Harvard Case - Two Ways to Fly South: Lan Airlines and Southwest Airlines
"Two Ways to Fly South: Lan Airlines and Southwest Airlines" Harvard business case study is written by Ramon Casadesus-Masanell, Tarun Khanna, Jordan Mitchell, Jorge Tarzijan. It deals with the challenges in the field of Strategy. The case study is 26 page(s) long and it was first published on : Nov 22, 2006
At Fern Fort University, we recommend Lan Airlines pursue a hybrid strategy combining elements of Southwest Airlines' low-cost model with Lan's existing strengths in international markets. This approach would leverage Lan's established brand and network while incorporating cost-saving measures and operational efficiencies inspired by Southwest. This strategy aims to achieve a sustainable competitive advantage in the South American market, focusing on value creation for both customers and shareholders.
2. Background
This case study examines the contrasting strategies of Lan Airlines, a South American carrier, and Southwest Airlines, a US low-cost leader. Lan, with its focus on international routes and premium service, faced increasing competition from low-cost carriers in its home market. Southwest, known for its low fares and efficient operations, was exploring international expansion. The case highlights the strategic challenges of competing in a globalized airline industry, particularly in emerging markets.
The main protagonists are:
- Lan Airlines: A traditional airline with a strong international presence, seeking to maintain market share and profitability in a competitive environment.
- Southwest Airlines: A low-cost carrier with a proven track record of success in the US market, aiming to replicate its model internationally.
3. Analysis of the Case Study
Porter's Five Forces Analysis:
- Threat of New Entrants: High, due to low barriers to entry in the airline industry, particularly with the emergence of low-cost carriers.
- Bargaining Power of Buyers: High, as passengers have numerous choices and are price-sensitive.
- Bargaining Power of Suppliers: Moderate, with fuel and aircraft manufacturers holding significant influence.
- Threat of Substitutes: Moderate, with alternative modes of transportation like buses and trains available.
- Competitive Rivalry: High, with numerous airlines competing on price, service, and route networks.
SWOT Analysis of Lan Airlines:
Strengths:
- Strong brand recognition in South America.
- Established international route network.
- Experienced workforce and management team.
- Strong financial position.
Weaknesses:
- High operating costs compared to low-cost carriers.
- Limited focus on domestic routes.
- Lack of a strong cost-control culture.
Opportunities:
- Growing demand for air travel in South America.
- Potential for expansion into new markets.
- Increasing adoption of technology for improved operational efficiency.
Threats:
- Competition from low-cost carriers.
- Rising fuel prices.
- Economic instability in South America.
Value Chain Analysis:
Lan's value chain can be analyzed to identify areas for improvement:
- Inbound Logistics: Optimize procurement processes for fuel and aircraft parts.
- Operations: Implement lean manufacturing principles and streamline operations.
- Outbound Logistics: Improve baggage handling and on-time performance.
- Marketing and Sales: Develop a clear value proposition and target specific market segments.
- Service: Enhance customer service and offer value-added services.
Business Model Innovation:
Lan needs to innovate its business model to compete effectively. Southwest's success demonstrates the potential for a low-cost model in international markets. Lan could adopt elements of this model, including:
- Point-to-point network: Focus on direct flights between major cities, reducing the need for connecting flights and associated costs.
- Single aircraft type: Standardize its fleet to simplify maintenance and training.
- Simplified service: Offer basic amenities and charge for extras, reducing operating costs.
- Technology-driven operations: Leverage technology for efficient scheduling, ticketing, and customer service.
4. Recommendations
Hybrid Strategy:
Lan should adopt a hybrid strategy that combines elements of Southwest's low-cost model with its existing strengths. This approach would involve:
- Developing a dedicated low-cost subsidiary: Create a separate brand focused on domestic and regional routes, offering low fares and basic service. This would allow Lan to tap into the price-sensitive market segment without compromising its premium brand.
- Implementing cost-saving measures: Streamline operations, negotiate better fuel prices, and reduce unnecessary expenses.
- Leveraging technology: Invest in advanced information systems for efficient scheduling, route planning, and customer service.
- Focusing on customer experience: While offering low fares, Lan should maintain a focus on customer satisfaction through efficient service and convenient travel options.
Implementation Timeline:
- Year 1: Launch the low-cost subsidiary with a limited number of routes.
- Year 2: Expand the subsidiary's network and implement cost-saving measures across the entire organization.
- Year 3: Evaluate the performance of the hybrid strategy and adjust as needed.
5. Basis of Recommendations
This strategy aligns with Lan's core competencies in international operations and brand recognition. It addresses the needs of both price-sensitive and value-conscious customers. By adopting a hybrid model, Lan can compete effectively with low-cost carriers while maintaining its premium brand for international routes. This strategy also leverages technology and innovation to drive efficiency and customer satisfaction.
Quantitative Measures:
- Return on Investment (ROI): The hybrid strategy is expected to generate a positive ROI through increased market share, improved operational efficiency, and lower costs.
- Net Present Value (NPV): The NPV of the investment in the low-cost subsidiary should be positive, considering the potential for future growth and profitability.
Assumptions:
- The South American air travel market will continue to grow.
- Fuel prices will remain relatively stable.
- Lan can successfully implement cost-saving measures and operational improvements.
6. Conclusion
By adopting a hybrid strategy, Lan Airlines can navigate the competitive landscape of the South American airline industry. This approach combines the strengths of its existing business model with the efficiency and cost-effectiveness of a low-cost model. By focusing on value creation for both customers and shareholders, Lan can achieve a sustainable competitive advantage and secure its future growth.
7. Discussion
Alternative Options:
- Full-scale low-cost model: This would require a significant shift in Lan's culture and brand identity.
- Maintaining the status quo: This would likely lead to declining market share and profitability in the face of low-cost competition.
Risks and Key Assumptions:
- Execution risk: The successful implementation of the hybrid strategy relies on effective change management and organizational buy-in.
- Market acceptance: The low-cost subsidiary needs to attract a sufficient number of customers to be profitable.
- Competition: Low-cost carriers may respond aggressively to Lan's entry into the domestic market.
Options Grid:
| Option | Strengths | Weaknesses | Risks |
|---|---|---|---|
| Hybrid Strategy | Combines strengths of both models | Requires significant change management | Execution risk, market acceptance |
| Full-scale low-cost model | High potential for profitability | Significant cultural shift | Loss of brand equity, customer backlash |
| Maintaining the status quo | Preserves existing brand and operations | Declining market share, profitability | Loss of competitive edge, potential for failure |
8. Next Steps
- Develop a detailed implementation plan: Define specific actions, timelines, and resources required for the hybrid strategy.
- Communicate the strategy to stakeholders: Ensure transparency and buy-in from employees, customers, and investors.
- Monitor performance and adjust as needed: Regularly assess the effectiveness of the strategy and make adjustments based on market conditions and performance metrics.
Timeline:
- Q1 2024: Develop a detailed implementation plan and secure funding for the low-cost subsidiary.
- Q2 2024: Recruit key personnel for the subsidiary and begin route planning.
- Q3 2024: Launch the low-cost subsidiary with a limited number of routes.
- Q4 2024: Begin implementing cost-saving measures across the entire organization.
By taking these steps, Lan Airlines can successfully implement a hybrid strategy that positions it for long-term success in the competitive South American airline market.
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Case Description
Looks at the different business models of two highly successful and profitable airlines: Chilean-based Lan Airlines and U.S.-based Southwest Airlines. Lan Airlines pursues a hub-to-spoke international full-service model where passenger and cargo operations are highly integrated. Southwest, on the other hand, is set up for a point-to-point, low-fare, "no frill's" service with a homogenous fleet. Designed for a course on the design of business models.
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