Southwest Airlines

INTRODUCTION

Following the Deregulation in 1978, a competitive price war ensued among the airline industry as a direct result of the new freedom for airlines to set their own fares as well as route entry and exits. This gave rise to the operating structure of the airlines as it exists today, consisting of the point-to-point system and the hub and spoke system. With this came the change of focus for major airlines to non-stop, cross-country routes in densely populated cities, which, in the regulated environment, could be profitable. This resulted in the obvious outcome of increased competition, thus lowering the average industry prices for non-stop cross country routes which were profitable. This caused operating costs to increase, narrowing the profit margins. During the mid 80's, acquisition let to eight airlines capturing a disproportionate share of domestic traffic. Due to a recession and increasing fuel prices in the 90's, bankruptcy and collapse were common to many carriers. As a direct result, new airlines were formed, and now position themselves as low fare, no frill airlines.

As a culture, American consumers seem to follow one obvious trend; the need and desire for maximum safety. This trend has seen a rapid rise in the wake of 9/11, and seems to show no sign of a decline. This can be further observed in the form of advanced airport/airline security measure and regulations.

In accordance with this, Southwest has always prided themselves on being the safest airline in the industry, adapting to the rapidly changing times. This has helped them soar over competition.

DISCUSSION

Southwest exists and operates within the air travel industry in the Unites States; and industry which has traditionally been based on a point-to-point flight system. However, this industry has been redefined, evolving into a hub-and-spoke system which all airlines have adopted; all except Southwest. Hub-and-spoke flights, called feeder flights, are defined by long-haul, layover flights where consumers stop at a central hub city and can then either continue the flight on the same plane, or transfer onto a different plane flown by the same carrier. The point-to-point system, deployed by Southwest, is non-stop flights, called shuttle flights. The point-to-point system allows Southwest to cut down on fuel costs as well as allowing them to run more flights per day. This serves as a huge differential advantage.

This industry is heavily saturated with intense and rapidly evolving competition due to the relative ease of entry into the market. This accounts for why there are hundreds of airlines ranging from prominent well-known ones to virtually obscure and obsolete airlines. There are six primary airlines which compete fiercely and maintain the majority of the market share and total volume. The remaining fraction of the market share is then sub-divided and allocated amongst the hundreds of smaller, less relevant airlines. The only notable trend within the industry seems to be a total lack of consistency, as market shares and profits fluctuate regularly during any given time period.

The industry has taken somewhat of a beating economically following the disaster of September 11. That is, people have not been anxious to fly, regardless of price cuts across the boards. This is slowly changing, yet in the meantime, select airlines have been forced to seek government aid, even having to go as far as filing for chapter 11.

As of December, 2004, Southwest Airlines was the top airline in terms of volume of business, accounting for 3,615,707 in sales. This is the equivalent of approximately 21% of the market share, making it the leader in the airline industry.

81% of the market is controlled by seven airlines. The breakdown in terms of market share held by these seven companies is as follows: Southwest leads the market with 21%, Delta accounts for roughly 20% of the market: US Airways accounts for 11%, American 10%, Continental and United having 6.5%, and Northwest has 6%. Delta, totaling 3,567,345 in sales, ranked just below Southwest, making them the primary competitor. The remaining 19% of the overall market is allocated almost evenly amongst the smaller carriers, which are all far behind the top seven.

Since fares vary depending on many stipulations, typical industry rates will be analyzed using the following criteria: A roundtrip flight for one passenger departing from Newark, New Jersey on June 20, 2005 to Las Vegas, Nevada and returning May 25, 2005. Using this criteria, the rates from the primary seven airlines in the industry from the lowest to the highest are as follows:

Ð'* Southwest-$208

Ð'* Us Airways-$208

Ð'* American Airlines-$390

Ð'* Northwest-$407

Ð'* Delta-$517

Ð'* United-$637

Ð'* Continental-$688

It can be noted that southwest has clearly dominated its competition in terms of pricing and being the low cost provider up until recently. US Airways has since began a pricing campaign to directly compete for market share, going as far as lowering its fares to match those of Southwest to the dollar. Other airlines, however, have been unable to lower prices to such a drastic extent, falling victim to the recession of the airline industry and suffering from having too much inventory (planes, seats, etc.) and not enough business.

Southwest's product is an airline travel service for relatively low prices within the Unites States. The company prides themselves in being number one in safety and customer service. In addition, Southwest only uses Boeing 737 carriers to transport passengers, ensuring maximum safety while promoting fuel efficiency. The services offered by Southwest differ from those of other airlines because there are no class barriers: there is simply one section on the aircraft where passengers select their own seats based on a first-come-first-serve basis.

The target market ranges from individuals who are looking for maximum value for their money, to middle-class families looking to save money on vacation flights and package deals.

Southwest tries to offer the lowest industry prices available in order to remain competitive. Due to their fuel efficiency, Southwest is able to maintain low prices and stay ahead of competition. Prices start as low as $39 for a one-way ticket and can reach anywhere up to $300. These prices are determined based on the location of departure and ending destination. They are also determined and adjusted based on weather or