Part 2 - Cevdet KIZIL



SOUTHERN NEW HAMPSHIRE UNIVERSITY

|Graduate School of Business |

| | |

|Program: |SNHU School of Business Graduate Program |

|Course Title : |Marketing Strategies – MKT 500 |

|Instructor: |Jeannemarie Thorpe |

|Due Date: |Monday, March 1, 2004 |

|Submission Date: |Monday, March 1, 2004 |

|Type of Assignment: |Industry/Company Analysis and New Product Plan |

|Title of Assignment: |Southwest Airlines |

|Student Name: |Cevdet KIZIL , Gokhan BAYKAL |

| | |

|Student Phone #s: |(603) 626 9302 , (518) 462 33 69 |

|Student E-mail: |cevdetkizil@ , gokhanbaykal@ |

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I have cited any and all sources, both print and electronic, from which I have used data, ideas, or words, either quoted or paraphrased. My cited sources are indicated within this document. I also certify that this assignment was prepared by me specifically for the course as listed above.

[pic] Monday, March 1, 2004

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MARKETING STRATEGIES – MKT 500

INDUSTRY/COMPANY ANALYSIS AND NEW PRODUCT MARKETING PLAN

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Cevdet KIZIL & Gokhan BAYKAL

(Graduate MBA-MIB)

Southern New Hampshire University

Marketing Strategies (MKT500) – Jeannemarie Thorpe

March 1, 2004

Manchester, New Hampshire

Part 1

I. Description of the Company, including its size, the geographic scope of its operations, the width and depth of its product line, and a description of the general target market for each.

- Mission Statement

The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride and Company Spirit.

- General Information (company description, its size, geographic scope of operations, the width and depth of product line, description of general target mkt.)

Southwest Airlines began its operations on June 18, 1971, scheduling short-haul, point-to-point, low-fare, high-frequency flights. The company began providing service to customers in three Texas cities – Dallas, Houston and San Antonio utilizing three Boeing 737 aircrafts. Southwest Airline Co. is a major domestic airline in the United States. Presently, Southwest operates 375 Boeing 737 aircrafts and provides service to 59 cities. According to company records; 59 percent of Southwest’s capacity, measured in available seat miles flown, was deployed in the U.S., 22 percent in the southwest, and 19 percent in the Midwest. Southwest’s customer base is comprised of 69% consumer travelers and 31% business travelers. Based on number of revenue passenger miles flown, Southwest Airline is the fifth largest airline in the United States. Southwest recorded net income of $240.1 million on total operating revenue of $4.2 billion for the year ended December 30, 2002, thus marketing 30 consecutive years of operations always resulted in great profits – a feat unmatched in the U.S. airline industry over the past three decades. Southwest became a major airline in 1989 when it exceeded the billion-dollar revenue mark. Southwest Airline Co. continues to be the only major airline to report a profit since 2001 terrorist attacks, although earnings fell significantly. According to Southwest’s co-founder and former Chairman, President and CEO (he did give up his titles on June 19, 2001 – source:, 2004), Herb Kelleher, Southwest’s formula could be described as, “Better quality plus lesser price equals value, plus spiritual attitude of our employees equals unbeatable”

(source: depts/antn/tapecat/genman4.htm, 2003).

- Business Strategy

Southwest’s business strategy of “keep it cheap, keep it simple, focus your energy” has also contributed largely to its success. The airline flies out of secondary airports to gain access to cheaper gates and to avoid its competitors. Unlike its major competitors, Southwest is known to be not operating a hub and spoke system, but rather makes frequent point-to-point flights. However, they are trending now towards hub and spoke system because hubs offer various ways to get their destinations. Our outside research says: “Southwest feeds traffic into hubs where it can be decanted into larger aircraft and flown on to other hubs, or else redirected along another spoke to a smaller destination”.

(Source:, 2003).

Southwest’s suppliers are mainly fuel related and the airplane has had to adjust accordingly based on ever changing fuel prices. Southwest uses only one supplier, Boeing that produces and delivers Boeing 737 aircrafts which keeps training and maintenance costs low. Also, Boeing 737 jets are all-coach configurations, therefore all of the Southwest customers are provided with the same accommodations and low-fares. While other major airlines that fly a variety of jet aircrafts made by Airbus Industries, Boeing and McDonnell Douglas have to spend significant amount of money on their aircraft maintenance, Southwest does not. Southwest uses channels like cities with smaller airports or less congested airports in large cities. By forcing on these channels the airline reduces aircraft taxi time and less airport circling while awaiting landing permission.

-Marketing Objective

The marketing objective of Southwest Airlines is mainly increasing their market share in U.S. domestic airlines market by serving their customers to the best of their ability. They have been a solid contender since 1971 and their efforts have been labeled as the “Southwest Model” to be followed as a standard by the airline industry. The marketing objectives intertwine customer service along with operations. The company has used creative marketing to effectively differentiate themselves from other airlines.

- Competitors

Southwest’s competitors include various types of airlines (major carriers: Delta, Continental, United, American & short haul low fare airlines: Jet Blue, Value Jet, Air Tran, Metro Jet, Reno, Kiwi, Western Pacific), trains, buses and automobile. To start with major carriers, they are not able to complete with Southwest Airlines, because first of all, their costs (including labor, maintenance, crew training, flight preparation, meal service) and ticket fares are higher. Especially, Southwest has a significant advantage in labor costs which only accounts to 33% of its revenues. On the other hand, the major carriers’ labor costs are more than 40% of their revenues (source: , 2004). Then, Southwest Airlines schedules large number of flights each day compared to major carriers. Of course, large carriers tried to adapt low fare and short segment efforts. For instance, United Airlines had Shuttle by United against Southwest. However, because their costs and ticket fares were higher compared to Southwest and they couldn’t find a way to further reduce their costs and lower their ticket fares, Southwest was again undefeated. On the opposite side, major carriers like Continental and American are now in better shape and defending themselves better. They are reducing their ticket fares and also attacking to airports served by Southwest and low fare airlines. Besides, for instance Delta and United Airlines have their own discount airlines now (Song and Ted respectively). After that, Delta did increase number of flights 50% and lowered ticket fares. For low fare airlines, we can say that some have embraced Southwest model with great success. The fact that low-fare airlines are now accounting to 22% of airline industry by performing an increasing trend must be noted. (source: , February 16, 2004). Especially, Jet Blue is considered to be the strongest rival of Southwest Airlines with their famous CEO David Neeleman. Jet Blue is planning to spend some $7 billion to increase the number of their planes to 290 by 2011. Jet Blue is also planning to buy 100 seat capacity jets to expand their operations. They have a strong balance sheet - $571 million in cash and is going to introduce service to New York’s famous airport- LaGuardia. However, they are still struggling to match Southwest because their operating margin fell 13%, stock price fell down 52% and their profit is expected to fall nearly 7% next year. Plus, their maintenance costs are high and labor costs are going up.

(source:, February 16, 2004). Next, other low fare airlines like Jet Blue, Value Jet, Air Tran, Metro Jet, Reno, Kiwi and Western Pacific have less unionized workers compared to Southwest, so their labor costs are lower. However, Southwest has expanded well already to 59 cities while others have faced obstacles of expansion (e.g. Jet Blue serves only 20 cities. Source: , 2002). Value Jet also has another disadvantage against Southwest, their crash in 1996 is still remembered. Finally, Western Pacific Airlines was just like a copy of Southwest with its Boeing 737 planes, no meal service and no assigned seats. But they didn’t go into a head-to-head competition with Southwest Airlines. Western Pacific was also no match for Southwest. Because they had started their operations in Colorado Springs which had low operating costs. However, the company did abandon Colorado Springs later which is still considered to be a very big mistake by the authorities. Because United Airlines easily matched their prices outside Colorado Springs. In conclusion, none of Southwest’s competitors was successful.

- Technology

The product technology of Southwest is mainly their airplanes. Less than one percent of Southwest flights were canceled or delayed due to mechanical incidents and Southwest was consistently ranked among the world’s safest air carriers making their product technology a valuable asset. So, Airbus 737s provide Southwest Airlines a technological advantage. In addition to this, Southwest Airlines’ website () is also important in terms of technology. Because customers are able to book travels, view flight status, make reservations, check schedules and view special offers (Southwest’s Click ‘n Save Program) by using Southwest’s website. They sell great quantities of tickets, generate great revenue, minimize operating costs, keep ticket fares low, ensure quality control, receive feedback, create customer loyalty and increase their reputation by using their website technology. As a result of our out outside research (source: , October 29, 2003), we were impressed to learn that online ticket sales generate 55% of the company’s revenue. Southwest says: “The only place our low fares call home is ”. (source: , October 29, 2003).

- Financials

|INCOME STATEMENT |2002 December |Pro-Forma |

|Net Sales |5,521.77 |5,687.42 |

|Cost of Goods Sold |3,684.81 |3,611.11 |

|Operating Inc | 417.34 | 429.86 |

|Pretax Income | 392.68 | 402.79 |

|Net Income | 240.97 | 248.20 |

| | | |

|BALANCE SHEET |2002 December |Pro-Forma |

|Assets | | |

|Total Current Assets |2,231.96 |2,520.22 |

|Net PP&E |6,645.46 |6,445.49 |

|Total Assets |8,953.75 |8,997.14 |

|Liabilities and Shareholders' Equity | | |

|Short-Term Debt | 130.45 | 514.57 |

|Total Current Liabilities |1,433.83 |2,239.19 |

|Long-Term Debt |1,552.78 |1,327.16 |

|Total Liabilities |4,532.13 |4,983.09 |

|Total Common Equity |4,421.62 |4,014.05 |

| | | |

|CASH FLOW STATEMENT |2002 December |Pro-Forma |

|Net Cash Flows from Operations | 520.21 | 988.61 |

|Net Cash Flows from Investing | 603.06 | 997.84 |

|Net Cash Flows from Financing |-381.66 |1,270.10 |

- Customer Relations

Southwest is still ranked by U.S. Department of Transportation as #1 among major air carriers in on time performance, baggage handling and customer satisfaction (source: , October 10, 2002). Southwest has much lower operating costs than other carriers which are passed on to their customers in the form of consistently low fares. Southwest’s customers enjoy low fare and non-stop flights in the U.S. In order to keep costs down and to be able to provide low fare to its customers, Southwest did not use computerized reservation systems or travel agents. The company also didn’t provide seat assignments – “Let passengers sit anywhere they like, as long as they get there first.” The carrier appeals to their customers through effective service, convenience and low ticket fares.

- Employee Relations

Southwest has shown a dedication to their employees, who are a big part of operations, who according to them are the most important elements in the Southwest Model. Southwest has a culture where employees feel part of an extended family. The workforce owns 11% of the company, which helps to align their interests with the airline’s overall goals. As a result; labor relations have not been a problem at Southwest even though 90% of the employees are unionized. Efficient working practices and low employee turnover help to reduce Southwest’s costs, thereby making it much more competitive. Southwest also says: “We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, employees will be provided the same concern, respect and caring attitude within the organization that they are expected to share externally with every Southwest customer.” Finally, Southwest Airlines is successful at employee relations because they are careful about hiring the right people.

II. Description of the industry in which the company operates, the business environments that affect it, the major competitors and their relative sizes and product lines.

- Micro Environmental Scan

The Micro Environment includes a company’s own internal environment (management, finance, marketing, research, development, purchasing, manufacturing and accounting), the marketing channel firms (suppliers and intermediaries), the relevant customer markets, competitors and the stakeholders. (sources:, 2003 & , 2001). To start with Southwest’s internal environment, first of all their management is very efficient. The company’s former president Herbert Kelleher was a legendary manager and the current president Colleen Barrett is also doing a very good job. Southwest’s financials as a part of company’s own internal environment is also in a good condition. The 2003 revenues of Southwest was $5,937,000 compared to 5.521.771 in 2002. Also, the earnings per share rate was 0.54 in 2003 compared to the rate of 0.30 in the year 2002. (source: , 2004). The marketing efforts of Southwest as a part of their internal environment are also widely recognized. Southwest’s marketing strategy, unlike most of the American firms, is based on long-term success and they emphasize their customer satisfaction, on-time service and low fares in their advertisements. As an example, according to one of our researches, Vicky Wong, vice president of Dae Advertising said this sentence about Southwest’s marketing strategy: “Southwest isn't looking at the short-term sell, but they embrace the community by demonstrating they want to serve and care for them“ (source: , September 29, 2003). Then, the company once used this marketing slogan for their on-time service: “The All-Time On-Time Airline”. For their low ticket fares, Southwest Airlines did use this marketing slogan: “Try to march our prices” (source: , 2003). Next, Southwest also follows a good strategy about online marketing. For instance, one of their advertisements underlined their low fare tickets advantage and encouraged the usage of their website with these words: “The only place our low fares call home is ” (source: swatakeoff/go_alone.htm, October 29, 2003). The following component of micro environmental scan was suppliers and intermediaries. Southwest’s suppliers include the fuel and the aircraft suppliers. Indeed, Southwest has only one aircraft supplier, Boeing which provides the company Boeing 737 jets. On the other hand, Southwest has no intermediaries, mainly as a part of cost minimization objective (source: , October 20, 2003). For example, they don’t sell their tickets via Orbitz (). The customer market comes next as a micro environment component. Southwest’s customer market includes 59 cities where the target market is generally middle income persons (69% consumer and 31% business travelers). Then, to talk about the Southwest’s competitors as an element of micro environment, the firm has many competitors in the industry like Delta, Continental, United, American, U.S. Airways, Jet Blue, Value Jet, Air Tran, Metro Jet, Reno, Kiwi and Western Pacific. Southwest Airlines is currently the company with highest profits in U.S. airline industry among all major and low-fare carriers. This is because Southwest has lower costs, lower ticket fares, larger number of flights and a more experienced management compared to its competitors. Southwest’s opponents had many attempts to win, but were never victorious. Finally, stakeholders must be mentioned as a part of micro environment. The government, laws and regulations, competitors, consumers, employees, shareholders and suppliers are all included to stakeholders. Stakeholders are important in terms of micro environment scan, because they affect Southwest Airlines as well as they are being affected by the company.

- Macro Environmental Scan

Prior to 1978, the federal government through the Civil Aeronautics Board regulated Southwest and other airline carriers. The board controlled the fares, routes and mergers. Post 1978, the board was dissolved and the airlines gained much greater control over their own operations. Currently, all airlines follow the same guidelines set forth by the government agency known as FAA. Economically, Southwest has done very well since entering the airline industry on June 18, 1971. Southwest has managed to record over 3 decades of profitable operations. Other airlines like Continental and United have tried to clone the short haul formula adopted by Southwest in an attempt to boost their own net profits.

During 1990s, the airline industry was trying to effectively navigate the economics of air travel. Various airlines come up with approaches (concepts) of providing services to its customers. The following concepts were introduced: Airline-Within-an-Airline Concept, Continental Lite and Shuttle by United.

Southwest Airline, operated primarily short haul, point-to-point routes, was able to make a fast turnaround of its aircraft between flights. The company had much lower operating costs than other major carriers. The company’s savings and lower operating costs were passed in the form of consistently lower fares. Southwest’s operating practices s served as a blueprint for several major carriers, which produced a “clone” of Southwest by implementing a low-cost service in short haul markets. The “airline-within-an-airline” concept that involved operating a point-to-point, low fare and short haul was born.

On October 1, 1993, Continental, having just emerged from bankruptcy, introduced Continental Lite. A service that focused on Continental routes in the eastern and southeastern United States by converting about 1,000 daily flights into low fare, short haul and point-to-point service. After about fifteen months in January 1995, due to operating activities, Continental Airline started to fold back its “Continental Lite” operations into the Continental hub-and-spoke system.

On October 1, 1994, United Airlines inaugurated its “airline-within-an-airline” branded as “Shuttle by United” that was designed to be a high-frequency, low fare, minimal amenity, and short haul flights. By January 1995, United expanded to 14 routes where nine of the routes competed directly with Southwest.

- History of Airline Industry

In early years of Airline Industry, CAB approval was required before any changes in fare or route systems could be made. The CAB assured that individual airlines were awarded highly profitable and semi-exclusive routes necessary to subsidize less profitable routes. Price competition in highly regulated airline industry was suppressed and any increase in airline cost was routinely passed along to passengers. The airlines were able to earn a reasonable rate of return on their investment. In 1978, the Airline Deregulation Act was passed. The Airline Deregulation Act of 1978 allowed airlines to set their own fares and enter or exit routes without CAB approval. Jurisdiction for mergers was first transferred to the U.S. Justice Department. The Civil Aeronautics Board (CAB) was dissolved in 1985.

During the period of deregulations, public policy makers and industry analysts expected the major carriers serving previously semi-exclusive routes would bring about healthy price competition. However, major carriers responded to deregulation with two significant changes in their operations:

a. Major carriers turned their attention to serving nonstop “long haul” routes anchored by heavily populated metropolitan areas or city pairs. As a result of it; existing regional carriers and new airlines filled the empty space. In 1978, the U.S. had 36 domestic carriers; by 1985, the number had grown to 100.

b. Major carriers abandoned point-to-point (nonstop flights) route system and adopted the hub-and-spoke (“feeder flights”) route system. The feeder flights would bring passengers to a central hub city, where passengers could continue their trip on the same plane or transfer to another plane to continue to their final destination. However, increased revenue and some cost economies from adding passengers to the larger aircraft and flying them longer distances were offset by increased costs resulting from reduced utilization of aircraft as they waited to collect passengers, capital investment in hub facility and the need for larger ground staff.

The Airline Deregulation Act made it possible for newly formed airlines and regional carriers to expand both the number and length of their routes. Consequently, the competition to survive and succeed intensified in the airline industry. Since the regional carriers were able to retain the point-to-point route system that were more economic to operate than hub-and-spoke, they had lower debt than older major carriers, they had an immediate cost advantage that resulted in lower fares on both short - and long – haul routes. As a result of the increased number of available flights on long-haul routes, all airlines scrambled to fill their seats. The average fares paid on the formerly profitable long-haul routes had to be lowered, while the operating costs of major carriers remained high. Therefore, in order to be profitable, major carriers had to cut their schedules and further reduce the number of short-haul routes. In the late 1980s, in consequence of a price war of slow destruction and a price-cist predicament, major carriers were acquiring struggling airlines.

As a result of acquisition activities, by the late 1980s, after a decade of marginal profitability, eight airlines controlled 91 percent of U.S. traffic. An existing situation led industry analysts to believe that U.S. airline industry would soon evolve into an oligopoly. The recession of the 1990s, a doubling of fuel prices during the Gulf War in 1991, and excess capacity in the industry, contributed to more carrier bankruptcies. During a period of four years, from 1990 through 1993, the U.S. airline industry recorded a cumulative deficit of $12 billion. As existing airlines collapsed, new airlines that positioned themselves as low fare, low-frill were formed. These new entrants benefited from cost economies of point-to-point route system, cheap supply of aircraft grounded by major carriers during the period from 1989 to 1993, and the availability of airline personnel. Again, their cost structures were significantly below most major carriers. In 1994, these new entrants reported combined revenues of about $1.4 billion compared with $450 billion in 1992. The pricing practices of the low-fare and low-frill airlines depressed fares on a growing number of routes also served by major carriers. “In 1994, 92 percent of airline passengers bought their tickets at a discount, paying an average just 35 percent of the posted full fare.” (source: , 2003)

- Industry Economics

The underlying economics of air travel; consumers’ income, their spending and traveling patterns, had a major impact on financial performance of individual carriers and the U.S. airline industry as a whole. Two basic cost sources: 1) labor, fuel, facilities and planes 2) salaries, wages and benefits represented almost one-half of an airline’s costs and were relatively fixed at the particular level of operating capacity. One of the largest uncontrollable costs to a carrier was fuel, especially during the Gulf War in 1991 when fuel prices were skyrocketing and it was expected to increase by 4.3 cents per gallon in late 1995 based on a tax imposed by the Revenue Reconciliation Act of 1993. It was estimated that the U.S. airline industry would have to spend an additional $500 million annually in fuel cost. On the other hand, labor cost was a controllable expense within limits. During a period of six years, from 1989 to 1994, more than 100,000 airline workers lost their jobs. Major carriers were eliminating jobs in order to reduce operating expenses.

The operating performance of the majority of carriers, carriers’ passenger revenue (“Passenger revenue means a passenger for whose transportation an air carrier receives commercial remuneration”.

(Source:, September 18, 2002), was linked to the number of passengers carried and the fare paid for a seat at a particular passenger capacity level. An Available Seat Miles (ASM), passenger capacity measurement, is defined as one seat flown one mile whether the seat is occupied by a passenger or empty. Carriers’ productivity is obtained by dividing a carrier’s operating cost (“Operating cost means the cash outlay that would be necessary to maintain production operations”. Source: , 1992) by available seat miles (“Available seat miles means a compound unit defined as one seat being flown one mile”. Source: , 2003). Other factors such as: yield (“Yield means realized price per unit of transport capacity” Source: , April 4, 2002), load factor (“Load factor means the percentage of seats filled”. Source: , 2004) and cost are used to determine the profitability of passenger operations. Individual carriers frequently compute a break-even (“Break-even means that the cost equals the revenue or that the profit is 0”.

Source: algebra1/greetings.pdf, 2003) load factor for passenger operation by setting operating income to zero and monitoring yield, and cost. All of these terms are very important for the airlines industry. First of all, the passenger revenue is important, because the carriers are only able to cover their costs with passenger revenues which comprise the greatest part of monetary resources of carriers. After that, ASM (Available Seat Miles) is another important factor because if the number of empty seats increases, costs will also increase for the carriers. We can also explain this one in a different way. The carriers pay for the fuel, for pilots and other employees and the only way to go over break even point is passenger revenues. However, if the seats are empty, this means that carriers are operating under their capacity and potential profits will not be received. Then, operating cost is of course important. Because if one carrier company doesn’t have the required cash to maintain its production operations, then this company will have to stop operations or will look for credits. A company in this situation can easily be in debt. Next, the term available seat miles also has importance to the industry. Because if one company’s available seat miles is over the industry average, this is favorable. The reason is that passenger revenues will increase when available seat miles will go up. Also, it is always better to have more available seat miles, thus more passenger revenues and profits while enduring the same costs. Why not earn more with the same costs? But of course available seat miles must not exceed the limit that latest technology provides. The following important term is the load factor. The more load factor is always better because the term refers to the percentage of seats filled. Here, if the load factor is high, this means that the percentage of seats filled is high. If the seats filled are high, the passenger revenues will high. If the passenger revenues are high, the profits will be higher. That’s why the load factor is important for the airlines industry. Finally, the break-even load factor is important. Because, the break-even load factor refers to the percentage of seats filled where the revenues are equal to the costs. So, by calculating break-even load factor, airline companies can learn the minimum number of seats (or the minimum percentage) they must sell to at least cover their costs.

- Industry Social Trends

The social components such as customers’ lifestyles and their mobility represent an important factor for airline industry. During a period of twenty years, from 1974 to 1994, revenue passenger miles and available seat miles for the industry have shown an upward trend. On the other hand, due to periodic imbalance between industry capacity and passenger demand, load factor fluctuated up and down. Since 1978, despite periodic fluctuation in fuel prices, cost per available seat miles, shows sign of a downward trend. Continuous labor cost reduction, productivity improvements and gradual addition of more fuel-efficient and lower cost maintenance planes by major carriers had not kept with the declining yields in the industry. The major carriers were continuously trying to reduce labor cost, the factor that would benefit customers by charging them a lower price per available seat mile.

- Competitive Analysis

Southwest has many competitors (major carriers: Delta, Continental, United, American & short haul low fare airlines: Jet Blue, Value Jet, Air Tran, Metro Jet, Reno, Kiwi, Western Pacific), trains, buses and automobile. Southwest has advantage against major carriers with its low labor, maintenance, crew training, flight preparation, meal service and ticket fares. Company’s another strength against major carriers is of course the high number of flights. So, Delta and United Airlines had their own discount airlines (Song and Ted respectively). Also, Delta did increase number of flights 50% and lowered ticket fares. But, some viewed the greatest potential threat to Southwest Airlines as new low-cost entrants to the industry. Some of these start-ups were initiated by major airlines such as Delta Express, U.S. Airway’s Metro Jet and Shuttle by United. These units sought to replicate Southwest’s short haul routes, low cost practices and fares. Other entrants – such as Jet Blue, Reno, Kiwi, Air Tran, Metro Jet, Western Pacific and Value Jet were completely new airlines. As with the major airlines’ low-cost start-ups, these new entrants sought to copy the Southwest model of a low-cost airline by adopting philosophy of cheap fares and no frills. The new startup typically enjoyed the advantage of less unionized workforces. This gave them a potential advantage over Southwest on labor costs.

Jet Blue is still considered to be the strongest rival of Southwest Airlines with their famous CEO David Neeleman. Jet Blue is planning to spend some $7 billion to increase the number of their planes to 290 by 2011. Jet Blue is also planning to buy 100 seat capacity jets to expand their operations. They have a strong balance sheet - $571 million in cash and is going to introduce service to New York’s famous airport- LaGuardia. However, they are still struggling to match Southwest because their operating margin fell 13%, stock price fell down 52% and their profit is expected to fall nearly 7% next year. Plus, their maintenance costs are high and labor costs are going up. (source:, February 16, 2004).

Another rival of Southwest is Value Jet. However, they had a crash in 1996. Value Jet’s traffic did not fully recover when it resumed operations following the crash. The airline operated at only 55% capacity compared to 65% before the accident. Largely because of this lackluster performance, in 1997, Value Jet merged with and adopted the name of AirTran Airways.

The Value Jet crash in 1996 affected the prospects of possible airline start-ups. Smaller airlines experienced a sharp reduction in passengers following the accident. Over time, passengers returned to the newer discount airlines when large fare differences were offered. New government policies also made it more difficult to start a new airline following the Value Jet crash. The FAA increased its scrutiny of start-ups. This scrutiny took the form of more complete reviews of maintenance, safety and recordkeeping procedures. The new procedures doubled the time needed to acquire FAA approval to operate a new airline. The FAA also placed limits on the number of aircrafts new airlines were able to operate. The limits were based on a carrier’s financial and managerial resources.

Southwest’s another competitor we should mention is Metro Jet. Perhaps, the greatest threat among the new startups was Metro Jet, a subsidiary of U.S. Airlines. Metro Jet was predominantly in the East and Southeast. Metro Jet’s strategy was simply: “We match Southwest”. The entire operational structure of Metro Jet was explicitly patterned after Southwest along with fares, schedules and customer incentives.

Southwest responded to Metro Jet by rallying its employees. First, Southwest commenced a “war day” where employees declared war on Metro Jet. Southwest employees decorated their offices with army surplus netting and paraphernalia. All employees were invited to wear army fatigues to work on war day. Since Metro Jet expressed an intention to match any Southwest price, Southwest decided to emphasize customer service in its “war with Metro Jet. Southwest employees were asked to write two or three thank you letters to passengers who chose Southwest over Metro Jet on identical routes. These letters were then passed out at the end of the flight, thanking the passengers for flying with Southwest.

United Airlines comes next. Because, another effort by a major airline to move into the low-fare, short-haul segment of the industry was undertaken by United Airlines. Begun in 1994, Shuttle by United was an effort by United Airlines to create an airline within an airline. At its inception, Shuttle flew 184 flights per day between eight West Coast city pairs. While widely viewed as a threat to Southwest, Shuttle’s early head-to-head efforts against Southwest had met with some setbacks. In Southwest strongholds such as Oakland and the San Diego – Sacramento market, Shuttle had not fared well. In response, Shuttle refocused its operations around its Los Angeles and San Francisco hubs. By late 1996, Shuttle overlapped only about 6-7 percent of Southwest’s capacity, down from 13% earlier. According to estimates, Shuttle’s costs were approximately 50 cents higher per ASM than Southwest’s, but they were also able to command slightly higher fares. More of Shuttle’s passengers were business travelers (approximately 80 percent earned frequent flier miles), which allowed them to sustain slightly higher fares than Southwest. United had indicated that it might expand Shuttle to other areas of the country, but it had not discussed any specific areas or timetable for doing so.

Other regional competitors, such as America West, sought to avoid direct competition with Southwest. Instead of overlapping flights with Southwest flights, America West chose to service routes that were typically longer than Southwest routes, but still offered low fares and no-frills, so as not to compete with the other major airlines.

As Southwest continues to expand, competition becomes stronger and stronger. Recently, many airlines have taken Metro Jet’s position for matching fares whenever Southwest expands into their territory. Another aspect of increased competition is the presence of stronger, well-established regional discount airlines.

One startup, Western Pacific closely modeled its operations after Southwest. Founded by Edward Beauvais, who earlier was co-founder of America West, Western Pacific was financed with $28 million in addition to $48 million raised in an initial public offering. Based in Colorado Springs, it used only Boeing 737-300s to simplify aircraft operations. Flights included no reserved seats and no meal service. While Western Pacific sought to emulate Southwest, it was intent on avoiding head-to-head competition. Later, Western Pacific Airlines made a big mistake by abandoning Colorado Springs which had very low operating costs. Outside Colorado Springs, United Airlines easily matched their prices. So, Southwest was again left as the leading airline company while none of its competitors was victorious.

III. SWOT Analysis

Potential Strengths

- Low ticket prices

- Customer service

- Low employee turnover / Loyal employee base

- Strong financial position

- Steady growth

- One of the top 10 companies to work for

- Good marketing focus

- Rapid rewards program

- Convenience

- No ticket change fee

- Over 330 planes serving 59 cities

- By only flying Boeing 737’s, the company has dramatically lowered the cost of training, maintenance and inventory

- 80% of promotions are internal

- First airline to offer employee profit sharing

Potential Weaknesses

- Open seating policy

- No in flight entertainment

- No escort service for minors

- Limited snacks, no meals

- Agents can not book online

- Limited storage capacity for carry on baggage

- Overbooked flights

- Bus-like atmosphere

- Limited direct flight for long distances

- No accommodation for dogs

- Lack of information when flights are delayed

- Numerous untapped domestic markets

Potential Opportunities

- Find a way to better service last minute planners

- Create a program to include advanced seating assignments

- Increase the number of flights

- Implement single stop baggage check-in

- Keep the customer well informed of delays and problems

- Expansion to new markets

- Competition looking to international markets rather than domestic

- Barriers to entry for other competitors

Potential Threats

- Government regulations

- Weakening economy

- Lower cost alternatives in terms of competition

- Public perception – low cost means low quality

- Consolidation in the industry

- Management change

- Vulnerable to public opinion about traveling in regards to terrorism

- Replication of the Southwest model by other companies

Part 2

I. Identification of gap in product line, new opportunities, different in target market, or change in needs of current target market

We think that the gap in Southwest Airlines’ production line is the entry to new domestic markets. We did check the Southwest Airline’s website () and also their travel booking page () to learn about the cities they are serving. Here are all of the cities which they serve:

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After that, we thought Southwest Airlines had a good opportunity for dominating new markets which do not take place in the map above. So, in our opinion, if Southwest Airlines expands its production line and services into three new cities, this will create a great opportunity in sales and profits increase. These three cities are Denver, Miami and Minneapolis. We did think of these cities because they are convenient to provide short-haul, high frequency, point to point and low fare service. Also, for instance we did consider other three cities that Southwest Airlines is serving. Phoenix, Las Vegas and Houston cities which are already served by Southwest Airlines have customer traffic of 30-40 million passengers (number of passengers per airport). The number of passengers in Denver, Miami and Minneapolis are very close which is another good reason to enter these new markets.

|Established Routes |Daily Departures |# of Passengers |

|Phoenix |180 |38,748,781 |

|Las Vegas |171 |36,856,186 |

|Houston |141 |35,246,176 |

Of course, according to our outside research, there are some changes in customer needs of current markets (). First of all, customers must be better informed about the delays and problems. Then, we did read about complaints of passengers who had pets. So, Southwest Airlines must also have accommodation for pets. The changing needs of customers must be satisfied in existing target markets as well as the new markets (Denver, Miami and Minneapolis).

II. Develop appropriate marketing objectives for the company that will drive the product you will introduce or the reintroduction of the current product to a new market.

The first marketing objective of Southwest airlines will be entering the Denver, Miami and Minneapolis cities. The second marketing objective will be increasing sales 3% in the first year up to 5% by the 3rd year.

To effectively market the new cities that will be served by Southwest Airlines, the strengths of the company must be emphasized in the eye of consumers. It is significant that Southwest Airlines has many strong points, however not all of them can be a subject of general marketing practice. The most important strength of the company that can be very sensible for marketing practice must be the low ticket prices. This means, Southwest Airlines must underline the fact that low ticket prices will continue in the new markets – Denver, Miami and Minneapolis. This is one of the marketing objectives. Additionally, the company’s famous customer service must be used as a marketing tool for the new markets. This is the second marketing objective. We think that it is best to have advertisements for the new markets by using especially these two strengths. As an example, an advertising practice with a message “Southwest Airlines will be in Denver, Miami and Minneapolis soon! Again with the lowest ticket prices and worldwide famous customer service! You won’t have to wait so long…” can be really helpful. Thus, an effective advertising practice and slogan for the new cities is the third marketing objective. The fourth marketing objective will be localized advertising. It is a known fact that advertising costs are very high in today’s business world while the financials are critically important for all companies. So, if Southwest Airlines implements localized advertising, it will be very effective and also the firm will save a lot of money. It is important to get the word out that Southwest Airlines entered the market. For this marketing objective to be successful; local newspapers, TVs, radios, bulletin boards, locally famous internet sites, uniquely painted planes and public relations events will be good choices to implement advertising.

III. Clearly define the target you will be attempting to reach with your new product based on consumer behavior concepts from the class.

The target for the new product (service) that will be provided by Southwest Airlines will be middle income consumers who are no frill value minded. As it is clearly known, Southwest Airlines also targets the middle income consumers already. So, the target will not change for the new cities. The reason which did lead us to decide on this target was that the middle income consumers are always price sensitive and are more likely to continue traveling with Southwest Airlines (because of low ticket prices) in these tough economic times.

To relate the target to consumer behavior concepts from the class, first it is important to mention that besides the marketing stimuli, other stimuli like economic, technological, political and cultural are important for consumers’ behavior. So, because Southwest Airlines provide low price tickets, it has an advantage in terms of consumer behavior for sale of services.

[pic]

This is also very important in the decision process through evaluation of alternatives. Then, upper uppers and lower uppers can not be a target for Southwest Airlines because of their unorthodox consumption behaviors. Finally, the selection of target is again very critical if we consider the consumer evaluation grids of consumer behavior concept - another important topic we discussed in the class. The reason is simple. Consumers who comprise the target of Southwest Airlines will give high ratings to the cost (low price of tickets) and customer service. Because Southwest Airlines’ target will give priority to low cost while having a good service. Thus, a great advantage will be gathered against other competitors here.

IV. Clearly define and discuss product issues, including new product development process, and / or the adaptations to your current product, and how it meets the needs of the target market. Discuss branding issues as required, and discuss how the product fits into the current line, or forms the cornerstone of a new line.

For the new product (service) development process, we did first look at the characteristics of Southwest Airlines and then did have a look at our SWOT analysis. After that, we did have a complete list of the cities served by Southwest Airlines. The next step was to locate common specifications of these airports. This would give us an idea for the selection of new cities which should have parallel characteristics with the existing airports. As an example; Denver, Miami and Minneapolis airports will have 30-40 million passengers each just like the already being served Phoenix, Las Vegas and Houston airports and they will again be suitable for short-haul, high frequency, point to point and low fare service just like all other existing airports served by Southwest Airlines.

The new product (service) will meet the needs of the target market. Because majority of the target have moderate income and the economic condition is usually uncertain. Thus, they will most welcome Southwest Airlines which offers low ticket price but a high consumer service. Another important thing is time which is important for all consumers. So, Southwest Airlines which has a very low delay rate, but still tries minimize delays (source: , 2003) will be advantageous. Besides an additional time advantage will be created because Southwest will choose small and less congested airports in Denver, Miami and Minneapolis which reduces aircraft taxi time and airport circling. We also know that not all airline companies are as safe as Southwest Airlines (mainly because of Southwest’s technology). As a result, the needs of consumers who look for safety will be satisfied.

The branding will remain the same while serving the new cities because we need the advantage of Southwest’s reputation. From our point of view, this is extremely important since we will be entering the new markets for the first time. In an industry where safety, time saving and customer service comes first to the minds, a well known brand name having all these characteristics will boost the sales quickly and more easily.

Finally, the product fits into the line because of the similar airport passenger population, the opportunity to continue short-haul, high frequency, point to point and low fare service, on-time arrivals, customer satisfaction and safety.

V. Discuss the pricing strategies that you will incorporate and provide reasons for your choices. Include the way in which pricing supports your marketing objectives.

For pricing strategies, we think Penetration Pricing Strategy must be chosen. Indeed, this strategy is already the one used by Southwest Airlines in other cities.

We choose the Penetration Pricing Strategy because our goal is to attract higher volume with a low price. Also, as mentioned before, Southwest currently has many competitors including Delta, Continental, United, Jet Blue, ValueJet and Metro Jet). Also, it must be noted that the number of competitors has an increasing trend. So, Penetration Pricing Strategy will help Southwest Airlines to have an advantage against its competitors. Because it will be more difficult for competitors to gain share as they enter. On the other hand, we didn’t consider Skim Pricing Strategy sensible because we thought it would be a bad idea to increase the prices. Also, our aim is not to create quality leadership, so Penetration Pricing Strategy is definitely better. Another good reason why we chose Penetration Pricing Strategy is that our customers are generally moderate income individuals who are very sensitive to price changes.

Our pricing strategy will support our marketing objective. Because entering Denver, Miami and Minneapolis markets and increasing sales 3% in the first year up to 5% by the 3rd year requires attracting many customers. To do this, Southwest Airlines must use its most valuable advantage – low ticket pricing which has a strong relationship with Penetration Pricing Strategy. Finally, we thought it would be smart to enter the three cities first with various price offerings and occasional offer specials. As an example, our travelers can fly cheaper at limited times, certain flights and on limited amounts of seats. If these special price offerings will be implemented for lower appeal days of the week, the idea will be smarter of course. Southwest Airlines will have a more successful entry to the new markets with these ideas which have high probability to work because our customers are always looking for cheaper prices.

VI. Identify and map out a distribution strategy that includes intended coverage and relevance to your product and target market. Discuss how the distribution strategy meets your marketing objectives.

Southwest Airlines will implement direct distribution for its new service. So, we think using intermediaries is not a good idea. By using direct distribution, Southwest Airlines (defined as the manufacturer here) will have complete control over its product/service.

[pic]

Direct distribution is also advantageous in terms of keeping the ticket prices low. Because using intermediaries will mean more costs for us which will result in an increase in ticket prices.

For direct distribution strategy, Southwest Airlines’ website will be used (). The company will continue to allow bookings through its website and toll-free call center. This distribution strategy will also help the company to have strong ties with its customers.

|Airline Ticket Distribution Costs in the US, 1999-2000 |

|  |Travel Agents |Direct Sales |

| |Offline |Online |Offline |Online |

|Ticket Processing fee |$3.00 |$.60 |$9.00 |$.60 |

|Credit Card fee |$6.00 |$6.00 |$6.00 |$6.00 |

|GDS Booking Fee |$8.40 |$8.40 |- |  |

|Commissions |$22.80 |$10.00 |- | |

|Total |$40.20 |$25.00 |$15.00 |$6.60 |

As you can see in the table above, using intermediaries (travel agents) increases costs in great amounts (resource: ).

The distribution strategy meets Southwest Airlines’ marketing objectives (entering Denver, Miami and Minneapolis cities and increasing sales 3% in the first year up to 5% by the 3rd year). Because, direct distribution strategy will make it much easier to reach the new customers in the new cities. Also, increasing the sales is tightly related with keeping the costs low.

VII. In light of all of the above decisions, determine what the customer needs to know about your product, and what method(s) will best deliver the message. Weight each of the promotion options according to its relevance to your marketing campaign and objectives. Include discussion of all markets, including trade and consumer, and which strategies best address each market.

The customer needs to know that Southwest Airlines will not only bring its reputation to Denver, Miami and Minneapolis cities but will also continue to provide the same friendly and satisfactory customer service, lowest fares, on-time arrivals and of course safety.

Advertising and promotion practices will deliver the best message. We must implement pull selling strategy because it requires high spending on advertising and consumer promotion to build up consumer demand for our service in the new cities. Newspaper advertisements (we will especially have intensive advertisements on local newspapers), TV and radio advertisements (again we will focus on local ones), bulletin boards (in airports at Denver, Miami and Minneapolis. Additionally bulletin boards around famous roads, streets and shopping centers will be used), internet sites (both Southwest’s website and other websites – e.g. placing banner ads websites of ally firms, famous websites related to Denver, Miami and Minneapolis), uniquely painted planes (we will paint some of the Southwest’s planes – e.g. we will use symbols and famous places of Denver, Miami and Minneapolis. We will also write the names of these cities on planes so that they will attract more attention), public relations events and e-mail advertising (Click ‘n Save e-mail list will be used) will be implemented.

The weights of each of our promotion options are: Newspapers (0.20), TV (0.20), Radio (0.05), Bulletin Boards (0.10), Internet Websites (0.15), Painted Planes (0.10), Public Relations Events (0.05) and E-mail List (0.05). So newspapers and the TV have highest weights. The sum of all weights equals to 1.00 (100%).

Our three markets (Denver, Miami and Minneapolis) have different kinds of individuals: High-income, moderate-income and the low-income persons. But, our customers are mainly the moderate-income group, just the same as all other cities we are serving. Because there are no differences among our moderate-income customers in these three different cities, there will be no difference in the implementation of strategies. That’s why we can’t say one particular strategy addresses one particular market the best.

VIII. Provide discussion of method you would choose to determine your marketing budget and your reasons for choosing that method.

To determine our marketing budget, we will use the Objective and Task method. Our objectives are already set, so we will determine the tasks and costs necessary to meet the objectives. By using this method, we can relate our advertising budget to the sales objective. Also, Objective and Task method will help us to prepare an advertising budget on the basis of dollar amounts which is tightly related with sales objective. Additionally our outside research () says “It’s the most sensible method because the budget set is dependent on the objectives of the marketing plan and the financial outlay required to meet them. A company using the task method may determine how much money is needed based on past experience”. On the hand, as an example we won’t use Unit of Sales method because it focuses on the number of sales (units). We didn’t prefer Percentage of Sales method too. Because our outside research () says “The disadvantage of Percentage of Sales method is that Opportunities can arise in market and businesses may need to increase their advertising spend to capitalize on them”. Finally, we will also have research on industry average marketing budgets in addition to implementing Objective and Task method.

IX. Describe how you will monitor and control the plan’s implementation and measure the results against the objectives you set in II.

To monitor and control the plan’s implementation and measure the results against our marketing objectives, we will first check financials and statements every three months to ensure if the projected growth is on track. Then, we will monitor anticipated market share at the three targeted airports (Denver, Miami and Minneapolis) every month. After that, we will analyze departure and arrival statistics (every month) to continue to maintain high level of efficiency. Next, we will review safety statistics on a frequent basis. Plus, we will track website usage and number of e-mail subscriptions every two weeks. In addition to these, we will have online (using our website) and face-to-face surveys directed to our customers about our services in the three new markets. Finally, we will control the plan as a whole (including all mentioned) annually.

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