Southwest Airlines: In a Different World

09.12.2016 |

Episode #2 of the course Most influential business school case studies by Magoosh

 

The Southwest Airlines: In a Different World case shows the common struggles that face companies with once-disruptive business models as they grow from industry upstart to dominant player. The case focuses on the decision Southwest faced in 2008 of whether or not it should attempt to enter New York’s LaGuardia airport. It then uses that one decision as a jumping off point to explore the seismic shift that Southwest had undergone since its founding in 1967.

Southwest was founded as a low-cost, no-frills airline with a radically different business model than most legacy airline carriers at the time. Rather than offering long-haul flights using a hub and spoke model out of major airports as most legacy carriers did, Southwest operated shorter-distance flights offering point-to-point service out of smaller regional airports. In its initial conception, Southwest did not see itself as even competing with other airlines, but rather as a faster and more convenient alternative to bus routes. Southwest charged consistently lower fares and flew relatively limited routes initially. Because it only operated short flights, it served no food. It had no assigned seats and was able to turn around flights in short time windows. Because Southwest operated out of smaller airports, they had many fewer delays.

Southwest’s model was successful, but that success required many changes. Southwest started offering longer flights and began securing spots in larger and more popular airports. Low fuel costs throughout the 1990s allowed Southwest to keep fares low, but as oil prices surged in the 2000s, the airline faced increasing fares and lower demand. In addition, in 2008, Southwest was facing stiffer competition from other low-fare airlines as well as some legacy carriers, many of whom had declared bankruptcy and had been able to renegotiate labor and other contracts to keep costs under control.

Choosing to enter LaGuardia was just another in a long line of decisions Southwest faced that had the company shifting from its roots as a low-cost startup to the most valuable airline in the US. Some in the company worried that they were abandoning their core and becoming no different from the legacy airlines. Others argued that the LaGuardia spots were valuable and were willing to continue shifting the company’s business model in search of more and more profitable routes.

The case combines questions of operations and efficiency with issues of market expansion and business model changes. It’s a story that happens to many successful startup companies as they become the leader in the industry they once sought to upend.

The case leaves the decision up to the student, who has to balance the tradeoff between sticking to a successful model and adjusting that model in the face of new business opportunities and challenges. In the real world, Southwest did enter LaGuardia in 2008 and then expanded further in the airport in 2013.

 

Recommended book

“The Hard Thing About Hard Things: Building a Business When There Are No Easy Answers” by Ben Horowitz

 

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