SOUTHWEST AIRLINES Submitted By: P.Ranjithkumar 10MBA0031 Batch-D
PROBLEM STATEMENT: The chief competitor of South West Airlines, Braniff International airways has introduced a 60 day half price ticket sale on Southwest s major route Dallas Hobby. OBJECTIVE: To discuss and strategize alternatives in response to Braniff s move, while ensuring profitability. FACTS: The domestic airline market is highly price sensitive and journey time is very less when compared with international routes. The competitors like Braniff International and Texas International operated long haul flights in Hub and Spoke model while South West Airlines (SWA) operated short haul flights. The target segment for SWA is business community travelling between Dallas, Houston and San-Antonio. The chief competitor, Braniff often cancelled the flights hence it is considered as un reliable operator and its flights were always over booked. The short haul flights of SWA reduced the turnaround time and offered flexibility to the commuters. The major revenue earner route for SWA is Dallas- Hobby (Houston) route in which Braniff has announced a half price sale for 60 days. The Braniff is an established player with strong balance sheet while SWA is a new entrant. BRIEF ANSWER The SWA is a new entrant in the domestic airline market while Braniff and Texas International (TI) are established players. The target market for SWA is business commuters who preferred low cost traveler for short distance travel. The market is also highly price sensitive and they preferred short haul flights over the long haul flights operated by Braniff and TI as the short
haul flights offered flexibility and ambience. The SWA introduced half price fares on all Dallas- San Antonio route which increased the average passenger per flight from 17 to 48 drastically. Braniff has announced half price fares in Dallas-Houston route which is the major revenue earning route for SWA. The SWA has to counter the Braniff s move in order to retain traffic while maintaining the profitability. ANALYSIS: Incremental Cost per Flight = $ 245 Incremental Cost per Passenger = $ 2.8 Operating Expense = $ 1842000 Interest costs = $ 204000 Total Costs = $ 2046000 Total Cost/Flight = $ 717.0146 (Excluding Passenger Variable Cost) Breakeven Analysis: Price Level 30 26 20 13 10 Variable Cost per tax 2.8 2.8 2.8 2.8 2.8 Margin 27.2 23.2 17.2 10.2 7.2 No of Passenger to cover a flight 10.00 11.00 15.00 25.00 35.00 No of Passenger to cover total costs 27.00 31.00 42.00 71.00 100.00 Current affordable price level = $ 36 Off Peak customers = 23 SENSITIVITY ANALYSIS:
Parameters Cost (in $ ) Incremental Cost per Flight 245 Incremental Cost per Passenger 2.48 No of Passenger 20 Price 26 Profit 225.4 Revenue 520 From the above sensitivity analysis it is clear that fare can be reduced to $ 16 to counter Branniff s price cut while maintaining the profitability of operations. In the above tabular column Yes refers to the parameters considered by the business traveler (self booking & agent booking) and pleasure traveler while booking the tickets. No refers to the parameters which are not considered while booking the tickets by the commuters. The business commuters and corporate people should be the main target segment for SWA than attracting the commuters of competitor airlines. The price cut has the potential to attract the commuters who use non airline mode of transport. This is necessary to remain profitable in the long run. The competitor s weakness is unreliability due to cancellation of flights and being not punctual. They can t offer the ambience as they operate long haul flights. SWA should concentrate on these parameters and use this as their differentiation, fare being the same for both. The SWA s point to point operation model, short haul flights, less turnaround time, fresh looking crews, good customer service etc are the vintage points and they should capitalize on it by emphasizing it in the advertisements. SWA can fix the high fares for its peak time service which targets the business commuters; they give importance to speed, convenience and punctuality than price.
They can also offer reduced fares during off peak time and concentrate on pleasure traveler who gives importance to price than speed, convenience and punctuality of flight arrival and departure. CONCLUSION: Thus the given case Southwest Airlines was successfully analyzed about its issues and the alternatives which we suggested also given.