SOUTHWEST AIRLINES 2007
Thomas M. Box, Pittsburg State University Kent Byus, Texas A&M University – Corpus Christi
CASE DESCRIPTION The primary subject matter of this case concerns Southwest Airlines. A secondary issue concerns the appropriateness of modifying a Generic Strategy that has lead to thirty five years of uninterrupted growth and profitability. The case has a difficulty level offour (senior-level undergraduates). The case is designed to be taught in one fifty minute class period and is expected to require about two hours of outside preparation by students. CASE SYNOPSIS Southwest Airlines has long been cited in Business Strategy classes as an exemplar of Porter’s Low Cost Leadership strategy. Through fiscal year 2006, they have enjoyed thirty five years of uninterruptedprofitability. In 2007, they began considering several fundamental changes in their long-term business model to address the realities of increased competition, rapidly-escalating fuel costs and the threats of world-wide terrorism. New competition – particularly JetBlue and ATA have modeled their operations on the original “Southwest model.” Interestingly, David Neeleman –founder of JetBlue in2001-- was a former southwest Airlines executive and Michael O’Leary – CEO of Ryanair (Dublin, Ireland) –spent several weeks in 1991 at Southwest Airlines headquarters in Dallas, Texas learning the Southwest model. Ryanair is the lowest cost major airline in Europe at this time. Fuel prices – the second largest component of operating cost for airlines—has increased dramatically (about 50%) in thelast three years. As a result, airline profits in 2008 will be lower than originally forecast in early 2007. The most common complaint about Southwest Airlines has been its boarding policy. For many years, passengers were assigned to groups of thirty with those arriving early at the gate getting into the first group of thirty and, thus, the first choice of seats. In 2007, Southwest began twoexperiments in seating – the first in San Diego—with assigned seats and later a differential pricing scheme whereby those willing to pay $10 - $30 more per ticket were allowed to board first. Southwest is also considering the possibility of extending its route map to include large cities in Canada, Mexico and the Caribbean. An additional consideration is the possibility of buying smaller regional jets toserve smaller markets in the United States.
Journal of the International Academy for Case Studies, Volume 15, Number 2, 2009
8 INSTRUCTORS’ NOTES Learning Objectives This case is intended to teach and reinforce various aspects of strategic analysis and choice including internal and external analysis, strategic choice as a function of SWOT analysis, implementation of a Low Cost Leadershipgeneric strategy, utilization of Financial Ratio Analysis and modification of strategy as time unfolds. The case can also be used to examine the potential benefits and risks of overseas expansion for a domestic concern. Teaching the Case We suggest that a practical starting point for this case analysis is a discussion in class of mission, vision and SWOT analysis. This case illustrates how a LowCost leadership generic strategy can be extremely successful in a very competitive industry – passenger airlines. Southwest has enjoyed profitability and continued growth for thirty five years. It should be noted that as of the date of the case (February, 2008) that Southwest Airlines’ market cap was $9.42 billion while American Airlines, United, Delta, Northwest and Continental had substantiallylower market caps. When assigning this case for classroom discussion, we recommend that the instructor require the students to read the case, review a selection of the references and jot down answers to the discussion questions before class. Then, in class, we suggest that individual students assemble themselves into teams of three to four students and prepare consensus answers to the five...