Service Operation Management at

Background :

- Founded in 1967 - Love Field in Dallas, TX - 35,000 Employees (started Flying in 1972) - Nation’s 4th largest airline (59+ cities and 65M Customers) - Only two fares: regular coach and off-peak Only airline to win the FAA’s

“triple crown” 26 different months, three full years in a row best on-time record fewest lost bags fewest customer complaints (consistently the airline with lowest

complains)

• Results and Outcomes:

- Excellent customer service (rated the best for on-time performance, fewest lost bags; fewest customer complaints – 13 years in a row) - Safest airline in the world (never had a fatal accident) - Profitable every year (33 years in a row); only airline in the world

Fun facts (www.southwest.com)

Southwest reviewed 284,827 resumes and hired 3,363 new employees in 2006 (11.8%).

Southwest carried 96.3 million passengers in 2006.

Southwest served 93.8 million bags of peanuts in 2006.

Southwest moved 265 million pounds of cargo in 2006.

Southwest used about 1.6 billion gallons of jet fuel in 2006.

The shortest daily Southwest flight is between Ft. Myers and Orlando (133 miles). The longest daily Southwest flight is between Philadelphia and Oakland (2,508 miles).

Southwest has approximately 1,133 married couples. In other words, approximately 2,266 Southwest Employees have spouses who also work for the Company.

Southwest’s Business Model

Providing safeReliableShort duration air serviceLowest possible fairQuality servicePoint to Point

Integrated Low Cost/Differentiation Strategy

Use a single aircraft model(Boeing 737)

Use secondary airports

Fly short routes

15 minute turnaround time

No meals

No reserved seats

No travel agent reservations

Low Cost

Focus on customer satisfaction

Focus on customer satisfaction

New flight services for business travelers

(phones and faxes)

S.W.A.’s Culture, Values, Philosophies & Principles

New flight services for business travelers

(phones and faxes)

S.W.A.’s Culture, Values, Philosophies & Principles

High level of employee dedication

High level of employee dedication

Differentiation

Differentiation

The “Right” People or the “Right” Organization?

• What are our basic Principles, Philosophies and Core Values?• What do we believe in?

• What policies and practices are consistent with these Values and Philosophies?

•What can we do for the customer better than our competitors?

• Given our capabilities, how can we deliver value (EVA) to customers in a way our competitors cannot easily imitate?

• Senior management “manages” the values and culture of the firm.

A Values-Based Organization View of Strategy

Fundamental Values or Beliefs

Design Management PracticesThat Reflect and Embody

These Values

Use These to Build Core Capabilities

Invent a Strategy That is Consistentwith the Values and Uses the

Talents & Capabilities of People/Organization to Compete in

New and Unusual Ways

Senior Management’s Role

SW:Anatomy of a 15-minute Turnaround

7:55 Ground crew chat

around gate position

8:08 Boarding call ,baggage

loading, refueling complete

8:03:30 Ground crew move to their

vehicles

8:07 Passenger off plane

8:04 crew moves

towards gate

8:06:30 Baggage unloaded, refueling

8:15 Jet way

retracts

8:10 Boarding complete.

ground crew leaves

8:15:30 Pushback

from backs

8:18 Pushback

disengages plane leaves for runway

How SW strategy is Implemented

Passenger related

departure

Very low

ticket prices

No site assignm

ents

No baggage transfer

s

No connectio

n with other

airlines

No meals

Short hual,point to point travel

Limited Passenger service

High aircraft utilizatio

n

Key operation parameters of sw

Passenger Load factor- is the percentage of a plane filled with

paying passengers. Revenue passenger

miles- One paying passenger

flown one line

626466687072

1998 1999 2000 2001 2002

Passenger Load Factor

%

0

20000

40000

60000

1998 1999 2000 2001 2002

Revenue passenger miles

million

Source:www.southwest.com

Cont……

Aircraft Utilization-in hours and minutes in a day a plane

is used 01,0002,0003,000

Average Daily Passengers

passengers

11:0211:0911:1611:24

1998 1999 2000 2001 2002

Aircraft Utilizatin

hr:min

SW’s Top Ten Airport-Daily Departure

Southwest avoided congested airport.

High employee productivity.

Reliable on time performance.

80 86117 122 130 141 150

171 180

020406080

100120140160180200

No.

of D

aily

Flig

hts

Airports

Daily Departure

No od Daily flights

Third-Degree Price Discrimination

The firm identifies different consumer groups, in the market, each with a different demand curve. Southwest Airlines recognizes that any given

flights has different types of travelers business travelers vs. vacation travelers

To maximize profit, the firm sets a price for each group by equating marginal revenue and marginal cost. Equivalently, by using the inverse elasticity

pricing rule (IEPR)

Conditions for price discrimination

A firm must have some market power to price discriminate

The demand curve the firm faces must be downward sloping

Southwest knows that it can attract more customers at lower fare price

The firm must have some information about the different amounts people will pay for its product.

Southwest must know how reservation prices or elasticities of demand differ across consumers

A firm must be able to prevent resale, or arbitrage. Customers need to present an identity card

before boarding

Corporate Culture

Tickets must be bought from the airline itself, the phone or online

Extra Rapid Rewards - frequent flier program- credits for online booking users only

Customers are assigned to a boarding group depending on check-in time - find their own seats on the plane

Colorful boarding announcements and crews that burst out in song instead of no video entertainment

Meal service is less than on historically full service airlines

Looking Ahead

Increase more non stop flightsEnrich operation systemInclude daily non stop flights in busy air

traffic route.

Conclusion

Southwest Airlines uses third-degree price discrimination to fill the plane with travelers in the most profitable way

Depending on the price of elasticity of demand for tickets Charge a higher price for business travelers who have

relatively inelastic demands Charge a lower price for vacation travelers who have

relatively elastic demands

That’s It