Southwest Airlines

Its the same plane going to the same place at exactly the same time. But these days, not all airline passengers are equal. Nor do they all pay equally. In fact, a person on any given flight has likely paid a different price for his or her ticket than the people on either side of them. No matter where they sit, however, all passengers seem to have one thing in common: Almost nobodys happy with what they get for what they pay. Tempers are flaring over rising air travel prices coupled with fewer amenities and less attentive customer service. Industry-wide, satisfaction ratings dropped last year for the third year in a row. Something is just not right with the airline price-value equation. Most of us probably have had experiences like those of Doug Fesler, an executive at a medical research group in Washington, D.C. He wasnt expecting much in the way of amenities on his American Airlines flight to Honolulu. In fact, knowing the airline no longer served free meals, he had packed his own lunch for the second leg of his flight from Dallas to Honolulu. But he said he was shocked at the lack of basic services and the overall condition of the cabin. On that flight, the audio for the movie was broken. The light that indicated when the bathroom was occupied was squirrelly, causing confusion and, in some cases, embarrassingly long waits for passengers in need of the lavatory. And though food was available for purchase, the quantity of food was depleted before the flight attendants could serve the entire cabin, leaving some fellow passengers looking longingly at the snack he had packed. His return flight was just as disappointing. This time the audio for the movie workedbut only in Spanishand his seat refused to stay in the upright position. I was just appalled, said Fesler. You pay $500 or $600 for a seat, and you expect it to be functional. He said he has considered refusing to fly airlines with such poor service but added that if you did that with every airline that made you mad, youd never get anywhere in this country. Certainly, these arent the best of times for airlines. The long recession has had the dual effect of decreasing revenues while increasing costs. This has made it more difficult to maintain aircraft and provide the niceties that customers have come to expect. In the midst of the turmoil, however, one airline in particular seems to be flying high. Southwest Airlines is setting records for customer loads and profitability. This isnt just a recent phenomenon for the most famous low-fare airline. Since it started flying in 1972, Southwest Airlines has never lost money, something no other U.S. airline can claim. And for 2009, Southwest was the only airline to carry more passengers than it did the year before. Whats its secret? In short, it has been able to provide airline service that maximizes value by giving customers great benefits for the price paid. THE SOUTHWEST FORMULA From its humble beginnings, the airline has been known for a few things that truly classify it

as a no-frills airline. For starters, it does not assign seats. Rather, passengers board on a first- come, first-served basis, a procedure that customers prefer by a two-to-one ratio. It doesnt

serve meals on any flights, only basic snacks. It flies only 737 narrow-body planes and doesnt have a first-class section. And it doesnt provide electronic entertainment, relying instead on humorous flight attendants to entertain passengers.

From the beginning, its main draw has been low prices. It has communicated very effectively to customers that the lack of amenities allows it to charge some of the lowest fares in the industry. In fact, this has long been a competitive advantage for Southwest. As the airline expanded into city after city, other airlines were forced to drop their fares to compete. That overall lowering of fares in markets that Southwest enters has become widely known as the Southwest effect. But during the mid-2000s, Southwests cost advantage over other airlines narrowed considerably. The bigger carriers in the industry cut costs tremendously as fuel and labor costs rose. New low-fare carriers gained strength. Competition became leaner and better able to match Southwests prices. But Southwest didnt put all its eggs in the price basket. For years, it focused on providing the types of benefits that truly matter to air travel patrons. Gary Kelly, CEO since 2004, summarizes these benefits: Ultimately, our industry is a customer-service business, and we have the best people to provide special customer service. Clearly, as the differences between air carriers narrow with respect to fares, we must execute in order to differentiate ourselves. But thats our core advantage. Since the U.S. Department of Transportation began collecting and publishing operating statistics, weve excelled at on-time performance, baggage handling, fewest complaints, and fewest canceled flights. Besides, were still the low-cost producer and the low-fare leader in the U.S. We have no intention of conceding that position. HOW TO INCREASE PROFITS As the effects of the global recession tightened its grip on the travel industry, many major carriers struggled to find ways to cut costs and increase revenue. Northwest discovered that it could save $2 million a year by cutting pretzels from its coach seating. American dropped $30 million a year by eliminating free meal service on longer flights. In fact, in a move that extinguished any hope of hot meals returning to coach, the airline removed the rear galleys from its MD- 80 aircraft and replaced them with four seats, an addition worth another $34 million a year. Eliminating pillows was good for another million. The cutting of such amenities has made some traditional airlines even lower on frills than nofrills Southwest. After all, you can still get free snacks and a pillow on its flights. I actually have more respect for Southwest Airlines in this area, says one experienced traveler. Theyve never pretended to have more than they do. But the most commonand perhaps annoyingnew practice is the addition of baggage fees. Almost every airline now charges a fee of $15 to $35 for the first checked bag, even more for the second bag, and as much $125 if you have to check a third bag. And thats only for the departing trip! Customers pay the same fees on the return. And Spirit Airlines recently announced the unthinkable. It will soon begin charging customers between $30 and $45 to stow carry-on bags in the overhead bin. On this matter, Southwest has taken a stand. In a nationwide ad campaign, it has communicated to customers that bags fly free. In fact, it is the only U.S. carrier that does not charge for checking luggage. Despite criticism that Southwest has faced for not taking advantage of the revenue stream from charging for bags, the airline has chosen to side with customers. At Southwest, we try to give you more, while all our competitors are taking away, said Kelly.

Kelly couldnt be happier with the results of this campaign. He doesnt see it as a missed opportunity for revenue. In fact, he quickly points out that Southwest is the only airline that has actually gained customers. Were beating the pants off everybody in terms of our revenue production. We have fewer seats offered every day, and were carrying more passengers. Were defying gravity. Kelly claims that Southwest has gained about $1 billion in revenue this past year by taking market share from its rivals. Although he is quick to point out that it is difficult to determine just how much of that revenue increase is due to its bags-fly-free campaign, Kelly thinks that this policy is the biggest factor in its current financial success. We cant prove to you it is the source of the (market share) shift, but what we can prove is the awareness, Kelly said. The ad campaign has been very powerful. It has definitely penetrated the American travelers consciousness. They definitely know that we dont charge for bags. Kelly believes that the airlines increase in revenues from its higher load factors dwarfs what it could have collected in bag fees. A STRONG VALUE EQUATION In addition to charging fees for checking bags, airlines are continually searching for ways to squeeze any dollar they can from customers. Some airlines charge a fee if you want to sit in an aisle or window seat. There are now booking fees, fees for checking in online or at the airport, and fuel surcharges. One airline even hinted that it might begin charging customers to use the onboard lavatory. All these new ways to make money make it difficult for customers to easily determine the actual price of a ticket. They also dont seem to be working as US Airways, Continental, United, Delta, and American combined lost almost $4 billion in 2009. If Southwest was beginning to lose its low fare advantage, it is now evident that the airline has found a new way to compete on price. By not adding new fees, it is driving home the message that it is once again the cheaper choice. Combined with the fact that it has not cut services, customers are eager to board its planes. The tried-and-true method of increasing customer benefits while decreasing costs is working better than ever for Southwest. And if Kelly has his way, it will continue to assert its competitive strength for years to come.

Answer all the questions. Q1. What benefits do airline customers seek when they buy air travel tickets? Has Southwest done a better job than its competitors of meeting the needs of these air travelers? In what ways? Q2. What are the benefits and risks to airlines of cutting costs? What impact are these factors now having on airline profitability? Q3. Does the airlines current strategy truly differentiate it from its competitors? Is the strategy sustainable? Q4. What marketing strategy recommendations, would you make to Southwest as it moves into the next decade?