Culture, Values, and Operating Practices in 2016

Strategic Management Group 4

Ari Permadi Sakti Rami Ibrahim
Fadrian Jatmiko Yannick Mnzinger
Leonie Fusban Sriwiyata Ismail Z.
1. Company Introduction 2. Present
2. ?Analysis

History
KSF
Values
Driving Forces of Industry
Key Figures

3. Future Analysis 4. Proposed Strategy

PESTEL
Strategic Plans
Porters Five Forces
Strategic Elimination
Perceptual Mapping Balance Score Card
Competitor Analysis Proposed Strategy
SWOT
Part 1/3:

Case
Overview
 What is Airlines?

Worlds Largest Low Has operated since Exclusively use

Cost Carrier (LCC) 1971 and based in Boeing 737 jetliners
Dallas, TX, USA

Since 1973, it has Most passengers in Outstanding customer

been profitable for 44 the US and most daily service and
consecutive years departures in the hospitality
world
 Companys History

1967 1971 1979 1981

After battling
2001
Founded by First flight out The infamous Wright
Kelleher
Rollin King of Dallas Love- Amendment, limiting numerous legal
hurdle, Kelleher stepped down
and Herb Field Airport what airports the
took over as as CEO, a
Kelleher airline can fly into was
CEO legend in the
enacted
industry

2004
2016 2014 2011 2006 Gary C. Kelly
took on the role
Preparation Complete redesign Start of The Wright of CEO
for of the airline visual AirTran Amendment was (and is still
international identity and logo acquisition repealed in court, Southwest
expansion where the boosting revenue CEO up until
company was from Dallas Love- present).
The effective successfully Field by almost
abolishment of merged in 1000%
Wright Amendment 2014
 Purpose
Connect People to whats important in their lives
through friendly, reliable, and low-cost air travel.

Vision
To become the worlds most loved, most
flown, and most profitable airline.

Mission
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.

Values
Live the Southwest Way Work the Southwest Way
Warrior Spirit, Servants Safety and Reliability, Friendly
Heart, Fun-LUVing Attitude Customer Service, Low Costs
Transformation of the Company

Founder Herb Kelleher took over as CEO

1981 2001 2016

$270 $5.6 billion $19.8
Revenue million billion

27 350 704
Planes planes planes planes

14 airports 58 airports 104

Destinations airports

2,100 30,000 49,600

Employees personel personel personel
Key Financial Figures and Ratios

2015 2014 2013 2012 2011

Total Assets $ 21,312 $ 19,723 $19,345 $ 18,596 $18,068
(***) D/E Ratio 1.896 1.982 1.637 1.660 1.627
Operating Income $ 4,116 $ 2,225 $ 1,278 $ 623 $ 693
Net Income $ 1,298 $ 1,136 $ 754 $ 421 $ 178
Earnings per Share $ 3.30 $ 1.65 $ 1.06 $ 0.56 $ 0.23
EPS (Diluted) $ 3.27 $ 1.64 $ 1.06 $ 0.56 $ 0.23
ROIC (pre-tax) 32.70% 21.20% 13.10% 7.20% 6.80%
(**) WACC 9.29% 5.57% 7.57% 5.16% 6.00%

* All currency in million USD The company uses Economic

Earnings (ROIC WACC) as one of
(**) Prediction by analysts their primary measure of financial
(***) Industry standards for DE ratio is performance.
around 7.00 to 9.00
 Part 2/3:
Internal and
External
Analysis
 Key Success Factor - External

Keep fares and

operating costs be prepared for
Care for
lower than bad times with a
customers warmly
anybody else by strong balance
Hire great People & personally, like
being safe, sheet, lots of
theyre guests in
efficient, and cash, and a stout
our home
operationally fuel hedge
excellent
Key Success Factor - External

No hidden
additional
fees

Strong
Corporate Low costs
Culture

Outgoing
& fun
atmospher
e
Driving Forces of Industry - External

Regulatory Forces Economic Forces

- Regulation & Deregulations - Aggregated Demand
- Treaties - Oil prices
- Global GDP fluctuations

Social & Demographic Technological Forces

Forces
- Performance optimization
- Globalization - Innovations in transportation
- Changing societal concerns & industry
lifestyles
- Environmental consciousness
Attractiveness of Industry / Lifecycle

4%
Canals
1825 Paradigm shift

1836 Peak year

3%

Rail
2%
Roads
1869 Air
1913 1969
1825

1% 1836 1891 1946 2015

t= 55 years t= 65 years t= 70 years

t= 30 years

0%
1800 1850 1900 1950 2000 2050
 1st

Where to fly next?

PESTEL Analysis - External

Political Impact on Supply Impact on Demand

& Legal
Decrease in margins due Deregulation allows sharp

High

High
Deregulation to increasing competition rise in routes and competition

P
related to deregulation and drop in price

Security requirements Increased in waiting time

Low

Low
Terrorism increase operational cost and general unpleasantness

Economic Impact on Supply Impact on Demand

Volatility in oil price has

Volatility in oil price tend to
major impact on Southwest,

E
encourage airline to
Low

Low
Fuel Prices but overall in the long run
increase price, making air
through fuel hedging the
traveler less attractive
impact could be lessen

Continued
 PESTEL Analysis - External

Economic Impact on Supply Impact on Demand

Increase in opportunities Increased demand
Global

High

High
for growth in different by Business and
Expansion

E
market Leisure Flyer

Introduction of JetBlue into

Falling Flight the LCCs market put Increased demand by

High

High
Fares pressure to compete in general flyers
price, eroding margin

Social Impact on Supply Impact on Demand

More people are now able to

Rise of Middle Increased demand of
fly, making the industry more

High

High
Class Flyers airlines with low cost

S
crowded with new airlines.
affinity

Culture of holidays travel,

People preferring airline
Holiday aided by social media,
High

High
with diverse assorted
Travelers necessitate the need for
route in their travel
more routes
 PESTEL Analysis - External

Technology Impact on Supply Impact on Demand

High cost and Better on-board conditions
Drive for

High

High
unpredictable results for increased demand.
Innovation

T
investing in RnD.

Lower Modern aircraft are more Lower operating cost reduce

High

High
Operating economical to run, lowering price, increase demand.
Cost operating costs.

Lower or even eliminates Lower or even eliminate

Online

High

High
intermediation cost to airline intermediation cost to
Booking companies. customer.

Environment Impact on Supply Impact on Demand

Given how large the

E
contribution of airline industry Customer increasingly
Environmental
Low

Low
to climate change prefer eco friendly
Concerns necessitates efforts to airlines.
address environmental issue.
 Porters Five Forces - External
Threat from Other modes of
transportation Low
Substitute Products

Airplanes: Just
Boeing and
Airbus High Competitive
Rivalry Very low
Supplier Other: Many switching cost Buyer
interchangeable High
Bargaining suppliers vs. Main service Bargaining
Difficult to maintain
Power few airline (transport) highly Power
competitive edge
Moderate companies. interchangeable High
Industry in maturity stage
Southwest offers High exit barriers
huge volume.
Low

Domestic Operating Airlines: Moderate initial investments.

Process know-how easy transferable. High Threat of New
Entrants from Outside the Airline Industry: Large initial Entrants
investments. Importance of learning curve effects. Strong
governmental regulations. Building trust takes a long time.
Moderate
Loyal customer base Low
Perceptual Mapping - External
Good Customer Service

Low High
Fares Fares

Poor Customer Service

Competitor Analysis - External

Low Fares

Cost Efficiency

Route

On Time
Performance

(*) Mishandled
Baggage Report

Involuntary
Denied
Boardings
(*) Data from reports per 1000 passengers. Higher performance mean less reports.
SWOT Analysis - Internal
S Centrality of customer
service
Great corporate culture
(low turnover rate)
Value Chain activity cost
efficiency
Free baggage policy
O Growth in oversea expansion
New aircraft technology to
improve customer satisfaction
and cut operational costs
Focus on technology to
enhance sustainability of
company
W Barely international flights
Dependency on single airline
producer
Inefficiency of some
employees due to strong
corporate culture (non-firing
policy)
T Market saturation
(domestic)
Cost of fuel in correlation of
ticket price
Competitors could try to
imitate their strategy
Higher gate costs and
landing fees
 Part 3/3:

Strategic
Implementation
 Current Strategic Plans

Cost Leadership

Fare Structure Strategy

Low-Cost Operations
Use of single aircraft type
Point-to-Point Route Structure
Cost efficient Value Chain Activities
Fleet modernization

Expansion within Corporate Creating a fun Growth

US market after Culture: experience for strategy:
acquisition of Employees customers Market
AirTran First penetration
(more routes)
 Strategic Elimination

OBJECTIVE Achieve Better Operational Excellence

OUTCOME Increase in Revenue Reduction in Costs

International More Domestic Tweaking Operational

APPROACH
Expansion Flights Costs

More routes into Abolishment of the Achieving optimum cost

international Wright Amendment optimization for all cost
destinations makes way for elements of their operating cost:
potential new Landing fees
(e.g. Canada, destinations across Rentals
Mexico, the the entire US. Fuel
Carribbeans, the Advertising
Pacific and Administrative
Europe) Maintenance
Others
Proposed Strategy International Expansion

Southwest Flies
International

Strategic
Maintain Price Bring LUV Alliance with
Leadership Around the Local Low
World Cost Carriers

One model Avoid Hedging Employees

airplane crowded on fuel as KSF
policy hubs prices
 Proposed Strategy Balanced ScoreCard
Objectives Measures Target Initiatives
Increased Profitability Market Value 10% CAGR International and
Financial

domestic expansion
Seat Revenue 20% CAGR
Increase Lower Operating Cut lending fees, fuel
Revenue Cost CASM (25%) and rental
Customer

Mishandled Reduce 43% Total Quality

Baggage to 1.50 Management
Customer
Involuntary
Satisfaction Reduce Revenue Management
Denied
Boardings 20% Algorithm

Cycle-time optimization
Processes

On Time 90%
Internal

Performance program
Fast Ground
Turnaround Time on 20 Increase productivity
Ground minutes per employee

% Ground Crew Profit Sharing Plan

90%
Learning &

Shareholders
Growth

Aligning Crew with the

% Ground Staff Training
Operational Crew trained
100%
Excellence Strategy Employee Benefit
% Supervisor
99% Package
Internally
Thank You for Flying With
!