Southwest Airlines business model and strategy
Imagine you are the owner/CEO of a low-cost carrier (LCC) and you have grown your business extensively where you have achieved a level of market saturation where options for growth based on your existing business model are limited. This was the challenge facing the world’s biggest LCC, SouthWest Airlines in the US. A similar problem was faced by Air Asia – Asia’s fastest growing and most successful LCC.
In Europe, Ryanair and EasyJet also have continued to expand and in some senses, the saturation level of their markets is some way off – the monthly proliferation of new flights from secondary airports suggests there’s some space left to go in Europe.
Indeed, SouthWest and Air Asia have pursued different extension strategies faced with the rapid maturation of their business models. It’s important to emphasize that these airlines faced different constraints and contexts – SouthWest is a domestic, continental airline and Air Asia is an international, intercontinental carrier, nevertheless, it’s worth exploring how they went about their growth.
I would suggest that Air Asia has attempted to develop a hybrid carrier model – integrating elements of both conventional LCC services with premium services of the traditional carriers.
On the other hand, SouthWest have decided to differentiate themselves from the traditional carriers in the US domestic market not by ‘dumbing down’ the quality but actually raising the quality vis-a-vis the traditional airlines. Here’s a blurb from their website (emphasis added by me): “Stay connected inflight with WiFi (where available on WiFi equipped aircraft). Our roomy Boeing 737 cabins feature all-leather seating with some of the best seat-pitch in the industry. On top of that, our friendly, fun-loving Flight Attendants are on call to help you sit back, relax, and enjoy your flight.”
SouthWest was the first major LCC to introduce a frequent traveller program: Rapid Rewards that linked your ticket spend to the number of points you would receive. While the benefits are akin to traditional FFPs, Rapid Rewards is much more limited in scope across all dimensions. Since SouthWest does not have a premium cabin, there’s no business class seats, nor are there any VIP lounges either. Instead SouthWest has linked it’s BusinessSelect flight experience to its Rapid Rewards program by offering the perks of BusinessSelect to it’s ‘A-List’ and ‘A-List Preferred’ FFs. Perks include priority check-in, free WIFI on board and a premium drink voucher.
SouthWest has equipped all their planes with leather seating and onboard comfort that exceeds many of its domestic competitors. While that’s not saying much in a US domestic airline context, it certainly provides a differentiated advantage. Moreover, unlike many LCCs, they provide complimentary non-alcoholic drinks to their customers. Most LCCs charge you for any drinks.