Southwest Airlines Environmental and Industry Analysis

Southwest Airlines Environmental and Industry Analysis

Introduction 

Over the last 35 years, southwest airlines have adopted a low-cost passenger, point to point operational strategy.  This strategy has ensured that the southwest has been able to churn a profit consistently for the last 35 years. The airline has a market capitalization of $14 billion, and in an industry where the majority of the carriers have struggled, the airline has continued to thrive. However, the entire industry has continued to endure a harsh environment and depressed market conditions. The industry has to cope with soaring labor costs, increased fuel costs, reduction in passenger numbers, and currently, the coronavirus- which has seen some carriers canceling some of their routes. This paper attempts to perform an industry and environment analysis of Southwest Airlines

Sectors of the external environment and the five forces of competition.

Supplier power.

To analyze the supplier power of southwest airlines, an analysis of the current ratio is required. The current ratio for 2017 was 0.70 and 0.64 for 2018.  A negative current ratio implies that the southwest is having challenges meeting its short term debt.  To this extent, suppliers are not paid when invoices fall due. The current ratio is deteriorating, implying that in the future, the airline is going to struggle even further. The supplier power will decrease as confidence in the airline declines among suppliers. On the other hand, the leverage ratios are proper. They are low, meaning that southwest airlines are attractive to lend to. For instance, the value of the firm’s debt-to-assets for both 2017 and 2018 are low, which indicates that Southwest Airline can easily use its assets to repay its debts. Also, the values of debt-to-equity of the company for the two years are low.

Buyer power

Southwest airlines have been predominantly operating in the US markets.  More so, they are mainly concentrating on interconnecting cities via small regional airports. For this reason, the brand is famous, and passengers love it. Several industry experts have suggested that southwest airline should consider expanding their business model to other countries. Limiting their operations to the United States has been considered a significant weakness because the opportunity to tap into more revenue from abroad is lost. Additionally, the chance to grow and increase the return of shareholder value is lost

Competitive rivalry.

Southwest is a low budget airline, and it is not alone. There are other industry players. Being a low-cost carrier southwest faces competition to American Airways and Jet blue. However, despite these established careers being in the market, southwest has strictly adhered to its business model, ensuring that it has continued to thrive. (Macrotrend, 2020).  The business rivalry is stiff, and the regulator is also scrutinizing prices to ensure that dominant carriers don’t cut prices to an extent smaller carriers cannot operate profitably

The threat of substitution.   

The threat of substitution is ever looming.  High-speed railways have interconnected significant cities in china, japan, and in Europe. However, in the United States, this is not the case. A network of high-speed railways poses a significant threat to the aviation industry.  Though a plane is faster, a train can ferry a larger number of people over the same distance at much lower costs while offering the same level of comfort. Besides, technology is reducing the need for business travel. An individual can have several meetings across the world without having to travel. Patients are being operated remotely, reducing the need to fly.

The threat of new entry

The threat of a new entry is ever-looming, although it is low at the moment. With the majority of the carriers filing for bankruptcy and merging, the industry doesn’t anticipate a new entrant. There aren’t enough passenger number numbers to sustain the new entrant. Currently, the likelihood of a bigger carrier merging with a smaller carrier are more likely to happen than a new entrant to the airline business being witnessed

 Macro trends that affect Southwest Airlines.

Macro trends are directional shifts in lasting ten years, and they involve a large population. The first trend is the internet of things. Today’s frequent flier is always on the internet looking for bargains, comparing brands. Maintaining brand loyalty to the consumer is not as important as making a saving. Previously airlines relied on agents who earned a commission that has been overtaken by direct internet bookings. (Munier, Hontoria & Jiménez-Sáez, 2019). Southwest airlines have a presence on the internet, whereby they engage passengers actively over the internet.

Additionally, nowadays, customers are allowed to voice their complaints about the same platforms. Previously it was reviled. It was viewed as airing dirty laundry in public. Southwest realized this was an opportunity to promote openness and dialogue with the customers.

The second trend is the need to diversify income sources. Airlines shave traditionally relied on revenues from passenger and cargo sources. But with the soaring of costs, while fares remain significantly low, top executives are faced with the dilemma of expanding revenue while retaining the business model. The avenues are fewer and less. An example is an extra fee for an assigned seat.

A third macro trend affecting the airline business is regulations relating to regulation and accounting procedures.  Lately, the government has increased its scrutiny. For instance, airlines in Europe are being taxed for emissions above allowed limits; the airlines the US are being required to include all fees and costs to the price of the ticket advertised. Regulations vary with jurisdiction, and airlines are forced to adhere to them all if they are to operate.

Fourthly, the southwest is faced with the challenge of maneuvering between offline activities to manage online activities. Seventy-five percent of all tickets sales are completed via an online platform. At the same time, issues to do with customer care have to have a human hand. Successful management of online activities will dictate the strong performance of the brand.  Customer care in the present day and age is a micro-trend that is affecting the southwest.

Fifth, attracting new customers is continually being a challenge to the southwest. Traditional methods of advertising are not enough. Some carriers are letting passengers choose the seats based on the type of person they would like to sit next too. Passengers are creating groups on social media pages. Whereas the airline offers a no-frills ride, this is a whole new challenge that is facing them. Executives have to leave the comfort of their offices and join their marketing teams in sourcing for new clients. (Gürel & Tat, 2017).

Lastly, the threat of disease and terrorism.   Terrorism and respiratory infections are the new macro trends that are facing airlines. Terrorist attacks like those witnessed on September 11 as well as a disease like SARs and the coronaviruses’ causes some flights to be canceled entirely. Moreover, passenger numbers reduce leading to grounded flights and crew, which is an expense. They cannot be planned for or anticipated. Airlines only plan around them.

Impact of the trends and issues identified above

The macro trends listed above have contributed majorly towards the shrinking balance sheet of southwest airlines. With the advent of the internet and competition, airlines offer ridiculously low prices to ensure all the seats on the plane are fully booked. The increased regulation has increased costs, and the increased regulations have reduced cash that is available to run the business. Overall the micro-trends have led to lower ticket prices at the southwest, increased operational costs, and at a global level lower return on investment to the shareholder.

Impact of the trends and issues above the southwest operating business unit.

The trends have not altered the way a southwest airline does its business. Rather they have resulted in a business unit that is run efficiently and with less waste. Southwest airlines. Despite the decline in return on equity, passenger numbers on the rise. (Goetz & Sutton, 2017).  Southwest, too has the largest fleet in the world.   The airline has reduced the turnaround of planes on the ground. The aim is to have as many planes flying at any one given time. To ensure compliance with regulators, the southwest has a risk and compliance department that is charged with the task of ensuring that regulations are fully adhered to.

Conclusions

Southwest airlines are a national brand that has built loyalties across generations. For these reasons, it always has a competitive advantage over its rivals.  For this reason, the airline has increased its fleets and destinations but at a marginally low cost. Subsequently, this has brought about increased demand for their flight services within the United States of America. They have thus been able to increase get into new destinations, launch new flight routes, and gain momentum almost immediately as a result of their big brand. Notably, the company has a culture that emphasizes friendliness to customers to increase their value for money.

Southwest airlines, like many of its peers, is grappling with decreasing profitability as the global airline industry faces increased operational cost, higher fuel prices, and declining passenger numbers due to completion among the industry players. Southwest is still a profitable airline but will be faced with a more robust business environment in the future. The coronavirus epidemic has the risk of grounding planes. This will negatively impact the balance sheet, and the southwest might book a loss for the first time in its history.  Americans are increasingly flying, but the airlines are staring at huge losses and bankruptcy. Southwest may, in the future, be forced to increase prices marginally to stay afloat.

References

Goetz, A. R., & Sutton, C. J. (2017). US Airline Industry. Low Cost Carriers:” Emergence, Expansion and Evolution, 199.

Gürel, E., & Tat, M. (2017). SWOT analysis: a theoretical review. Journal of International Social Research, 10(51).

Macro trend. (2020, December). Southwest Airlines Financial Ratios for Analysis 2005-2020 | LUV. Macro trends | The Long Term Perspective on Markets. https://www.macrotrends.net/stocks/charts/LUV/southwest-airlines/financial-ratios

Munier, N., Hontoria, E., & Jiménez-Sáez, F. (2019). The Initial Decision Matrix (IDM) and Its Fundamental Role in Modelling a Scenario. In Strategic Approach in Multi-Criteria Decision Making (pp. 15-59). Springer, Cham.