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 [Link].

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

Porter’s 5 Competitive Forces Model

Bargaining
power of Threa Threat of
buyers ts substitute

Southwest vs. All

other Airlines

Bargaining
Threat of new
power of
Bargaining entrants
suppliers
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

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“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
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.