Pricing – an Airline Industry example

Team 3 (Ca-Boom!) – Angela Hoskisson, Jeff Van Sant, Kelley Malone, Shawn Casey

Time to Go Back…

Late 1960’s

How Far Back?

The Airline Industry – Late 1960’s

Barriers to Entry

Government Regulation• Civil Aeronautics Board (CAB)

• Formed in 1940• Safety Rulemaking• Control of what routes airlines can fly• Control of fares airlines can charge

• Federal Aviation Administration (FAA)• Formed in 1967 under Dept. of Transp.

• Air Traffic Control • Airman and Aircraft certification• Safety Enforcement• Airway Development

Infrastructure Constraints

• To start service airlines must have:• Access to airport facilities

• Gates• Ticket Counters• Baggage Facilities

• Access limited at most of nation’s largest airports by long-term exclusive-use leases

High Fixed and Operating Costs

• Airplanes• Fuel• Engines• Parts• Labor• Equipment• Insurance• Leases • Marketing

Legal and Political Dangers

• Regulation of airline industry often brought out intense litigation among competitors who would protect their market at all costs

• Similarly, regulation often led to enormous political power held by major carriers who were unafraid to wield this power against the competition

Summary – Barriers to Entry

•Government Regulation•Civil Aeronautics Board •Federal Aviation Administration

•Infrastructure constraints•High fixed and operating costs •Legal and Political Dangers

What would you do?

•Anyone interested in starting an airline?

Southwest Airlines

• The beginning came on a cocktail napkin, pointing out the “Golden Triangle” of Texas was perfect opportunity.

TURN AROUND TIME

BUSINESS OR PLEASURE

DON’T MESS WITH A TEXAN

Value Creation + Southwest

• Reference Value• Differential Value

• Monetary• Psychological

• Total Economic Value versus Use ValueReference Value + Differential Value

Southwest Strategic Pricing

Interaction of Expectations and Behaviors

Pricing Policy Development

• Ad hoc Pricing Policy?• Passing on material costs• Inducing product trials

Responding to Price Objections

• Ad hoc price negotiations• Value of price negotiation policies

• Value-Base Selling

Imp

ort

ance

of

Diff

ere

nti

ati

on

High

Low

Cost of Search(Difficulty of Comparison)

Low High

Price Increase Policy & Economic Downturn

• Know that an increase in cost affects the competition too.

• Hedge your price flux by buying futures or bulk.

• INNOVATION!!!

Differentiation Through EmployeesSouthwest Hires….•Positive attitudes over degrees and skill •After rigorous interviewing•With peer interviews

Culture/Structure•Casual dress code •Pension through profit-sharing plan•Team focus•Cross-training encouraged•Internal promotions common•Encourages employees to treat customer service as most important part of the job

Former CEO Kelleher, “We want people who do things well, with laughter and grace.”CEO Gary Kelly, “Our people are our single greatest strength and most enduring long term competitive advantage.”

We Luv Market Segmentation

• Low cost• Low-fare• Short-haul• High-frequency• Point-to-point• Fun to fly• No inflight meals (nuts and pretzels)• No assigned seats• Bags fly free

Strategic Pricing