Business Analysis of Southwest Airlines Corporation - Essay Example

? Term Paper Final Term Paper Section Number Table of Contents Assignment 3 Cost-benefit analysis refers to the evaluation of the advantage and the cost incurrence in undertaking a given project. It helps in decision making, since if the cost is found to be more than the benefits, then it is not worth investing in the project and vice versa. While tangible costs can be indentified directly with a certain project and can be quantified, for example, by the cost of an asset, intangible costs are those that cannot be identified with any particular project, and their nature is not quantifiable, for example, by the value of goodwill in a business. 2) I was forced to decide on whether to enroll for a Master’s program or to take up a job. I sought the motivations behind each decision. In a scale of 1-4, where 1 represents the least important, 2 - important, 3 - more important and 4 represents the most important, I graded the motivation behind my selecting either of the alternatives. I finally decided to take up a job first and enroll for Master’s program at a later date, since there was a higher motivation towards taking a job as compared to Enrolling for Master’s program. Financial reasons Family Viewpoint Personal objectives Social considerations Total scores Enroll for Masters 1 3 2 4 10 Take a job 4 1 4 3 12 Executive Summary This paper is a study of challenges facing Southwest Airlines Co., an airline company based in Dallas, USA. The paper starts by introducing the company which was established in 1961. It has employed 33,000 employees since then. The Airline makes 3,300 flights a day to 72 destinations in 37 states of the USA (Larry). The mission of the company is to provide the best quality services to its customers with a spirit of friendship and respect. It also serves to provide its employees with a steady and conducive working environment. Though it is ranked as the best performing Airline Company within the framework of domestic passenger travels in the USA, the company experiences some challenges that are the basis of this study. The symptoms of these challenges which face the company today include loss of profits, retarded growth rate, cutting down in flights and a decrease in the share value of the company (Ragland, 1990). To accomplish this study, a problem statement was designed to guide the research undertaken. The problem statement is the following: many analysts see the slumping of the fuel prices as the only cause of the Airlines’ great profit loss. However, they do not take into consideration how the general weakening of the global economy contributed to this scenario (Libby, 1998). Without such considerations the whole phenomena will never be fully understood. Slumping of the oil prices and the general weakening of the global economy are factors worth consideration in demystifying this occurrence (Bailey, 2011). The study is narrowed down to focus on the root causes of the loss in profits of the company. The root causes were found to be the plunging of the global fuel prices because of a general weakening of the global economy. The abovementioned causes resulted in increased operation costs of the company and a reduction in the customer base of the company. As a measure of averting these challenges the study recommends an increased funding of the operations of the company to serve its customers as before and retain their goodwill. A merger or acquisition is also recommended to strengthen the resource base of the company. However, it is feared that this might lead to the loss of identity by the company and a dilution of its customer focused value system (Libby, 1998). The recommendations can be implemented through selecting a company that has similar value system to merge with this company. A flexible fuel hedge program should also be established to eliminate the risks associated with global oil price fluctuations. The success of such recommendations can be measured on a quarterly basis, applying the customer base growth and the increase in revenues of the company as the units of measure. Position Southwest Airlines Co. is an airline that started its operations in 1961; it is based in Dallas, USA. It is the airline which offers the highest domestic passenger transport based on the report released in June 2011. It offers passenger transport at low cost, which is the reason why it ranks as the highest domestic passenger transporter airline in America. The Airline has 33,000 employees, operates 3,300 flights to 72 destinations in 37 states every day (Larry). The mission of Southwest Airlines Co. is to provide its customers with affectionate and highest quality customer service, with kindness, personal respect and satisfaction (Maxon, 1996). Since its inception, the company has afforded to provide its clientele with warmth and best care. This achievement has become possible due to the team of employees committed to treat customer needs with urgency and priority. It is also within its mission to provide its employees with a stable and conducive work environment that gives opportunity for learning and innovation. Its objective is the establishment and maintenance of speedy and top low-fare American domestic air travel (Kruggel, 2011). The Airlines have been performing very well in the airline transport industry managing to leave behind the rest of its competitors in the same field. Any news of the entry into a new market by the Airlines has always worried its competitors. The reason for this being that, it has afforded to discount its air tickets offering low transport costs to its customers. This aspect has enabled the company to gain a competitive edge over its competitors. However, the company is facing some challenges. These challenges are the basis of this study, as their root causes, the solutions available and the expected results are addressed by the study. Sense Over the last 30 years, Southwest Airlines Co. has gained the reputation of being the most popular airline within domestic passenger transportation. This reputation has been built on its three operation fundamentals of charging their customers with low fares, their timely delivery and ensuring that the customers are happy with their services at all times (Kruggel, 2011). To achieve this, the company has provided its employees with the best Public relations and customer services principles, while providing them with a steady and conducive working environment. However, the company faces challenges that have threatened to tarnish its reputation and retard its growth. There are some symptoms or indicators of these challenges and their effects on the company: Loss of profits cutting down in flights Slowed rate of growth Decrease in the Airline’s share value The change in the Airlines’ performance is observed, from the usual expected state to the present one (Larry). In the previous decades, the profits of the Airlines were on the rise, something expected to continue to date. Unfortunately, the opposite has occurred with the company incurring losses in the second half of the last year to the tune of 176 million US dollars. The flow of new airplanes has been steadily increasing for the last decades. Though, this is not the case now. The Airlines, though there were plans to increase its flights per day and cover more destinations, have had to reduce these flights. Finally, while it is expected that the share value of the airline should be increased, it has been observed to depreciate with an alarming rate averaging to 40% value loss. This includes the worst ever-recorded share depreciation of 18% loss a day, soon after the losses were declared (Ragland, 1990). My focus will be mainly on factors that have caused a loss of profits for this company. The fall in the profits of the company was unprecedented. Being a force to be reckoned with in the American airline industry, it was not expected for the company to incur losses, within its two quarters of the second half in a row (Larry). Based on this fact, there is a need to unearth the root cause of this outcome. The incurrence of such a loss affects the whole economy of the US, the customers, the company’s employees and its shareholders. However, this can work to the advantage of the competitors, as the competition they face from side of the Southwest Airlines is weakened. There is a viewpoint that the root cause of this problem is the fuel-hedging program that the Airline works with to avoid the risks associated with fuel price increase. The Airline has established contracts that afford it buy oil at a price set in advance. This allows it to negotiate for low prices of its fuel, thus, lowering its operation cost. This strategy has enabled the company to lower its air tickets through offering discounts, consequently beating all its competitors in this field. When plunging of fuel prices occurred, the company was left to buy its fuel at a price higher than the market price. This worked to its disadvantage causing the incurrence of such huge losses which amounted to $176 million US dollars in its two last quarters of the last year (Larry). Preliminary problem statement: Many analysts see the slumping of the fuel prices as the only reason for the Airlines great profit loss. However, they do not take into consideration how the general weakening of the global economy contributed to this scenario. Without such considerations, the whole phenomena will never be understood well. Slumping of the oil prices and the general weakening of the global economy are factors worth consideration in demystifying this occurrence. Uncover The challenges faced by Southwest Airlines Co. are of great magnitude and threaten to bring it down. With such challenges as incurring huge losses, cutting down its flights per day, inability to bring in new aircrafts, slowed growth rates in its customer base and market share, coupled with the depreciation of its share value, the company is on the verge of downfall. There are major factors that have been attributed to the success and growth of this company (Maxon, 1996). Its established strategy to negotiate for fuel prices and sign contracts that will see it supplied with oil at an agreed price in advance. This hedge contracts ensure the company avoids the risks associated with oil price hikes. It is observed that the company purchased oil at an average price of $ 2.9 per gallon, when the market price was $ 3.17 per gallon (Bailey, 2011). This acts as its tool for obtaining competitive advantage, since it enables the company to offer low fare charges for its tickets to its customers. However, the above strategy turned against the company’s target when the oil prices plunged due to the weakening of the global economy. The plunging lowered the oil prices by a big margin causing the market prices of jet fuel to go down tremendously. This meant that Southwest Airlines purchased fuel at a price higher than the market price. This, in turn, dealt a blow on the finances of the company demanding the company to clear the value of its hedges (Maxon, 1996). This aspect works against the company’s strategy, as it makes it prone to global oil fluctuation impacts, while eroding the competitive edge it had over its competitors by accessing fuel at a low price than the rest of the airlines. The growth of the company, which has been on steady rise since its inception, is now retarded. The company increased its customer base from 53 million in 1998 to the present 89 million by the end of 2008 (Libby, 1998). This growth rate was decreased by 4% by the end of last year. These scenarios have caused the increase in the companies operation cost by 8%. This cost increase is related to labor, airport and aircrafts maintenance. Cause Effects Fish bone’s diagram of causes and effects. The repercussions of these occurrences are worse for the company’s stakeholders. There is a likelihood of losing investors due to the loss in share value. The company may not satisfy its customers’ demands, since reducing the number of flights means the customers’ needs cannot be adequately catered for. This, in turn, means the loss of customers to the competitors. The revenue earned to the government is going to decrease, since with losses no income tax is payable. It might get even worse for the employee’s sine, even though the management ruled out possible layoffs; and early retirements, as well as buyouts, are some of its options to reduce the work force (Libby, 1998). Solve The existence of such challenges calls for certain measures to avert the worse situation. The company has to establish ways to increase its revenues, so as to keep in line with its mission and objectives of lower fare to the customers with excellent services, while serving better the interests of all its stakeholders. Several measures can be applied here: raising more funds through credits to finance its operations and ensure it retains the goodwill of the customers by increasing the flights and coverage area. Through mergers and acquisitions the company can strengthen its resources and embark on an expansion move to cater for more clients. Continuance of the fuel hedge program is vital to avert the risks associated with global oil price fluctuations (Hughes, 2010). However, the contract should be signed so that in the event of reduction of fuel prices below the contractual price the Airlines can purchase the fuel at market price. Provisions of extra-services to customers, at a low cost, which will help entice more customers to use the company’s aircrafts. Such enticements include drinks and other parks that the customer pays for at a lowered price. The Airlines should expand its coverage to more states and even internationally to increase its generated revenues (Brooker, 2009). My recommendation is that the company should acquire more funding through loans, sale of more shares or through partnerships, mergers and acquisitions. This is meant to retain the goodwill of the customers by providing better services, as the company used to provide before, increasing its coverage area and customer base. This will help maintain the company’s competitive edge and, thus, increase its growth and profits. Build However, such recommendations have some limitations. Even though the company can retain its competitive advantage and goodwill through mergers and acquisition, the company is likely to lose its identity. The company culture, spirit and customer experience is also likely to be eroded. This being the differentiation factor of this airline, it may make the company lose its uniqueness and customer taste (Brooker, 2009). Worth noting is the fact that such a move is likely to bring on board aircrafts from other companies that are not the unique brand of this Airline. This may have a negative impact on the side of customers who are used to the specific aircraft brand of the Airline. Achieve The recommendations can be implemented through various ways. The choice of an airline for merger or acquisition purpose should be made in such a way that the missions, the spirits and the customer value systems of that airline are pretty much alike (Hughes, 2010). To eliminate the aircraft brand issue, the companies should agree on getting only the brands that are more appealing to the customers. Fuel hedging program should be continued to avert the risks associated with global oil price fluctuations. However, the contract should be signed to incorporate choices that are more flexible. The contract should allow the company to purchase the fuel at market value in case the hedge price is higher than the market value. This is so if there occurs a global plunging in fuel prices. The effectiveness of such recommendations should be measured based on the customer base growth, and the growth of the revenues of the company (Libby, 1998). This should be done on a quarterly basis and the areas of weakness should be addressed on time. Works Cited Bailey, Jeff. Southwest Airlines Gains Advantage by Hedging on Long-term Oil Contracts. International Herald Tribune, 2011. Print. Brooker, Katrina. A Timeline of Southwest Airlines at a Glance. Associated Press, 2009. Print Hughes, John. Southwest CEO Risks Keep-it-Simple Strategy to Reignite Growth. Bloomberg L.P, 2010. Print. Kruggel, James. Air Travel: It’s Impact on the Way we live and the Way We See Ourselves. U.S. Centennial of Flight Commission, 2011. Print. Larry, Stevenson. “Southwest Airlines. Serious Consequences of Plunging Oil Prices on the US Low Cost Airline industry”. Flight International: Reed Business Information. 2011. Print. Libby, Sartain. “Why and How Southwest Airlines Uses Consultants. Journal of Management Consulting. 1998. Print Maxon, Terry. “Council OKs Southwest Land Lease, Headquarters Addition, Training Center Planned”. The Dallas Morning News. 1996. Print. McCartney, Scott. “The Middle Seat: An Old Rule Keeps Fares High”. Wall Street Journal (Eastern edition), November 30, 2004: p. D7. Print. McCartney, Scott. “Wright Amendment Is Wrong”. The Wall Street Journal, November 30, 2004: p. D1. Print. Ragland, James. “Airline Changing Jets’ Tax Status: Southwest's Maneuver Will Cut Local Revenues by $7 Million”. The Dallas Morning News, 1990. Print. Torbenson, Eric. “Wright Sides Split on Traffic Limits”. Dallas Morning News, May 30, 2005: p. D1. Print. Torbenson, Eric. Dallas Morning News, May 19, 2005: p. D1. Print. Read More