Total Pages: 2 Words: 662 References: 2 Citation Style: APA Document Type: Essay
Essay Instructions: Question: Will AirTran continue to be successful in this highly competitive industry?
Internet Mini Case #11
AirTran Holdings, Inc.
Maryanne M. Rouse
AirTran Airways? ability to grow, in what has arguably been the worst environment in years for airlines, adds an unexpected new chapter to one of the most unlikely turnaround stories in the airline industry. In 1996, when the carrier was known as ValuJet, it grounded all flights for three months after the crash of its Flight 592 in the Everglades killed all 110 people on board. Fortu-nately, the carrier had floated a package of $150 million in junk bonds just prior to the Ever-glades crash, and these cash resources proved critical as the company addressed safety concerns during the shutdown and the 11 successive loss quarters that followed. In 1997, ValuJet merged with AirTran Airways Corporation to form AirTran Holdings, Inc. (AAI).
At the end of December 2004, AirTran operated 508 daily flights to 48 destinations, primarily in the eastern United States, making it the second-largest ?affordable-fare? scheduled airline in the United States in terms of departures (just behind Southwest).
Although the company moved its headquarters from Atlanta to Orlando, Florida, after the 1996 crash, it still flies most of its flights to and from Atlanta, providing both point-to-point and one-stop flights through its Hartsfield hub. AirTran offers a business class any business can afford, all-assigned seating, a generous frequent flier program, and a corporate program dubbed ?A2B?; unlike its competitors, the carrier never requires a round-trip purchase or a Saturday night stay.
The company?s regional jet operation, AirTran JetConnect, operated by joint-venture partner Air Wisconsin, flies 50-seat Canadair Regional jets in short-haul markets to and from the airline?s hub at Hartsfield Atlanta International Airport. AirTran JetConnect serves Greensboro, North Carolina; Pensacola, Florida; and Savannah, Georgia?all of which were previously served by AirTran. The new service will allow the company to redeploy its 717s to increase frequencies in longer-haul, more profitable markets and facilitate growth in larger markets not currently served. In addition, AirTran JetConnect will allow the airline to expand into other short-haul markets as well as increase frequencies in underserved markets.
This case was prepared by Professor Maryanne M. Rouse, MBA, CPA, University of South Florida, as the basis for classroom discussion. Copyright ? 2005 by Maryanne M. Rouse. This case cannot be reproduced in any form with-out written permission of the copyright holder, Maryanne M. Rouse. Reprint permission is solely granted to the pub-lisher, Prentice Hall, for the books, Strategic Management and Business Policy?10th and 11th Editions (and the In-ternational version of this book) and Cases in Strategic Management and Business Policy?10th and 11th Editions by the copyright holder, Maryanne M. Rouse. This case was edited for SMBP and Cases in SMBP?11th Edition. The copyright holder is solely responsible for case content. Any other publication of the case (translation, any form of electronics or other media) or sold (any form of partnership) to another publisher will be in violation of copyright law, unless Maryanne M. Rouse has granted an additional written reprint permission.
MARKETING AND OPERATIONS
AirTran?s marketing strategy is to develop an innovative brand identity that sets it apart from its low-fare and full-service competitors. The company targets two primary segments: price-sensitive business travelers and leisure travelers, primarily in the eastern United States. To attract business travelers, the carrier launched a business class product that is, in terms of comfort, the equivalent of the first class service offered by its full-service rivals. The business class cabin is configured with 2 ? 2-foot oversized seats, providing considerably more leg and seat room than a typical coach cabin. Targeted to the price-sensitive business flier, upgrades to business class from coach are just $25.
AirTran offers a range of fares based on advance purchases of 14 days, 7 days, 3 days, and ?walk-up? fares. All fares are one-way, and most are nonrefundable; however, reservations can be changed prior to departure, with a service charge.
The company also offers a popular frequent flier program, A+ Rewards, that allows members to earn free travel more quickly than its competitors and, for twice the number of flight credits, will even buy members a free domestic ticket on any major carrier. The A+ Rewards program offers a number of ways to earn free travel, including the use of the AirTran Visa card, Hertz car rent-als, and bonus earnings for Business Class.
In spring 2003, AirTran introduced a new standby program targeted broadly to young travelers (and specifically to college students) between the ages of 18 and 22. Dubbed the X-Fares Standby Program (www.xfares.com), this marketing initiative allows those who are eligible to fly standby to almost any AirTran destination for $55 per segment ($75 per ?long-haul? seg-ment).
In addition to targeting individual business travelers, AirTran has focused on developing travel partnerships with companies of all sizes, from one- and two-person small businesses to such large corporations as BellSouth, State Farm, and John Deere. Under the terms of its A2B corpo-rate travel program, employees of registered companies get free confirmed upgrades to business class when paying full coach fares, fee waivers for ticket refunds or changes, and advance seat assignment. Unlike rival Southwest, AirTran has established interline ticketing and baggage agreements with Delta, United, US Airways, and American Trans Air and has ticketing arrange-ments with major online travel services such as Orbitz, Priceline, Expedia, and Travelocity.
AirTran has been aggressive in lining up corporate and community support via public?private partnerships that allow the carrier to shift more of the risk of expansion to communities and businesses expected to benefit from overall lower fares in their markets. The ?public? part com-prises revenue guarantees by cities, counties, or other municipal entities to protect AirTran against losses during the initial phase of operations; the ?private? part builds ?travel banks? in which businesses pledge to spend a specified amount on tickets. Both elements help to build a loyal following and serve as a cushion against the early losses of expanding into a new city and the invariable backlash from bigger competitors, which often respond by slashing their own fares and expanding service. Because AirTran?s arrival in a market typically drives down fares by as much as 50%, both cities and businesses view the partnership guarantees as money well spent. For example, when AirTran began service to Wichita, Kansas, in May 2002, the average full fare on the Wichita?Washington, DC, flight dropped from $1,667 to $460. Wichita, which was com-peting with other cities to lure AirTran, estimates that the entry of the low-fare carrier could lead to annual airfare savings of $43 million for business and leisure travelers.
In December 2004, AirTran lost a bidding war to buy leases on 14 gates at Midway Airport in Chicago from ATA Holdings, a company now in bankruptcy. The company, which added seven daily flights from Midway to Florida destinations in January 2004, had planned to create a Mid-western hub and diversify its route system by adding more east?west flights. Despite the disap-pointing loss of gates to Southwest, AirTran believes it can grow profits by adding new destina-tions?Sarasota, Indianapolis, and three unnamed cities?and by adding flights to connect cities already in its system.
Named ?Best Low-Fare Airline? for 2001 and 2002 by Entrepreneur magazine, AirTran?s cost structure is among the lowest in the domestic airline industry in terms of cost per Average Seat Miles (ASM). The company?s low-cost position is supported by an emphasis on cost controls, lower distribution costs (reservations, ticketing), and high employee productivity. The compa-ny?s labor costs are equivalent to approximately 25% of revenue?the same percentage as Fron-tier and JetBlue?below Southwest?s 30% and significantly below the full-service carriers? 40+%. An award-winning web site that makes it easy to book flights online has helped AirTran shift 52.5% of its sales to the site?one of the highest percentages in the industry?with an addi-tional 13% of bookings coming from other travel sites. The company estimates its cost per book-ing online at less than $1?a significant saving over the $8.50 average cost of booking through a travel agent.
In September 1999, the company became the launch customer for the new Boeing 717, an inno-vative, cost-efficient, and environmentally friendly commercial aircraft that has reduced the higher fuel and maintenance costs associated with the DC-9s with which it had begun operations. (The company?s current fleet comprises 77 Boeing 717-200s and 5 Boeing 737-700s.) AirTran has also forged close ties with Boeing and Boeing Capital Corporation, a full-service provider of financial services, including asset-based lending and leasing. Boeing Capital, an indirect wholly owned subsidiary of the Boeing Company, refinanced $201 million of AirTran?s junk bonds in 2001 (and also agreed to finance the 20 Boeing 717s to be delivered in 2002, 22 used and 1 new 717 in 2003, and 5 737-700s delivered through June 2004), enabling AirTran to continue its rap-id fleet modernization.
AirTran was one of the few domestic airlines to report profitable operations for the year ended December 31, 2003, recording operating income of $86.3 million and net income of $100.5 mil-lion. The company also strengthened its balance sheet by issuing $145.9 million in common stock and $125.0 million of convertible debt at 7% while paying down $76.5 million of long-term debt at 11.27%, paying down $12.7 million of long-term debt at 13%, and converting $5.5 million of 7.75% convertible debt to equity, all of which greatly improved AirTran?s debt-to-equity ratio.
Despite a sea of red ink, overcapacity, and threatened bankruptcies in the industry, the company overcame intense fare wars and weak October bookings to eke out a profit of $1.1 million, or 1 cent per share for fourth quarter 2004. Although this was down from $21.7 million or 24 cents a share in fourth quarter 2003, AirTran beat analysts? consensus estimate of a 9 cent loss. Both domestic fare wars and escalating fuel costs hurt the company?s profit yield. (The company re-ported a 70.3% increase in fuel costs.) AirTran?s load factor for the period declined 0.5%, to 69.3, compared with fourth quarter 2003; however, revenue passenger miles increased 22.6% as capacity rose 23.4%.
The four hurricanes that struck the state of Florida in 2004 have had and will continue to have a major economic impact on the state in the affected area, which represents about 51% of the air-line?s normal traffic flows and seriously disrupted flights over the normally busy Labor Day hol-iday. Both the company?s Orlando headquarters and its aircraft hangar in Orlando suffered dam-age that further hampered operations. The impact of the hurricanes, coupled with a weak revenue environment and record high fuel costs, affected AirTran?s financial results for both the third and fourth quarters.
For the full year, AirTran reported a profit of $12.3 million, or 14 cents per share, to become one of only two U.S. airlines (the other was Southwest) to post an overall profit for the year.
Complete annual and quarterly financial information is available from the company?s web site (www.airtran.com), The Wall Street Journal (www.wsj.com), and FreeEdgar.
On the morning of September 11, 2001, terrorist attacks shut down the U.S. airline industry. The Federal Aviation Administration (FAA) suspended all commercial flights within hours after the attacks on the World Trade Center?s Twin Towers and the Pentagon and, although some flights resumed three days later, on September 14, the industry still had not recovered nine months later. Continuing concerns about the safety of flying, a weaker-than-expected economic recovery, and delays resulting both from tighter security and fewer flights led to a passenger traffic year-over-year decline of approximately 12% among the nine major U.S. airlines in the first three quarters of 2002.
Major airlines, many of which deferred or cancelled new aircraft deliveries, pared down flight schedules, and furloughed employees in the wake of 9/11, have been slow to increase capacity to previous levels. Some majors have permanently retired up to 5% of their total capacity, mostly large, older, gas-guzzling planes such as DC-10s and 727s. And, while analysts and airline finan-cial officers agree that retiring inefficient aircraft is a positive step toward profitability in an in-dustry that had suffered from overcapacity, a great deal of that capacity is being replaced by low-fare startups, most of which are still growing, and by small-jet regional carriers. For example, New York?based JetBlue Airways, while still small (500 million revenue passenger miles in April 2002, about 10% of what Continental carried in the same period), has won over a signifi-cant number of business travelers on the long-haul routes that have been the province of big, full-service carriers for years. JetBlue is strongly capitalized and well run, and analysts predict that it can grow at an aggressive 25% per year for the next five years by taking market share from the majors. Similarly, both Frontier Airlines and American Trans Air have made traffic gains at the expense of United Airlines in Denver and other western cities.
The airline industry is highly competitive in terms of fares, frequent flier benefits, routes, and service. Profit levels in the industry are highly sensitive to changes in operating and capital costs and the extent to which competitors attempt to match each other?s fares and services, as well as to general economic trends. Energy prices continue to be unpredictable: Favorable prices in the first quarter of 2002 were followed by sharp increases in April and May. The airlines have racked up higher costs for the security tax assessed on tickets; for the monthly security fees paid to the Department of Transportation (DOT); for a war-risk insurance premium; for implementing federally mandated directives such as stronger cockpit doors; and for the first class seats dedicat-ed to federal air marshals. Recently testifying before a Congressional committee, airline execu-tives noted that if the United States does strike Iraq, the results will be disastrous for the industry because travel, particularly international travel, will fall off sharply at the same time that oil pric-es surge.
Of increasing concern to carriers is the number of business travelers who are practicing what one industry analyst calls ?Airline Avoidance.? Poor service and complex pricing, further exacerbat-ed by arcane rules, regulations, and restrictions on reservation changes, have created an envi-ronment in which companies and individuals are purchasing planes, purchasing fractional owner-ship in planes, or choosing to drive. So many travelers are choosing the latter that Delta Air Lines (DAL) launched a fare sale at the end of March 2002 specifically to provide additional customer incentive to fly rather than drive. The short-haul market is crucial to profitability for full-service carriers because, in general, travelers pay more per mile to fly short trips.
Increasing numbers of travelers are using web sites to book airline tickets, hotel rooms, and car rentals. According to the Internet analysis group Jupiter Media Metrix, consumers were expected to spend about $36.8 billion on travel sites in 2004, up from $24 billion in 2001. Concerned about prices and practices of online travel services, Congress created a nine-member commission to investigate the pricing, practices, and exclusive marketing agreements of various airline and independent sites.
The industry is subject to regulation by a number of federal, state, and local departments and agencies. The DOT has regulatory jurisdiction over passenger airlines, with the FAA regulating aircraft maintenance and operations, including equipment, ground facilities, licensing, and com-munications. The Aviation and Transportation Security Act of 2001 established a new Transpor-tation Security Administration (within the DOT) with responsibility for aviation security func-tions including passenger and baggage screening.
Excerpt From Essay:
Essay Instructions: Using the article on AirTran that I will email to you, discuss the "environmental / economical factors" that are effecting the company. Discuss their "organizational behavior" and strategies for turning the company around. At the end of the paper, state an alternate recommendation that you believe could also help the company. Use at least two quotes from the article. No need for a works cited page, this essay is just based on the article and opinion. Thank you.
There are faxes for this order.
Excerpt From Essay:
Essay Instructions: This week you are required to submit a case study. Your paper analysis should be between 3 ? 5 pages, not counting the title and reference page. Each page should be approximately 350 words, so no submission should be less than 1050 words.
Format your case study assignment paper so that the three questions asked below are clearly defined. Double space your work, cite your work, limit quotes, and edit your work well for spelling, grammar, and punctuation errors.
Review this synopsis:
Southwest Airlines was the pioneer of "low-cost, no-frills" strategy. From its beginnings in 1971, the company had become one of the world's most profitable major airlines (36 straight years of profitability as of January 2009). The company was known for its fun-friendly culture and high employee loyalty. Its former Chief Executive Officer, Herb Kelleher, was a celebrated leader and had been the backbone of the organization, building it to its present scale.
In July of 2004, Southwest's new CEO James Parker relinquished the CEO role to Gary C. Kelly, former Chief Financial Officer of Southwest. The organization had been facing problems with its labor unions, a potential threat to its employee loyalty-based culture. Also, with the emergence of other low-cost players such as JetBlue and AirTran, who had made differentiation an integral part of their strategy, Southwest faced the challenge of achieving some parity on differentiation going into the future. The intensifying competition in the low-cost industry segment, increased pressure from employees pushing for higher compensation, and labor restructuring agreements among other airlines were eroding Southwest's culture, as well as its low-fare and wage-rate advantages. In 2008, the Federal Aviation Administration (FAA) fined Southwest for missing mandatory safety checks. Southwest swiftly grounded 44 aircraft for immediate inspection. Although CEO Kelly said that safety had not been compromised, the incident was a "black eye" on the airline's safety record. Southwest had established its strategy based on its low-cost operations.
To solidify some of the SWA safety worries, please review this clip from July 2009:
FAA Too Close for Comfort
Colleen Barrett - Servant Leadership
Southwest Airlines - Culture
Answer the following questions in your paper.
1. Assess the effectiveness of Southwest Airlines' leadership.
2. Discuss the basis of Southwest's competitive advantage and the potential challenges to its strategy.
3. What growth strategies might Southwest pursue?
Southwest Chief Discusses Earnings
Font and Spacing - Use Times New Roman 12 pitch font with double-spaced lines.
Length - Write a 3 to 5 page analysis not including the title page and citation page.
Reference Page - Include all sources including your textbook on a Reference page
Utilize the APA Style for documenting sources. You will need to include at least 4 sources in additional to your textbooks
Excerpt From Essay:
Essay Instructions: You are to write a 20-page paper. Read the Case Study below. For Outside Sources, Use Internet Only.
**Your analysis should include all 12 of the strategic steps below. Additionally, be sure to conduct a financial analysis which allows you to present a future cash flow analysis to demonstrate that the firm can implement your recommendations.**
“In writing a comprehensive written analysis. You must follow the steps outlined below, which correlate to the stages in the strategic management process.”
12 Strategic Steps
Step 1: Identify the firm’s existing vision, mission, objectives, and strategies.
Step 2: Develop vision and mission statements for the organization.
Step 3: Identify the organization’s external opportunities and threats.
Step 4: Construct a competitive profile matrix (CPM)
Step 5: Construct an external factor evaluation (EFE) Matrix
Step 6: Identify the organization’s internal strengths and weaknesses.
Step 7: Construct an internal factor evaluation (IFE) Matrix.
Step 8: Prepare a strengths-weaknesses-opportunities-threats (SWOT) Matrix, strategic position and action evaluation (SPACE) Matrix, Grand Strategy Matrix, and Internal-External (IE) Matrix. Give advantages and disadvantages of alternative strategies.
Step 9: Recommend specific strategies and long-term objectives. Show how much your recommendations will cost. Itemized these costs clearly for each projected year. Compare your recommendations to actual strategies planned by the Company.
Step 10: Specify how your recommendations can be implemented and what results you can expect. Prepare forecasted ratios and projected financial statements. Present a timetable or agenda for action.
Step 11: Recommend specific annual objectives and policies.
Step 12: Recommend procedures for strategy review and evaluation.
Southwest Airlines Co.-2004
Despite terrorist attacks, new security measures, dramatic increase in aviation insurance costs, industry downsizing, rising energy costs, and a severe production in consumer air travel, Southwest Airlines is still poised for success. For 12 the consecutive years 1991 through 2002, the Department of Transportation and travel consumer report listed Southwest Airlines and among the top five all major carriers for on-time performance, best baggage handling, and fewest customer complaints. In a highly competitive industry, all Kerry is continually strive to place first in any of these categories of the Department of Transportation report; Southwest is the only airline to ever hold the Triple Crown for its annual performance. In addition to this honor, Southwest is consistently among Fortune magazine’s most admired companies second in 2002, and it is also one of the magazine’s list for a 100 best companies to work for. In 2002, Southwest ranked first among airlines customer service that expansion, as reported in the Wall Street journal. In addition, Southwest ranked first in Money magazine feature for the 30 best stock since 1972.Southwest continues to operate profitably despite geopolitical tensions: in 2003, it had $442.0 million in net income on $5.8 billion in revenues (Southwest annual report, 2003).in an industry that historically has been awash in red, where airlines continually go in and out a bankruptcy or fail, Southwest has an enviable record of holder 30 consecutive years of operation at a profit. But, considering the tremendous strain in current economical and political environment, can this record of success continue? In their best-selling book Nuts, Kevin and Jackie Freiburg point to a company with people who are committed to working hard and having fun and who avoid following industry trends. The Freiburg note that Southwest, based in Dallas, Texas, is a company that likes to keep prices at rock bottom; believes the customer comes second; runs recruiting ads that says, work at a place wearing pants is optional; paints its $30 million assets to look like killer whales and state flags; avoids trendy management programs; avoids formal, documented strategic planning; spend more time at planning parties than writing policy; and once settle a legal dispute by arm wrestling. This strategy has always worked, but will he continue to work?
History and Growth of Southwest Airlines
Rollin King and Herb Kelleher completed the necessary paperwork to create airline Southwest Co. later named Southwest airlines. The two filed for approval with the asked FAA; and on February 20, 1968, the Texas Aeronautical commission approved their plans to fly between the three cities. In the 1980s and 1990s, Southwest continued to expand, and by 1993, it was serving 34 cities in 15 states. Southwest Oakley, but methodically, moved Southwestern states into California, the Midwest, and the Northwest. It added new destinations in Florida and on the East Coast. With its low prices and no-frills approach, it quickly dominated the market it entered. In some markets, southwest entered, competitors soon withdrew allowing the airline to expand even faster than they projected. For example, Southwest entered the California market in 1990; it quickly became the second largest player, with over 20% of the interstate market. Several competitors soon abandoned Los Angeles-San Francisco route because they were unable to match Southwest $59 one-way fare. Before Southwest entered this market, fares had in as high as $186 one-way. California offers a good example of the real dilemma facing competing carriers, which to refer to Southwest as a 500 pound cockroach that was to be stamp out. While airfares were dropping, passenger traffic increased dramatically. Competitors, such as American Airlines and US Airways, were losing money on several key routes segments, even though they cut service drastically. In the late 1994 United began to fight back by launching a low-cost high frequency shuttle service on the West Coast. But it found that even a shuttle could not win against Southwest in a head-to-head battle. So United airlines repositioned its shuttle away from Southwest routes and even abandoned some routes altogether. According to the Department of Transportation, eight airlines surrendered West Coast routes to Southwest; at the same time, one-way fares fell by over 30% to an average of $60, and traffic increased by almost 60%. The major problem for the larger airlines was that many of these was cost rows were critical for feeding traffic into their highly profitable transcontinental in transpacific routes, and Southwest was cutting into that market. Southwest is currently before the larger domestic area in terms of customer boarded. Airline has transformed itself from a regional carrier operating out a Dallas, Texas into a truly national carrier. At year end 2002, the airlines surged 58 cities in 30 states and operated more than 2800 flights a day with its fleet of 375 Boeing 737s. In 2002, Southwest flew 45.4 billion revenue passenger miles compared with 44.5 alien revenue passenger miles in 2001. The most remarkable in its 30th year in a row of profitable operations, with total operating revenues in 2002 of $5.52 billion a decrease of 0.6% over 2001. Operating income in 2002 fell by 33.9% into the Houston one. Net income fell by 2.9% from $511.1 million in 2001 to $241.0 million in 2002 (Southwest annual report, 2003). Nonetheless, Southwest was the only profitable major US airline in 2002.
Lamar Muse led Southwest its climb to profitability; but, in a dispute the board, he was ousted in 1978. With Muse out, Kelleher moved into the top position, and ran the airline until June 19, 2001. On that date, Kelleher was succeeded as CEO by Southwest vice president and general counsel, James F. Parker, 54. Colleen C. Barrett, 56, who started her collaboration with Mr. Kelleher 34 years earlier as his legal secretary, would-be president and chief operating officer. Mr. Kelleher is slated to remain as chairman for three years. Mr. Parker has been the airlines taught labor negotiator, making him well known to the Company employees, and, according to Mr. Kelleher, he has had a say in every important decision for long long time. Ms. Barrett, the unsung hero of Southwest, has been the keeper and crusader of Southwest’s culture, and she has success indoctrinated thousands of new workers in southwest’s ways. Parker’s plan as CEO is to stay with the cheap southwest below cost, low fare, no-frills airline it has always been. There will be no change in our core philosophy and our base business model, he says. It is a model he helped shape as general counsel for 15 years. Southwest Management team drives home the feeling that all of XP or part of one big family. Southwest culture committee, formerly headed by Barrett, has unique ways to preserve the Company under dog back ground and can do spirit. She constantly reinforces the message that employees should be treated like customers, and continually celebrates workers who go above and beyond the call of duty. Barrett also regularly visited each of the company stations to reiterate the airlines history and to motivate employees. As keeper of the company culture, Barrett commemorates all employees are a special events with cards signed Herb and Colleen. Employees know the culture and expect others to live up to it. Donna Conover, another longtime Southwest employee who also understands and supports the company culture, will succeed Barrett as president and COO.
Southwest operation under Kelleher has a number of characteristics that seem to contribute to its success. It has always been able to quickly seize strategic opportunity whenever one arises. Other key factors are at its conservative growth pattern, its cost containment policy, and the commitment of its employees. Kelleher always resisted a chance to expand too rapidly. His philosophy was to expand only when there were resources available to go into a new location with 10 to 12 flights per day not just one or two. For years, he also resisted the temptation to being transcontinental operations or to get into a head-to-head battle with major carriers are long-distance routes. But even with a conservator approach, Southwest expanded any vigorous pace. Its debt has remained the lowest among US carriers, and, with an A-rating, Southwest has the highest Standard & Poor’s credit rating in the industry. Southwest has made its mark by concentrating on flying large numbers of passengers on high frequency, short hops (usually one hour a less) at bargain fares. It has avoided the hub and spoke operations of its larger rivals, taking its passengers directly from city to city. Southwest also tends to avoid the more congested major airports in favor of smaller satellite fields. Kelleher revealed that niche strategy of Southwest when he know and where rents other airlines a hub and spoke systems in which passengers on a shuttle to a few major hubs from which they are transferred to other planes going to their destination, we wound up with a unique market niche: we wound up with a market segment that is peculiarly ours, and everything about the airline has been at that to serving the market segment in the most efficient and economical way possible. However, the strategy may be changing. Southwest has begun to introduce longer, nonstop trips on such routes as Baltimore, Maryland to Las Vegas, Nevada (2099 miles), and Austin, Texas to Los Angeles (1234 miles). Even one-stop trips are being added through central cities such as Nashville and Kansas City coast-to-coast travel. The prospect of Southwest going long haul on a grand scale is what the genie rivals always hoped would not come out of the bottle, says analyst Kevin C. Murphy of the Morgan Stanley Dean Witter. He believes Southwest will continue its expansion and that it will really rewrite the economic of the airline industry. This shifting strategy is downplayed by the fact that Southwest still flies about 80% of its flights on routes that are shorter than 750 miles. In 2002, the average flight was 548 miles and had duration of 1.5 hours. We are built for the short-haul markets, and we know that, says chief financial officer Gary C. Kelly. Kelleher explains the jump into routes that are 1000 plus miles as a way to deal with the changes in the 1997 federal ticket tax, which was pushed by the bigger carriers. The incorporation of that new tax replaced a percentage tax with a tax that included a flat, per segment fee, which hits the low-fare carriers harder.
Competitors believe southwest would have moved strongly into the long-haul flights market despite the altered tax requirements. They have dug all a shallow hole, says Rona J. Dutta, senior vice president for planning at United Airline Inc. He also replied that other low-fare units are increasing the competition and South West core markets. As all other major airlines have performed poorly since the 2001 terrorist attacks, many are expanding for developing a low fare program in an effort to increase profit. Short-haul lines such as JetBlue, Spirit Airlines, ATA Airlines, AirTran Airlines, SkyWest Airlines and Frontier Airlines, as well as Delta Song and Continental’s JetExpress, maybe affecting Southwest probability, but with its lower cost and impressive balance sheet, Southwest still prevails. Nonetheless, some low-fare lines have ended operations because they were unsuccessful in competing with existing low-fare lines. These include US Airways MetroJet, shuttle by United, Vanguard, and national airlines. Southwest continues to be the lowest cost airline in its markets. Even when trying to match Southwest cut rate fares, the larger carriers could not do so without incurring substantial losses. Southwest continues to operate with the lowest cost per available seat mile (the number of seats multiplied by a distance flown) among all major airlines, what an average of 15 to 25% below its rivals. One of the major factors in this enviable record is that all of its planes used are of a single type Boeing 737s which dramatically lower the Company cost of training, maintenance, and inventory. Because of Southwest crews know the 737 inside and out, they could substitute personnel rapidly from one flight to another in an emergency. In addition, Southwest recognized that planes only earn you money while they are in the air, so the company worked hard to achieve a faster turnaround time on the ground. Most airlines take up to one hour to unload passengers, clean and service the plane, and board new passengers. Southwest has a turnaround time for most flights of 20 minutes or less. Thorough knowledge of 737has helped in this achievement. Southwest has also caught cost in the customer service area as well. Because of its flights are usually one hour or less, it does not offer meals-only peanuts and drinks. Boarding passes are reusable plastic cards, and boarding time it saves since the airlines has no assigned seating. Airline does not subscribe to any centralized reservation service. It will not even transfer baggage to other carriers: that is the passenger’s responsibility. Even with this frugality, passengers do not seem to object, since the price is right. The ability to turn planes around rapidly, surprisingly, has not jeopardized by the events after 9/11, but this did not happen without incurring added expenses. Initially, new government mandated security procedures did not cause delays and longer check-in times. Since then Southwest has added new automated systems and technologies that have streamlined the check-in process. This includes computer-generated baggage tag and boarding passes and self-service rapid check-in kiosks. Because of these new additions, Southwest reports that check-in times are almost back to normal. Southwest has achieved team spirit that others can only envy.one of the reasons for this team spirit is that the company truly believes that employees come first, not customers. Southwest is known for providing its employees with tremendous amount of information that will enable them to better understand the company, its mission, its customers, and its competition. Southwest believes that information is power. It is a resource that enables employees to do the job better. Armed with this knowledge, they are able to serve the customer better, and customers will deal with Southwest rarely get the runaround. Even though unionized, Southwest has been able to negotiate flexible work rules that enable it to meet the rapid turnaround schedules. It is not unusual for pilots to help flight attendants cleaned airplanes or to help the ground crew the baggage. Consequently, employee productivity is very high, and the airline is able to maintain a lean staff. In good times, Kelleher resisted the temptation to over-higher, and so avoided lay offs during lean times.
Southwest has only laid off three people in 25 years and it immediately hired them back. The airline industry as a whole has furloughed approximately 100,000 employees as a result of the 2001 attacks. Not only did Southwest lay off no one, it also hired employees in 2002 and increase overall salaries, wages, and benefits. This was made possible by reductions in other areas: new plane deliveries were delayed, renovations to the company headquarters was scrapped, but layoffs were not considered. Said CEO Parker, we are willing to suffer some damage, even to our stock price, to protect the jobs of our people. This employee we change in policy has contributed to employees feeling of security and a fierce sense of loyalty. The people of Southwest see themselves as crusaders whose mission is to give ordinary people the opportunity to fly. Maximizing profitability is the major goal at Southwest. This leads to a drive to keep costs low and quality high. The airlines ideal service consists of state, frequent, low-cost flights that get passengers to the destination one-time and often closer to the destination and the major airlines do, because its competitors use larger airports farther from the cities. Southwest uses Dallas’s Love Field, Houston Hobby Airport, and Chicago’s Midway, which are closer to their respective downtown areas, are less congested, and are, therefore, more convenient for the business traveler. This also helps Southwest’s on-time performance. In its marketing approach, Southwest always tries to set itself apart from the rest of industry. It also plays up its fun-loving, rebel reputation. In the early years, when the big airlines were trying to run southwest out of business by undercutting its low fares, Southwest made its customers an unprecedented offer. In response to a Braniff ad offering $13 fare to fly between Houston and Dallas, Southwest place an ad that read, nobody’s going to shoot Southwest Airlines out of the sky for a lousy $13. It did offer to passengers the opportunity to purchase a ticket from Southwest the same price, which was half the normal fare or to buy a full fare ticket for $26 and received a bottle of premium whiskey along with it. The response was unprecedented. Southwest planes were full and, for short time, Southwest was one of the top liquor distributors in the state of Texas. Southwest ads always try to convince the customer that what the airline offers them is of real value to them. It also believes it is in the business of making flying fun. With its ads, the company wants customers to know that when they fly Southwest Bay will have an experience unlike any other. It promised a safe, reliable, frequent, low-cost air transportation that is topped off with outstanding service. By keeping its promises, Southwest has earned extremely high credibility in every market it serves.
Southwest has been aggressively marketing its services on the Internet, and it was the first airline to establish a home page on the Web. When Fortune magazine asked experts which businesses have web sites that work, the answer to got was not many. However, Southwest was one of the Jim side as a business doing it right. In the Internet travel rays, many observers think the West has lost the battle to a subsidiary of American Airlines, Travelocity. Yet while Americans have been getting most of the attention, Southwest has been getting the business. According to a Nielsen/Net Ratings’ survey 13.8% of the people visited Southwest site booked a flight. The company looked to book ratio is twice that of Travelocity and higher than that of any traditional retailer on the Web. Southwest, it seems as being a success in turning browsers into buyers. In March 2002 Internet week reported that Southwest experienced Internet traffic gain 16%.Southwest reports that approximately 50% of its passenger revenue is generated by online bookings. It costs per booking via Internet is about one dollar; in comparison, the cost per booking via a travel agent is about $10. Southwest web site has also been named the top ranking web site customer satisfaction among major travel sites, according to research conducted Harris interactive. The Southwest side scored a rating of 8.62 out of 10, with its web site attracting 4 million unique visitors during March 2001. In the June 11, 2001, issue of Internet week, Southwest web site was named as one of the top 100 ebusinesses in United States, as determined by the publications survey.
Since September 11, 2001, competition for Southwest Airlines has yet to our major airline to low-fare airlines. This happened mainly because major airlines incurred losses and 2002. Before September 11, 2001, United Airlines, the second largest airlines with over 100,000 employees, was one of Southwest most formidable competitors. Since then, the company has downsized to approximately 85,000 employees. Because of financial losses, United airlines filed for bankruptcy in December 2002. Since United shuttle service ceased operation shortly after September 11, 2001, direct competition with Southwest Airlines has diminished. Following September 11, 2001, Delta Airlines, the third-largest US carrier, cut 21% of its workforce and in 2003 was operating with approximately 70 5000 employees. Delta Airlines flies to about 225 US and foreign locations, and remained particularly strong throughout much of the southern tier of the United States, where two of its major hubs Atlanta and Dallas/Fort Worth are located. In the summer of 2003 Delta Air Lines replaced its low-fare regional carrier service Delta express with Song, in an effort to better compete with low-fare airlines like Southwest. Delta airlines have also acquired a minority stake in three regional airlines which can feed passengers into its several hubs, and has established an alliance with Continental Airlines and Northwest Airlines. A third past competitor, American West Airlines, is faring better than both Delta Airlines and United airlines. In July 2002, American West Airlines recalled virtually all employees furloughed after the September 11, 2001, attacks. Despite net income losses of $388 million in 2002, American West airlines expects to restructure its finances with the of federal loan guarantees totaling $380 million. It has about 1100 employees and serves 144 cities in United States with foreign locations in Mexico and Canada. American West Airlines has a strong position in its hubs, Phoenix and Las Vegas. These locations put it into direct competition with Southwest. With Continental airlines and Mesa airlines, which have small stakes in American West Airlines, America West Airlines has formed alliances which give it access to another 35 destinations.
The low-fare carriers are doing better because they do not rely on high business fares and do not of frill the major carriers offers. They tend to gravitate toward secondary airports where less congestion and lower fees keep cost down. Many also fly point-to-point without stops, and in general have relied on highly efficient e-business. Most importantly, low-fare airlines have succeeded in appealing to the customer in ways that major airlines never could by using creative market strategies in promoting individualism. As a result, customers are intrigued by this new mode of transportation after trying it, are convinced that it is a new way to travel. In 1994, revenues earned by low-fare carriers represented 5% of the $76 billion US air travel market. By 2003, their share was over 20%, according to CFO magazine, up from just 10% in 2000. Experts predict that low-fare airlines will have 25 to 35% of market share by the end of 2004, an increase that may restructure the airline industry forever. JetBlue airline is one of Southwest newest and possibly most noteworthy competitors. In 2002, JetBlue was the only airline to report profits, with $55million on revenues of $635 million. In 2003, despite geopolitical tensions, JetBlue was hiring an average of six new employees a day to accommodate growth. JetBlue founder and CEO is David Neeleman, who was employed in the inner circle of Southwest for over a year. Thus it is no surprise that JetBlue is structured similarly to Southwest: a low-cost, low-fare airlines with high employee productivity, a laid-back attitude, and a single aircraft model. Perhaps these are the reasons that JetBlue continues to grow and earn profits. It may also explain why Southwest CFO Gary Kelly stated, we have got to be prepared for intense competition. In fact, Southwest gave model JetBlue planes to its executives with a note: know your enemy. Currently, the two airlines do not compete in many of the same markets, but being the only two airlines experiencing significant growth, they are certainly affect each other’s potential growth. All of the competitors have calm into head-to-head competition with Southwest on several occasions. Southwest always walk with competition and firmly believes it can come out ahead in any of those situations. Kelleher when asked about his thoughts on facing a competitor such United shuttle head on, stated, I think it’s good to have some real competitive activity to get your people stirred up and renews their vigor and their energy in their desire to win.
Long-haul success for Southwest will put pressure on the profits realized by its bigger competitors. A cost advantage of Southwest includes a rat 20 minute gate turnarounds; an efficient all-Boeing 737 fleet, including new 737–700s that can fly cross-country nonstop; and a more productive workforce. Even if longer flights increase the cost, Southwest still realizes a significant competitive advantage. Roberts, Roach& Associates Inc., an airline consultant in Hayward California says that Southwest has at least 59% cost advantage over a bigger rivals at flights of 500 miles, as well as a 35% lead for flights at 1500 miles. It is a huge threat, says a rival airline executive. Already, a quarterly to an estimate by analyst Samuel C. Buttrick from PaineWebber Inc., nonstop flights longer than 1000 miles account for more than 16% of Southwest capacity. Southwest is not the only low-fare airline that has expanded long-haul services in recent years. According to report from the Department of Transportation, AirTran Airways, ATA Airways, Frontier airlines, JetBlue Airways, and Spirit Airlines, along with Southwest, had expanded long-haul services by 26% between 2000 and 2002. Will longer flights or these airlines also mean a lost in profit due to increased cost, or could low-fare airline win an even larger portion of the market to reign in the American skies? For now, consideration serious expansion had to put on hold as many airlines are still trying to recover from losses over the past two years. Southwest will continue its strategy to capitalize conservatively and increased growth steadily. It is capitalizing on the schedule cutbacks other airlines have made, but as a result, the door is also open for other low-fare carriers to profit.
Today, Southwest provide services to only eight cities, so there are tremendous opportunities for expansion. The problem: competitors have learned from Southwest Airlines and its unique management strategies, and they are using these tactics as well as unique ones to win over consumers. Southwest has always utilized conservative growth tactics, but this may hurt it if new competitors opt for faster growth strategies. Over 100 cities have asked Southwest Airlines to begin service in their communities because of positive impact the Company has had when it began operations in a new location. But if Southwest does not do it, another low-fare airline will.
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