ACG 5075
Case 2
Gulver Karamemis
Puneet Kankaria
Joshua Morse
Manuel Hurtado
Five of Southwest’s most important indirect activities and their drivers, that should be considered
to implement ABC, are listed in Table 1:
Activity
Associated Costs
Advertising/Marketing
TV, print and radio
advertising expenses, online
media campaign, marketing
partnerships
Frequent Flyer Award
Free roundtrip travel
Number of awards given in a
period
Use of automated systems
and technology
Web hosting, web design
and maintenance, set-up,
software update,
depreciation on equipment,
High speed Internet link
Number of online2 devices
used
Offer more leg room
Compensating volunteers for
oversold flights
Unused planes capacity 3
Travel voucher in the
amount of $100 or $200,
amount equal to the face
value of the remaining oneway flight coupon
Table 1 Indirect activities
Cost Driver
Number of advertising air
time units1
Number of unused seats4
Number of volunteers
Southwest Airlines business model is based on offering low price flight tickets and high quality of
costumer service; they have reached their costumers through a very strong advertising and
marketing plan that includes TV, radio and print advertising, online media (not only
www.southwest.com but also banner ads on online web pages like NFL.com) and marketing
partnerships specially in the sports business with the NFL and the NBA and most recently with
the college Bowl Championship Series (please refer to exhibit 1). Advertising and marketing are
critical for companies in highly competitive industries like the Airline industry, and SW has done a
fabulous job differentiating the company among its peers, with a variety of campaigns running;
when costumers need a non-stop cheap flight they are most likely to look for one of the
company’s flights. They also use a weekly email newsletter to drive sales. The cost driver
associated with this activity is the number of advertising air time units, that can be used to obtain
the cost per every second/minute or hour that a company’s commercial is aired on TV or on radio;
the total air time per commercial and the period of time that it will be aired is defined with a
previous contract between Southwest and the broadcaster; the time of the day in which the
commercial will air is also considered and could include a premium for specific times or programs
(like Monday night football or the Super Bowl). The other cost driver that could have been
considered is number of days advertising is published (print and online); this driver refers to the
price for each day (or publication, that could be translated into days) that the ad is printed or
shown and is predefined with contracts along with the total period of time for which the ad will
extent; this driver can be translated into the same time units as the previous driver (number of
1
The units are time units e.g. seconds, minutes or hours
Online, meaning on the Southwest Network not necessarily connected to the Internet
3
Implies a loss on less passengers
4
Refers to each extra seat that could’ve been used if the total seat capacity per plane was used
2
2
advertising air time units) so that we can define one only accurate driver for the activity. For
example, if the time unit used is minutes, and the company pays NFL.com 1M to show a banner
ad for 1 month, the company will be paying $23.15 per minute. From the company’s most recent
filed 10K: “The Company expenses the costs of advertising as incurred. Advertising expense for
the years ended December 31, 2006, 2005, and 2004 was $182 million, $173 million, and
$158 million, respectively”
The company also offers the Frequent Flyer Award program (for more information please refer
to exhibit 2) which is based on trips flown rather than mileage, like most commercial airlines.
Rewards Customers earn a credit for each one-way trip flown or two credits for each roundtrip
flown. Rapid Rewards Customers can also receive credits by using the services of non-airline
partners, which include car rental agencies, hotels, telecommunication companies and credit card
partners; the Rapid Rewards Award Ticket offers one free roundtrip award valid to any destination
available on Southwest Airlines after the accumulation of 16 credits. The Rapid Rewards
Companion Pass is granted for flying 50 roundtrips (or 100 one-way trips) on Southwest or
earning 100 credits within a consecutive twelve-month period. The Companion Pass offers
unlimited free roundtrip travel to any destination available on Southwest for a designated
companion of the qualifying Rapid Rewards member. The driver used for this activity is the
number of awards given in a period, the company can keep track of this number and come out
with the cost of the activity; even though the cost of each award given can slightly vary depending
on the length of the flight, the company can use the average cost per mile as stated on the latest
filed 10k and a roundtrip award can be separated into 2 one-way trips.
Southwest Airlines is increasingly dependent on automated systems and technology to operate
its business, enhance costumer service and back office support systems and increase employee
productivity, including the company’s computerized airline reservation system, flight operations
systems, telecommunication systems, website at www.southwest.com, automated boarding
passes system, and the E-Ticket Check-In self service kiosks. Costumers can easily book flights,
check flights status, self check-in, etc. this creates a competitive advantage for the company due
to the fact that more costumers will be attracted by this and it also reduces the operating costs of
printing and shipping tickets, check in clerks, telephone operators for reservations, among others.
Successful companies in today’s market need to implement edge technology that allows them to
reach costumers faster, prevent congestion, prevent data loss and in general automate its
processes; SW has realized this and has gone one step further. The costs associated with the
use of automated systems and technology include web hosting (for the www.southwest.com
domain and other web pages used by SW), high speed Internet links (key to prevent congestion,
data loss and implement high encryption network security), software update, depreciation on
equipment, etc. Several cost drivers were considered for this activity: Number of set-ups, Number
of updated devices, Number of high speed links, Number of days paid for web hosting, Number of
web pages designed. The design of the web page, data bases and software can be considered
as a one time expense and the possibility of keeping the same logic system and graphic design
for several periods is high, so there will be periods were this expense is not even considered.
Other drivers can be measured in usage time: the high speed Internet link cost and the web
hosting cost is defined in a contract with an ISP 5, so these values can be added and divided by
the total number of devices used to come out with a basic cost. Then the costs of set ups per unit,
depreciation per unit in a period and the cost of software update per unit can be added to the
basic cost; the cost driver selected for this activity is number of online6 devices used.
The company offers more leg room than other airline companies in the industry. The float of
Boeing 737’s used includes 3 models of airplanes and they have redesigned their aircraft interior
5
6
Internet Service Provider
Online, meaning on the Southwest Network not necessarily connected to the Internet
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to maintain a comfortable distance between one seat and the one in front (please refer to table 1
on the appendix). With this activity the company implies the cost of not using the maximum
capacity of the plane; the cost driver Number of unused seats can be easily measured because
the company knows this number for each flight accordingly with the plane used (12 or 10) and
can come out with the cost per seat using the average seat price. It’s important to consider that
the number of flights per period is not a fixed number, because flights may be canceled and new
flights can be added to congested seasons or routes.
Compensating volunteers for oversold flights is something that has to be done, because airlines
need to overbook flights to compensate for passengers who neither cancel reservations nor show
up for their confirmed flights, it also creates booking opportunities for costumers who really want
or need to be on a flight that is showing full but likely to depart with available seats. The cost
driver for this activity is the number of volunteers, due to the fact that the cost per volunteer is
known; Southwest Airlines gives volunteers a travel voucher of $100 plus an amount equal to the
face value of the remaining one-way flight coupon. For the face value of the remaining coupon,
the average coupon price of a one-way flight as stated on the latest filed 10k can be used.
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APPENDIX
Exhibit 1: Southwest Airlines Scores Big on Partnership With the Bowl Championship Series [1]
The college football bowl season is upon us, and Southwest Airlines is getting in the game as
the Official Airline of the Bowl Championship Series (BCS). The airline will utilize the
partnership to launch its new ad campaign. College football fans will be the first to see
Southwest's new ads during the BCS bowl games beginning in January 2008.
"Southwest Airlines is kicking off 2008 with a brand new advertising campaign, and what
better venue to feature these new ads than on college football's biggest stage," said Andy
Allmann, Southwest Airlines' Director of Promotions and Sports Marketing. "We're excited to
work with the BCS, and we know that nothing is more popular in early January than bowl
games!"
Southwest Airlines' presence will be felt New Year's Day during both the Rose Bowl
presented by Citi and the Allstate Sugar Bowl. On Jan. 2, fans will see Southwest ads during
the Tostitos Fiesta Bowl and in the FedEx Orange Bowl on Jan. 3. As a part of the
partnership, Southwest Airlines will support the FedEx Orange Bowl Half Time Show
featuring ZZ Top. These games lead up to the grand finale -- the Allstate BCS Championship
Game on Jan. 7, in which Southwest will also have a presence.
"Southwest Airlines shares our Customers' passion for college football," said Allmann.
"College football fans can cheer for their favorite teams while watching commercials from
their favorite airline."
Exhibit 2: SW Airlines Frequent Flyer Program [2]
Frequent Flyer Program
Rapid Rewards
Southwest Airlines’ frequent flyer program, Rapid Rewards, is open to Customers of all ages.
With Rapid Rewards, receiving free Award Travel is easy. We count credits, not long miles. It
takes only eight roundtrips or one-ways within a consecutive, 24-month period on Southwest
to receive a roundtrip Standard Award. And by using any of our Rapid Rewards Preferred
Partners,
you
can
obtain
your
Award
even
faster.
Visit
http://www.southwest.com/rapid_rewards/ to learn about all the ways you can get your Award
faster.
Standard Awards
Receiving your free roundtrip Standard Award is hassle-free! Once 16 credits are
accumulated in your Rapid Rewards account, we simply credit your account with your free
roundtrip, electronic Award and mail or e-mail a notification letter with the Award Certificate
number to your designated account address. As soon as the Standard Award is deposited in
your account it is ready to use.
Standard Awards are subject to capacity controls, meaning seats will not be available on all
flights on all days for Members traveling on a Standard Award. It may be particularly difficult
to secure a seat when traveling during peak travel times and around holidays.
Freedom Awards
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Rapid Rewards Members have the flexibility to convert to a Rapid Rewards Freedom Award
by trading in two Rapid Rewards Standard Awards.
Freedom Awards are not subject to seat restrictions when traveling on Southwest Airlinesonly itineraries, so if a seat is available, it's yours! Freedom Awards are subject to limited
holiday blackout periods during which they may not be used (listed below). To convert two
Standard Awards to one Freedom Award, you can login to your MySouthwest Account and
select the "Convert Awards" option, which is located under the "Awards" section of the left
margin toolbar.
All Award Travel on codeshare (service involving a Southwest and ATA Airlines flight) or ATA
Airlines-only service will be subject to seat restrictions, whether you are traveling on a
Freedom Award or a Standard Award.
Freedom Awards are subject to holiday blackout periods during which they may not be used.
To
view
2007
and
2008
blackout
dates,
visit:
southwest.com/rapid_rewards/freedom_awards.html
Awards Go Anywhere We Go!
Standard and Freedom Awards are valid for one roundtrip (or two one-way trips) to any
published city Southwest Airlines serves in the continental United States. A roundtrip Award
may also be used to some destinations in the continental United States offered by a
Southwest Airlines codeshare partner. Two roundtrip Standard or Freedom Awards may be
applied for travel to Hawaii destinations offered by a Southwest Airlines codeshare partner.
Southwest Airlines Contract of Carriage rules apply. Award travel must take place on
published service, if available, between origin and destination. And, your Awards can be
transferred (but not altered, sold, purchased, brokered, or bartered) to anyone you wish!
You can make reservations online at southwest.com or phone us anytime for reservations.
We even provide a special reservations telephone number
(1-800-248-4377) just for Rapid Rewards Members.
Keeping Track of Your Credits
As a Rapid Rewards Member, your flight activity is automatically updated within 14 days of
your flight. Simply provide your Rapid Rewards membership number at the time you are
making reservations online at southwest.com or over the phone with one of our
Reservations Sales Agent. Each Rapid Rewards credit is active in your personal account for
two years from the date the credit is earned. You can view your Rapid Rewards account at
your convenience through the password-protected area on southwest.com. There, you can
also verify your account status, change your account information, and designate your first
Companion (if applicable).
Other Perks
Complimentary cocktail coupons, toll-free Rapid Rewards Membership Services, and a
special toll-free reservations telephone number are just a few of the incentives we provide for
our frequent flyers. Rapid Rewards Members can also take advantage of special offers and
earn
Rapid
Rewards
credit
from
our
Preferred
Partners.
Visit
http://www.southwest.com/rapid_rewards/ and checkout our Rapid Report for the latest
Preferred Partner listings, which include car rentals, hotels, and financial and
telecommunications services. And while you’re there, sign up to receive free Rapid Rewards
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e-mail updates that provide you with news and information on Southwest Airlines and Rapid
Rewards, including exclusive Rapid Rewards promotional offers.
Frequent Flyers—A-List Membership
Rapid Rewards Members who fly 32 or more qualifying one-way flights within a 12-month
period will receive reserved boarding privileges for an entire year. When you purchase your
travel at least 36 hours prior to your flight time, we’ll reserve you the best boarding pass
number available—most likely an “A.” And since it’s already reserved, it’s one less thing to
think about. You can just print your boarding pass and go!
Frequent, Frequent Flyers—Companions Travel
A Rapid Rewards Member who completes 100 flight segments (50 roundtrips) on Southwest
Airlines within one year (12 months) earns one Rapid Rewards Companion Pass. This pass
enables the Member to designate one travel partner who can fly with the Member as often as
(s)he wishes on Southwest Airlines-operated flights—for one full year. The companion flies
free, regardless of whether the Member buys a ticket or travels on a free Award.
Commitment with Codeshare Airlines
Southwest Airlines currently has a codeshare agreement with ATA Airlines (ATA). We have
ensured that ATA has implemented policies and procedures that are comparable to
Southwest Airlines on all codeshare flights.
Table 1
Model
Maximum
Capacity
Southwest
Capacity
737-700
149
137
737-500
132
122
737-300
149
137
Southwest Airlines float capacity
REFERENCES
[1] http://biz.yahoo.com/prnews/071203/lam142.html?.v=17
[2] Southwest Airlines Costumer service Commitment. Available online:
http://southwest.com/about_swa/customer_service_commitment/customer_service_commitm
ent.pdf
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