South West Airline Case Study
BATTLE STATIONS!
In March 2004, US Airways CEO David Siegel addressed his employees via a Web-cast. “They’re
coming for one reason: They’re coming to kill us. They beat us on the West Coast, they beat us in
Baltimore, but if they beat us in Philadelphia they are going to kill us” Siegel exhorted his employees,
emphasizing that US Airways had to repel Southwest Airlines when it joined the competition at the
Philadelphia International Airport in May -or die. On Sunday, May 9, 2004, at 5:05 A.M. (yes,
A.M.), leisure passengers and some thrift-minded business people lined up to secure seats on
Southwest’s 7 A.M. flight from Philadelphia to Chicago-its inaugural flight from the new market.
Other passengers scurried to get in line for a flight to Orlando - and why not? A family of six indicated it
bought tickets for $49 each way, or $98 round trip- An equivalent round-tip ticket on US Air would have
been
$200. Southwest employees, dressed in golf shirts and khaki pants or
shorts, had decorated the ticket counters with lavender, red, and gold
balloons and hustled to assist the throng of passengers. As the crowd
blew noisemakers and hurled confetti, Herb Kelleher, Southwest’s quirky
CEO, shouted, “I hereby declare Philadelphia free from the tyranny of
high fares ! ” At 6:59 A.M., Southwest might 741 departed for Chicago.
THE WAR IS ON
You might wonder what’s causing all this fuss. After all, isn’t US Air firmly entrenched in
Philadelphia, the nation’s eighth-largest market, offering over 375 flights per day and controlling twothirds
of
its 120 gates? Further, little Southwest, which only serves a total of
58 cities and 59 airports in 30 states, is offering only 14 flights a
day from Philly and has only four gates. Even more, Southwest
has a history of entering smaller, less expensive, more out-of-the-way airports where it didn’t pose a direct
threat to the major airlines, like US Air. Does Southwest really have a chance?
Thirty-three
years ago, when Kelleher and a partner concocted a business plan on a
cocktail napkin, most people didn’t give Southwest much chance. It
adopted a strategy completely in opposition to the industry’s
conventional wisdom. Its planes flew from “point-to-point” rather than
using the “hub-andspoke” pattern the major airlines have used. This gave
it more flexibility to move planes around based on demand. Southwest
served no meals, only snacks. It did not charge passengers a fee to
change same-fare tickets. It had no assigned seats. It had no electronic
entertainment, relying on comic flight attendants to entertain passengers. The airline did not offer a
retirement plan; rather it offered its employees a profit-sharing plan. 〔In 2003, that plan paid $126
million to the company’s 31,000 employees.〕Because of all this, Southwest had much lower costs than its competitors and was able to crush the competition with low fares.
Southwest has stuck with its strategy. In 2003, the company earned $442 million-more than all the other
U.S. air lines combined. Over the last three years, Southwest earned $1.2 billion, while its competitors
were losing a combined $22 billion. In May 2003, for the first time, it boarded more domestic customers
than any other airline. From 1972 through 2002, Money magazine indicated that Southwest was the
nation’s best-performing stock-growing at a compound annual rate of 26 percent over the period!
Moreover,
while competing airlines laid off thousands of workers following the
September 11tragedy, Southwest didn’t lay off a single employee and
remained profitable every quarter - keeping its string of 31 straight
profitable years intact! In 2004, its cost per average seat mile (CASM -
the cost of
flying one seat one mile) was 8.09 cents, as comparedwith between 9.42 and 11.18 for the big carriers.
LOW ON AMMUNITION
There
are three problems for the major airlines, such as US Air, Delta,
United, American, and Continental. First, “little” Southwest is not
little any more. Second, many others, such as JetBlue, AirTran,
ATA, and Virgin Atlantic, have adopted Southwestlike strategies. In fact, JetBlue and America West had
CASMs of 5.90 and 7.72 cents, respectively. In 1990, discount airlines flew on just 159 of the nation’s top
1,000
routes. In 2004, that number had risen to 754. As a result, the majors,
who used to believe they could earn a 30 percent price premium, were
lucky to get a 10 percent premium, if that. Third, and most importantly,
the major (or legacy) airlines had high cost structures that were
difficult to change. They had more long-service employees who earned
higher pay and received expensive pension and health benefits. Many had
unions, which worked hard to protect employees pay and benefits.
ATTACK AND COUNTERATTACK
US Air has experienced Southwest’s attacks before. In the late 1980s, Southwest entered the
California
market, where US Air had a 58 percent market share on its routes. By
the mid-90s, Southwest had forced US Air to abandon those routes. On the
Oakland to Burbank route, average one-way fares fell from $104 to $42 –
and traffic tripled. In the early 90s, Southwest entered Baltimore
Washington International Airport, where US Air had a significant hub and
a 55 percent market share. By 2004, US Air had only 4.9 percent of BWI
traffic, with Southwest
ranking
number one at 47 percent. So, USAir knows it’s in for a fight in
Philly. Reluctantly, it has started to make changes. In preparation for
Southwest’s arrival, it began to reshape
its image as a high-fare, uncooperative carrier. It began to spread out its scheduling to reduce
congestion
and the resulting delays and to use two seldom-used runways to reduce
bottlenecks. Thecompany also lowered fares to match Southwest and
dropped its requirement for a Saturday-night stay over on discounted
flights. US Air also began some new promotion tactics. It
launched
local TV sports on popular shows like “Friends,” “American Idol,” and
“Frasier” to promote free massages, movie tickets, pizza, and flowers.
However, Herb Kelleher knows Philly won’t be a cakewalk. The airport is
known for its delays, congestion, bureaucracy, and baggage snafus –
factors that work against Southwest’s strategy of 20-
minute turnarounds for its planes. Therefore, Southwest has unveiled a new
promotion
plan for Philly. Kelleher ditched his triedand- true, cookie-cutter
approach. The airline held focus groups with local travelers to get
their ideas on
how
it should promote its service – a first for Southwest. As a result, the
airline developed a more intense ad campaign and assigned 50 percent
more
employees
to the airport than it would in a customary launch. Southwest also
recruited volunteers to stand on local street corners handing out free,
inflatable airline hats, luggage tags, and antenna toppers. The airline
is using billboards, TV, and radio to trumpet the accessibility of its
low fares, pointing out that competitors make many fewer seats actually
available
at
advertised low fares. The ads also note that frequent fliers earn free
flights based on the number of Southwest flights, not based on mileage.
Southwest knows that Philadelphia passengers have other low-fare
options, such as Frontier, AirTran, and America West. Further, some of
the Southwestwannabes are offering things like JetBlue’s 24 channels of
free TV and XM satellite radio at each seat in addition to low fares.
Southwest will have to
distinguish itself - just advertising low fares will notbe enough anymore.
Discussion Questions
1. How do Southwest Airlines’ marketing
objectives and its marketing mix strategy affect
its pricing decisions?
2. What is the nature of costs in the airline
industry? How does this affect pricing decisions?
3. How do the nature of the airline market and the
demand for airline service affect Southwest’s
decisions?
4. What general pricing approaches have airlines
pursued?
5. What pricing and other marketing
recommendations would you make to Southwest
as it enters the Philadelphia market?
6. Briefly review Korean airline industry including
recently introduced low-fare airline companies.
What marketing recommendation would you
make to newly introduced low-fare airline
companies? Also, what marketing
recommendations would you make to existing
airline companies to deal with competition from
low-fare airline companies?
Sources:
“Let me Battle Begin,” Air Transport World,
May 2004, p. 9; Tom Belden, “Southwest Airlines
Launches Low-Fare Service from Philadelphia’s
Airport,” Knight/Ridder/liibune Business News, May
11, 2004; Micheline Maynard, “Southwest Comes
Caning, and a Race Begins,” The New York Times,
May 10, 2004; Tom Ramstack, “US Airways Faces
Big Threat from Southwest Airlines in Philadelphia,”
Knight Ridder/Tribune Business News, May 8, 2004;
Dan Fitzpatrick, “Southwest Airlines Challenges US
Airways at Philadelphia Airport Hub,” Knight
Ridder/Tribune Business News, May 5, 2004;
Melanie Trottman, “Destination: Philadelphia,” The
Wall Street Journal, May 4, 2004, p. B1; Eric
Torbenson “Rising Costs, Low-Fare Carriers Could
Spell Doom for Big Airlines, Experts Say,” The
Dallas Morning News, April 8, 2004; Andy Serwer,
Kate Bonamici, “Southwest Airlines: The Hottest
Thing in the Sky,” Fortune, March 8, 2004, p. 86.You Can Also Read:
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