Southwest Airline Case Study

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One of the major concern for Southwest they must consider is their net loss. Although Southwest has been increasing their transportation revenues each financial quarter they are still experiencing an overall net loss due to not achieving their break-even point with passengers per flight. To break-even, Southwest must collect approximately $780 in revenue per flight (Calculation 1). In 1972, Southwest’s average passenger per flight for Dallas-Houston was 33.4, Dallas-San Antonio was 25.2, and San Antonio-Houston was 17.7 (exhibit 10). Impact on the half-price fares was fast with Dallas-San Antonio service increasing to 48 passengers per flight, but to break the $780 revenue threshold, Southwest will need minimum of 60 passengers per flight. Price promotion is effective for Southwest to capture new customers but this reduced fare should not be permanent as it will be more difficult for Southwest to make a profit.

As a short-term action plan, Southwest should roll out their “Remember What It Was Like Before Southwest Airlines” advertisement campaign intensively to entice consumers to fly Southwest for a better flight experience rather than cheap flying option. Southwest already has a positive brand image of plucky and friendly company with attractive hostesses. Prices can easily be mimicked by competitors but company culture and services will allow Southwest to differentiate. To cut operation cost, Southwest should pay close attention to consumer needs to focus and be flexible on routes with higher demands. Southwest should also focus more on approaching travel agents and corporate accounts. Southwest needs loyal consumers who will choose Southwest over their competitors and by contracting with travel agent or a company to fly Southwest it will bring in steady revenue. In terms of long-term action plan, Southwest should consider taking their business outside of Texas. They can either partner with PAS in California or open to different airport locations to serve a wider consumer market.

(Calculation 1)

Simple Calculation on Southwest Break-even point

Fare $20 * 39 passengers = $780 revenue per flight

Regular Flight: $780/ $26 = 30 passengers per flight

Half Price: $780/$13 = 60 passengers per flight

Southwest Airline Write Up

Southwest Airline was formed in March 1967 and founded by Rolling King. Southwest airline flies majorly within three cities: Dallas, San Antonio, and Houston. Southwest has two major competitors Braniff and Texas International Airline. Muse quickly recognized that interstate carriers can't fulfill the need in the Texas market. In 1971 Southwest bought four Boeing 737 twin jets at a lower cost due to Boeing’s overproduction ($16.2 million). Braniff and TI both want a piece of the triangle routes and started legal battles with Southwest. Southwest quickly response to the battle by gathering all possible dollars they could to prepare to advertise their company. Dick Elliott was the marketing vice president of Southwest. In their perceptual map shows that TI ads were dull and conservative. Braniff's were fun and obvious. Southwest decided to sell tickets at a low cost to increase the number of passengers, but soon its competitors quickly compete to the same price as Southwest. Southwest decided to create a friendly image to distinguish themselves from its competitors and spend the half year of their promotion budget in the first month. Soon, Southwest had to face their crisis they sold their fourth 737 planes to recover their lost. Which means they have only three airplanes left to fulfill more flights and shorter turnover time. No matter how low their price gets, Braniff and TI follows. That had left Southwest with no choice. Southwest has launched their third phase of advertisement "60-Day-Half-Price-Sale". Muse will continue doing this promotion if it can successfully help the company. Five months later Braniff has also competed with Southwest's half price promotion. Muse quickly gather an urgent meeting with all management team which that leaves a question at the end of the case, how should they respond?

Before answering the question, we should look at the Southwest business model, employee first then customers. They believe that by treating their employees well enough they will love to help the company to do better. Braniff and TI both are big carriers with great financial supports. Southwest shouldn't try to compete them with price strategy, but they should use their advantage their love imagine that they have deeply planted within their customers and employees. At this point, Southwest is the only carrier that only flies interstate. It will be best for Southwest airline to keep building them imagine that they are loyal to their customers in the U.S by keeping on flying only within states. In Exhibit 8, we can see that Southwest's loss decrease between 1971 to 1972. Which means by having a $20 fare, Southwest still earns profit customers still prefer their airline. In Exhibit 9 and 10, we can see that the numbers of passengers increase rapidly since 1972. Southwest should also keep using the only one model of the aircraft, that will reduce the cost by only train people to deal with one type of aircraft and can buy in plenty of parts for the airplane. Southwest can use many other ways to save money in order to provide a lower fare for local customers. Southwest also have their advantage that its competitors don't have which is the love imagine that they have created for the public to see. Southwest also has another advantage which is their short amount of passenger turnover time. In their financial statement, we can see that Southwest airline has done a great job on "buying" their customer's loyalty with their love. In my recommendation, I would say Southwest should stay with their half-off promotion and ignore what other big competitors will do. Because no matter how low price Southwest airline can give other competitors will compete with it. Southwest should focus more on building the friendly imagine deeper inside their customer's mind. As long as they can make customers feel more comfortable with the airline the more loyalty they can receive from their customers which mean will bring them a greater amount of profit.

Rodney (R.T.) Akins

June 26, 2017

BBUS 438

Instructor: Ceri Nishihara

Case: Southwest Airlines