Provide a CASE STUDY . Parts are INTRODUCTION, SITUATION ANALYSIS AND STRATEGY FORMULATION

Andrew Inkpen and exit, passenger fares, mergers and acquisitions, and You are now free to move about the country. airline rates of return. Typically, two or three carriers In 2013, Southwest Airlines (Southwest), the once scrappy provided service in a given market, although there were underdog in the U.S. airline industry, was one of the larg- routes covered by only one carrier. Cost increases were est U.S. airlines and, based on number of passengers, one passed along to customers, and price competition was of the largest in the world. The company, unlike all of its almost nonexistent. The airlines operated as if there major competitors, had been consistently profitable for were only two market segments: those who could afford decades and had weathered energy crises, the fly, and those who couldn't. t1 terrorist attacks, and the energulation sent airline fares tumbling and allowed t1 terrorist attacks, and the 2008-09 recession. An insight many new firms to enter the market. The financial impact into Southwest's operating philosophy can be found in on both established and new airlines was enormous. The the company's 2001 annual report: fuel crisis of 1979 and the air traffic controllers' strike Southwest was well poised, financially, to withstand in 1981 contributed to the industry's difficulties, as did the potentially devastating hammer blow of September 11. the severe recession that hit the United States during Why? Because for several decades our leadership phi- the early 1980s. During the first decade of deregulation, losophy has been: we manage in good times so that our more than 150 carriers, many of them start-up airlines, Company and our People can be job secure and prosper collapsed into bankruptcy. Eight of the 11 major airthrough bad times...Once again, after September 11, our lines dominating the industry in 1978 ended up filing philosophy of managing in good times so as to do well for bankruptcy, merging with other carriers, or simply in bad times proved a marvelous prophylactic for our disappearing from the radar screen. Collectively, the Employees and our Shareholders. industry made enough money during this period to buy As Southwest entered its 42 nd year of service, the two Boeing 747 s. 1 The three major carriers that survived company was facing some major challenges. Legacy intact-Delta, United, and American-ended up with carriers in the United States had become more efficient, 80% of all domestic U.S. air traffic and 67% of transand the recent mega-mergers involving Delta/Northwest, Atlantic business. 2 Exhibits 1A and 1B provide summary Continental/United, and American/US Airways were financial data for the major airlines. The rapid growth shaking up the industry. Smaller companies like JetBlue, of Southwest was in stark contrast to the much slower Alaska, and Spirit were pressuring Southwest's cost growth of its major competitors. advantage and low-fare focus. A major internal chal- Competition and lower fares led to greatly expanded lenge for Southwest would be managing its acquisition demand for airline travel. Controlling for inflation, the of AirTran, a deal completed in 2011. To make the acqui- average price to fly one domestic mile dropped by more sition a success, the company would have to integrate than 50% since deregulation. By the mid-199os, the aira workforce of more than 8,000 (about 25\% the size of lines were having trouble meeting this demand. Travel Southwest) and manage a fleet of aircraft different from increased from 200 million travelers in 1974 to 700 the Boeing 7375 used by Southwest. million in 2007 in the U.S. Demand fell significantly during the recession and then started to grow again in