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Changes in Service and Price in the Airline Industry

Case: Southwest Airlines
In October 1994, United Airlines launched "Shuttle By United" to compete directly with Southwest Airlines in nine markets in California and adjacent states. "Shuttle By United" represented United's effort to operate on airline-within-an-airline alongside its hub and spoke route system with Southwest Airlines (SWA).

i) How would you characterize the U.S. airline industry in the early 1990's?
ii) How is it that Southwest Airlines has been able to consistently grow and prosper in the U.S. passenger airline industry
iii) How would you describe United's goals, objectives and strategy for "Shuttle by United"?
iv) How should Southwest Airline respond to the "Shuttle by United" decision to change its service and price? Why?

Solution Preview

i) How would you characterize the U.S. airline industry in the early 1990's?

The U.S. economy started to go into a recession in the very late 1980's, which carried over into the early 90s. In the late 80s, we experienced Black Monday, where the stock market fell at drastic rates. While the market eventually recovered, it slowed growth in many areas, which include both the retail and service industries. The airline industry was no exception, as the number of passengers that traveled for non-essential purposes also began to fall. Meanwhile, customers were also looking for less expensive ways to travel through air, as economy class prices on airlines were even higher than normal. The declining economy kept prices high, and airlines had to raise prices in order to keep operations running, much like many other large industries had to also do during this time period.

To make matters worse at the time with the ongoing recession, the U.S. entered into the Gulf War in August of 1990. During times of war, people typically scale back and cut expenses, as there is always an inherent uncertainty of future economic stability in times of war. The airline industry was then further depressed and suffering due to a lack of travel due to the war. Airline ticket prices had to increase even more. The only way that airlines, including Southwest, could stay afloat was to increase prices for customers that were traveling. There will always be a percentage of customers that have to travel for business and personal reasons, regardless of the state of the ...

Solution Summary

This solution thoroughly discusses Shuttle by United from Southwest Airlines. All questions are thoroughly answered.

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