1. A Case Study by: Benjamin Sanders

2.  Southwest began scheduled service on June
18, 1971 as a low-fare, high frequency airline
committed to exceptional customer service.
 They utilized a short-haul, point-to-point
aviation system

3.  Southwest’s co-founder Herb Kelleher had this to say about the employees
he wanted working for Southwest, “What we are looking for, first and
foremost, is a sense of humor. Then we are looking for people who have to
excel to satisfy themselves and who work well in a collegial environment…
We can train people to do whatever they have to. We hire attitudes.”

4.  Prior to 1978, the U.S. airline industry was
regulated by the federal government through the
Civil Aeronautics Board (CAB)
 The CAB regulated airline fares, routes, and
company mergers
 A change in routes or fares charged by a carrier
had to be approved by the CAB
 Price competition was suppressed

5.  In 1978, the Airline Deregulation Act was passed
 This act allowed airlines to set their own fares and enter or
exit routes without the approval of the CAB
 As far as jurisdiction for mergers was concerned, it was
first passed to the U.S. Department of Transportation; then
again transferred to the U.S. Justice Department in 1985

6.  The Civil Aeronautics Board
was dissolved in 1985
 Two Major Changes Occur

7.  Major carriers turned their attention to serving non-stop
“long haul” routes, which had been very profitable during
the Civil Aeronautics Board regulation era
 Consequently, major airline carriers reduced service on the
“short haul” routes that were much less profitable (if not
costly) during the time of aeronautic regulation

8.  This void created by major carriers was filled
with smaller domestic carriers
 In 1978, America had 36 regional carriers
 By 1985, the number of regional carriers had
grown to 100

9.  The manner in which carriers executed their routes
was no longer regulated and quickly changed.
 Almost all the major carriers dropped their
previously used point-to-point system, and
adopted a hub-and-spoke system which featured
“feeder flights” from outlying cities to a central hub
city.

10.  The point-to-point system that was abandoned
involved non-stop flights between city-pairs and
would often shuttle flights back and forth between
city-pairs
 The key to the hub-and-spoke system was to
schedule numerous feeder flights into the large hub
airports that coincided with the highly profitable
long-haul flights, with each spoke adding more
passengers to the aircraft flying the longer distances.

11.  The major carriers did not enjoy the success they had forecasted
with their hub-and-spoke system.
 Potential increased revenue and some cost economies from
flying more passengers longer distances were offset by increased
costs resulting from reduced utilization of aircraft as they waited
to collect passengers, the capital investment in hub facilities, and
the need for a larger ground staff.

12.  Conversely, the small newly formed airlines
along with previously existing regional
carriers were experiencing company growth
and profit.
 Since the industry was deregulated, these
smaller carriers expanded both the number
and the length of their routes.
 They did this by maintaining the point-to-
point system that was more economical to
operate than hubs.

13.  First, they did not bear the higher costs of
operation present in the spoke-and-hub system.
 Also, the regional carriers had much lower debt
than that which the major carriers had assumed
during the regulation era.
 Subsequently, the newly formed airlines and
regional carriers had an immediate cost
advantage.

14.  This cost advantage allowed these carriers to offer lower fares on both
long-haul and short-haul flights.
 This created price competition among all airlines, which were scrambling
to fill their seats.
 This price competition also lowered the average fare paid on long-haul
flights, which caused further damage to the major airline’s already
dwindling profits, whose cost on the long-haul flights remained high.

15.  As the price war raged on, major carriers engaged in
acquisitions of smaller carriers at a feverish pace.
 One of these acquisitions was Pacific Southwest
Airlines being acquired by USAir.
 By the late 1980’s, 91 percent of U.S. traffic was
controlled by eight major airlines.

16.  However, the financial condition of these eight major carriers
was not stable due to a decade of marginal profitability.
 The 1990’s were a dismal decade for airline carriers due to
recession, a doubling of fuel prices during the Gulf War, and
excess capacity in the industry.
 But the floundering of these major carriers only made things
easier for regional carriers and newly formed airlines…

17.  Due to rampant bankruptcy among major carriers, “low-fare, low-frill”
carriers were successfully formed.
 The new carriers were drawing on a pool of cheap, grounded aircraft
from major carriers, a wide availability of furloughed airline personnel,
and the cost economy provided by point-point route systems.
 These “low-fare, low-frill” carriers jumped from combined revenues of
$450 million in 1992, to $1.4 billion in 1994!

18.  From 1990 through 1994, Southwest had more
than doubled its operating revenues and almost
quadrupled its operating income.
 Southwest was so successful that the U.S.
Department of Transportation took note, “…As
Southwest continues to expand, other airlines
will be forced to develop low-cost service in
short-haul markets.”

19.  Many competitors started formulating operation
practices very similar to Southwest, if not identical.
 The outcome of this effort was the airline-within-an-
airline concept.
 The airline-within-an-airline concept involved
operating a point-to-point, low-fare, short-haul,
route system alongside a major carrier’s hub-and-
spoke route system.

20.  In 1994, United Airlines was the world’s largest
airline.
 They launched their own version of the airline-
within-an-airline concept on October 1, 1994.
 United’s airline-within-an-airline was branded
“Shuttle By United”.

21.  This initiative followed the employee buyout in the
summer of 1994 when employee wage cuts and more
flexible work rules made a point-to-point system
alongside United’s hub-and-spoke system possible.
 “Shuttle By United” was designed to be a high
frequency, low fare, minimal amenity, short-haul
flight operation serving destinations in California and
adjacent states.

22.  Beginning with eight routes, “Shuttle By
United” had expanded to 14 routes by
January of 1995, nine of these fourteen
routes competed directly with Southwest.

23.  “Shuttle By United” is intending to discontinue
some service and raise fares by $10. What, if
anything, do we do in response?

25.  Southwest is a low-fare, high frequency airline committed
to exceptional customer service.
 “We hire attitudes.” Our workers go above and beyond the
call of duty.
 Customer service was so important to Southwest that they
literally wrote the book on it. Southwest released an
international publication titled The BOOK on Service: What
Positively Outrageous Service Looks Like at Southwest
Airlines

26.  In 1994 Southwest recorded a net income of $179.3 million, thus
making 22 consecutive years of profitable operations. No other
carrier matched that over the past two decades.
 1994, Southwest won the annual “triple crown” of the airline
industry by ranking first among major carriers in the areas of
on-time performance, baggage handling, and overall customer
satisfaction. It is worth noting that no other airline had ever won
the “triple crown” for even a single month.

27.  Southwest Airlines also created a strong bond
between the corporation and its workers. Kelleher
referred to this bond as “a patina of spirituality”.
Kelleher stated, “I feel that you have to be with your
employees through all their difficulties, that you have
to be interested in them personally… I want them to
know Southwest will always be there for them.”

28.  No hub-and-spoke system (although
considered by many to be a positive)
 No first class seating
 Not competitive on a national scale

29.  Electronic ticketing (ticketless travel system)
 United charges 5-10% higher than the average Southwest
fare in the nine markets of direct competition in California
 United’s withdrawal from the Oakland-Ontario market
(United previously had 32% market share in this market)
 United charging higher fares in non-direct competition
markets

30.  “Shuttle by United” was launched on October 1, 1994 by United
Airlines. By mid January of 1995, “Shuttle by United” was serving 14
routes in California and the surrounding area. Nine of these 14
routes were in direct competition with Southwest.
 United’s CEO was quoted as saying, “We’re going to match them
(Southwest) on price and exceed them on service.”

31.  Very few changes need to be made.
 Market indicators seem to be in our favor. The system has already
ousted “Continental Lite” from the competition.
 It is only natural that the world’s largest airline carrier (United) would be
able to hang in the airline-within-an-airline race longer than
Continental.
 Their withdrawal from the Oakland-Ontario market along with raised
fares indicates they are already facing operating cost problems.

32.  Don’t rock the boat.
 One thing that has made Southwest stand out from its competition-
consistency.
 Consistently low fares with consistently exceptional customer service
are an integral part of what makes Southwest work so efficiently.
 Changing our prices to match United’s will erase our competitive
advantage while driving overall fares down.
 The “patina of spirituality” within the company offers advantages that
United does not possess.

33.  A public relations campaign may be helpful to remind both new and loyal
customers that we (Southwest) have always been a leader in “low-fare, low-frills”
flights. PR would utilize low cost print ads, as well as in-airport advertisements.
 Let it be known we’re not going to try and squeeze an extra buck out of them for
shareholder profits.
 Implementation of electronic ticket technology would reduce airline expenses even
further.
 If technology permits, I would also suggest a wide-spread social networking
public relations campaign.

35.  Codenamed “U2”, “Shuttle By United” was
dissolved by United Airlines in 2001 as it
folded the shuttle flights back into the main
fleet. United filed for bankruptcy in December
2002.