Southwest Airlines

Imagine that you are Herb Kelleher, and you are faced with one major question: how should Southwest Airlines respond to United Arlines pricing strategy? However, this is a loaded question, so in the position paper, clearly identify your choice to respond to Uniteds strategy, if so, which option, how much of a change in pricing, and why?

• How can the economics of the airline industry be used to explain the performance of individual airlines and the industry as a whole? Use and calculate the information provided in the appendix section to respond to this question.
• What assessments can be made about the Shuttle by United market and financial position based on 1994 fourth quarter results?
• Based on your assessments, how would you interpret Uniteds decision to (a) discontinue Shuttle by United service for the Oakland-Ontario market and (b) raise the one-way walk-up first class and coach fare on all 14 Shuttle by United routes by $10.00?
• How should Southwest Airlines respond, if at all, to the Shuttle by United decision to change its service and price? Why?

APPENDIX

Calculation of airline operating income for passenger operations (you may use either formula):

The case notes that an airlines operating income for passenger operations is as follows: Operating income = (Yield x Load Factor) - Operating cost, or: (Operating income / ASM = ((passenger revenue/RPM) x (RPM/ASM) - (operating cost/ASM))