Southwest Airlines

Southwest Airlines

Executive Summary

Southwest Airlines is a major low-cost airlines carrier, established in 1967, and operating in the United States and abroad.  Southwest was able to position itself as the nation’s largest domestic air carrier in 2003 and has since maintained this ranking according to the U.S. Department of Transportation’s most recent reporting of domestic originating passengers boarded.

Southwest caters to a customer base that is now more than 120 million passengers annually and offers 99 destinations in the United States, plus ten more in additional countries. Southwest is currently the only major U.S. airline to provide bags with fly free for everyone, and also, there are no change fees for switching flights. The culture built by Southwest is apparent with the countless reviews found online of their employees efficiently positively helping customers.

Southwest has now enjoyed 45 consecutive years of profitability and is considered among the most distinguished airlines in the world, with an efficient triple bottom line approach leading to sustained productivity. For Southwest to hold this position in the future, they need to maintain this current structure, while also focusing on improving some of their weaknesses.

Southwest has some unique opportunities to expand more into the international flight market, increase their freight capacity, and capitalize on new technologies. In conclusion, these strategies combined with a continued dedication to low-cost customer service will allow southwest to expand its market position in the coming years potentially.

Industry Analysis

Competitive Rivalry

The airlines within the industry are always competing against one another to be the best    Southwest for years has always succeeded in being the best low-cost carrier in the United States, however for being the “original low-cost carriers, Southwest has long battled major rivals like American, Delta, and United” (Jansen 2016). The competitive rivalry is continuously growing not only in local airline industries but in international as well. More recent companies such as JetBlue and Allegiant are threating Southwest’s advantage in low price and customer service by having lower costs. Not only do have to continue worrying about their long battle with the big three but now with these smaller industries outdoing them in their pricing strategies.

The threat of New Entrants

Since Southwest has been around for many years, it has made a name for itself within the airline industry. Not only have they made a name but other major companies have made a name for themselves, so the idea of new entrants is minimal.  Czerny states that flights are operated on basis of first come first serve within many airports because of how congested they are. Not only do new companies have to fight off the currently existing companies, but there are many regulations and hurdles they have to go through to get the company approved. Tons of federal laws must be met in order even to enter this business.

Threat of Substitutes

According to Kasi “every buyer does their cost-benefiting analysis before choosing their mode of transportation”(Kasi 2017) which can go both ways for Southwest. Depending on the distance cars, trains and buses could just as quickly get the job done for an even lower price than air travel. This is why the threat of substitutes is high for Southwest because yes, they do have low-cost pricing but not small enough to benefit those who are on an extremely tight budget. So not only are they competing against other major domestic airlines, but also other forms of transportation that initially are taking away business. Since the threat is so high, Southwest is trying to counteract by hitting buyers with low cost and convenience all in the same packages hoping to eliminate the effect of these substitutes.

Bargaining Power of Suppliers

Boeing and Airbus are the leading suppliers of aircraft in the United States. According to Kasi “they try to build long-term contracts and good relationships with their airlines so that their business keeps on going” (Kasi 2017) which they have done, especially with Southwest. The bargaining power of Boeing is high due to the fact its costly to switch from Boeing to Airbus because that includes not only the aircraft its self but employees and training pilots. Putting all these factors into perspective the more costly it is to obtain a well-managed aircraft the more costly a plane ticket will be. This will affect their image as a low-cost airline industry. Along with aircraft manufacturers, oil suppliers have an immense bargaining power as well. Keeping flights more regional rather than flying into big international airports like Intercontinental helps avoid the heavy fuel prices.

Bargaining Power of Buyers

Consumers have the full power, especially customers of Southwest. Southwest buyers are already looking for low-cost pricing and efficiency. Due to the advances in technology and the internet consumers have many resources to compare the best-valued prices, which in the long run hurts Southwest. These third party intermediaries give Southwest along with other upscale airlines a run for their money because of the switching costs these buyers are doing.

Southwest Airlines Competitor Analysis

Current Strategy:

Southwest Airline’s known advantage is being a low-cost carrier. They do not have extra additions for their passengers. Many of their competitors offer passengers to choose their seat before-hand or deliver meals on the plane. Southwest does not do that. This allows support in the competitive structure to stay at a lower cost against their competitors. Another strategy is their loyalty to their customers.  They strive to connect with their customers.

Future Objective:

Southwest is always keeping the future in mind. A next goal that will keep them competing with their competitors is expansion. They have recently decided to operate in Hawaii. This is a significant destination spot and having loyal customers will help them compete with their competitors. Southwest started as the underdog amongst its competitors. Today, it was one of the top airlines in the United States. To get to where they are today, Southwest had to be a risk seeker. They want to keep playing it smart to beat their competitors in the future.

Assumptions:

The airline industry is a very volatile market. Southwest will always have to deal with environmental or political changes. However, Southwest has handled the challenges well.  It is one of the only airlines amongst its competitors not to go bankrupt. Having a low-cost carrier is one of the many reasons it stayed above their competition. Southwest operates under a status quo. Their mission is dedicated to the highest quality of customer service. They also have one for their employees. Southwest’s competitors might see that it is still an underdog because it always flies to fewer places. However, expansion is in Southwest’s future.

Capabilities:

Culture, Price leadership, and customer loyalty/ Southwest card. These are a few of Southwest’s top strengths against their competitors. A few weaknesses for Southwest is dependence on Boeing, high passenger revenue, and flight booking not allowed through third parties. Southwest is rated high amongst their competitors. Since they focus on low-cost, this will enable them to have a great advantage against their competition. “The company’s estimated earnings per share for the next twelve months is similar, at $5.68”, showing that the future financials look promising.

Internal Analysis

Resources:

A couple of tangibles resources that Southwest Airline acquires is Financial and technological. The company has dealt with their money well over the years. “Its consistent profitability and balance sheet strength have resulted in the airline holding the position of the only US airline to achieve investment grade.” Southwest’s financial statement shows the value of its tangible resources and it is good. As for the technological resource, Southwest’s low-cost carrier allows for more efficient operations. Technology has allowed them to have more additions to cut down costs. An intangible resource for Southwest is their human resources. Southwest is known to have trust with their employees. They have a low turnover rate and find that happy employees create a better environment.

Capabilities:

Southwest Airlines pays close attention to human resources. They make sure that their employees are empowered and driven. They want their employees to always have a positive attitude towards their customers. Southwest also desires their management to be efficient and forward looking. Their CEO is Gary Kelly and he s looking toward the future. He wants expansion and to allow Southwest to grow against their competitors. Lastly, their low-cost method they use allows their management techniques and development to be effective.

Core competencies:

A valuable capability creates value to a customer. Cutting extra costs for a customer will always benefit the company in satisfactory. Southwest care for their customers is a rare capability. Not many companies are goal oriented and will go out of their way for a customer. They have even been known to respond to their customers’ needs when tagged on social media posts. Southwest’s low-cost strategy is a technique that is costly-to-imitate by other companies.  A non-substitutable capability that southwest has is their trust with their employees. They have a very low turnover rate and do not lay off many employees. They are loyal to their employees which makes their employees loyal to them.

Value Chain:

Southwest believes in creating value with their customers. In finance they created a low-cost strategy. They treat their employees well, so they will have a positive attitude toward their customers. The management for Southwest is efficient and wants expansion to add more value. Each of the firms allow southwest to create the most value for their customers.

Southwest Airlines SWOT Analysis

Strengths:

There are several strengths associated with southwest airlines, they are associated with its success. Culture is one of the company’s strength that enables company runs its routines efficiently. Without culture, no company can be successful because it helps employees to run the day to day duties. Employees in southwest airlines love their jobs, and that makes to work with joy and in a conducive working environment. Southwest airlines recognize the slogan of their culture is woven into all business, and their employees treat their fellow employees the way the company operates each other.at southwest airline believes in essential elements of culture

The company recognizes every employee who helps to boost the morale of the employees and it helps in reducing the company turnover. The second strength is the price leadership hold at southwest airline-the company lowers the cost strategy which allows the company to compete with other companies which tend to be expensive. For a minimum of 45 years for the company’s profitability, it has been the most honored airline in the world in the triple line bottom approach that contributes to their carrier’s performance and productivity. The company uses a perfect model which enables them to maintain low their price which they include: efficient use of fuel airlines like Boeing, 737 which reduces its maintenance cost.  Another strength of southwest airlines strong customer loyalty-the company has gained customer loyalty through interactions and customer service. The company has several ways of conducting customer service reviews through online by taking care of the customer in an efficient positive way enabling back to the employees and culture portray to the customers.it also gives their customers airline cards which help to grip customers frequently and provide them with an offer and reward of flight miles.

Weaknesses:

The company has a large Boeing fleet –this is sole supplier to the company and causes tension. Boeing suppliers over 700 planes to the company , gives high bargaining power the company has a partnership with who they cannot disagreement on the contract renewal, Boeing can raise the prices for the company that their supply to southwest and would not have a backup the company to get a counter offer .through this way Boeing is a weakness for southwest airlines.

Leading on-high number of passenger revenue is a reason that makes the company profitable. The company is over depended on revenues from their passenger which contributes over 93% of the company revenue if fuel rise abruptly the company suffers greatly.  Lastly, the company does not allow flight was booking through any third party. Instead, they sell their tickets through their site which leads the company to lose market share. Another issue is that consumers outside of the US are unable to reach the company site without an error popping up.  If the company could allow the third party, they could be able to reach more consumers daily.

If Southwest offered tickets through third party sites, then they would be able to reach more consumers daily.

Opportunities: currently the company serves 98 destinations in which 87 are the US the company focuses their business in US.in 2014 the company launched a few international flights in 11 foreign markets, the main aim was to do business with the US.

. Threats:

The critical danger in this industry is competition; there are price wars which are initiated by the company rivals in the market. Unfortunately, if a competitor lowers their prices, a company might reduce too resulting in bankruptcy.

Government regulation and policies are also threats to the industry. The company is not executed and has to follow the rules so to keep its profitable stance.

The issue of terrorism is also another threat to the southwest airlines as it slows the travel leisure. Many of the travelers might prefer not to travel when there is crisis due to fear of terrorisms.

Strategy Formulation

Following the SWOT analysis, we now need to analyze further and formulate a strategic plan internally to build and enhance their strengths while resolving and reducing weaknesses. As well as externally to exploit their opportunities and avoid or remove any threats.

Beginning with Southwest Airlines Strengths and Opportunities as they go hand and hand. If we were to be in charge of formulating a plan based on strengths, our best bet to keeping with low-cost airfare and travel would be by using the most advanced technologies when it comes to the airplanes. Though they may be extensive in the short term; in the long run as fuel prices increase, fuel efficiency airplanes will help lower costs thus allowing Southwest to continue lowering prices while the competitors struggle to match without massively losing profit.  Along with low cost, a little extra culture outside of the company as in not just with employees but extending that gratitude and recognition towards employees throughout the airport (Janitorial Staff, TSA, Restaurant/Shop Employees) and the customer as well regardless if they are flying with Southwest or another company. Doing so, build a more significant better reputation by showing them our extent to customer service and that if that’s how we treat someone as a client of our competitor, how may they be treated as a client of our own.

The company can purchase Boeing 747 aircraft with the aim of moving into fright business and provide shipping goods as another portfolio. They are currently set up to operate 737s only. This would substantially change the need for labor, where they can fly, and how they could work.Not only does that keep them in good standings with Boeing to cut better deals on planes but allows another form of income for the already well-known and respected company making it easy for them to contract business especially for being known for low prices. And though they don’t provide third party booking for travel, they now have the possibility of overcoming third-party access by their new means of shipping products whether it’s online or a local mailing company. However, dependency on Boeing is still a concern as they do have quite a bit of price control. In that case, Southwest may branch out into international travel and purchase aircrafts such as A350 by Airbus thus allowing two partnerships with the leading aircraft manufacturers. Boeing for domestic and freight travel and Airbus for international travel or even some local or delivery if needed, providing several opportunities for profit while fighting the dependency of one producer of airplanesThough competition in the airline industry is extreme, the price will always be a significant factor, and as competition increases, costs decrease and with all the possible options of income provided above. Dropping prices even lower should be no problem, knocking out the competition reasonably quickly as they won’t be able to match such low prices while receiving the same customer service and experience

Strategic Alternative Implementation

One of the first key components of implementing our strategies is to maintain the critical elements that have been characterized as strengths for Southwest in the SWOT analysis.  The biggest strength that comes to mind is the low cost of air travel provided to customers. Based on our analysis, we want to keep this low-cost structure in place long-term by investing in the latest technology indefinitely.  While these costs are sure to be expensive in the short-run, in the long run, there will be major benefits. These benefits include that while fuel prices potentially go up in the future, this technology will enable us to be more fuel-efficient, thus allowing continually lower prices.  Another staple of Southwest is their great reputation for customer service, and we want to implement a strategy that continues to build on that foundation. Southwest already boasts a sterling reputation among its employees and customers, but we want to extend this gratitude to all persons that come in contact with our staff at any point. This extends beyond just our customers and staff to the janitorial staff of an airport, the TSA employees, employees of the restaurants/shops, etc. We want to encourage an environment of treating all people with the proper respect, so when others see how our employees interact with people at all levels, they are impressed. Firmly establishing a culture of positive, nice, and helpful employees will lead to further increased profits in the future, as happy employees lead to happier customers across the board.

Some strategies to help implement this culture could be very harsh penalties for employees who do not adhere to this code of conduct and a “no tolerance” policy for bad customer service. An increased forum for more customer service reviews could be another way to help ensure this policy is actually in place. Another method is a more stringent hiring process to acquire the right type of personalities to deal with our customers, and anyone else they encounter while wearing the Southwest uniform. Customer loyalty is another crucial aspect of the company’s ongoing success, and the Southwest airlines card along with the Southwest Rapids Rewards Credit Card has gone a long way in aiding this.  An implementation strategy to expand this customer loyalty to new heights may include expanding the way customers can use their Southwest cards and getting more people involved with the card and the Rapids Rewards Credit Card. The Rapids Rewards Credit Card enables customers to use more redemption options other than just flyer miles to accumulate “points.” These options include hotel stays, and car rentals, and are just another way for customers to use their Southwest card to build up points they can use. More customers using the cards means more customers are staying loyal to the company. Along with expanding on the strengths of the company, we also want to develop strategies to address the weaknesses. One weakness highlighted is the high dependence on passenger revenue, and the small use of freight shipping.  A strategy to improve this mentioned above is to purchase Boeing’s 747 aircraft and move more into the freight business in doing so. This will help to further stabilize our relationship with Boeing, along with giving us more diversification in our revenues.

Implementation of this strategy just includes a more company-wide commitment at all levels to providing more services than just passenger flights. Buying the Boeing 747’s will also require a large capital investment in the short-run, but in the long-run gives us a more diversified portfolio along with another solid source of revenue. Our analysis shows that this will prove beneficial in the future in competing with the other major airlines that offer more freight services. Dependency on Boeing, however, is another major concern for the company. Boeing is currently the sole supplier for aircraft and supplies for Southwest, and this gives them high bargaining power.  A strategy for this may be to diversify our purchases of aircraft, and buy from another manufacturer. A partnership with the other major aircraft manufacturer Airbus could be beneficial for both parties, and we have mentioned a strategy of purchasing the Airbus 350 and using it to venture into more international flights. Again, to implement this strategy requires more capital investment up front to purchase these planes, but it also adds multiple benefits in the long-run. These include steering away from only purchasing from Boeing, which gives them high bargaining power, and also gives us more offerings for customers and more sources of revenues. The new Boeing 747’s can be used for domestic and increased freight shipping, and the Airbus 350’s for more international flights. The Airbus 350 could also be used for domestic travel, freight shipping, or however needed. Implementation of these new strategies also requires a slight change in the focus of the company.  A shift in focus from passenger revenue, to more freight shipping is required, along with a shift in focus from just flights in the U.S. to a broader international focus. These shifts will need to be felt at all levels of the company, and especially among the customers. Implementation of this strategy may require an extensive advertising campaign, intended to inform customers of these new services that Southwest offers.

The airline industry is extremely competitive, and through our analysis, we have concluded that price will always be the major factor in this competition. Through keeping up with technological advances, we plan to continually undercut the other airline carriers in price, while upholding our standards of customer service. Government regulations are strict in this industry, but Southwest has a solid reputation of adhering to these, and we plan to uphold this reputation. With our plan of sustained success through an increasing focus on international flights, more freight shipping, all while maintaining our current strengths, the fees associated with government regulations should not be an issue.

Update

As of 2017, Southwest is upholding many of their business principles that helped them become an industry leader in the first place. In keeping with being able to provide low-cost fare to its travelers, in 2017 continually they spent $800 million in technological overhauls on a system called OpsSuite, to help company employees operate more efficiently.  Company employees are working more efficiently with more updated information at their disposal, leads to happier customers and higher revenues. Another staple of the Southwest business model has been impeccable customer service, and the company still places a significant emphasis on this factor. There is plenty of support for this statement if you start to look at customer reviews online, which are overwhelmingly positive.  Southwest clearly describes in its mission statement the company goal of transparency, which is a philosophy of treating its customers honestly and fairly, with low rates staying low. Some of the weaknesses involved with the company are also still apparent, such as the dependence on Boeing for all aircraft and supplies. Although Southwest has the largest fleet of Boeing craft in the world, they are still dependent on just that one source for their plane.  They are also still highly reliant on passenger revenue with 93% coming from this area and again, do very little freight shipping at only 1% of its revenues.

Flight booking not allowed through third parties is another weakness for the company, and in 2017 80% of the passenger, revenues were booked through either Southwest.com or Swabiz.com. Southwest still has a relatively small amounts of international flights, and haven’t really ventured much further in this sector still only offering 10 destinations outside of the U.S.  In 2018, they have announced plans to provide new services to Hawaii, and while this is not included in the international spectrum, it will serve to diversify their flight offerings further. Factors such as intense competition, stringent government regulations, and decline of leisure travel have led to harsh conditions and many start-up companies failing in the airline industry. The foundation in place at Southwest, however, will allow them to continually compete in the most significant factor, which is lower prices. The stability of the company and loyalty of the customers may also allow for an expansion in the years to come.  The increased spending on technology in 2017 is already a huge indicator for the company, as they are usually slower than their competitors to incur huge costs. In conclusion, the strategies outlined by Southwest Airlines has caused a lowering of fares and an increase in passenger traffic in any region where they establish themselves and is even termed “The Southwest Effect.” This strategy of low cost with excellent customer service has led to 45 consecutive years of profitability, and a sterling reputation among airliners.

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