines were affected by the poor
economic conditions. Few of their main competitors are Continental Airlines and American
Airlines. Substitute products include the train (Amtrak) and bus (Greyhound) which cover
long distances. While these alternates cannot offer the speed of travel, most of Southwest
Airlines' customers are attracted to the low price.
Suppliers include those who provide service/products necessary for Southwest Airlines to
their business function. For Southwest Airlines, suppliers include mechanics(and other
maintenance people), providers of fuel, food(the snacks that are offered). The suppliers do
not have much bargaining power.
Customers include both residential and commercial sectors. There is no bargaining power
for customers, as there is no threat of backward integration; it is unlikely that customers of
Southwest Airlines are going to build their own airplanes and fly themselves.
Rivalry among competitors sets the price-Southwest Airlines is a discount airliner. Rivalry is
increasing, as the market decreases, and competitors downsize, the competitors become
more or less equal in size and capacity. This means that as economic conditions worsen,
competitors downsize and then compete for the same remaining market.
The threat of new entrants is low, the demand is not high. On top of that, there are hurdles,
not necessarily the greatest; the FAA. Government regulations and restrictions imposed on
those involved in this industry. Such would be government sanctions consequent of
international issues.
At a glance, the company's source of competitive advantage is its low price tickets. Most of
its customers are people who are willing to forego in-flight meals, direct routes and fancy
seats if that would mean for a cheaper ticket. Not to imply that Southwest doesn't provide
direct flights, but that is offered at a higher price. Southwest Airlines was in better shape
than its competitors after recent attacks on September 11 for a simple reason: their lowcost
model.
Terrorist attacks on the World Trade Center had a devastating effect on the airline industry,
particularly because the instrument of destruction of these attacks was hijacked airplanes.
The public lost faith in the airline industry immediately following September 11th, and for
many airline companies this meant going into severe debt or even declaring bankruptcy.
Even after some time, the majority of the airline industry experienced lower profits and
massive downsizing. However, for smaller companies like Southwest, they were able to turn
a profit and were in a more enviable position than the larger counterparts.
The reason for Southwest Airline's success is due to their low-cost model. The Southwest
Airlines consists solely of Boeing 737s and offers only coach seats (there is no business or
first class). Southwest Airlines also do not offer in-flight meals, only peanuts and other
snacks. Southwest is simple and direct at the goal of their service; "a primarily short-haul
airline that flies directly from city to city, with just one type of plane--the Boeing 737 - and
the lowest costs". With a simple goal, Southwest has excised many of the "luxuries" that
competitors have offered, such as luxury seats; this is made evident by their decision to
enforce a rule for passengers who could not fit into the seats to purchase an additional seat.
This rather unpopular move (whereas other airlines would have suggested a more luxury
class seat) is simple in its purpose-get passengers from point A to point B. Services, such as
in-flight meals and luxury seats, which have become standard to competitors, have been
seen as unnecessary for an airline that provides a short-haul trip from city to city at the
lowest cost. To have opted for a first class, business class, or any form of luxury class seat
would have been excess baggage; most people would prefer to do without it if it meant for
cheaper ticket price.
While Southwest Airlines offers no frills, Southwest Airlines do meet customer expectations
when it comes to service. They base their model on the motto, which states that "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,"
Southwest has very good relations with all their employees. Employees are either of
independent unions or have flexible contracts which all
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