Southwest started its service in 1971. It becomes famous by using its pricing strategy of cheap fares backed by seriously controlling costs. The central business of Southwest is the short-haul domestic route. The airplanes of Southwest are always on time which make the customers very delighted.
Southwest Airlines¡¯ used market penetration pricing strategy with low-fare, no frills, low cost service on relatively short flights. Moreover, it also provides benefits to customers such as simple scheduling, ticketless travel, and point-to-point service. It used this market-entry strategy to compete and discourage other companies because they realized the market for flights is very big, but the demand is highly elastic, depending on the price of the fares. It also finds that the more passengers Southwest has, the lower the cost per unit.
In order to offer low prices and earn profit, Southwest tried very hard to control its cost. Pricing of a product also should consider its cost, so Southwest and other airlines must control fixed cost and variable cost. Although fixed cost is hard to change in the short run, it still can reduce it in the long run. Fixed cost is the cost that remains constant regardless of how many passengers. Southwest tried to use the airplanes on resources as often as possible in order to increase revenue and pay off the fixed cost. Therefore, it emphasized rapid turnaround time which allows its planes to be in the air 3 more hours more than other airplanes in other airlines.
Variable cost can be controlled in the short run by changing demand of flights. Southwest reduces variable cost by not offering assigned seating, in-flight meals, a first-class section, or interairline luggage transfers to the passengers. It also reduces employee cost and spare part¡¯s inventories by using only single type of aircraft the Boeing 737. It also introduced ticketless travels which save the company $25 million from making tickets. Many Airlines are trying to imitate Southwest¡¯s successful strategies on controlling cost. Delta Airlines would lower their variable costs by lower pay, more flight hour, with union agreement which makes it become more efficient.
Southwest can be the pricing the pricing leader because they use lower costs measure by available-seat-miles(ASMs). Southwest has taken four steps to protect against competitors entering low price domestic market. Southwest plans more airplanes to fly in short distant which give more flexible schedule to the passengers. Second, it only added few longer flights to please the need of customers because the long distant fights cost more money for customer service, and they earn less profit. Next, it improves the quality of customer service with lower cost through the use new technology.
It introduces ticketless travel and lets the passengers use the Internet to check flight information and buy tickets. Forth, the company tried to maintain morale. Southwest does not pay high salary, but give away attractive bonus and cheap stock to their pilot who fly more than the pilots from the other airlines. Employees feel they belong to the company because of high employee morale. It saves a lot of money by not hiring new employees.
Many airlines tried to imitate Southwest airlines¡¯ successful low price strategy, but only a few succeeded. However, Untied Airlines, who distinguish itself from Southwest by offering more attractive customer service such as a flight-meal, but the same low price that Southwest charge. Southwest reacts to Untied by providing more flights and fare cuts on both short-haul and long-haul routes that were provided by United.
A series of successive price cuts by competing firms creates a price war, which can harm the profits of all participating airlines. Southwest must calculate how much money can it afford losing in their low price competition in order to prevent it being a loss leader. Southwest needs to find a way to set themselves apart from the competitors. It can mark itself as the ¡°original low price leader.¡± It can provide extra service for customer who fly frequently.