Purposes, objectives or research questions
Briefly introduce the topic/organization
Describes its history and development to date.
Study its structure and operation Collect the necessary quantitative or qualitative data on:
staff or customer service
…..any other information deemed necessary
Probable future trajectory (future scenarios)
Possible Strategies and Issues to Consider
Strategy evaluation (pros and cons)
make a recommendation
CASE OF THE SOUTH WEST AIRLINE:
As of 1996, Southwest Airlines (Southwest)
entered the markets of Florida and the southeastern United States. He
The airline planned to operate 78 daily flights to Tampa,
Fort Lauderdale and Orlando through August
Next year. With the expansion to Florida, the
The Northeast remained the only major US air service area.
where Southwest did not compete. US Northeast
The market was generally avoided by low-cost airlines.
like Southwest due to airport congestion,
Traffic control delays, frequent bad weather and
Mastery of some of the major airlines. airports like
Logan International in Boston, JFK International in
New York and Newark International were among them.
busiest and most congested airports in the country.
Continental Airlines' attempt to
Low Fare Operations in the East durante 1994-5 fue un
With the move to Florida and the potential
challenges related to the Northeast market,
Questions have been raised about Southwest's ability to
more consistently asserting its position as the United States
profitable airline. Above all, there were concerns
if Southwest grew too fast and drifted
of his proven strategy. would enter florida
Market and possibly the Northeast Market,
25 years of success in jeopardy? The success led to a
focused strategy based on frequent, fast flights
Airport gate rotations and careful selection of
Markets and airports that avoided land and air traffic
control delays. Herb Kelleher, the charismatic president,
Co-founder and CEO of the airline,
wrote to his employees in 1993: "Southwest had more growth opportunities than airplanes.
Unlike other airlines, however, it avoided the pitfall of
grows beyond its means. I want to talk
With an officer or ramp agent, the team just doesn't do it.
they seem enthusiastic about the idea that bigger is better.”1
The US airline industry
The nature of the US commercial airline industry.
moved permanently in October 1978 as president
Jimmy Carter signed the Airline Deregulation Act.
Before deregulation, the Civil Aeronautics Council
regulated entry and exit of air routes, passenger fares,
Mergers and Acquisitions and Airline Returns.
Usually two or three carriers provided a service
specific market, although there are routes covered by
a single carrier. Cost increases passed through
customers, and price competition was almost
non-existent. The airlines operated as if there were only
two market segments: those who can afford to fly and
those who could not.2
Deregulation reduced air fares and
allowed many new companies to enter the market. He
Financial implications for established and new airlines.
it was huge. The 1979 fuel crisis and air travel
The controllers' strike in 1981 contributed to the industry strike
The difficulties, as well as the severe recession that the
United States in the early 1980s. During the first
Decade of deregulation, more than 150 airlines, many
of them new emerging airlines, went bankrupt
Bankruptcy. Eight of the top 11 airlines dominate
In 1978, the industry declared bankruptcy,
merge with other operators or simply disappear
the radar screen. In general, the industry has gained enough
Money in this period to buy two Boeing 747
(Appendix 1).3 The top three airlines that survived intact—Delta, United, and American—finished at 80
percent of total domestic air travel in the United States and 67 percent
Competition and lower rates have largely contributed to this.
increased demand for air travel. Until the mid-1990s
Airlines have had trouble meeting this demand.
Travel increased from 200 million travelers in 1974
500 million in 1995, only five were new potential customers
built during this time. In the 1980s, many
Airlines have taken on significant new debt as part of their efforts
to meet the growing demand for travel. long term debt
Cap rates rose dramatically: Eastern
went from 62 to 473 percent, TWA increased from 62
115 percent, and from Continental it increased from 62 to 96 percent
Penny. By contrast, United and Delta maintained their
Debt ratios below 60% and US
The airline's share fell to 34%.
Despite the financial problems of many
Young airlines started after deregulation, new companies
continue entering the market. Between 1992 and 1995,
69 new airlines were certified by the FAA. most of these
Airlines competed with limited route structures and
Lower fares than major airlines. The new low rate
Airlines have created a second tier of service providers that
Save consumers billions of dollars a year and
Services rendered in markets abandoned or ignored by
great goalkeepers. One of those start-ups was Kiwi Airlines,
founded by former employees of the defunct Eastern
and Pan Am Airlines. Kiwi was largely financed by
Employees: The pilots paid $50,000 each to get jobs and
other employees paid $5,000.
Despite promoting competition and the growth of
new airlines, deregulation has created a significant
different ticket prices and deteriorated service
for small and remote communities. airline employees
generally suffered, average adjusted for inflation
Employee salaries fell from $42,928 in 1978
$37,985 in 1988. Nearly 20,000 airlines
The employees were laid off in the early 1980s.
The productivity of the rest of the employees increased by 43%
cents during the same period. In countless cases,
Bankruptcy filings were used to diminish the role of
Unions and unionized wage cuts.
About 80% of airline operating costs were fixed costs
or semivariable. The only true variable costs were
travel agency commissions, meal expenses and ticketing
Fares The operating costs of an airline flight depended
primarily on the distance traveled, not the number
passengers on board. For example, the size of the crew and ground staff was not determined by aircraft type.
passenger load. So, first of all, an airline
established its route structure, most of its operations
The costs have been determined.
Due to this high fixed cost structure, airlines
developed sophisticated software tools to maximize
Capacity utilization, known as load factor. charge factor
was calculated by dividing RPM (Revenue Passengers
Miles - number of passengers carried multiplied by
distance flown) from ASM (available seat miles - the
Number of places for sale multiplied by
On every flight, one of the major airlines
(excluding Southwest and low-fare carriers), there are
there were usually a dozen fare categories. the airlines
analyzed historical travel patterns on individual routes
to determine how many seats to sell at each fare level.
All major airlines have used this type of analysis and
flexible pricing known as performance management
System. These systems allowed airlines to manage
your inventory of seats and the prices paid for those seats.
The goal was to sell more seats on each flight
higher yields. (All passenger receipts were
Income from planned operations divided by planned
RPM.) The higher the ticket price, the better the performance.
The reduction in operating costs was a high point, however
Priority for airlines, the nature of the cost structure
Limited cost reduction opportunities. Fuel costs (approx.
13 percent of total costs) were well above that
Airline control and many of the largest airlines.
Restrictive collective agreements limited the flexibility of employees.
Although the newer planes were much more fuel efficient
Like older models, most airlines have drastically reduced
their new aircraft orders to avoid new loans.
At the end of June 1990, US airlines had outstanding payments
Purchase orders for 2,748 aircraft. end of June 1996,
Orders fell to 1,111.5 (cost of a new Boeing 737).
about $28 million in 1995.)
To manage your track structures, everything important
Airlines (except Southwest) continued to operate
around a hub-and-spoke network. lined the spokes
Passengers from peripheral cities to a central airport:
the hub – where passengers can also travel
Turnstiles or your final destination. for example fly
Phoenix to Boston with Northwest Airlines, a typical
The itinerary would include a flight from Phoenix to
Detroit, the heart of the Northwest. then the passenger
Take a second flight from Detroit to Boston.
Establishing a major hub in a city like Chicago or
Atlanta required an investment of up to $150
Millions to buy gates and build terminals
Hub systems were an efficient means of distribution
Services in a wide network. The big airlines were
very protective of their so-called centers of strength and the US.
centers to control various local markets. For example,
The Northwest controlled more than 78 percent of the locales.
traffic in Detroit and 84 percent in Minneapolis. When
Southwest entered the Detroit market, the only one available
The gates have already been leased to Northwest. northwest
Southwest gates subleased at rates 18 times higher
than the Northwest coast. Southwest ended up pulling out
Detroit, one of only three markets for the company
he had given up his story. (Denver and Beaumont,
Texas, were the other two.)
Current performance of the aviation industry
US airlines suffer a total loss of $13 billion
from 1990 to 1994 (Graph 1).6 High debt
swept the industry. swag photo from 1994
began to change, with the industry as a whole shrinking
its losses to $278 million.7 General expansion and
Health returned to the sector in 1995 and 1996.
In 1996, net income was a record $2.4 billion. (To see
1995 Flight Performance Appendix 2 and Appendix 3
for 1995 market share valuations.) For 1996, sales projections were $7.2 billion with net income of $3
1996, for the first time in 10 years, the industry
had a profitable first quarter ($110 million).
Numerous statistics showed that the industry was in
good shape: load factors were up to 68-69 percent in
nineteen ninety six; Rates were increased by 5%; and yields achieved
13.52 cents for Personenmeile. last break-even point
The factor fell 2.5 points to around 65 percent and the unit cost
fell 0.4 percent in 1995.8 The expiration of a 10-year term
Domestic ticket tax percentage led to net fare reductions
Tickets for customers despite fare increases. Traffic
Growth outpaced industry growth by 1.7 percent
Future pressures on the industry
Despite recent positive financial performance,
Concerns about price wars, excess capacity in some markets,
increase in fuel prices and the possibility of savings
The recession causes great uncertainty about the
Future. In particular, cost pressure was to be expected
1 labor costs. The average salary per airline employee
from 1987 to 1996 increased faster than
Increase in the CPI index (4.4 percent increase in labor costs compared to a CPI of 3.7 percent).
increase in the same period).9 Working pressure
These were expected to increase as officials searched for the property.
Recent record airline profits. The possibility of
new federal regulations on flight crews and
The length of service requirements was also an issue. Was
estimated that the potential cost of regulation
The changes can reach US$ 1,200 million in the first case
year and $800 million in each subsequent year.
2 aircraft maintenance. The general's aging
Aircraft population meant higher maintenance costs
and eventual replacement of the aircraft. The introduction
of stricter government regulations for older aircraft
imposed new burdens on operators.
3 Debt Service. The debt burden of the airline industry
The United States far exceeded about 65 percent
Industry average of about 40 percent.
4 fuel costs. The long-term cost of kerosene was uncertain.
Prices have risen 11 cents a gallon since July 1995
May 1996. Proposed fuel taxes could cost
Industry worth up to $500 million a year.
5 air traffic delays. Increased air traffic control delays
caused by increased travel demand and the associated airport
Traffic jams should have a negative impact
Background of Southwest Airlines
In 1966, Herb Kelleher was practicing law in San
Antonio when a client named Rollin King suggested
He founded a short-haul airline similar to the one in California
Southwest Pacific Airlines. The airline would fly the "Golden Triangle" from Houston, Dallas and San Antonio
and being in Texas, it avoids federal regulations.
Kelleher and King started a company, created
Initial capital and application for regulatory approval of the
Texas Aviation Commission. Unfortunately, the
other Texas-based airlines, i.e. Braniff,
Continental and Trans Texas (later called Texas
International) – opposed the idea and fought against it
ban flying to Southwest. Kelher argued
Corporate case in the Texas Supreme Court, the
decided in favor of the Southwest. The Supreme Court of the United States
it refused to hear an appeal from the other airlines. In it
In the late 1970s, it looked as though the company might start
Southwest began building a management team and
bought three surplus Boeing 737s. While that,
Braniff and Texas International continued their efforts
Avoid the southwest fly. the insurers of
Southwest's IPO was canceled and
A precautionary measure was obtained against the company two
days before the first planned flight. waiter
re-represented his company's case before Texas
Supreme Court decision in favor of Southwest to
second time, lifting restraining order. south west
The airlines flew the next day, June 18, 1971.10
When Southwest began flying to three cities in Texas,
The company had three aircraft and 25 employees. initial
The flights departed from the former Love Field airport in Dallas and
Houston Hobby Airport, both closest
hub than major international airports.
The original flights were wacky from the start.
crewed by flight attendants in shorts. In 1996, flight attendant uniforms evolved to khaki.
Polo shirts. The theme "Luv" was an integral part of the airline.
from the beginning and became the ticker of the company
Signs on Wall Street.
Southwest management quickly found this out
there were two types of travelers: comfortable, time oriented
Budget-conscious business and leisure travelers
Traveler. Southwest has evolved to accommodate both groups
a two-tier pricing structure. 1972 was southwest
He charges $20 for the flight between Houston, Dallas and San
Antonio reducing the fees of $28 of each
Operator. After experiencing fees of $10
Southwest decided to sell spaces until 7 pm on weekdays.
for $26 and after 7pm and on weekends for
$13.11 In response, January 1973 Braniff Airlines
started charging $13 for his hobby in Dallas-Houston
flights. This resulted in one of the Southwest's most famous
Ads with the headline "No one will shoot."
Southwest of heaven for a measly $13.” south west
offered travelers the option of paying US$13 or
$26 and you get a free bottle of liquor. over 75
percent of passengers chose the $26 fare and
Southwest became the largest distributor of Chivas
Real Scotch Whiskey in Texas. 1975, braniff
left the Dallas-Houston Hobby route. When
Southwest entered the Cleveland market, the
unrestricted one-way fare between Cleveland and
Chicago was $310 on other airlines; The Southwest Tariff
it was $59.12. One of Southwest's problems was
convince passengers that their low fares were not fair
Introductory offers but regular rates. Although Southwest has become one of the largest
Airlines in the United States have not diverted from the company
from your initial approach: short distance (less than 500 miles),
point to point flights; a fleet consisting solely of Boeing
737; high frequency flights; low fees; and not
International flights. 1995 Southwest Average
A one-way ticket costs US$69. The average duration of the internship
Southwest's flights were 394 miles long, with flights of 600
Miles make up less than 2.5% of air miles
Ability. Kelleher hinted in an interview that it would.
It is unlikely that the company's longer flights (eg.
more than 600 miles) would never exceed 10 percent
their business.13 On average, Southwest had more than 40
Departures per day per city, and all planes flew
10 daily flights, almost double the industry average.14
The planes were used an average of 11.5 hours a day,
compared to 8.6 hours per day for the industry
Average.15 Southwest's cost per available seat-kilometre was the lowest in the industry (Figure 4) and average
The age of the fleet in 1995 was 7.9 years, the lowest in the
great goalkeepers. Southwest also had the best safety record.
in the airline business.
Southwest was the only major airline that operated
no hubs. Point to point service provided
maximum comfort for passengers who wanted it
fly between two cities, but insufficient demand may
make these non-stop flights economically unfeasible. To
For this reason, the hub-and-spoke approach was commonly used.
assumed this will generate cost savings for airlines
operational efficiency. However, Southwest saw
different: hub-and-spoke agreements have emerged
Planes spend more time on the ground waiting for you
Clients arriving from the connection points.
Response time: The time it takes to download a
waiting for the plane and loading it for the next flight - I was 15 years old
Minutes Southwest vs Industry
on average 45 minutes. This time saving was
performed with a gate staff 50 percent smaller than
those of other airlines. Passengers sometimes helped unload
Bags when schedules were tight. stewardess
regularly assisted with aircraft cleaning between
Compared to the other major airlines, Southwest had
a simple approach to service: reserved seats have been
not offered and meals not served. the clients were
Issued numbered or color-coded boarding passes
based on your search warrant. seats came first
served first. As a cost-saving measure, color coding
The passports were reusable. Why doesn't the airline
assigned seats, Kelleher explained: “We used to be
only about four people on the entire plane, so
The idea of assigned seats just made people laugh. Now him
The reason is that you can turn the planes faster at the gate.
And if you can flip a plane faster, you can have it.
fly more routes every day. Bring more sales
so you can offer cheaper rates.”16
Unlike some major airlines, Southwest rarely does
offered late-arriving customers a hotel room or long-distance calls
calls. Southwest did not use a computer
Reservation system, preferred travel agencies and
Customers book flights through the reservation center or
Vending machines at airports. Southwest was first
national airline to sell seats through a website.
Southwest was also one of the first airlines to use this
ticketless travel, which will offer the service for the first time on January 31
1995. In June 1996, 35 percent of the airline
Passengers flew without a ticket with a cost saving of
25 million dollars a year. October 1993 on 50 routes, mainly in the Southeast.
The frequency of the flights was an important part of the new strategy.
Greenville-Spartanburg has 17 flights a day and in
Orlando, daily departures more than doubled. cove
Rates based on Southwest and meals
they were eliminated on flights of less than 2.5 hours.
In March 1994, Continental increased the CALite
Service for 875 daily flights. continental coming soon
encountered significant operational problems with its new
Strategy.33 With its fleet of 16 different aircraft
mechanical delays disrupted processing times. Different
Pricing strategies were unsuccessful. the company was
last among major airlines in punctuality
Service and complaints increased 40%. In it
January 1995 Continental announced this
reduce its capacity by 10 percent and eliminate 4,000
works. In mid-1995, Continental's CALite service had
largely discontinued. In October 1995,
The Continental boss was fired.
Delta has developed its "Leadership 7.5" campaign,
plans to cut costs by $2 billion by mid-1997, and
reduce your ASM costs to 7.5 cents. west pacific
(WestPac) was one of the newest national companies
Airlines that are based on the Southwest formula as they add
their own spins. WestPac began to fly from a new
Colorado Springs airport in April 1995. WestPac's
The fleet consisted of 12 leased Boeing 737s.
started with 15 domestic destinations in the West
Coast, East Coast, Southwest and Midwest and all
medium distances. Offer an alternative to
expensive Denver International Airport, business boomed
Quick. The company made a profit on two of its first
four months of operation. Usage factors on average plus
more than 60 percent in the first five months of operation,
and they were 75.9 percent in August. operating costs per
Average morning seat mile was 7.37 cents
months and fell to 6.46 cents in five months.
The Colorado Springs airport has become one of the
the fastest growing country due to the WestPac market
Forbidden. WestPac had a third of the market share and
carried around 600,000 passengers on its first
One of WestPac's most successful marketing efforts
It was the "Mystery Fee" program. As an opportunity to fill the void.
Seats, $59 round-trip tickets sold for one of the
Fates, but which one remained a mystery.
The response far exceeded the airline's expectations;
Thousands of mystery seats have been sold. "Logo Jets",
also known as flying billboards, they were also inventive
Start-up company approach. jets painted on
out with customer referrals who earned more than $1
Millions in fees over a one year period. benefited from recent advances in ticketless operations.
A healthy commission program for travel agents and a
A diverse, non-unionized workforce was another feature of the
Operations at WestPac.34
Morris Air, inspired by Southwest, was the only
Southwest Airlines had acquired. before the acquisition,
Morris Air flew Boeing 737s on point-to-point routes,
operates anywhere in the United States other than
Southwest and it was profitable. When Morris Air was
acquired by Southwest in December 1993, seven new
Markets have been added to the Southwest system.
Southwest is muda and Florida
In January 1996, Southwest began new flights
Tampa International en Fort Lauderdale, Nashville,
New Orleans International Airport, St. Louis/Lambert,
Birmingham Airport, Houston/Hobby and the
Baltimore/Washington International Airport. saturation
and low admission prices are part of Southwest's expansion
Strategy. Some of the routes would have up to six
Daily flights. Orlando service began in April
International Airport, with 10 flights to five
different airports. Southwest's goal was to operate 78
daily flights to Tampa, Fort Lauderdale and Orlando.
The availability of goods and personnel was a potential
Limitation of airline expansion options.
Ground personnel were transferred from other
Southwest locations with pilots and flight attendants
leaving the bases of Chicago and Houston to cover the
Florida extension. Ten new Boeing aircraft have been ordered
for Florida routes.
In doing so, Southwest has established itself as a leader in many ways.
in the industry, there was almost no doubt that he would continue to be successful.
Still, Southwest proved vulnerable.
at least for a short period of time for a well-planned competition
by Shuttle by United on the west coast. new airlines,
like WestPac, also proved to be innovative
and be profitable quickly.
The planned entry into the northeast region of
The United States was, in many ways, the logical next step.
move southwest. The northeast was the most
densely populated area of the country and the only
Primary region where Southwest did not compete. New
England can be a valuable source of passengers
in Florida's warmer winter weather. southwest entrance
for Florida exceeded initial estimates. using a
ValuJet had built a low-fare strategy until its accident
strong competitive base in the main markets of the Northeast.
The research report talks about the airline industry Southwest Airlines, In January 1996, Southwest Airlines (Southwest) entered the Florida and Southeast US markets. The company planned to operate 78 daily flights to Tampa, Fort Lauderdale and Orlando for August of the following year. With the expansion into Florida, the Northeast remained the only major air service region in the United States where the Southwest did not compete. The Northeast US market was generally served by budget carriers like B. Avoided
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