There aro 3 ewstom as bolows entry) What are the 5 forces of competition for the airline incustry? (You can outline your antwere) 2) What assett and istouces does Southwest Airlines have that give it a competitive advantage? 3) Discuss the competitie advantage 3W Airtines has and the petential challenges to its strateuy? At the peginning of 2019. Southwest Airlines fared third in also hurt. In another incident in 2016 , an engine on a Souththe rankings of the best U.S. Airlines released by the Wall west jet blew apart over Florida. This was also attributed to Street Journal. Delta Airlines ranked first and Alaska metal fatigue, or wear and tear, hurling debris that struck the Airlines ranked second. These rankings were based on a fuselage and tail. No one was hurt in that incident.' composite set of parameters forming a scorecard. South- Further, the union that represented its mechanics acwest did best on two-hour tarmac delays and worst on mis cused Southwest Airlines of pressuring their maintenance handled baggage (see Exhibit 1). The Dallas-based airline, workers to cut corners to keep planes flying. A Federal famously known for its highly efficient and successful "low- Aviation Administration (FAA) investigation of these whiscost" operations, scemed to face other challenges as well. It theblower complaints found mistrust of management to the paid millions over the past decade to settle safety violations. extent of hurting the airline's safety. 2 This included fines for flying planes that needed repairs. In Another development in the industry that also threatthe past nine years, there were at least two incidents where ened the company's low-cost position was the advent of the the roofs of Southwest planes opened up inflight. _Ultra Low Cost Carriers" (ULCC). These carriers are even The worst incident took place in April 2018. One of the more bare-bones and keep their basic fares very low, thus engines on Southwest Flight 1380 blew apart at 32,000 feet eroding Southwest's low-price advantage. They, of course, over Pennsylvania. Jennifer Riordan, a 43 -year-old mother of charge extra for everything including baggage handling. 3. two, was blown partway out of a broken window. The As the investigation into the deadly engine failure conNational Transportation Safety Board (NTSB) said a fan tinued, Southwest Chairman and CEO, Gary Kelly, was blade that had snapped off the engine was showing signs of faced with several questions regarding its low-cost business metal fatigue. Later, the NTSB chairman, Robert Sumwalt, model. Was the low-cost business model, which put its said that the engine in the flight was missing a fan blade. planes through frequent takeoffs and landings, putting the This incident resulted in one fatality and seven others were passengers at risk? Would Southwest withstand the onstought of the ULCCs and continue to have its low-cost adyantage io remain profitable in 2019 and beyond? - This case study has been prepared by professors Naga Laktehmi Damarato, Sonoms State University. Alin Eisner, Pace Univerity, and Gresory Des. The Ef ence, Growth, and Transition 4 Univenity of Texas at Dallas, to serve as a basis for classroom discusion. The case study is not intended to be an endorsement of effective of intlifective Southwest Airlines began in response to an entrepreneurial handlise of adminittnative siituations. Copyright O 2019 Damacaju and Eisper. opportunity that existed for low-cost, hassle-free travel between the cities of Houston. Dallas, and San Antonio- Amendment* that could boost Southwest's ability to fly the Golden Triangle that was experiencing rapid economic uninterrupted services out of its traditional fort, Dallas and population growth during the late 1960s. Rollin King, a Love Field airport. San Antonio entrepreneur who owned a small commuter In 2007, a new fare structure was introduced that inair service, and Herb Kelleher, a New Jersey-born, New cluded Business Select, which gave customers the option of York University Law School graduate who moved to San priority in boarding. With a new $40 fee that allowed cus Antonio in 1967 to practice law, pooled the seed money to tomers to be among the first 15 passengers to board the start Southwest Airlines in response to this opportunity. plane, this new fare structure was definitely targeted at wooAfter an initial rough four years caused by the major airlines, ing some of the business travelers who wanted a little more Southwest got its flights to takeoff in 1971 with Dallas Love than no frills. However, with this move, Southwest managed Field as its base and it crossed every major benchmark in to irritate some of its most loyal customers. While Souththe following years. It remained the consistently profitable west continued its bags-fly-free policy, which had contribdiscount carrier year after year and became a major airline uted to increasing its market share, Kelly declared "never in 1990 by crossing the $1 billion revenue mark. Focused say never" when probed about his company's plans to start on the business travelers who needed to be "on-time, every charging baggage checkin fees in 2013 . Southwest introduced time," its business model had several intriguing elements. an in-flight entertainment portal with free live and onFor example, by-passing the traditional "hub-and-spoke" demand television, offering 20 live channels and 75 television configuration and offering shorthaul, pointto-point airline episodes from popular series. It also introduced Internet acservice allowed savings on fundamentals such as gate fees cess for $8 a day per device on Wh-Fienabled aircraft. because they could fly out of secondary airports; additional While all these were significant departures from the orighsavings were through elimination of other fringe services nal Southwest business model, there were two other important like no assigned seats, no meals, no baggage transfers, or strategic changes initiated in Kelly's regime. The first was exfew or no reservations through travel agents. The choice of pansion into the international markets that began in Decem: operating a new and uniform fleet of aireraft saved mainte- ber 2008 when the company agreed to provide an online link nance costs and facilitated optimum utilization of human to Westet's booking portal to help its customers book flights resources. Brilliant fuel hedges resulted in huge cost savings to Canada. Later, Southwest formally filed an application with for years. In addition, the charismatic leadership of Herb the Department of Transportation for the right to fly its own Kelleher, and a strong company culture and incentives fo. planes to Canada. As of January 2019, the company had cused on tight cost-control, made Southwest a legendary operations to over 14 destinations internationally. A significant airline (see Exhibit 2 for Southwest's Mission Statement). chunk of the company's revenves came from international In 2004, the leadership transitioned to Gary Kelly, a operations-approximately $595 million of the operating revelong-term employee and the former Chief Financial Orfieet awes in 2017, $383 million in 2016, and $287 million in 2015 , of Southwest Airlines. The same year, Kelly heralded a se- respectively, were attributable to foreign operations. The ro ries of initiatives to put the airline on a high-growth trajec- malider of the operating revenues, appraximately $20.6 billion tory. These included the codesharing agreements beginning in 2017, $20.0 billion in 2016, and $19.5 billion in 2015 , respeowith ATA (in response to AirTran eyeing the Chicago mar- tively, were attributable to domestic operations. 3 ket), a move into the Philadelphia market (a stronghold of The second most significant departure was moving away USAir), and kicking off a campaign to repeal the Wright from the organic growth strategy with the acquisition of AirTran Holdings Ine., the parent company of AirTran Airways (AirTran), for a combination of $1.4 billion cash and Southwest Airlines common stock. The acquisition, announced in September 2010, was only the third in Southwest's history. It gave the discounter its first service in Atlanta, a Delta Air Lines fortress for decades, and more flights from New York and Washington, DC. Little more than a year after the transaction officially closed, Southwest was dehubbing AirTran's Atlanta hub and conceding markets to Delta. AirTran's Athanta hub had been Southwest's motivation in acquiring AirThan, in addition to further pushing into international markets. 4 'To make that shift in strategy has taken a huge effort, but as a leading benefits in the proposed contract as industry leading, union domestic carrier, it was time 'that we think about stepping leaders had opinions otherwise. According to the union out," said Kelly.' Following what could possibly be the slow. leaders, the contract did not measure up to the higher hisest merger in history, Southwest successfully completed it torical rates Southwest mechanics earned relative to the on December 28, 2014, when the last AirTran flight flew, rest of the industry and it did not do enough to compensate retracing its original Atlanta-to-Tampa route of Octobez inembers for their industry-leading productivity. 10 Any 1993 (AirTran was called ValueJet at that time). "The coms. changes to the contract terms could put additional burden pany expected total acquisition and integration costs to bs in the low-cost competitive position. approximately $550 million (before profit sharing and taxes) upon completing the transition of AirTran 717-200 s. Increasing Fuel Costs. 11 Jet fuel and oil represented out of the fleet in 2015 ," said company officials." approximately 22 percent of the company's operating The Triple-Pressure on Bottomline expenses as of the beginning of 2019 and represented the second largest operating cost (see Exhibit 3). The cost of approx- fuel could be extremely volatile and unpredictable and fluc41 percent of total company operating expenses, tuated due to several factors beyond the company's control, salaries, wages, and benefits expenses were Southwest's for example, conflicts and hostilities in oil producing areas, largest operating costs. The terms of its collective-bargain- problems in domestic refining or pipeline capacity due to ing agreements limited the company's ability to reduce adverse weather conditions and natural disasters, or these costs." Approximately 83 percent of its labor force changes in currency exchange rates. Southwest's ability to was unionized. These employees had pay scale increases as effectively address fuel price increases and pass them to the a result of contractual rate increases. Additionally, there consumers could be limited by factors such as its historical were new collective bargaining agreements ratified during low-fare reputation, the portion of its customer base pur2016 with the majority of Southwest's unionized employees, chasing travel for leisure purposes, and the risk that higher including its pilots and flight attendants, among others. fares will drive a decrease in demand. This risk could partly Meanwhile, other unionized employees, including its be managed by utilizing over-the-counter fuel derivative mechanics and material specialists were also in negotia- instruments to hedge a portion of its future jet fuel purtions for labor agreements for the last six years. In Septem- chases. However, energy prices could fluctuate significantly ber 2017, Southwest Airlines mechanics rejected a proposed in a relatively short amount of time. Since the company contract offer that fell short of the pay rates they wanted. used a variety of different derivative instruments at differWhile Southwest described the pay rates and retirement ent price points, there was an inherent risk that the fuel derivatives it used would not provide adequate protection against significant increases in fuel prices and could in fact 'These are Boeing 717-200 airerafts for which NirTran has been the first_ result in hedging losses. For a long time, the company also customer. Boeing 717 was different from Boeing 737 which has traditionally benefitted from accounting standards in the United States. been the single aircref type that Southwent operated and saved on training and maintenance costs. Therefore, this sddition could have potentially increased some of these costs. tive or that they would no longer qualify for hedge accounting under applicable accounting standards. This problem could competed with these other airlines on virtually all of its have been severe without the recent increases in siale sil gcheduled routes. In addition, a new category of ultra-low production in the United States. cot carriers (ULCCs), for example, Frontier and Spirit AirSeveral efforts were underway to reduce fuel constis. Lison 1ines, omerged as a credible threat (Refer to Exhibit 1). and improve fuel efficiency. Southwest started modernisius The ULCCs represented a completely different apits fleet and also initiated other fuel initiatives. It was the first proach to the traditional air travel model. While similar to airline company in North America to offer scheduled service the disruptive innovation like Southwest Airlines in its iniutilizing Boeing's new 737 MAX 8 aircraft. This aircraft en- tial stages-when converting non-users to users of air traveltered service in fourth quarter 2017. The Boeing 737MAX8 the ULCCs are yet significantly different in several ways. was expected to significantly reduce fuel use and CO2 emis- Allegiant Airlines perfected this model offering low-fare, sions. There were 13 Boeing 737 MAX 8 aircraft in its fleet high-value vacation packages from secondary airports to by the end of 2017 . Southwest was also the launch customer points in Florida and to Las Vegas. for the Boeing 737 MAX 7 series aircraft, with deliveries ex- The revenue stream for a ULCC was not based on air pected to begin in 2019. It had placed firm orders for 197 of tickets, the core revenue for low-cost airlines like Southwest, 737 MAX 8 aircraft and 30 of 737 MAX 7 aircraft (see but on purchase of ancillary products such as hotel and Exhibit 4). These aircrafts would also have lower mainte- tour packages. The model evolved to be even less dependent nance costs since they are new and they are unlikely to in- on vacation/leisure travel. A. ULCC aimed to stimulate crease training costs since they are all large Boeing 737 travel decisions by offering very low fares and providing a aircrafts, continuing the Boeing 737 tradition at Southwest. nonstop routing where there was none, even if only for a few times a week. By offering a high value-to-cost equation Competition and the ULCC threat.'2 With moderate for the consumer, these airlines aimed to divert discretionary improvement in economic conditions over the last few years dollars into air travel. and an increased focus on costs by most airlines, competition Unlike Southwest, the ULCCs were not in the business has intensified in the airline industry. Southwest faced tough of connecting people and destinations. The stimulant of decompetition from major U.S. airlines, including American mand in the ULCC model was fares and not the need to get Airlines, Delta Air Lines, and United Airlines* and other low- to a destination. Typically, a ULCC entered markets that it cost competitors, including JetBlue Airways (see Exhibits 5 thought had latent potential, offered several flights, and and 6 for selected financial information). Southwest then monitored the results. If the expectations about traffic materialized, it offered more services at that airport. If ' Contineatal airline (another major airline in the United States) mergod with expectations did not materialize or the traffic was less UAL Corporation (parent company of United Airlines) in 2010. This stock is productive than at other points, the ULCC moved out tndod as United Continental Holdings Inc., (UAL). quickly. With the exception of some operations by Frontier at Denver, these airlines did not have their own turf nor did and the Caribbean. It operated more than 3,800 flights a day they operate connecting hubs. In this model, airplanes were including more than 500 roundtrip markets. 13 Its internamoved around the country when opportunities were spotted. tional footprint expanded to over 14 destinations covered ULCC flight schedules fitted their flect availability and not through 16 international gateway cities. The company renecessarily in timings that were most preferred by customers. mained profitable as of 2018 . It made significant technology Alongside Allegiant. Frontier. Spirit, and Sun Country investments and completed its single largest technology projwere the other prominent players in this genre. They repre- ect in its history in the recent years to completely transition sented about 7 percent of all U.S. airline departing seats by late its reservation system to the Amadeus Alta Passenger Ser2018 and were expected to grow to over 12 percent by 2020. vice System. The new reservation system was designed to Southwest in 2019 improve flight scheduling and inventory management. It over 100 destinations throughout the United States, Mexico, tions. Additional international growth and other foundational Ther we 3 quertions as titions entryl What are the 5 forces of cempetibion for the airine industry? (You can outtine your answers) What assets and itsouces does Southwest Alifines have that give it a competitive advantage? Discuss the compettitre advantage SW Airlines has and the petential challenges to its atrategy? There aro 3 ewstom as bolows entry) What are the 5 forces of competition for the airline incustry? (You can outline your antwere) 2) What assett and istouces does Southwest Airlines have that give it a competitive advantage? 3) Discuss the competitie advantage 3W Airtines has and the petential challenges to its strateuy? At the peginning of 2019. Southwest Airlines fared third in also hurt. In another incident in 2016 , an engine on a Souththe rankings of the best U.S. Airlines released by the Wall west jet blew apart over Florida. This was also attributed to Street Journal. Delta Airlines ranked first and Alaska metal fatigue, or wear and tear, hurling debris that struck the Airlines ranked second. These rankings were based on a fuselage and tail. No one was hurt in that incident.' composite set of parameters forming a scorecard. South- Further, the union that represented its mechanics acwest did best on two-hour tarmac delays and worst on mis cused Southwest Airlines of pressuring their maintenance handled baggage (see Exhibit 1). The Dallas-based airline, workers to cut corners to keep planes flying. A Federal famously known for its highly efficient and successful "low- Aviation Administration (FAA) investigation of these whiscost" operations, scemed to face other challenges as well. It theblower complaints found mistrust of management to the paid millions over the past decade to settle safety violations. extent of hurting the airline's safety. 2 This included fines for flying planes that needed repairs. In Another development in the industry that also threatthe past nine years, there were at least two incidents where ened the company's low-cost position was the advent of the the roofs of Southwest planes opened up inflight. _Ultra Low Cost Carriers" (ULCC). These carriers are even The worst incident took place in April 2018. One of the more bare-bones and keep their basic fares very low, thus engines on Southwest Flight 1380 blew apart at 32,000 feet eroding Southwest's low-price advantage. They, of course, over Pennsylvania. Jennifer Riordan, a 43 -year-old mother of charge extra for everything including baggage handling. 3. two, was blown partway out of a broken window. The As the investigation into the deadly engine failure conNational Transportation Safety Board (NTSB) said a fan tinued, Southwest Chairman and CEO, Gary Kelly, was blade that had snapped off the engine was showing signs of faced with several questions regarding its low-cost business metal fatigue. Later, the NTSB chairman, Robert Sumwalt, model. Was the low-cost business model, which put its said that the engine in the flight was missing a fan blade. planes through frequent takeoffs and landings, putting the This incident resulted in one fatality and seven others were passengers at risk? Would Southwest withstand the onstought of the ULCCs and continue to have its low-cost adyantage io remain profitable in 2019 and beyond? - This case study has been prepared by professors Naga Laktehmi Damarato, Sonoms State University. Alin Eisner, Pace Univerity, and Gresory Des. The Ef ence, Growth, and Transition 4 Univenity of Texas at Dallas, to serve as a basis for classroom discusion. The case study is not intended to be an endorsement of effective of intlifective Southwest Airlines began in response to an entrepreneurial handlise of adminittnative siituations. Copyright O 2019 Damacaju and Eisper. opportunity that existed for low-cost, hassle-free travel between the cities of Houston. Dallas, and San Antonio- Amendment* that could boost Southwest's ability to fly the Golden Triangle that was experiencing rapid economic uninterrupted services out of its traditional fort, Dallas and population growth during the late 1960s. Rollin King, a Love Field airport. San Antonio entrepreneur who owned a small commuter In 2007, a new fare structure was introduced that inair service, and Herb Kelleher, a New Jersey-born, New cluded Business Select, which gave customers the option of York University Law School graduate who moved to San priority in boarding. With a new $40 fee that allowed cus Antonio in 1967 to practice law, pooled the seed money to tomers to be among the first 15 passengers to board the start Southwest Airlines in response to this opportunity. plane, this new fare structure was definitely targeted at wooAfter an initial rough four years caused by the major airlines, ing some of the business travelers who wanted a little more Southwest got its flights to takeoff in 1971 with Dallas Love than no frills. However, with this move, Southwest managed Field as its base and it crossed every major benchmark in to irritate some of its most loyal customers. While Souththe following years. It remained the consistently profitable west continued its bags-fly-free policy, which had contribdiscount carrier year after year and became a major airline uted to increasing its market share, Kelly declared "never in 1990 by crossing the $1 billion revenue mark. Focused say never" when probed about his company's plans to start on the business travelers who needed to be "on-time, every charging baggage checkin fees in 2013 . Southwest introduced time," its business model had several intriguing elements. an in-flight entertainment portal with free live and onFor example, by-passing the traditional "hub-and-spoke" demand television, offering 20 live channels and 75 television configuration and offering shorthaul, pointto-point airline episodes from popular series. It also introduced Internet acservice allowed savings on fundamentals such as gate fees cess for $8 a day per device on Wh-Fienabled aircraft. because they could fly out of secondary airports; additional While all these were significant departures from the orighsavings were through elimination of other fringe services nal Southwest business model, there were two other important like no assigned seats, no meals, no baggage transfers, or strategic changes initiated in Kelly's regime. The first was exfew or no reservations through travel agents. The choice of pansion into the international markets that began in Decem: operating a new and uniform fleet of aireraft saved mainte- ber 2008 when the company agreed to provide an online link nance costs and facilitated optimum utilization of human to Westet's booking portal to help its customers book flights resources. Brilliant fuel hedges resulted in huge cost savings to Canada. Later, Southwest formally filed an application with for years. In addition, the charismatic leadership of Herb the Department of Transportation for the right to fly its own Kelleher, and a strong company culture and incentives fo. planes to Canada. As of January 2019, the company had cused on tight cost-control, made Southwest a legendary operations to over 14 destinations internationally. A significant airline (see Exhibit 2 for Southwest's Mission Statement). chunk of the company's revenves came from international In 2004, the leadership transitioned to Gary Kelly, a operations-approximately $595 million of the operating revelong-term employee and the former Chief Financial Orfieet awes in 2017, $383 million in 2016, and $287 million in 2015 , of Southwest Airlines. The same year, Kelly heralded a se- respectively, were attributable to foreign operations. The ro ries of initiatives to put the airline on a high-growth trajec- malider of the operating revenues, appraximately $20.6 billion tory. These included the codesharing agreements beginning in 2017, $20.0 billion in 2016, and $19.5 billion in 2015 , respeowith ATA (in response to AirTran eyeing the Chicago mar- tively, were attributable to domestic operations. 3 ket), a move into the Philadelphia market (a stronghold of The second most significant departure was moving away USAir), and kicking off a campaign to repeal the Wright from the organic growth strategy with the acquisition of AirTran Holdings Ine., the parent company of AirTran Airways (AirTran), for a combination of $1.4 billion cash and Southwest Airlines common stock. The acquisition, announced in September 2010, was only the third in Southwest's history. It gave the discounter its first service in Atlanta, a Delta Air Lines fortress for decades, and more flights from New York and Washington, DC. Little more than a year after the transaction officially closed, Southwest was dehubbing AirTran's Atlanta hub and conceding markets to Delta. AirTran's Athanta hub had been Southwest's motivation in acquiring AirThan, in addition to further pushing into international markets. 4 'To make that shift in strategy has taken a huge effort, but as a leading benefits in the proposed contract as industry leading, union domestic carrier, it was time 'that we think about stepping leaders had opinions otherwise. According to the union out," said Kelly.' Following what could possibly be the slow. leaders, the contract did not measure up to the higher hisest merger in history, Southwest successfully completed it torical rates Southwest mechanics earned relative to the on December 28, 2014, when the last AirTran flight flew, rest of the industry and it did not do enough to compensate retracing its original Atlanta-to-Tampa route of Octobez inembers for their industry-leading productivity. 10 Any 1993 (AirTran was called ValueJet at that time). "The coms. changes to the contract terms could put additional burden pany expected total acquisition and integration costs to bs in the low-cost competitive position. approximately $550 million (before profit sharing and taxes) upon completing the transition of AirTran 717-200 s. Increasing Fuel Costs. 11 Jet fuel and oil represented out of the fleet in 2015 ," said company officials." approximately 22 percent of the company's operating The Triple-Pressure on Bottomline expenses as of the beginning of 2019 and represented the second largest operating cost (see Exhibit 3). The cost of approx- fuel could be extremely volatile and unpredictable and fluc41 percent of total company operating expenses, tuated due to several factors beyond the company's control, salaries, wages, and benefits expenses were Southwest's for example, conflicts and hostilities in oil producing areas, largest operating costs. The terms of its collective-bargain- problems in domestic refining or pipeline capacity due to ing agreements limited the company's ability to reduce adverse weather conditions and natural disasters, or these costs." Approximately 83 percent of its labor force changes in currency exchange rates. Southwest's ability to was unionized. These employees had pay scale increases as effectively address fuel price increases and pass them to the a result of contractual rate increases. Additionally, there consumers could be limited by factors such as its historical were new collective bargaining agreements ratified during low-fare reputation, the portion of its customer base pur2016 with the majority of Southwest's unionized employees, chasing travel for leisure purposes, and the risk that higher including its pilots and flight attendants, among others. fares will drive a decrease in demand. This risk could partly Meanwhile, other unionized employees, including its be managed by utilizing over-the-counter fuel derivative mechanics and material specialists were also in negotia- instruments to hedge a portion of its future jet fuel purtions for labor agreements for the last six years. In Septem- chases. However, energy prices could fluctuate significantly ber 2017, Southwest Airlines mechanics rejected a proposed in a relatively short amount of time. Since the company contract offer that fell short of the pay rates they wanted. used a variety of different derivative instruments at differWhile Southwest described the pay rates and retirement ent price points, there was an inherent risk that the fuel derivatives it used would not provide adequate protection against significant increases in fuel prices and could in fact 'These are Boeing 717-200 airerafts for which NirTran has been the first_ result in hedging losses. For a long time, the company also customer. Boeing 717 was different from Boeing 737 which has traditionally benefitted from accounting standards in the United States. been the single aircref type that Southwent operated and saved on training and maintenance costs. Therefore, this sddition could have potentially increased some of these costs. tive or that they would no longer qualify for hedge accounting under applicable accounting standards. This problem could competed with these other airlines on virtually all of its have been severe without the recent increases in siale sil gcheduled routes. In addition, a new category of ultra-low production in the United States. cot carriers (ULCCs), for example, Frontier and Spirit AirSeveral efforts were underway to reduce fuel constis. Lison 1ines, omerged as a credible threat (Refer to Exhibit 1). and improve fuel efficiency. Southwest started modernisius The ULCCs represented a completely different apits fleet and also initiated other fuel initiatives. It was the first proach to the traditional air travel model. While similar to airline company in North America to offer scheduled service the disruptive innovation like Southwest Airlines in its iniutilizing Boeing's new 737 MAX 8 aircraft. This aircraft en- tial stages-when converting non-users to users of air traveltered service in fourth quarter 2017. The Boeing 737MAX8 the ULCCs are yet significantly different in several ways. was expected to significantly reduce fuel use and CO2 emis- Allegiant Airlines perfected this model offering low-fare, sions. There were 13 Boeing 737 MAX 8 aircraft in its fleet high-value vacation packages from secondary airports to by the end of 2017 . Southwest was also the launch customer points in Florida and to Las Vegas. for the Boeing 737 MAX 7 series aircraft, with deliveries ex- The revenue stream for a ULCC was not based on air pected to begin in 2019. It had placed firm orders for 197 of tickets, the core revenue for low-cost airlines like Southwest, 737 MAX 8 aircraft and 30 of 737 MAX 7 aircraft (see but on purchase of ancillary products such as hotel and Exhibit 4). These aircrafts would also have lower mainte- tour packages. The model evolved to be even less dependent nance costs since they are new and they are unlikely to in- on vacation/leisure travel. A. ULCC aimed to stimulate crease training costs since they are all large Boeing 737 travel decisions by offering very low fares and providing a aircrafts, continuing the Boeing 737 tradition at Southwest. nonstop routing where there was none, even if only for a few times a week. By offering a high value-to-cost equation Competition and the ULCC threat.'2 With moderate for the consumer, these airlines aimed to divert discretionary improvement in economic conditions over the last few years dollars into air travel. and an increased focus on costs by most airlines, competition Unlike Southwest, the ULCCs were not in the business has intensified in the airline industry. Southwest faced tough of connecting people and destinations. The stimulant of decompetition from major U.S. airlines, including American mand in the ULCC model was fares and not the need to get Airlines, Delta Air Lines, and United Airlines* and other low- to a destination. Typically, a ULCC entered markets that it cost competitors, including JetBlue Airways (see Exhibits 5 thought had latent potential, offered several flights, and and 6 for selected financial information). Southwest then monitored the results. If the expectations about traffic materialized, it offered more services at that airport. If ' Contineatal airline (another major airline in the United States) mergod with expectations did not materialize or the traffic was less UAL Corporation (parent company of United Airlines) in 2010. This stock is productive than at other points, the ULCC moved out tndod as United Continental Holdings Inc., (UAL). quickly. With the exception of some operations by Frontier at Denver, these airlines did not have their own turf nor did and the Caribbean. It operated more than 3,800 flights a day they operate connecting hubs. In this model, airplanes were including more than 500 roundtrip markets. 13 Its internamoved around the country when opportunities were spotted. tional footprint expanded to over 14 destinations covered ULCC flight schedules fitted their flect availability and not through 16 international gateway cities. The company renecessarily in timings that were most preferred by customers. mained profitable as of 2018 . It made significant technology Alongside Allegiant. Frontier. Spirit, and Sun Country investments and completed its single largest technology projwere the other prominent players in this genre. They repre- ect in its history in the recent years to completely transition sented about 7 percent of all U.S. airline departing seats by late its reservation system to the Amadeus Alta Passenger Ser2018 and were expected to grow to over 12 percent by 2020. vice System. The new reservation system was designed to Southwest in 2019 improve flight scheduling and inventory management. It over 100 destinations throughout the United States, Mexico, tions. Additional international growth and other foundational Ther we 3 quertions as titions entryl What are the 5 forces of cempetibion for the airine industry? (You can outtine your answers) What assets and itsouces does Southwest Alifines have that give it a competitive advantage? Discuss the compettitre advantage SW Airlines has and the petential challenges to its atrategy