Background: Airlines go in the long run at the competition to reason.

For the passenger the competition is good, because each competitor tries to undercut the other one. Same is the case with the Southwest airlines, Apple of the customers eye and still competing with low cost leadership strategy. Southwest Airlines works on three major strategies i.e. short-haul, high frequency and low cost strategy. Their employees are Jack of all the deck; they perform multiple tasks and believe in the superior customer value. They believe in the causal form of dressing so that each customer feels like family environment. They believe in the overall low cost strategy so for this they have developed a high profile activity based system (Exhibit #2). This case talks about how southwest airlines achieved the low cost leadership and also about the two options which southwest airlines are pondering to further penetrate the market. Core Competency: 1. Overall Cost Leadership 2. Cost Focus 3. Standardization 4. High Aircraft Utilization
5. Point-to-Point route system instead of Spoke and Hub system.

6. Fast Ground Turn around

Balance Scorecard: KPI Shareholders Objectives Profitability Increased Revenue Lower Cost Measures Market Value Seat Revenue Plane Lease Cost Target 30%(MV) 20%(R) 5%(LC) Initiatives Point-to-point System.

Customer

On-time Lowest Prices

FAA on time rating Customer ranking

#1 #1

(Quality Management) (Customer Loyalty Program) Cycle time optimization Program Employee Stock Plan. Growth Training. Crew Option

Internal Processes Learning Growth &

Fast

Ground Time on ground On-time departure Crew

30 mint 90%

turnaround Ground

% ground crew Year 1: shareholders 70% Year 2: 90% Year 5: 100%

alignment with company goals

Quantitative Data: 1. Low Price Comparison

Revenue Per Mile Comparison Other Airlines Fare 95.7 92.6 107.8 156.9 160 163.6 Miles 214 185 204 256 214 227 F/Mile 0.447196 0.500541 0.528431 0.612891 0.747664 0.720705 South West Fare 49 47.4 49.4 49.3 54.4 49 46.2 Miles 223 312 294 246 290 277 289 F/Mile 0.21973 1 0.15192 3 0.16802 7 0.20040 7 0.18758 6 0.17689 5 0.15986 2

Actually the gap between the Southwest airlines fare per mile versus the other airlines is the customer gain by travelling through the SWA. Their per mile cost is far low than its competitors and it is the true competitive advantage that SWA has on other airlines.

Average Pay of Flight Attendant/ Flight and Average Speed: 13.37 600Km =55/60=0.92hr = 600/0.92 = 652 Km/hr = 17.4

Compensation Avg. Flight Distance Avg. Time Avg. Speed Avg. pay per flight

Total cost of Labor: 20,000 3 20,000/365= 55 55/3= 18.5 17.4+18.5 = 35.9

Ground Crew Flights per day Earning/day Flights Total Cost

737

Total Trips/Day: 150 1500 App. 10

Total Trips So Each Plane Trip

Financial Ratio: Ratios Current Ratio Return on Equity Earnings Per Share Net Income margin Expense by Revenue D/E Interest Coverage WACC 1990 1.3 7.9% 0.55 3.9% 93.7% 6.1% 2.55 1991 1.4 4.4% 0.31 2.05% 96.7% 98.20% 1.43 10.8% 0.97 5.40% 91% 81.80% 3.09 12.7% CAPM+Frama French Operating Margin 6.9% 4.8% Model 10.8% 1992

Option # 1:

Two-Way: (Detroit to Phoenix and Phoenix to Detroit)

No.of aircrafts=2 Total Seats=137 *2 Total seats Average Load Factor =.65 Seat Occupied Average trips per aircraft on daily basis at SWA Distance between Detroit and phoenix =3.5*652 2282 2282k m Detroit Passenger Fee Detroit-Phoenix landing fee Phoenix -Detroit Landing Fee 489.77 5 1068.2 75 10682. 75 2.75 Phoen ix 3.25 578.5 178.1 274

One round trip landing fee cost 10 round trips cost per day

CF=13.37+(1.337(29.55)=52.88*2= 106 81 members per flight and 2 flights Total cost=81*2*106 Revenue=(129*178.1*10) Profit/Day 17133 229749 201933

Profits/ day Per Year Maintenance Cumulative Growth WACC % year growth Terminal Growth Revenue/Expense IRR NPV

201933 201933*340 = 68657220 25 days (Assumption) 15-30% 12.7% (Income Statement Analysis) 20% 3.5% growth (15 year life) 80% (Crew Cost Minus) 17.8% 2876896 Feasible

Maintenance Cost 25 days non operational cost (5 Years) Synergies Initial Cost

Starts After 3 year 67847 Through Holidays in the maintenance days. 1.27 Million

Option # 2: On-Way (Chicago)

Aircrafts Seats Total seats Average Load Factor =0.65 Occupied Daily Trip 10 178.1 2 137 274

Average distance

361Km 361K m Chicag o 0 Dayto n 2 356.2 0 356.2 3562

Airport Fee Chicago-Dayton landing fee Dayton-Chicago Landing Fee Total Landing fee per round trip 10 Trips a day Crew Fee=13.37*2=26.74 162 Crew Total Cost=(26.74*162) Revenue=120*178.1*10

4332 21372 0 20582 6

Profit/Day

Profit/day(Revenue- Crew cost) Per Year WACC Growth Maintenance Cumulative Growth Initial Investment Maintenance cost starts 25 days (Non-Operational Cost) Average Life Method IRR Assumption

205826 69980840 12.7% 20% 25days 20% Compounded 1.2 Million 3 year 36567 (On-way) 15 Years Project Feasibility 22.7% WACC is based on FAA ratings and Income interest and ROE analysis

NPV Expense by Revenue

3.2 Million 80% Feasible

Option # 3: Baltimore Per day revenue Profit per year Expense/Revenue NPV IRR WACC Method Initial Investment Growth But Weather Condition Maintenance Maintenance 10199.4 3467796 80% Positive 14.7% 12.6% IRR feasibility Method. 1.2Million 10% Bad delay 3 years 25*5

Recommendations: Balance scorecard: KPI Shareholders Option 1 NPV Positive IRR>WACC More ROE More profitability High Cost than option 1 and 2 Culture fit. Option 2 NPV Positive IRR>WACC More ROE than current More Profitability Low Cost because it is one way but incurred one route cost which again is high but comparatively Customer Two way opportunity Low Cost. Current route. Good connections Employees Available lower than option Low cost But it is one way Customers mostly prefer two ways. New market & customer. Airport uncongested Route>average Employees not available Option 3 NPV + IRR>WACC Better than 1 But not good as option 2. Attractive the Culture. with

Internal Processes Learning Growth

Faster(Because they are Same familiar) & Same Same

Bad Weather Delay in flight Same

Exhibit # 1:1 Southwest Performance:

Each variable is indexed to its average value for the period.

Exhibit # 2: Southwest Airlines: Activity Based System:

No Meal

Limited Passenger Service

No Baggage Transfer No Connecti ons

No Seat Assignm ent Limited Use of travel agents 15 minutes Gate Turn Gate Crows

Short Haul

Point-to-point Routes

Automatic Ticketing Machines

Secondary Airport

High Utilization

Very low ticket Prices

Standardize 737 Aircraft

Exhibit # 3:

Exhibit # 4:2

Comparison of Southwest airlines with the other airlines even though with car.