Air Travel Airlines Case Study

1. What benefits do airline customers seek when they buy air travel tickets? Has Southwest done a better job than competitors of meeting the needs of these air travelers? In what ways?

a. Traditionally, Southwest used a low-price strategy. They were known as always offering the cheapest flights. The airline did not serve meals, had no assigned seats, no electronic entertainment, and no retirement plans for employees. Because Southwest had such lower costs, they were able to crush competitors. This pricing strategy was so successful throughout the airline’s first three decades because their strategy was the complete opposite of competitors. The planes flew point to point based on demand which offered more flexibility. The airline did not serve

The business plan developed by Herb Kelleher seemed to fly in the face of every aspect of airline convention. No meals, no assigned seats, no amenities, no retirement plan, one kind of plane, and flying point-to-point instead of hub-and-spoke. But every one of these things was cheaper for Southwest and gave it a cost advantage. Thus, when competition attempted to match Southwest’s prices, they could not match Southwest’s profits. In order to deliver low prices, Southwest must keep the cost of the other marketing mix variables low. Therefore, it offers a no-frills, point-to-point, air transportation service (product) at out-of-the-way airports (places) where costs are low, with limited and low-cost promotion. Price is the only marketing mix variable that produces revenue, so with low prices the company must keep the cost of the other variables low. Southwest has done an excellent job of getting the marketing mix variables to fit with each other. The most recent way that Southwest has implemented value-based pricing is through its commitment not to charge for luggage. Baggage fees charged by almost every other airline have fast become calculated into traveler’s perception of

Air transportation is a very high fixed-cost business. In such a business, volume is important. The unit price minus unit variable cost (unit contribution) is high. An airline must have a high volume of passengers to cover the high fixed costs. Operating below break-even volume results in an airline losing lots of money quickly. Operating above break-even volume results in an airline making lots of money quickly. This is why the airlines can have lots of sales promotions and discounts—they had rather have a passenger in a seat making some unit contribution than have that seat be empty and produce no unit contribution. In this type of business, a company varies its pricing to produce the volume it needs. The text discusses dynamic pricing—charging different prices depending on individual customers and situations. The airline industry is an excellent example of this