18.case study- southwest airlines
TRANSCRIPT
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Spring Marketing Electives
• 15.828 New Product Development • 15.831 Marketing High Tech Products • 15.834 Marketing Strategy • 15.835 Entrepreneurial Marketing
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25
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themarket 10
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Repeat after me…
• Everybody is not like me.
• Everybody is not like me.
• Everybody is not like me.
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Southwest Airlines:key concepts
• Break-even analysis
• Price elasticity
• Price wars
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What are some of the product attributes of an airline flight?
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How does importance of attributes differ by segment?
• Safety Business Pleasure
• Comfort Business Pleasure
• Service Business Pleasure
• Convenience Business Pleasure
• Price Business Pleasure
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Southwest Airlines
Who was Southwest Airlines major competitor?
¾ "We've always seen our competition as the car. We've got to offer better, more convenient service at a price that makes it worthwhile to leave your car at home and fly with us instead."
(Colleen Barrett, executive vice president)
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Southwest Airlines
• Why did the president feel that the current level of usage underestimated potential demand?
¾ Because the interstate carriers weren't doing the job in this market.
¾ it was difficult to get reservations (Why?) ¾ poor record for punctuality (Why?) ¾ poor service (Why?)
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Southwest Airlines
¾ What were SW's innovations? ¾ fun atmosphere ¾ no assigned seating
¾ flight attendants required to clean airplane
¾ turnaround an aircraft in 15 minutes
¾ pilots paid per trip
¾ flight attendants paid per trip. (Lower pay, but more flexibility)¾ job security valued over pay
¾ compensation in terms of stock options
¾ extremely selective hiring policies (More selective than Harvard)
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Southwest Airlines
• How did Southwest arrive at their initial price of $20?
• "Break-Even Analysis": "Pick a price at which you can break even with load factor that you can reasonably expect to get within a short period of time…the price ought to be as low as you can get it without running out of money"
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Break even analysis
totalrevenue
total $ costs
# of passengers
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Break even analysis
BEQ = Fixed cost
Unit Price – Unit VC
Fixed cost= $670 per flight
Variable cost= $2.80
revenue
$ costs
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Break even analysis
BEQ = Fixed cost
Unit Price – Unit VC
Fixed cost= $670 per flight
Variable cost= $2.80
$ costs revenue
39 ??
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Break even analysis
$20
$10
39 78 93
losses from charging intramarginal customers less
additional variable costs
additional revenue from
increased demand
-$390
+$540
-$150
(93-39) * $2.80
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Was the BEQ of 39 passengers per flight realistic, given the current market?
• What was the daily demand for flights between Dallas and Houston,prior to Southwest's entry? (see Exhibit 1)
• (p. 4) Southwest scheduled called for 12 daily round trips betweenDallas and Houston. That's 24 flights.
• (p. 5) break-even load requirements = 39
• What proportion of the current market would SWA have to capture?
• Southwest needed to not only take share from competition, but toexpand primary demand.
• To expand primary demand via price cuts, demand for air travel between Dallas and San Antonio needed to be price elastic. Was it?
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Was demand elastic with respect to price?
Price Quantity
from 1973 (Jan) $26 17 Yes, very
page 11 1973 (Feb) $13 48 elastic !!
Price Quantity Much more than
from 1972 (June) $20 29 a previous
calculationpage 22 1972 (July) $26 26 would imply
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Radio ad for Southwest Airlines
• Southwest Airlines half-fare flights. Every flight between San Antonio and Dallas every day. Only $13
• [Irate Male Voice] "Hey! If you people fly Southwest Airlines during this half-price sale, you're gonna have a lonely bus driver on your conscience. Take the bus. It only costs a little more and is just 4 hours longer."
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Pricing strategies: a timeline
• June 1971 SW Opens. Introduces $20 flights • July, 1971 Braniff and TI reduce price to $20 • July, 1972 SW raises basic fare from $20 to $26, but
flights after 9:00 p.m discounted to $10. • July, 1972 Braniff and TI raise price to $26; Braniff adds
a $10 flight to Houston after 7:30 p.m. • January 22, 1973 Announces a "60-Day Half-Price Sale"
on all flights between Dallas and San Antonio. • February 1, 1973. Braniff announces 60 Day "Get
Acquainted Sale" between Dallas and Houston (H).
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How should Southwest respond to Braniff'smove? What are their alternatives?
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What did Southwest do?
• Offered people a choice between the low fare $13 or the normal fare of $26.
• If they paid the $26, they received a thank you gift. – Liquor – Ice bucket (for the Mormons who claimed they don't drink)
• Initiated a PR campaign in which they accused Braniff of predatory pricing
• Reminded customers what service was like before SW.
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Postscript
• When Braniff's 60 day sale was over, they returned prices to $26. So did Southwest.
• In 1975, a federal grand jury indicted Braniff and TI for predatory pricing
• Both Braniff and Texas International Airlines are now defunct
• Southwest worth more than all other airlines combined (11 Billion).
• Successful business model for the east coast? – More weather related delays – People not as friendly or fun loving
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Advertising campaigns
• Braniff • Texas International • Southwest
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Price Quantity 23,0001972 (June)
1972 (July)
$20
$26 19,000
$26
$20
gains from charging intramarginal customers more reduced
variable costs & "fixed" costs
lost revenue from
decreased demand
19 23