Low-Cost US Airline - Southwest - Research Paper Example

Low Cost US Airline - Southwest The paper will discuss the core problems as revealed after the analysis of business case of the largest low cost US airline namely Southwest, which has observed phenomenal growth in last 35 years (1973 – 2008) in highly lucrative US travel and airline industry. The company has proficiency in offering airline services of premium quality at extremely low fares. This is mainly because of the fact that Southwest airline has adopted various low cost strategies such as Website reservations and ticketless travel, employee buyout programs, low depreciation costs and administrative expenses, cancellation of flights at profitable routes due to unfilled capacity and use of similar planes at other destinations with temporary higher load factor and other practices etc. Indeed, the company has received tremendous response in domestic US market where sales increased considerably because of repeat customers who always enjoy experience by travelling through Southwest Airlines. The company usually adds 1-2 new cities every year as part of expansion and sustainable development strategy. After thoroughly reading the case, the researcher has discovered the following three managerial and strategic issues that need to be addressed for betterment and enhancement of Southwest’s business in upcoming years. Issue 1: The first major issue is increase in oil prices in international market followed by economic recession after credit crunch and debacle of US subprime property mortgage scheme. It is worthwhile to mention that Southwest Airlines would have to face bleak scenario and extremely challenging business environment in upcoming quarters of 2008 – 2009 because the higher crude oil prices increased inflation followed by decline in real purchasing power of US consumers. Obviously, this later would lead to production and consumption, thereby resulting in closures of industries. The unemployment would increase, shatter consumer confidence and adversely affect the airline industry for which survival had become the sole priority in 2008. In short, Southwest might not be able to maintain its load factor, average fare revenue per customer and current operating expense structure in 3rd quarter onwards. There is greater probability that demand for air travel would decrease that might lead to losses to Southwest. Recommendation: Economic recession is an uncontrollable factor because unemployment increases and consumption falls during recessionary cycle. For instance, the contraction in business activities also reduces the demand for business traveling followed by steep decline in leisure traveling because of high price elasticity. In this case, it would be recommended that Southwest should control its aggregate costs of doing business because it would enable the company to charge low fares and to touch at least break even point after 35 consecutive years of profitability. Southwest would benefit from declining crude oil prices in 2nd and 3rd quarters of 2008 because of weaker demand and could hopefully survive in upcoming business years. Next, it is not the right time to enter new markets and destinations because of low demand expectations by experts in airline industry. Issue 2: It should be pointed out that Southwest, although, have observed phenomenal growth since 1973, yet the fleet of the company does not really comprise of modernized fuel – efficient aircrafts made up of sophisticated technology. Rather, the airline had been using a great number of old Boeing 737–300 aircrafts, 46 of which were not properly inspected and maintained. Indeed, these old aircrafts not only increase total repair and maintenance expense but also their presence in fleet would force concerned US authorities to take legal action against top management of Southwest airlines. Quite unequivocally, the company has history of safe, secure and trouble free travelling but it could not be guaranteed that Southwest might continue offering safe trips in the presence of old aircrafts. Recommendation: The issue could easily be resolved if strategic planners of Southwest Airlines opt to upgrade the fleet through induction of latest aircrafts of same model produced by same company. Indeed, the British low cost carrier named Ryanair has also followed this strategy as it included similar aircrafts in its fleet, which not only reduced total repair and maintenance expense but also eradicate technical issues faced by repair staff at the time of maintenance. The handling costs would reduce substantially if this recommendation is followed by Southwest Airlines. In addition, the new aircrafts would also increase capacity as well as consume low quantity of jet fuel. Hence, fuel expenditures could also be controlled after upgrading of fleet by leading US airline. Issue 3: The third major issue is that Southwest Airline has relatively higher mishandled baggage reports per 1,000 passengers. Indeed, the company has on average 4.41 complaints against industry average of just under 4 cases, which is the evidence that lower staff has somewhat failed to curb such mishandling. For instance, the mishandling directly impacts first - time passengers that travel through Southwest on advice of regular travelers of the company. Obviously, the impact would be devastating for first – time passengers who do not expect such inefficiencies or at least, the fact that Southwest would fail to handle their luggage properly. Recommendation: The researcher, in this case, will recall that probability that luggage will be mishandled always exists because thousands of customers travel daily through airlines. However, the proper checking, scanning and computerized identification system coupled with use of printed chits would surely help in reducing such cases or complaints, especially, on behalf of airline. This will not only enhance customer confidence but also alleviate their mental worries about goods and belongings in suitcases. Obviously, a traveler may not fit everything in hand or personal bag, thus there is dire need to resolve such cases through effective handling. SWOT Analysis: Strengths: 1) The company has observed tremendous growth in last 5 years i-e during 2003 – 2007 that led to constant increase in net profits, which peaked in 2007. Even in first quarter of 2008, Southwest was able to serve around 25 million customers. 2) 35 consecutive years of profit - 1973 to 2008. 3) A stable increasing trend was also recorded in load factor that is the evidence Southwest offered top quality services at reasonable prices. Also, the total number of passengers served by Southwest in 2007 also touched record figure of 101 million that shows level of customer satisfaction and their inclination to travel through Southwest airlines. 4) Southwest hired well – educated, trained and experienced professionals. As a result, it became an internally efficient and performance - oriented airline across USA. 5) Assuming all external factors such as recession, inflation and unemployment remains constant, Southwest Airline has become the preferred airline, which observed phenomenal 55% growth in total revenues in 2007 (base year selected here is 2000). 6) Low cost, low price, no – frills strategy. 7) The company’s has strong liquidity position because total assets are much higher than total debts. 8) 95% ticketless sales. Weaknesses: 1) The passengers served in 2008 (per annum) have decreased drastically by 20% to just under 80 million as compared to above 100 million customers in 2007. The business revenues, therefore, observed a steep decline amid economic recession and higher crude oil prices. 2) High operating costs have reduced the net profit margin. This negative trend was because of higher oil prices that peaked to $147 in 2008. Indeed, it may lead to adverse consequences in future because Southwest would not be able to assimilate rising total expenditures mainly because of increase in international crude oil prices. 3) Southwest was only operational in domestic USA market, which had lost attraction for airlines in 2008 because of credit crunch, unemployment and rising inflation. Opportunities: 1) The world now is of the view that global economy is coming out of recession because of recent improvements in employment and business prospects. Demand of air travel will recover in upcoming years because of increase in trade and commercial business activities. 2) Changes in social trend as today consumers are more interested in spending vacations and holidays abroad for relaxation and entertainment. Also, there are many having inclination to explore the world. In short, the market is still very opportunistic because of social shifts. Threats: 1) Stiff competition among various domestic, regional and international airlines. Low cost no - frills carriers have become a real threat for growth of normal airlines. 2) Great threat of substitute products and price wars from competitors that may force passengers and travelers to switch to other airlines. 3) There is real threat of fuel cost escalation in upcoming years that may hamper growth and increase aggregate business costs. 4) Customers at present have been demanding greater value for their hard earn money. Indeed, they demand top quality at extremely lower prices because of decline in real incomes and unavailability of short – run employment opportunities. Conclusion and Final Recommendation: The author would like to conclude the paper by mentioning that the airline industry in USA will have to face challenges in upcoming years because of expected increase in oil prices. In addition, the growth of US economy is also extremely important for recovery of airline industry. Hence, it is recommended that Southwest should induct modern and highly fuel efficient aircrafts of same model so that it could reduce the impact of high future oil prices and retain its position as a low cost carrier. Indeed, the productive efficiency will enhance and Southwest will get a competitive edge on rival airlines. Reference: Thompson, Arthur and John Gamble “Southwest Airlines in 2008; Cultures, Values and Operating Practices” University of Albama, 2008, Case 23, c-401 to 431 Read More