For most of the last fifteen years, the U.S. airline industry has been one of the least attractive to be in. Following the 1978 deregulation of the industry, twenty-nine new airlines entered the industry between 1978 and 1993- This rapid increase in airline carrying capacity led to a situation of overcapacity. As more and more airlines chased passengers, fares were driven down to levels barely sufficient to maintain the profitability of U.S. airlines. Indeed, twice since 1978 the industry has been engulfed in an intense price war—first in the1981-1983 period and then again in the 1990-1993 period. So intense did the competition become during these two periods that in 1982 the whole industry lost $700 million, while in the 1990-1992 period the industry lost a staggering $7.1 billion, more than had been made during the previous fifty-year history of the industry.
Despite the obviously hostile nature of this industry, one company, Southwest Airlines, has not only been consistently profitable but also has been its performance improve during years when its competitors were wallowing in red ink. Southwest is a regional airline with a major presence in Texas. In 1992, when every major U.S. airline except Southwest lost money, Southwest actually reported a sharp jump in its net profit to $105.5 million on revenues of $1.68 billion, up from $26.9 million on revenues of $1.31 billion in 1991.
Southwest is profitable because of two factors: its low costs and the loyalty of its customers. Its low costs come from a number of sources. Southwest offers a no-frills approach to customer service. No meals are served on board, and there are no first-class seats. Southwest does not subscribe to the big reservation computers used by travel agents because it deems the booking fees too costly. The airline flies only one type of aircraft, the fuel-efficient Boeing 737, which keeps training and maintenance costs down. Last but not least, the airline has a very productive work force. Southwest employees say that they are wining to work hard because they feel appreciated by the top management. The CEO, Herb Kelleher, has been known to help flight attendants serve drinks and help maintenance engineers service planes. As one flight attendant put it, the airline’s employees work hard because “you don’t want to let Herb down.” In addition, Southwest operates a generous stock option plan that extends to all employees. As a result about 10 percent of the airline’s stock is owned by its employees, which gives them an additional incentive to work hard.
Southwest’s customer loyalty also comes from a number of sources. Due to its low cost structure, Southwest can offer its customers low prices, which builds loyalty. Southwest also has a reputation for being the most reliable carrier in the industry. It has the quickest turnaround time in the industry (it takes a Southwest ground crew just fifteen minutes to turn around an incoming a craft and prepare it for departure), which helps keep flights on time. The company also has a well-earned reputation for listening to its customers. For example, when five Texas medical students who commuted weekly to out-of-state medical school complained that the flight them to class fifteen minutes late, Southwest moved the departure time up fifteen minutes. In addition, South west’s focused route structure (it serves just fifteen states, mostly in the South) has helped it build a substantial regional presence and avoid some of the cutthroat competition that the nationwide airlines have to grapple with.
Case Discussion Questions
1. What does the success of Southwest Airlines tell you about the relative importance of industry company-specific factors in explaining a con performance?
2. What is the basis of Southwest’s competitive advantage? How might it lose that advantage?