Background Summary

Southwest Airlines based in Dallas was founded in 1967 by Rollin King and Herb Kelleher. It is one of the major domestic airliners which provides carrier and transportation service. This company has 35,499 employees and it runs over 500 Boeing 737 aircraft in 67 cities in the US. Philosophy 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. Southwests principal values are: Providing low-fare and short haul service. Offering the highest quality of customer service. Putting a lot of importance on the fair treatment to its customers. Building friendly relationship between its customers and employees.

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. It primarily provides short haul, high-frequency, point-to-point, low-fare air transportation service among 58 cities (59 airports) in the United States Southwest Airlines has achieved a great position in the airline industry by adopting five important strategies. First, using the minor league airports which have helped the company to reduce traffic delays and increase passenger convenience. Second, flying one kind of aircraft has helped it to achieve lower training cost. Third, reducing turn-around time by using point-to-point strategy, has avoided the use of complicated reservation process system. Forth, not offering assigned seating and preferential treatment on frequent fliers, has led the company to have better ticket price. Lastly, emphasis on building good relationship between passengers and attendants has been a well valuable factor.

Innovation
1st airline to offer a profit-sharing plan to employees beginning in 1979, employees now own about 10% of company stock

1st major airline to offer ticketless travel system-wide 1st major airline to enter information superhighway by creating its own web page 1st airline to offer online booking

Macro-environmental Analysis Porters Five Forces Supplier power within the industry is relatively weak. As a service company, Southwest supplies its services to those needing to travel. Southwest is dedicated to low fares for its customers. In order to achieve low fare air travel, the company must keep its costs low. Southwest, naturally, selects suppliers that will deliver products at low cost for the highest quality possible. Productivity, standardization, and efficiency are all key components of maintaining low systems costs. The threat of substitutes is the most influential force within the Porter's diagram. Switching costs for customers are low, as most would choose to fly on an airline that provides the lowest possible cost. The availability of flights and seats on a particular flight would be of great importance to those customers needing to maintain a rigid schedule that allowed for little variability. Southwest's business customers would fall into this category, as opposed to the leisure passenger that would generally have more flexibility on flight scheduling. The location of the airline's service areas is also an important factor. If the airline does not offer flights out of an airport that is most convenient for the consumer, sales are lost. For example, Southwest looses business in Knoxville, because they do not offer flights leaving Tyson-McGee airport. To fly Southwest, one would have to fly out of Hartsfield International in Atlanta or Nashville International. Within the established major airlines, barriers to entry into the low fare niche market are low. The major airlines have already begun to cut prices to gain market share from SW A. Air travel has become comrnoditized, and there is an excess of availability. The only thing to prevent other major airlines from edging out Southwest within this segment would be the great deal of long-term debt that they have assumed. With declining dividends and overcapacity, the other major carriers will need to decrease price, but cannot do so on the same levels that Southwest would be able to, because of their debt ratios. Also, Southwest has established a distinct brand identity within the minds of its customers as well. SW A provides a relaxed, fun envirorunent, and this is how it is marketed to customers. The airline industry competes with bus, automobile and train travel in the transportation of individuals. The primary substitute for the airline industry is the automobile. The extensive interstate highway system in the U.S. makes it possible to travel virtually anywhere by car. Auto travel dominates short distance travel because of the impractical nature of flying such short distance. However, as distance needed to travel lengthens usage of airlines dramatically increases. In 2004, only 13% of automobile trips were longer than 1000 miles, compared to 75% of airline trips. Trips of extended distance are impractical by automobile and do not provide sufficient cost benefit. A less popular substitute is the intercity railroad transportation. Trains may have many disadvantages but they have considerable cost advantage as compared to

airline transportation. Amtrak is the leading intercity railroad operator and has benefited from U.S. government subsidies that allow it to keep prices exceptionally low. The dramatic difference in price allows Amtrak to compete with the airline industry for those customers who have a large price elasticity of demand for airline transportation. Low costs may attract a small percentage of customers away from the airline industry but the slow rate of travel for trains guarantees that the majority of long distance travelers will chose to travel by airplane. These regional forms of transportation do not represent a direct substitute for the airline industry but they may be a competitive force that regional airlines need to consider. Southwest Airlines operates a point-to-point destination schedule between regional cities which may also be connected by considerable bus or railroad traffic. Increased wait times at many airports due to increased security means the time advantage gained by using air travel has diminished. Therefore the marginal benefit of using airlines for transport has decreased and the use of train or automobile may become more viable alternatives. There are many complements to airline travel but it is difficult to determine the magnitude of the relationship. Many services and products related to travel are complements to airline industry such as hotel rooms and car rental prices. The lower the cost of these services and products the greater demand there will be in the airline industry. However, these complements only affect the leisure traveler not the business traveler. The true determinants of demand for airline travel are economic and political factors.

Aside from the major airlines, smaller airlines would face barriers to entry first along the learning curve and the economies of scale that result. Southwest, along with other major airlines, has been in operation since 1971. During this time, its workers and corporate level leaders have learned how to maximize efficiency, reduce systems costs, and have developed a distinct brand name. These are things that a newly created airline could not copy. The economies of scale aspect become a factor in the many locations that Southwest and the other major carriers can operate. They have the financial ability to increase or decrease their service areas as needed. Experience and capital are the most important barriers for smaller or startup airlines. The airline industry is a highly consolidated industry with the top ten airlines accounting for over 90% of total U.S. air traffic in 2004. Despite the centralization of industry and the weak earnings of most major airlines, many new carriers have attempted to enter the airline industry in past years. A success story for new airline entrants has been Jetblue who began in 2000 and has shown sizeable profit margins and high load factors. Jetblue has become an exception to the rule. Most new carriers have failed to establish their place in the industry and have halted operations or filed bankruptcy. In the last three years Mesaba Airlines, Transmeridian Airlines, Aloha Airlines, Southeast Airlines, Great Plaines Airlines, and Midway Airlines have all halted operations. Entry for these firms and others into the airline industry is made difficult because of several strong barriers to entry present in the airline industry. High startup costs may appear to be a major obstacle for new entrants but capital markets have historically been willing to fund new startups in the airline industry despite high failure rate. Capital markets avid interest in the

airline industry has recently waned. The massive financial losses experienced by many major airlines in recent years and the lower consumer demand that has occurred in the aftermath of September 11 have resulted in the tightening of the capital markets for the financing of startups. However, new industry analysis has predicted a strong change in both industry demand and profitability which could correspond with increased access to capital markets for new airlines. The potential for funding from capital markets and the profitability of some airlines, especially Southwest Airlines, have increased the incentives for new entrants to enter the airline industry. The most significant barrier to entry that new entrants face is significant post-entry competition from existing major airlines. The typical strategy of new carriers is to pursue regional markets which offer the most profitable routes. In these markets, entrants can often offer lower prices then existing carriers because of lower marginal costs since they have lower labor and maintenance cost. However, the preexisting price competition amongst the major airlines has created a strong incentive for them to preserve their market share. When an entrant competes head to head with an existing major airline, the major airline will lower prices on that route below those of the entrant while maintaining higher fares on its non-competing routes. There are many barriers to entry in the airline industry but there remains the possibility that new competitors could arise. However, with the current market conditions and the steep experience curve it would take years for a new airline to become a viable competitor to any of the major airlines. The airline industry is sensitive to supplier power through three primary inputs; jetfuel, airframes and labor. The greatest source of increased supplier power has come from the suppliers of jet-fuel. Jet-fuel prices do no perfectly correlate with oil prices but the historical price level of $70.85 for oil reached in 2005, which meant problems for the airline industry. Historically crude oil has averaged around $20/barrel in the U.S. but since it reached its historical high, the price of crude oil has remained above 60$/barrel. Increased crack spreads have further worsened the position of the airline industry to its jet-fuel suppliers. The crack spread measures the difference between the cost of a barrel of crude oil and a barrel of jet-fuel. The crack spread has traditionally fluctuated between $5 and $10/barrel but spiked to over $60/barrel in the aftermath of Hurricanes Katrina and Rita. Like the rest of the airline industry Southwest Airlines faces declining margins due to increasing fuel costs but Southwest Airlines has the most extensive price hedge on fuel in the airline industry. Traditionally, many airlines have operated under the assumption that remaining exposed to fuel prices is the norm for the airline industry and therefore acceptable. Discount airlines, such as Southwest and JetBlue, have deviated from that traditional form of thinking. Both airlines now utilized dynamic hedging strategies which allow them to use hedging to control the episodic nature of jet fuel prices by capping higher prices in the future. Southwest currently has an advanced hedging program that is continually trying to determine future cash flows relating to jet fuel prices to optimize their hedges.7 However, each year Southwest Airlines fuel hedges as a percentage of total fuel consumption decreases. In 2005, Southwest Airlines fuel hedges cover 85% of fuel use but by 2009 they will only cover only 25%.8 This yearly reduction in hedge coverage will dramatically increase effective costs and cost per available seat mile (CASM) each year. Since low CASM has been the foundation for Southwest Airlines competitive advantage in the airline industry, the loss of their fuel hedge could pose potential problems for Southwest Airlines.

Current economic conditions have greatly increased the indirect power jet-fuel suppliers have over the airline industry but those same conditions have lessened the supplier power of both airframe manufacturers and labor unions. Only Boeing and Airbus exist as suppliers of commercial airframes for the airline industry. Historically, the high concentration of airframe manufacturers and the limited availability of substitute inputs have allocated Boeing and Airbus significant direct power in price negotiations with the commercial airlines. However, the current weakened economic position of the entire airline industry has altered the industrys bargaining position with Boeing and Airbus. The head-to-head competition of Boeing and Airbus and the large purchase volume of large airlines mean that suppliers are highly sensitive to airlines switching suppliers. For Boeing, Southwest Airlines is currently the largest single purchaser of Boeing 737s. Southwest Airlines single aircraft strategy may make it reliant on Boeing but Southwest plans to continue to grow their fleet by 25-30 new planes each year. With the comparative weakness of the rest of the industry this may make Boeing dependent on Southwests continued business. Labor costs represent the single largest expense for the airline industry. In 2004 labor costs accounted for 34.4% of total revenue and 39.9% of total costs.6 The majority of airline employees belong to one of the many industry unions. Historically these unions have allowed airline employees to garner premium wages and benefits. However, financial pressure from large pension funds has been responsible for the disruption of many airlines balance sheets and a leading cause of financial difficulty for the airline industry. Many analysts have speculated that the recent wave of bankruptcy filings by major airlines was completed in order to cut labor costs. United Airlines and US Airways have already cancelled their benefit pension plans while in bankruptcy and passed the obligation on to the Pension Benefit Guaranty Corp. (PBGC), a government agency responsible for insuring U.S. corporation pension funds. The risk of further pension cancellations and bankruptcies has resulted in loss of supplier power by unions and widespread concessions on employee compensation. Unions will maintain significant supplier power in the airline industry but the power has recently been reduced and may continue to decline if market conditions do not improve.

Buyer power within the airline industry is great. Customers can easily choose to fly on another of the many airlines within the United States. The ability for customers to easily access various airline websites for flight times and costs, along with the advent of web sites like Expedia and Travelocity, have added to customer buyer leverage. It is now easier than ever for a customer to get the flight time and day they want, at the desired cost. Price sensitivity and availability (time and location) remain the two greatest sources of buyer power. Consumers currently have considerable buyer power over the airline industry. The economic recession beginning in 2000 and the terrorist attacks of Sept. 11, 2001 had a significant negative impact on consumer demand. From their high in 2000, revenue passenger-miles (RPM) have decreased dramatically and though they have rallied recently they remain at a suppressed level [Revenue passenger-miles are an industry measure for consumer demand which is calculated by multiplying the total number of passengers carried by the number of miles flown]. During this period the airline industry did not experience a corresponding drop in available seat-miles (ASM)

[Available seat-miles are an industry measure of capacity which is calculated by taking the total number of seat multiplied by the total number of miles flown]. The industry has attempted to reduce ASM (capacity) to react to decreased RPM (demand) but the reaction has not been sufficient which has resulted in lower load factors. Airlines excess capacity and the perishable nature of airplane seats have allowed consumers to exert a tremendous amount of pressure on the price of airline tickets. The majority of airline consumers are highly price sensitive. Southwest Airlines was the first to offer online reservations but other airlines rapidly followed in order to reduce costs. Additionally, in an attempt to eliminate the commission required for travel agents, airlines such as Northwest Airlines and United invested in a travel website called Orbitz. This centralized site for online reservation eliminated the 3.5% commission for travel agents but its also increased price competition. The introduction of joint travel websites which allow customers to price shop with ease has also greatly increased consumers price sensitivity. Now reservations can be made for most airlines through a travel site such as Orbitz, Expedia, Travelocity or their individual home websites. Only Southwest Airlines and JetBlue do not offer services through joint travel website; they only offer online reservations through their individual websites. Current market conditions and consumer preferences have made it difficult for airlines to price discriminate. The airline industry previously relied on business travel for price discrimination but with the ease of internet booking virtually all consumers have become price sensitive. The rise in price sensitivity has been compounded by the lack of product differentiation in the airline industry. Consumers are more willing to purchase tickets based solely on price because most have no brand loyalty. The only remaining form of brand loyalty is through passenger reward programs which have to offer generous compensation to maintain consumer loyalty. Consumers have little brand loyalty to low cost carriers such as Southwest Airlines but since they consistently offer the lowest fares, price sensitive consumers repeatedly chose them. Low cost carriers face less buyer power from price sensitive consumer than high cost carriers.

The degree of rivalry among carriers is currently at its greatest, as the trend has been to decrease costs by any means. Exit barriers for major firms are relatively high, due to the highly specialized aspects of the industry. Fixed costs of air-carriers is extremely high, so exit comes in the form of mergers or acquisitions by larger airlines, military entities, large corporations, or third party logistics service providers as well as the United States Postal Service. The industry has become more concentrated, with a substantial decline in industry growth, as the supply of flights exceeds demand, and trends move towards lower fares. The drive for lower fares has lead to a blurring of product and service differences among the various airlines. It has become much harder and a lot less profitable to start an airline today, than fifteen years ago, when the FAA certified sixty-nine new airlines in a period of three years. The airline industry is characterized by numerous sellers who have very little differentiation in their product. As a result of these factors and the current market conditions, the airline industry is in a very weak position. Currently four of the top ten airlines are in bankruptcy; Delta Airlines Inc, Northwest Airlines Corp., United Airlines and ATA Airlines. Additionally, US Airways Group Inc, only recently emerged from bankruptcy in Sept. 2005. Southwest Airlines was the only 6

airline of the ten largest U.S. carriers to report a profit in 2004.6 The deterioration of many major airlines balance sheets is the result of several factors as will be discussed in later sections but it has been compounded by severe price wars during the last five years. The limited differentiation of the product of most major airlines coupled with the increased price sensitivity of consumers has forced the airline industry to use price competition as its primary mode of rivalry. Price competition has eroded profits in the airline industry and significantly reduced the price-cost margins of most major carriers. Additionally, the emergence of discount airlines, such as Southwest Airlines, in the major airline industry has exasperated the already damaging price competition in the industry. Non-price competition has mostly disappeared from the airline industry because of the extreme price sensitivity of consumers. Many firms have continued to try and differentiate their product through the advertisement of improved passenger service, more comfortable seats or exceptional frequent flyer programs but these programs have largely failed to increase revenue or market share. Even business travelers have become price sensitive, which has removed the primary way airlines had been able to price discriminate. The combined effect of increased consumer price sensitivity in the airline industry has led to increased rivalry. The industry currently has significant excess capacity and because of the perishable nature of their product and high fixed costs most airlines are left in a difficult negotiating position. Southwest Airlines is in a unique situation since it is one of the principal driving forces in the current price competition. Currently Southwest Airlines has the lowest cost per available seat mile (CASM) of the major airlines. This allows Southwest Airlines to control prices to maintain its profitability level. However, Southwest Airlines CASM has been slowly increasing due to increased labor costs and a decreasing fuel hedge (see CASM Analysis for details on Southwests fuel hedge). The major airlines are attempting to trim their margins and other discount carriers have the potential for even lower CASM as compared to Southwest Airlines.

Corporate Level Strategies The mission statement of Southwest Airlines is to provide "dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit." SWA can attribute its thirty plus years of profitability to maintaining its commitment to customer service. At Southwest, customer service starts first with employees. SWA consistently ranks in Fortune's top 10 businesses to work for, and has been regarded as one of the world's most admired companies. The family-oriented, fun, and flexible atmosphere has led employees to take ownership and a general reverence for the company. This esteem shines through all employees, and is passed along to customers, who in tum value and regard Southwest's service. Maintaining the lowest operating cost structure of any domestic airline industry has enabled Southwest to pass along reduced fares to its customers. It has also allowed Southwest to profit despite the various economic trends and conditions it has faced (e.g. recession, oil and fuel increases, and September 11,2001). Customer satisfaction is shown in the accolades that Southwest has received. SW A ranked as the most admired airline worldwide from 1997-2001. The Wall Street Journal reported SWA as first among airlines for customer service satisfaction in 2002, according a survey conducted by the American Customer Satisfaction Index.

An initial source of Southwest Airlines profitability lies in their initial decision to use one kind of aircraft. This decision greatly reduces maintenance costs and allows for standardization, eliminating the possibility of various expenses (i.e. labor, parts inventory, knowledge as it relates to job duty and investment in human capital). The choice by corporate leaders to use less congested airports (e.g. Baltimore instead of Washington D.C.'s Dulles or Reagan; Manchester, NH instead of Boston, MA) allowed for a more efficient process as well as a reduction in operating costs. Professors Vijay Gavindarajn and Julie Lang of Dartmouth's Tucker School of Business regard Southwest's leadership opting not to apply the "hub-and-spoke" approach, used by other major airlines (e.g. Delta, United, and American), as a major source of comparative advantage and cost reduction (2). The Southwest approach is to offer short-haul (average light times of fifty-five minutes), point-to-point flights, such as Dallas to Houston or Los Angeles to Phoenix, at a high frequency. All of Southwest's corporate level decisions have enabled it to reduce systems costs, maximize profits, and build customer relationships with superior service, while passing these savings to consumers. Business Level Strategy The Strategy canvas of southwest Airlines

Low cost/low-price/no frills strategy Tagline : Freedom to Fly Fare promotions to stimulate ticket sales on flights that otherwise would have had numerous empty seats 8

Bags fly free Shrewd practitioner of the concept of price elasticity, proving in one market after another Southwest designed a carefully route system to concentrate flights between pairs of city to allow Southwest sizable number of daily flights(Point-to-point scheduling of flights) Southwest frequent flyer program and giving a reward Standard Awards; accumulated 1 free round-trip after 16 credits within 24 months Companion Passes; accumulated 1 free round-trip after 100 credits within 12 months Gradual expansion into new geographic markets Adding flights in areas where rivals were cutting back services Curtailing flights on marginally profitable routes where numerous seats often went unfilled and shifting planes to routes with good growth opportunities Putting Strong emphasis on save, high quality maintenance and reliable operations

Southwest employees are among the highest paid in the industry. This results from various cost reductions across the entire system. SW A's good will towards employees and its high-energy, friendly environment have lead to extremely low employee turnover. In their Southwest Airlines Corporation study, Gavindarajn and Lang found that in 2001 the company reviewed 194,821 resumes, while hiring only 6, 406 new employees (3). Clearly there is no shortage of individuals wanting to work for the company. The hiring process at Southwest is unique in that peers screen candidates and conduct interviews (e.g. pilots hire pilots; gate agents hire gate agents). To better understand what Southwest looks for in a candidate, top management interviews top employees at each job function (e.g. baggage handlers, grounds crew, attendants, etc). Common strengths are identified among these employees, and from there profiles are created to identify top candidates for hire. Southwest President Colleen Barrett emphasizes that the carrier "hires for attitude and trains for aptitude," which has become a credo for the company. Top management believes that job duties and other related tasks can be learned. A great attitude, characterized by hard-work, creativity, and personal initiative, mean a great deal more to Southwest. Once hired, personal development is further achieved at the organization's University of People, which serves to reinforce the need for high-energy and local autonomy among employees. CEO and founder Herb Kelleher is quoted saying "we want people who do things well, with laughter and grace" (Frieberg 65). For those employees exhibiting stellar leadership and initiative, Southwest also offers advanced training in leadership through its Managers In Training program (MIT). This program is a development school for senior leaders to learn more about the company across all departments, and to have a more global view of the goals which the company seeks. Continuous learning and improvement is truly at the core of the Southwest organization Low-cost airlines the key strategy logics (per perspective) are:

Very low ticket prices (customer) High utilization rate of fleet of aircraft (growth, routes) Simple structures (processes) Lean and productive personnel (resources)

Low-cost airline allow business travelers, who could not fly in First Class, to enjoy a premium service. Accordingly, elements of the customer perspective focusing on frequent point-to-point flyers, limited service and refundable ticketless flight. Frequent flyers are people, mostly business, who frequently travel between destinations that are 250-500 kilometers (150-300 miles) apart. The growth perspective follow only the strategy logic of the high utilization of aircrafts, which is based on elements such as the efficiency in ground services (25 min gate turnaround), shorthaul, frequent and point-to-point routes between mid-sized cities and secondary airports. These the key issues keep planes in the air the most of the time. The utilization rate with high volume is very crucial for the low-cost airlines strategy model and every business issues must follow this logic. The process perspective based on simplicity of operations. Just one type of aircraft (Boeing 737) keeps costs down related to pilots training, spare parts, maintenance, etc. The hardest part of the implementation of low-cost airline business model is personnel. Create lean organization, flexible and productive personnel:

Flexible contracts & multi-skilled personnel Create right company spirit Reward: High compensations of employees Be selective: Only hire persons fit in profile

The whole Strategy Model of Southwest Airlines (see picture blow). Levels of analysis: 1. Root: mission statement 2. Orange elements: strategy logics per strategic perspective 3. Dark blue/violet elements: business issues 4. Blue elements: activity elements

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The central concept raised by King & Kelleher was very simple but an extravaganza for the typical use during the 1960s -1970s decades: flying focused on transportation. The idea when getting into a plain is not to eat, drink fine liquors, see movies or seat on leather; the clients intention is to move rapidly, safely, cheap and comfortable. With this idea in mind, the concept of slim factory was applied to the airline so all operations focus on what really had impact in added value perceived by clients, and then became quality guidelines. Southwest took this direction in a breaking point in history: the beginning of globalization. Flight transportation quit to be a luxurious service for high classes and began to compete with land transportation (train, bus, car), turning into a basic service required by vast number of middle class North Americans. This change of environment combined with increased costs in gas due to OPEP embargos, required airlines changing their understanding about air transportation basics, focusing on differentiation via costs administration (Porter 1985; Porter 1996). A second important process was the deregulation of the air market during 1978 (Morrison 2001). Large airlines like Pan Am used to depend much upon their advantages due to regulated tariffs and political social capital that provided advantages and quasi-monopoly status. Law suits and political pressure was an effective weapon to compete, but Southwest proved to be highly qualified to handle all sorts of legal crises. A third critical area was developing a conservative financial management, which avoided extensive loans and learned to perform effective purchase of fuel options. These

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practices let SWA face efficiently air traffic downs like that occurred with the 9/11 crisis. A forth critical area was human resources management and the control of union demands. The fifth fact is the administration of the companys image, producing a legend that has been reverted not only in administration studies but in stories and dramas. All these particularities about the ways and structures of SWA, were complemented with operational and product innovations that reinvented the service concept about air transportation logistics. The fleet operates one single kind of equipment: Boeing 737. This facilitates various operations like stock of spares, mechanical and operational training, and enhances knowledge about the equipment. The results in term of quality are mainly two: Minimum turn-time for the aircraft (15 minutes in average which was the shortest by far in the industry) reducing to a minimum possible delay of flights. Brilliant security record (only three major incidents occurred through all the history of the company with just 2 casualties). Reduced costs in operation without reducing the quality of service. Elimination of meals and extras to the air transport (i.e. movies, radio channels, liquors and the like) as well as seat reservation and class differences for service. Those extras did not affect flight security, basic comfort, or punctuality but definitively added a load to expenses and delay risk. Enhanced ticketing using self service and reusable cards reduced costs without harming queue time and in fact, it reduced it. The inclusion of the first-to-come-first-to-serve system to get the plane seats, produced a discipline effect in clients who got accustomed to arrive early to their flights, reinforcing fast passenger boarding process. This practice added to interlining (exchange of passengers between flights to the same destiny) and use of secondary non-saturated airports, produced minimum embarking times. Elimination of the hub-and-spoke routing system, reducing bottlenecks in the network and better suited routes, enhancing the rotation of passengers, seat occupation and net production. Fancy relaxed atmosphere in the flights, produced by amicable campaigns like All you need is LUV (American Stock Exchange ticker symbol from the airline), changing the Texas Love Field into an icon. Or nuts about Southwest, as nuts and soft drinks was all what they served during long fights (Southwest-Airlines 2007).

The company focused on a good level of comfort and a remarkable friendly atmosphere, high security, low fares and efficient operation, while competitors were stuck into operational high costs derived from service components that did not offer added value (i.e. seat reservation, class differences, in-flight meals, paper tickets), keeping an impersonal, complex and expensive relation to clients. Dimensions of service expectations had been studied by Van Pham (Pham 2006) and found that over 5 areas, reliability (the airlines ability to perform the promised dependably and accurately), assurance (knowledge and courtesy of airlines employees and their ability to convey trust and confidence), tangibles (appearance of the airlines ground facilities, aircraft, personnel and communication materials), empathy (caring individualized attention the airline provides its customers) and responsiveness (willingness to help customers and provide prompt service), US passengers prefer reliability and responsiveness. It is no coincidence that being well qualified in all these dimensions, SWA grew remarkable in the eyes of US air passengers.

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Did SWA phenomena had something to do with managerial developments of the time like SMED or the like? Such techniques were not applicable strictly to services, as they were born into the industrial manufacturing environment, but conceptually their spirit is present into this story. SMED is the acronym for Single Minute Exchange of Die, a philosophy that states that any change in machinery or process initialization should not last more than 10 minutes. Southwest applied this industrial concept to its product to reduce unproductive time. The basics of this routine includes practices dictated by the airports authorities and transport regulations so the operation answers to several critical elements of the business: Basic demands from the air transport authorities like security, comfort, health and migration control. Reliability and cost efficiency of the operation. Service quality standards.

The most significant elements into turning time included passenger enplaning and deplaning, cargo loading and unloading, airplane fueling, cabin cleaning, and galley servicing as seen in the bar graph (Boeing 2007). Here again it is noticeable that reducing this operation time was critical and it was necessary to attack several fronts under the SMED philosophy: Standardization of equipments, reducing diversity of tools, procedures and spares; this enhances the learning curve of the team in charge. Mastering tools and operations through strong training, and standardization of procedures. Team leadership and employee compromise. SWA was successful in building a legendary and particular organizational culture.

How corporate culture helped Southwest Airlines became a bestseller, based on An evaluation of the corporate culture of Southwest Airlines: measuring business excellence Delay control has been set not on individual basis but on team basis, to avoid conflict and increase learning. In the end the turnaround process is a team process. There was no punitive atmosphere regarding performance and the relation to the headquarters was direct; supervisory span is small (1 to 9) stated as an internal client relation. Workers selection pursued teamwork attitude (Gittell 2000). SWA carried the spirit of SMED to its highest level. How to ensure that standardization was compatible with the development of clients requirements? In fact, standardization was constructed on the base of what the clients perceive as quality, not the stereotypes that companies built around it. These capabilities were the product of changes along the different functional areas of the company:

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Operational, rupture with the hub & spoke route system in favor of point-to-point, standardize aircrafts, turnaround enhanced process. Financial, low debt, gas options; The debt-equity was by far the lowest in the industry, which enabled Southwest to manage the difficult period after September 11 without laying off any staff. Service, self-service paperless seat purchase, enhanced Internet-ATM facilities (it was the first airline to enable customer making reservations and purchase tickets via web using, an Object Data Base Management System ODBMS called Object store; the airline sells 50% of the tickets directly avoiding agency over costs. This has been a critical tool to avoid empty seats and react fast to shortcuts in demand. Abolition of seat class, no frills but nuts and soda (Editorial 1997). Commercial, branding with strong nontraditional campaigns. Human Resources, high compromise, productivity and training, protection employees in times of crisis, familiar and positive environment, permanent training. The following table can summarize the basics of SWA actions to build a differential competitive position.

How Southwest Airlines developed its balanced scorecard analysis Southwest Airlines set operating efficiency as its strategic theme. The four perspectives embodied in the balanced scorecard were linked together by a series of relatively simple questions and answers: Financial: What will drive operating efficiency? Answer: More customers on fewer planes. Customer: How will we get more customers on fewer planes? Answer: Attract targeted segments of customers who value price and on-time arrivals. Internal: What must our internal focus be? Answer: Fast aircraft turnaround time. Learning: How will our people accomplish fast turnaround? Answer: Educate and compensate the ground crew regarding how they contribute to the firms success. Also, use the employee stockholder programme. . The company extended the effort to the department level, and the degree of development varied between departments. The goal was to identify key performance measures in each segment for the operating personnel. Some of the non-financial metrics that have emerged on a departmental level include: load factor (percentage of seats occupied); utilization factors on aircraft and personnel; on-time performance; available seat miles; denied-boarding rate; lostbag reports per 10 000 passengers; flight cancellation rate; employee head count; and customer complaints per 10 000 passengers filed with the Department of Transportation.

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Source: Adapted from Institute of Management & Administration Report on Financial Analysis Planningand Reporting, July 2002.

Could this specialization on one single aircraft operation produce collateral damage to SWA competitiveness? The basic risk of this strategy was to built high dependence on one single supplier: Boeing. The airline has leased 737-200 and owned 737-300, 737-500 and 737-700 (Boeing 2007). This marriage with a single line of aircrafts and supplier lead to some technical and commercial risks: Faulty design, manufacturing fails or unreliable materials. Three examples for the Boeing 737: The USA National Transportation Safety Board found in 1995 that Flight Data Recorder from B737 did not provide needed information about airplane motion producing increased risk in landing (Hall, 1995); an evaluation on aged 737 by Sandia National Laboratories in 2006 questioned the use of sealant replacing resin based bond adhesive, as it makes impossible to visually determining the integrity of the rods in some areas of the hull (DiMambro, Werner et al. 2006) B737 problems with the fuel wring and rudder produced an investigation at the Select Committee on Environment, Transport and Regional Affairs from the UK (Parliament 007). Dominant position of the supplier (Porter 1985) as a technical knowledge spares supplies monopoly was produced. Changes on basic requirements about transport regulations, mainly regarding noise reduction and alternative fuel that were not fulfilled by the supplier. Although seems that Low Fare Airlines in Europe had been greeted regarding to their impact in fuel saving and efficient use of resources, for the European Low Fares Airline Association it is clear that one of the future challenges will be the mandatory use of alternative fuels (Association, 2007)

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But placing in the balance these perils, SWA thought that risks could be balanced by benefits: B737 is a widely known and used craft; in the United States, on the commercial side by 1987, the 737 was the most-ordered plane in commercial history. (Boeing 2007). This talks about the reliability and flexibility of the machine. There is no trace of confrontation between SWA and Boeing and seem they had a close relation, being this airline one of the biggest purchasers of 737 in the world; this surely helped to balance the suppliers power.

Regarding the possibility of discontinuing the 737 family, Boeing produced more that 5 upgraded models giving long life to the line but keeping the pace of air authorities requirements as well as technology enhancements. Other area of specialization that could represent trouble to SWA in times of globalization was the focus on short flights. What would happen when the airline is forced to expand into overseas trips or continental routes? It was expected the at least 10% of the long distance traditional carriers routes (mainly American Airlines, Alaska and Continental) were to be taken by low fare airlines, mainly SWA; Southwest began entering into a number of relatively thin, long-haul markets that it had previously avoided (Boguslaski, Ito et al. 2004). But SWA knew well the field in which they were strong and defended it but, although the pressure of world-wide air transporters was strong.

How did finally, low cost flight created in the USA by companies like SWA, could combine productivity, quality and flexibility? The success of SWA calls our attention to the fact that productivity, flexibility and quality are bonded elements that depend on how conceptual approaches to a business recognizes the added value triggers into it, and translate such knowledge into viable operational facts. The relation between (1) conceptual (mission & vision), (2) customer perception (marketing & service) and (3) routines (operations) requires the perceptual ability to identify turning points in the environment, so new routines are adaptative to new rules of market competition. If such innovations are accepted, the firm evolves to master the market. Productivity and competitiveness are a matter of facts: time, space, routines, marketing and service, under a constant feedback processes. Mission & vision are concepts that may configure the organization on images about what the activity must be. SWA evolved on these three axes to generate productivity, quality and flexibility. Productivity Shatter the hub-and-spoke concept, master turnaround process, eliminate catering and seat classes, transform ticket purchase and boarding, standardize equipments, avoid congested or expensive airports, Internet massive application (operational); low debt, gas options (financial); choosing only very dense, short and medium haul markets (marketing). All these measures had given to SWA a strong potential to produce profit although is an aggressive fare company, and let them concentrate in quality. SWA unit costs per seat remained less than all its competitors

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i.e. Southwest 7.82, American 9.49, Continental 9.76, United 10.18, Northwest 10.23, Delta 10.38, Alaska 10.41, U.S. Airways 11.68 (Boguslaski, Ito et al. 2004).

Quality The elimination of traditional non valued services let to a lean production which could offer a strong attractor: low price. Operational savings let the company create discounts that did not punch their ability to be in time, have comfortable seats, offer peanuts and soft drinks and the most important, have a remarkable attention to the client and an unbeaten security record. (2) What should the organization do to obtain such expected value? Standardization in equipment and process, innovative approximation to operations, training and compromised human resources. Flexibility. Quality and productivity mean doing the right thing at the right moment, in a particular situation in place and time, with a restricted amount of assets. The age of Pan Am and the mega carriers passed through, and traditional air lines did not noticed how changes affected their business. Low fare airlines had been flexible enough to see a different concept of air transportation that is more adapted to current times. Focusing on transportation let them be flexible in time schedules, routes and prices; a lower variable cost structure let such organizations adapt to new challenges as the basics (productivity) are solved by now. They have been flexible to adapt to the changes and restriction making of them profitable lessons; this means adopting changes in operations, finances, marketing and human recourses. During the 9/11 crisis, the multiple organizational gymnastics that SWA made to adapt let them not touch neither training expense

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nor human resources contracts. This ability made the airline pass over the situation with profit and increasing market (Taylor 2003) Productivity, quality and flexibility built a system of closely related variables that turn concepts into routines perceived by customers as valuable. Low fare airlines had applied a model that adopt a viable strategic position (low cost operational model), leverage of organizational capabilities (job quality and training) and reinventing the value equation (mission & vision). That equilibrium explains the success of SWA operational area as it has sense: pricing structure, fleet composition, route structure, choice of airports, distribution and productivity.

Corporate Culture Organization of Southwest Airlines is described as an upside-down pyramid. The upper management is at the bottom and supports the front line employees (~35000), who are the experts. This is Herb Kelleher's unorthodox leadership style, in which management decisions are made by everyone in the organization, not just the head executives. The company is described to not have much emphasis on structure; instead employees are encouraged to think freely without constraints such as titles. Kelleher, for example, is said to know the names of virtually all his employees. Incentive structure was efficient; i.e. pilots were paid per trip and number of hours in the air, so their interest is to minimize time in land. Flight attendants were called to collaborate in maintaining the aircraft tidy between flights, saving time for cleaning service (Editorial 2005). Southwest uses a different kind of reward programs. For instance, the reward for frequent fliers includes free flights according to the number of flights; which means if you fly eight round trips or sixteen one way trips, you will get one free round trip ticket. In addition the company offers free drink coupons, toll-free reservations phone numbers, and credit with a preferred partner, which means if you take fifty round trips in a year, you can designate one person to travel with you for one year. Southwest Airlines is characterized as a C-corporation with duration distinguished as a normal perpetual existence. The shareholders are not normally liable for debts of the corporation and they preserve an operation that is normally more structured, requiring more meetings and (in some states) more reporting requirements. Management is very centralized through the board of directors (elected by the shareholders) and the officers (elected by the directors). The corporation is taxable entity, although the income which would normally be taxed at the corporate level can normally be paid out in salaries (and in other deductible ways) so that there is in fact no tax at the corporate level. As far as transferability of interest, it is normally fully transferable and raising capital is in the choice of public companies. Southwest Airlines values employees, initiating the first profit-sharing plan in the U.S. airline industry in 1974 and offered it ever since. "In 2000, Southwest offered its employees a recordsetting $138M in profit sharing. This tax-deferred compensation represented an additional 14.1 percent of each employee's annual salary.

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Rivalry among competitors sets the price-Southwest Airlines is a discount airliner. Rivalry is increasing, as the market decreases, and competitors downsize, the competitors become more or less equal in size and capacity. This means that as economic conditions worsen, competitors downsize and then compete for the same remaining market. Southwest Airlines main competitors are: Continental Airlines, USAir ways, Delta, United airlines, and American Airlines. As you can see in the table below, the current days have been really challenging for the industry. However Southwest has been able to increase its operating revenues. The threat of new entrants is low, the demand is not high. On top of that, there are hurdles, not necessarily the greatest; the FAA. Government regulations and restrictions imposed on those involved in this industry. Such would be government sanctions consequent of international issues. At a glance, the company's source of competitive advantage is its low price tickets. Most of its customers are people who are willing to forego in-flight meals, direct routes and fancy seats if that would mean for a cheaper ticket. Not to imply that Southwest doesn't provide direct flights, but that is offered at a higher price.

SWOT

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Strengths

Weaknesses

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1. High capacity usage. 2. Named the Best Low Cost Airline leader for the last three consecutive years. 3. Diversity in upper management. 4. Revenues increased by 8% to 5.94 billion in fiscal year 2003. 5. Net Income increased 83% to $402million in fiscal year 2003. 6.Dominates the Short haul segment of Airline Industry. 7. Fourth largest domestic airline. 8. In 2003 Southwest posted a profit for the 31st consecutive years. Opportunities 1.National and International Markets 2.Growth Of Older Generation 3.Industrial Research and Development 4.Growth of Hispanic Population In U.S.A. 5.New Technology Opens the Door for New Products/ Services 6.Increased Internet advertising 7.Longer flights 8.Growth of business and leisure travel S-O Strategies 1. Expand into other countries or new cities. (S2, S6, S7, O1, O7)

1.No international flights. 2.No segmented seating. 3.Dependent on a single producer. (Boeing) 4.Lack of exposure towards online booking agencies. 5.Four out five employees are members of the union. 6.Carry a small amount of freight and cargo. 7.Do not use chat communication such as e-mail. 8.Do not offer morning flights.

W-O Strategies 1. Expand into Canada. 2. Expand into Mexico. (W1, W2, W3, O1, O3, O6, O7)

Threats

S-T Strategies

W-T Strategies

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1.Decline of leisure travel due to economy and terrorism 2.Competing online ticket reservation systems. 3.New government regulations that make operations costlier. 4.Demand for air travel has dropped sharply since September 11th. 5.Gas and oil price fluctuations. 6.Terrorist attacks. 7.Increased restrictions to limit noise (including restrictions on types of aircraft used and limits on number of operations) 8.Annual airline security costs have increased.

1. Increase advertising for southwest.com. (S8, T2)

Situational Analysis Strengths Low operating costs Service innovation Technological expertise Integrated marketing campaign Product innovation Age of equipment Ability to continuously refine service Intellectual capital Financial position No-frills service fills market niche Image

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Safety record Customer service

Weaknesses Product breadth and depth Multi-country coverage No baggage transfer outside Southwest system Lack of intra-airline services and alliances

Opportunities Growth opportunities for smaller urban airport destinations Societal values in the changing economy Rebound opportunity as a result of 9/11 decline in market size Vertical integration Extent of rivals horizontal integration Long-term industry growth

Threats Costs: Aviation fuel, labor Terrorist attack on an aircraft Weather General economic downturn Legislative and regulatory constrictions Communications technology and e-commerce Number of rivals and their relative size. Network airlines subsidiaries that replicate Southwest business model Rival distribution channels Extent to which rivals use economy of scale Industry profitability in relation to the changing economy Declining consumer confidence Diminishing pool of qualified employees

The reason for Southwest Airline's success is due to their low-cost model. The Southwest Airlines consists solely of Boeing 737s and offers only coach seats (there is no business or first class). Southwest Airlines also do not offer in-flight meals, only peanuts and other snacks. Southwest is simple and direct at the goal of their service; "a primarily short-haul airline that flies directly from city to city, with just one type of plane--the Boeing 737 - and the lowest costs". With a simple goal, Southwest has excised many of the "luxuries" that competitors have offered, such as luxury seats; this is made evident by their decision to enforce a rule for passengers who could not fit into the seats to purchase an additional seat. This rather unpopular move (whereas other airlines would have suggested a more luxury class seat) is simple in its purpose-get passengers from point A to point B. Services, such as in-flight meals and luxury

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seats, which have become standard to competitors, have been seen as unnecessary for an airline that provides a short-haul trip from city to city at the lowest cost. To have opted for a first class, business class, or any form of luxury class seat would have been excess baggage; most people would prefer to do without it if it meant for cheaper ticket price. While Southwest Airlines offers no frills, Southwest Airlines do meet customer expectations when it comes to service. They base their model on the motto, which states that "if they're happy, satisfied, dedicated, and energetic, they'll take real good care of the customers. When the customers are happy, they come back. And that makes the shareholders happy," Southwest has very good relations with all their employees. Employees are either of independent unions or have flexible contracts which allow employees to work longer hours. Southwest Airlines, however, is not without weaknesses. No matter how successful, Southwest Airlines serves only 29 states and cannot compete against the bigger companies that serve nationally or even internationally. Furthermore, Southwest Airlines does not utilize a hub system that allows for bigger competitors to reach further out. Such competitors are aware that they cannot match Southwest Airline's prices; their market is larger and is not feasible to offer cheaper tickets at the cost of no in-flight meals. Instead, competitors narrow the price difference between Southwest Airlines and themselves and stress on the quality of these frills (such as roomier seats). Others, through use of flight hubs, are the only ones who can economically serve remote customers. Another weakness of Southwest Airlines is their preference of Boeing 737s. Being limited to one type of airplane leaves them with little flexibility when the model receives a bad reputation or a critical flaw is discovered. Such would be a costly venture for this company, who've used only one type of airplane and in the face of a dire situation would face a costly venture of finding replacements or counteracting bad publicity. Southwest Airlines' success is primarily because they have focused sharply on their goals. This is evident by their no-frills, low-cost model: their goal is to provide the cheapest form of short air travel between two cities; providing the bare necessities. Driven by the idea that customers can be satisfied without having expensive options available for them, Southwest Airlines have stepped on the toes of many of its bigger competitors. Southwest Airlines was able to differentiate themselves from their competitors by offering the lowest prices. This appealed to many people who were not impressed with the additional services such as in-flight meals or wanted to avoid busy airports. Coupled with the utilization of the internet, Southwest Airlines almost became a trend, a sort of an underground hit, bypassing travel agents and their fees. Southwest Airlines provided a medium in which city-to-city transportation was possible with the lowest costs. Part of their success is due to their focused group; Southwest Airlines serves only 29 states - a substantially smaller portion of geography, when compared to those who serve customers coast-to-coast. While the company was able to enjoy their success in the earlier years, recent

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events and poor economic conditions have made competition fierce. Now, the bigger companies are trying to emulate Southwest Airline's style. By narrowing the price gap, the luxurious services previously deemed too expensive has become more affordable. A possible drawback is that because Southwest Airlines' strategy has proven so effective, it will be duplicated and emulated by its competitors to a point where it would lose the originality. This could result in competitors offering low rates to the areas covered by Southwest and beyond, making Southwest Airlines' range and limitations more obvious. It would be very possible in the near future where a big company, with its hubs (something Southwest does NOT have), basically introducing Southwest Airlines' low-cost model to a wider market, encroaching and outdoing Southwest Airlines. When a comparatively small, new company is able to take on major players in an extremely competitive industry, gain market share, please customers and employees alike, it is time for others to take notice. We will initially evaluate Southwest Airline's competitive business strategy of their maintenance of a low cost and exceedingly reliable service approach (forgoing perks such as meal service, first-class preference and assigned seating), as a major transportation corporation. We will ultimately make supplementary recommendations and improvements based on the stratagem of their already flourishing company. As a company that still faces continuous growing challenges before them, it is essential for Southwest Airlines to expand on their existing achievements. Our analysis and promising suggestions will be developed with intent to better serve customers by improving their routing system, offering enhanced accessibility and minimizing delays. As business consultants, we anticipate to pave the way of one of the leading travel industries into becoming the best of the best.

Recommendations: Southwest Airlines were able to operate their business relatively undisturbed. It was only in the poor economic conditions that suddenly Southwest Airlines' method of operation became the ideal model for its competitors. While the publicity is beneficial in raising employee morale, and raising stock prices; Southwest Airlines is now target of competitors' focus. A tactic that Southwest Airlines can do to inflict damage to competitors is to slash prices. This type of tactic is typical of a big company that has a monopolistic rule in an industry squeezing other competitors. This tactic is advisable when competitors are near bankruptcy or are in dire situations. Because competitors cannot match Southwest Airlines' prices, the most they can do is narrow the gap of the price difference. Southwest Airlines, which has consistently made a positive profit, can increase the price gap by lowering their prices. Southwest Airlines will incur losses from this move, but the goal of this move is to drag the competitors further into debt. Because this move affects both companies, this move is very risky and should not be done unless Southwest Airlines is sure that their competitor is near bankruptcy. Possible reasons for this move would be to eliminate the weakest competitor in the industry, which would free up the market held by that company.

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The reason for the creation of Southwest Airlines started when its founders saw an opportunity. Frequent trips between cities were exploited by providing a quicker form of transportation. Southwest Airlines has weathered through several crisis and has proven itself to have potential for to be a leader of its industry. The poor economic conditions have placed many airline companies in debt, while Southwest Airlines was able to make a profit. With its competitors weakened, Southwest can take the initiative and expand-not foolishly, but with the same drive and precise execution the company was founded under. The genius behind Southwest Airlines' success is location; and if researched properly, this can be applied to other areas. The appeal of Southwest Airline is the cheap tickets, as they offer none of the luxuries (such as in-flight meals). Southwest Airlines' no frills approach may not be pleasing to all - it would be good for Southwest to make a few changes in which the aesthetics would be more accommodating. Upgrading seats may be a costly venture, but it would open Southwest Airlines to a larger market. The medium of choice for customer referral is the internet. Internet referrals have been the main source of customers (it further cut costs by charging a lesser fee to book seats through the internet than through a travel sales agent). With the saturation of discount websites, however, Southwest Airlines is losing the grip it held advertising on the internet. More websites offer competitive rates and special discounts-which if Southwest Airlines does not take immediate action can end up losing customers. Since advertising through the internet is risky, as people hate pop-ups or spam e-mails, it is our general consensus that Southwest should find ways to be listed on these price comparison websites. Before, there weren't many sites that offered price comparison and finding deals was difficult. With these sites, information is available at the fingertips of the web surfers who can make better informed choices. Southwest Airlines should ensure that their voice is heard through this medium, as it is sure to attract people in search of deals.

Key Financial Ratios

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Valuation Ratios P/E Ratio Price to Sales Dividends Dividend Yield Payout Ratio Growth Rates % Sales vs 1 Yr Ago EPS 5 Yr Growth Financial Strength Quick Ratio Total Debt to Equity

Southwest 24.72 1.84 .14 3.18 7.52 -.26 1.16 .30

Industry 23.71 1.24 .27 1.88 12.79 -2.27 1.20 1.19

Sector 25.41 1.62 1.38 23.05 8.27 6.80 1.18 .59

S&P 500 24.01 3.33 2.04 26.78 11.90 12.15 1.26 .85

1.16 0.3

1.2 1.19

1.18 0.59

1.26 0.85

Profitability Ratios % Gross Margin Net Profit Margin Management Effectiveness % Return on Assets Return on Investment Return on Equity 4.69 5.63 9.41 4.71 6.51 11.68 6.66 8.59 14.57 6.40 9.97 18.71 29.97 7.46 26.52 5.27 33.15 6.77 47.32 13.12

Major problem The Southwest Airlines major problem is the threat to lose some of its frequent customers. The case illustrates two opposite kinds of frequent passengers:

The first one is William Mark, who loves almost everything that Southwest provides such as: the opportunity to come earlier and have a great seat, the absence of meals, and the ticket prices.

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The other one is Liz Bast, who loves the policy of using minor league airports, but has complaints related to the ways of seat assignment, the rules about upgrading restricted tickets, and she wishes to have preferential treatment, especially because she flies more than 100.000 miles per year.

Contributing Factors: The threat to lose some of Southwests frequent customers is caused by five factors: Recheck-in baggage: Passengers with connected flight who are going to switch to another airline have to pick up their checked baggage and recheck-in with the next airline. No assigned seats for passengers: Southwest used first-come first-served system in seats assignment, which means people who arrived first will get the better seats. This is an issue because passengers might easily change their preferences and fly with other airlines. For example, Liz Bast is a frequent customer of Southwest Airlines, but because she is always busy she comes late to her flights and the company cannot offer her the seat she wanted. Lizs problem will be solved if she could book a specific seat and this service is not valid at Southwest Airlines. Rewards count on trips number: there is no credit given to passengers on how many miles they flew, but free flights are offered according to the number of trips taken. Therefore, customers could choose Southwest Airlines for only short flights because the length of flight is not a factor in the company reward system. Restricted fare tickets: Passengers with restricted fare tickets cannot use their tickets if they missed the flight without paying the difference even if they were frequent customers. This strict policy gives the customers a feeling that the company does not value their business. High competition in the industry: 2001 was so difficult for airlines industry, the Southwests competitors might be thinking of attracting its loyal customers for their benefits.

Conclusion
First and foremost, Southwest Airline has developed a great low cost model for the past thirty year that fits today's economy the best. It has expanded from a tiny company with merely three aircrafts to one of today's major airliners that flies between 58 cities carrying over 60 million customers each year. As everyone can see, Southwest Airline has been a big success. Now, it is given an opportunity to grow even bigger at this extremely hard and critical time for the airline industry. After the incident of September 11, Southwest Airline is one of the few airliners that remained profitable; other airline companies are losing millions of dollars due to the insurance raise, the security cost and lack of customers. We recommend Southwest airline to take this opportunity to expand to greater regions. It is the time for Southwest airline to use its low price tickets to drive its competitors out of business and

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take over their market. We believe, giving up some of the profit to cut the ticket price even lower and upgrade hardware can open Southwest Airline to a much larger market that will bring more profit in future. Implementations of cost saving technology such as internet is needed to lower the operation cost to give customers better deals. STRATEGIC ATLTERNATIVES AND RECOMMENDED STRATEGY 1. Introduce structured continuous learning programs that will be used to retain current employees. 2. Adapt services and specials to cater to the population based on their demographics in order to increase market share. 3. Pursue market growth opportunity created when the market declined after 9/11. 4. Defer delivery of new aircraft. 5. Create a shared services ground crew pilot program with competitors. 6. Create a promotional campaign of a buy one, get one free ticket offer on one -way ticket purchases for off-peak flights. 7. Aggressively pursue Internet marketing opportunities. 8. Improve turnaround times. 9. Continue to successfully hedge fuel prices. 10. Improve employee-management relations to avoid disruptive contract negotiations.

IMPLEMENTATION Short-term goals: Many of the marketing strategies can be implemented immediately at the department level Mid-term goals: Programs to improve operational efficiency and improve employee retention can be implemented within one year. Long-term goals: Strategic goals such as market expansion (perhaps overseas), acquisitions and mergers, and aircraft delivery schedules must be planned in the context of a five- or ten-year plan at the highest levels of management. Through consistent focus on operational efficiency and cost control, progressive human resources management, upbeat marketing, service to underserved markets, and a dedication to quality at every level, Southwest Airlines is poised to remain profitable and dynamic.

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