Southwest Airlines 2005
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In 2005, Southwest Airlines (Southwest), the once-scrappy underdog in the U.S. airline industry, carried more domestic passengers than any other U.S. airline. The company, unlike all of its major competitors, had been consistently profitable for decades and had weathered recessions, energy crises, and the September 11 terrorist attacks. In recent years, Southwest had become more aggressive with its growth. The company entered the Philadelphia market in 2004 and planned to enter Pittsburgh in 2005, two markets that had long been dominated by the financially strapped US Airways. Southwest planned to increase its capacity about 10% in 2005, adding 29 planes to its fleet of 417. In December 2004, Southwest announced a code-sharing arrangement with ATA Airlines, a tactic Southwest had avoided in the past. Along with the expansion plans, Southwest was making internal moves to strengthen accountability and communication between departments and pushing its employees to become even more productive. In the fourth quarter 2004, excluding fuel costs, Southwest’s operating costs declined 4.5% on a per-unit basis. An insight into Southwest’s management philosophy can be found in the company’s 2001 annual report: Southwest was well poised, financially, to withstand the potentially devastating hammer blow of September 11. Why? Because for several decades our leadership philosophy has been: we manage in good times so that our Company and our People can be job secure and prosper through bad times.…Once again, after September 11, our philosophy of managing in good times so as to do well in bad times proved a marvelous prophylactic for our Employees and our Shareholders.
The U.S. Airline Industry
The U.S. commercial airline industry was permanently altered in October 1978 when President Carter signed the Airline Deregulation Act. Before deregulation, the Civil Aeronautics Board regulated airline route entry and exit, passenger fares, mergers and acquisitions, and airline rates of return. Typically, two or three carriers provided service in a given market, although there were routes covered by only one carrier. Cost increases were passed along to customers, and price competition was almost nonexistent. The airlines operated as if there were only two market segments: those who could afford to fly and those who couldn’t. Deregulation sent airline fares tumbling and allowed many new firms to enter the market. The financial impact on both established and new airlines was enormous. The fuel crisis of 1979 and the air traffic controllers’ strike in 1981 contributed to the industry’s difficulties, as did the severe recession that hit the U.S. during the early 1980s. During the first decade of deregulation, more than 150 carriers, many of them start-up airlines, collapsed into bankruptcy. Eight of the 11 major airlines dominating the industry in 1978 ended up filing for bankruptcy, merging with other carriers, or simply disappearing from the radar screen. Collectively, the industry made enough money during this period to buy Copyright © 2005 Thunderbird, The Garvin School of International Management. All rights reserved. This case was prepared by Professor Andrew C. Inkpen and Valerie DeGroot, with research assistance from Jairaj Mashru, Arturo Wagner, and Chee Wee Tan, for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.
two Boeing 747s1 (Exhibit 1). The three major carriers that survived intact—Delta, United, and American—ended up with 80% of all domestic U.S. air traffic and 67% of trans-Atlantic business.2 Competition and lower fares led to greatly expanded demand for airline travel. Controlling for inflation, the average price to fly one domestic mile has dropped by more than 50% since deregulation (10 cents in 1975 to almost 4 cents in 2003). By the mid-1990s, the airlines were...