I NDUSTRY AND C OMPETITIVE S ITUATION A NALYSIS : S OUTHWEST A IRLINES T EAM 2 C AITLIN C LARK S TEPHEN M ASSIMI W ILL M AYRATH K ATIE T REVINO M ATT V ANTANKHAH

On A Wing and A Prayer…and A Napkin In March 1971, Southwest Airlines founder Herb Kelleher discussed plans for a new type of airline with a sketch on a napkin.

On A Wing and A Prayer…and A Napkin, continued The notion for the new business concept was “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.”

On A Wing and A Prayer…and A Napkin, continued Southwest Airlines’ first flight took place on June 18, 1971 Service started with three Boeing airplanes to reach three destinations: Dallas, Houston, and San Antonio

On A Wing and A Prayer…and A Napkin, continued Today, Southwest Airlines operates more than 500 Boeing 737 aircraft with destinations in more than 60 cities nationwide Daily, Southwest Airlines has 3,300 flights

INDUSTRY AND COMPETITIVE SITUATION ANALYSIS

Chief Business and Economic Characteristics of the INDUSTRY Environment Economic factors – Current state of the economy – Jet fuel prices Political factors – Increasing regulations Competitive factors – Highly competitive industry Geographical and Social factors – International/domestic – Business – Everyday travelers Technological factors – Airport technology – Codeshare relationships

Chief Business and Economic Characteristics of the COMPANY Environment Economic factors – Current state of the economy – Jet fuel prices Political factors – Increased regulation – The Wright Amendment Competitive factors – Low cost position – Convenience – Customer satisfaction Geographic and Social factors – Domestic – Everyday travelers/business Technological factors – Airport technology – Codeshare relationships

Driving Forces of Change—INDUSTRY Current economic conditions Events out of the control of the airlines – Natural disasters – Terrorist attacks – Regulation Competition among airlines

Driving Forces of Change—COMPANY Industry forces – Current economic conditions – Events out of the control of the airlines – Competition among the airlines Labor Reliance on technology Cost control

Strength of Competitive Forces— INDUSTRY Fractional Ownership Airlines – NetJets is a company that threatens the airline industry in the future by offering shared ownership of an airplane Convenience, quality, and prestige are niches Surface Transportation – Traditional transportation for shorter trips such as busses, cars, and trains As these modes of transportation become more efficient, it will become more cost effective to use them

Strength of Competitive Forces— COMPANY Southwest Airlines competes domestically with a number of competitors in the airline industry – AMR (American Airlines, American Eagle, AmericanConnection), Delta Air Lines, United, and others Southwest Airlines competes mainly on the basis of low cost and outstanding customer service – Due to Southwest Airlines’ fuel derivative instruments, their low cost strategy is difficult to imitate – Southwest Airlines’ outstanding customer service is easily imitated Most of Southwest Airlines’ competitors use a hub-and- spoke route system as opposed to Southwest Airlines’ point-to-point route system

Positions of Competition 3 main competitors of Southwest Airlines

Competitor Predictions Southwest Airlines has introduced the “Bags Fly Free” deal American Airlines may follow this trend, possibly limited to domestic flights

Keys to Success Embracing the employees Lowest airfares in the industry Boeing 737 Management style Innovations

Overall Industry Attractiveness and Profitability The airline industry is not necessarily an attractive industry for new companies – Factors include the current economic crisis and the high start-up costs associated with the airline industry For existing companies, however, the industry has huge potential – Southwest Airlines’ unique strategy components set them apart from the competition, positioning them to earn exceptionally high profits

COMPANY SITUATION ANALYSIS

Current Strategy Statistics Southwest Airlines has continued to perform well for years while maintaining the same core strategy Accounting+/-Net income has dropped steeply, but liabilities are also decreasing Financial+Continues to maintain high market cap of $6.5 billion Marketing+Humorous and attractive advertising Innovative deals HRM+Excellent long-time leaders Loyal employees

SWOT Analysis Strengths – Customer service – Low cost airfare – Frequency of flights destinations – 71 employees to operate plane – Advantages of Boeing 737 – Less crowded airports Weaknesses – Dependence on passenger revenues – Load factor – Inability to fly internationally

SWOT Analysis, continued Opportunities – Expansions into new, smaller airports – Increased Rapid Rewards – New Boeing 737s – Freight business possibilities Threats – Oil prices – September 11, 2001 affects

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Relative Cost Position Operating Expenses (in millions)

Relative Cost Position, continued Percentage of Oil Needs Hedged Hedged Price per Barrel

Strategy Issues and Problems Southwest Airlines’ strategy, overall, does not have any obvious problems The almost sole dependence on passengers’ personal revenues to sustain Southwest Airlines’ business could become a problem in the future Southwest Airlines should make immediate efforts to break into international travel to take full advantage of the benefits and shelter themselves from any future problems that may arise

STRATEGY FORMULATION

Southwest Airlines Mission Statement ““The Mission of Southwest Airlines 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. To Our Employees ” We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer. ”

Corporate Leaders Gary Kelly – Chairman of the Board, President, and CEO – 22-year veteran of Southwest Airlines – Began as Controller and moved up the corporate ladder until he achieved his current position in July 2008 Laura Wright – Senior Vice President—Finance and CFO – Began at Southwest Airlines in January 1988

Current Overall Strategy Competitive Strategy – Low operating costs generates low priced airfare – Customer satisfaction through productive employees – Convenience through frequent flights and the point-to-point system

Current Overall Strategy, continued Corporate Strategy – Internal growth Do not acquire other airlines – Domestic travel only

Southwest Airlines Strategy Suggestions Codesharing – Occurs when one company uses another company’s resources to offer a wider range of services to customers Southwest Airlines sells tickets to some destinations in Canada – Passengers use a Southwest Airline ticket to board a WestJet aircraft and are serviced by WestJet employees » WestJet also sells tickets for this same flight, but they service these Southwest Airlines customers as well

Southwest Airlines Strategy Suggestions, continued Codesharing, continued – Southwest Airlines’ History of Codesharing Formerly in a codeshare relationship with ATA Airlines – With ATA Airlines’ bankruptcy in 2008, the codeshare relationship was terminated – Southwest Airlines’ Current Codeshare Agreements July – November 2009: Southwest Airlines enters into codeshare agreements with WestJet and Volaris – This allows Southwest Airlines to be able to expand services into Canada (through WestJet) and Mexico (through Volaris) Unfortunately, Southwest Airlines postpone these codeshare agreements in May 2009

Southwest Airlines Strategy Suggestions, continued Codesharing, continued – Southwest Airlines’ Future Strategy Codesharing is the perfect avenue for Southwest Airlines to expand into markets outside of the United States They should not only consider relationships with these current companies but also with other companies Many bureaucratic steps to be approved by all governments involved and time taken to groom these markets make it imperative that Southwest Airlines enter into these arrangements as soon as possible

Southwest Airlines Strategy Suggestions, continued Expanding Fleets and Adding New Destinations – Southwest Airlines may benefit from increasing the number of Boeing 737 jets in operation from 537 to approximately 600 – New destinations at highly trafficked airports may increase revenue and provide greater customer service – Currently services 64 destinations in 32 states

Southwest Airlines Strategy Suggestions, Continued Expanding Fleets and Adding New Destinations, continued – Several highly trafficked airports are currently not serviced by Southwest Airlines PassengersSeptember 2009September 2008 Domestic On3,265,1853,139,569 Domestic Off3,062,2403,125,883 Subtotal6,327,4256,265,452

Southwest Airlines Strategy Suggestions, continued Increase Rapid Rewards Benefits to business – Seek out companies that require a tremendous amount of traveling – More credits per flight Time-shares – Allow companies to purchase partial aircraft time – Convenience of having aircraft nationwide – Providing quick turnaround time for customers