Southwest Airlines Case

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  • Topic: Cost, Pricing, Airline
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  • Published : November 14, 2008
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Case: Southwest Airlines

1.Although Southwest is smaller than some of the major airlines, it is pursuing a market share leadership strategy. The example in the case of its success in the Oakland market versus US Airways indicates that even though it may not be the biggest overall airline, it tries to dominate any particular market it enters through its low-price strategy. Thus even though it is entering the Philadelphia market with only 14 flights per day, US Airways should expect it to expand its number of flights quickly if it is successful in getting a start in the market. Southwest is not pursuing a current profit maximization strategy, even though it has been highly profitable. Low prices do not necessarily result in lower profits.

In order to deliver low prices, Southwest must keep the cost of the other variables low. Thus, it offers a no-frills, point-to-point, air transportation service (product) at out-of-the-way airports (places) where costs are low, with limited and low-cost promotion. Price is the only marketing mix variable that produces revenue, so with low prices the company must keep the cost of the other variables low. Southwest has done an excellent job of getting the marketing mix variables to fit with each other.

2.Salaries of the pilots, flight attendants, ground crews, terminal personnel, reservations systems personnel, and corporate employees are all fixed. The costs of the planes, the gates at the airports, terminal fees, etc., are also fixed. The only variable costs are the transaction costs of issuing a ticket (very low with e-tickets), the extra fuel the plane uses because of the extra weight of the passenger and luggage, and any in-flight food or beverages. The true variable cost of flying one additional passenger is very low.

So, air transportation is a very high fixed-cost business. In such a business, volume is important. The unit price minus unit variable cost (unit contribution) is high. An airline must have a...
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