Economic, Structural and Competitive Characteristics of Southwest Airlines Company - Case Study Example

 Economic, Structural and Competitive Characteristics of Southwest Airlines Company Introduction The airline deregulation act of 1978 aimed at removing government control over fares, route allocations and the regulation of market entry for new service providers. The regulatory powers of the Civil Aeronautics Board (CAB) were abolished, which means that consumers became exposed to market dynamics as the major determinant of fares and other aspects. This change had extensive impact on the operations of US airline companies on such aspects as economy, organizational structure, as well as functional structures for handling market situations such as competition. To that end, we attempt to evaluate the economic, functional and structural characteristics of Southwest Airlines, its pre-deregulation operations and the nature of impacts that the deregulation had on its operations. Pre-deregulation traits of Southwest Airlines Established in 1966, Southwest Airlines experienced a gradual growth period marred by court battles regarding route operation and other logistics from other competitors. The company offers domestic flights, to which tickets in the earlier days were only one way. Given its small market share during the period prior to deregulation, the company’s profits remained low. However, it was able to provide quality services to travellers, majority of who were businesspersons, choosing not to compete with other airline companies on fares but with other forms of transport, especially land transport (Gittell, 2003). In a bid to attract more customers, the company through advertisement adopted humorous slogans. For instance, the slogan ‘Love is still our field’ resonated well with customers during the earlier years of the airline’s operation, and played a critical role in boosting its brand awareness not only in Boston and Dallas, but also across the nation. The period spanning 1971to 1978 saw the company expand its city-service network within Texas, an achievement that was the precursor to introduction of inter-state services in 1978. The airline had an efficient management structure that was responsible for its success. Gittell further notes that Herbs leadership that was immensely exceptional, the airlines’ cultural evolution that made it possible to accommodate diverse aspects, incorporation of a point-to-point network that made it have a quick turnaround, as well as efficient coordination of air travel services were crucial to the success of the company. Post deregulation period and life of Southwest Airlines The deregulation of the airline service industry gave a new breath of life not only to Southwest Airline but also to the entire sector. The government regulatory agency, the CAB, had become highly inefficient, and the impact of its rigid system coupled with the oil crisis of the early ‘70s made airline industries to opt for better operation procedures. The deregulation shifted airline control from the government to the market dynamics, though the government continued to regulate safety measures requirements (Belobaba, Odoni and Barnhart, 2009). With the deregulation in effect, Southwest Airline adjusted its capacity utilization, and its services became more accessible to the public. The airline enhanced its point-to-point mode of operation, maintaining only short haul routes with minimal amenities. This made the airline have the lowest operation costs in the industry, a phenomenon that ensured that it remained highly competitive and viable. Additionally, this system of operation enabled the Southwest to make comparatively higher profits, giving them an opportunity to maintain the low cost tickets that was integral to make them the dominant domestic travel airline. The airline also adopted a cultural practice that allowed them to provide quality services to their customers. For instance, ticket agents could at times be seen assisting with luggage as a way for covering for lags, or pilots helping at the boarding gate. Additionally, the company ensured that most ticket reservations were made through direct calls to the company as opposed to through travel agents, a practice that ensured the company made huge savings. This period was marked by rapid growth in the company as it had access to a larger market following the expansion of destination points. Current trends within Southwest Airline Company Route structure, product alternatives and means of achieving differentiation Southwest airline has been predominantly operating on a point-to-point basis, although it introduced international flights in 2014. The point-to-point system allows the company to operate a widely spread route network with non-stop flights between pairs of cities. Vasigh, Fleming and Tacker (2013) observe that this operation system allows the airline to operate bases brimming with economies of scale, leading to increased utilization of airport facilities and personnel, thereby reducing operational costs. In a bid to increase their aircraft utilization and stage length, Southwest Airlines introduced flights to Mexico and the Caribbean. While long haul flights are known to give rise to diseconomies of scale especially for relatively small airline companies, the decision to venture into this field by Southwest airline was to increase the number of daily departures, which in turn would increase the rate of aircraft utilization. Additionally, the undertaking is in line with the airlines’ mission of becoming a force to reckon with in the industry, both domestically and internationally. In addition to providing short haul, point-to-point, low fare passenger and cargo services, the airline in a bid to improve its efficiency and reliability in cargo handling, recently introduced a cargo companion product that helps customers to keep track with delivery of high value goods. The companion is available on transactional basis as well as volume pricing, and provides the customer with such benefits as ability to monitor the location, track the status and send email alerts in the event that the cargo suffers any anomaly, which could be position wise or other. The device has the potential of offering clients timely information and at the same time providing the company with substantial income. The company also strives to achieve differentiation in its products especially by focusing on short haul, low cost services with quick turn-around for efficient utilization of its aircrafts while maintaining quality service delivery. To this end, the company ought to present its service provision means and qualities to the consumers in a manner that depicts them as being the best in the market, in terms of not only fast delivery, but also reliability and cost efficiency. To achieve this, the company can employ far-reaching marketing campaigns as well as after-market product support to their cargo sub-section. Departments available within Southwest Airline and their respective roles in planning, development and execution of flight operations Several functional departments exist at Southwest Airline whose functions are integral to the success of the business. Among these departments, the marketing department, legal department and customer service department play an important role in the planning, development and execution of flight operations of the company. To begin with, the marketing department has and continues to play a critical role in developing and presenting the company as a brand. For instance, the marketing department was instrumental in creating the company’s logo and slogan that still resonates among many today. Many people still identify Southwest Airline as a service provider with great love to its customers. Secondly, the legal department has been crucial to the growth and development of Southwest Company especially with regards to acquisition of trading and business rights. For instance, the acquisition of Muse Air in 1985, Morris Air in 1993, acquisition of ATA Airline assets following its bankruptcy in 2008 as well as acquisition of AirTran in 2010, all of which were processed legally and after an evaluation from the legal department that also determined their strategic importance to the company. Additionally, the legal department also provides daily crucial advises to the management regarding and representing the company in litigation cases as and when they arise. Finally, the other highly important department to Southwest Company is the customer service department. Without the reliable efficiency of this department, no substantial gains in customer satisfaction would be possible. Through this department, the company has been able to establish and cement a good relationship with the public, more so with the customers. Additionally, the department helps create a lasting image of the company with customers, which is central to customer retention. Other functions that of this department that have helped establish the brand of Southwest Airline Company are the creation of a positive employee culture that customers find warmly and receptive, as well driving sales upward as a result of the positive image created. The cost structure of Southwest Airline According to Southwest Airline One Report concerning their cost structure as at 2011, the company records a lower average unit cost compared to all other major US carriers. This low-cost structure has enabled the company to charge comparatively lower fares on its customers. However, with continued integration of AirTran into their system coupled with implementation of the fleet modernization program, the company expects the average unit costs to drop even further, translating to more profit and hence cheaper flight services. The cost outlook is as follows: Operating expenses totaled $15.0 billion in 2011, representing an increase of 34.6 percent from the figure recorded in 2010. This is partly due to integration of AirTran into the system. Fuel and Oil expenses averaged $3.19 per gallon, equivalent to an increase of up to 33.5 percent from the previous year’s figure. Fixed costs- $670 per flight Variable costs- $2.80 In addition to this, the company also conducts an aggressive fuel price hedging, a practice that cushions the company against future increase in fuel prices. Through this program, the company has been able to save on fuel costs, hence the sustained success. Several factors have been critical to the success of Southwest Airline as a Low Cost Carrier (LCC). These include: Good marketing and human relations- Given that the company offers lower fares, their budgetary needs for ticket marketing are lower compared to those of legacy carriers. A greater percentage of Southwest’s tickets are sold directly over the website, eliminating the additional costs charged by travel agents. Their point-to-point system of operation helps keep them away from busy and expensive hubs. Additionally, they operate from smaller airports that are usually less busy, allowing them to make a good number of trips, thus considerably higher turnover. Given the fact that they cover short flights, the company does not incur food and beverage costs, although the services are available as and when needed at additional costs. This gives them an advantage over other carriers. Method of revenue management adopted by Southwest Airline Revenue management refers to the practice of employing an analytic strategy to forecast the behavior of consumers especially at the micro business level, then optimizing the availability of a product and its price in order to maximize the growth of returns. To Southwest Airline, this endeavor entails offering quality services convenient to its customers, and in the most accommodative way that makes it the airline of choice in the home market. To this end, the airline has adopted a myriad of specific actions capable of generating high returns both in the short term and in the long term. The system is based on key aspects as follows: Pricing- the Company has a competition immune pricing strategy that keeps it afloat and beyond reach of its major competitor. Rouse et al. (2011) notes that implementing a pricing strategy that shapes the objective of the company determines how it captures the value. This is reminiscent of what Southwest Airline has done. It is worth noting that while other LCC competitors adopt dynamic pricing tools to curb the effects of such market fluctuations as changes in oil prices, Southwest Company has a pricing strategy that is rather flexible, and which is cushioned by the aggressive fuel price hedging, hence does not change often. The company also controls its inventory regarding revenue management by stabilizing its prices and adjusting its capacity according to need. Through this, the company avoids such practices as hiking ticket prices during high seasons. Marketing- generally, this aspect has been crucial in the success of Southwest Airlines. Since its inception, the company has always involved simple but highly effective awareness creation strategies, with captivating slogans and media outreach comparable to none in the domestic market. Channels- apparently, the company’s fare remains unaffected by class division as such an aspect is alien to their domestic services. However, it has adopted other channels of distributing their income sources, For instance, the introduction of cargo handling section is thriving well alongside passenger traffic, and the recently introduce companion system for tracking cargo movement also promises significant amount of income once it becomes fully operational. Conclusion The inception of Southwest Airline Company and its journey through the decade has been one full of huddles polished with success. While the pre-deregulation period made the market highly competitive due to the restrictions imposed by the government regulations, the post-deregulation period offered airline companies, and especially Southwest Company a new lease of life. Since 1978, the company has been growing exponentially, and currently has a strong asset base following the numerous acquisitions it made such as that of AirTran. Its objective and visionary leadership coupled with an effective organizational structure with efficient departments as well as an effectual revenue management system have been integral to its success. References Belobaba, P., Odoni, A., & Barnhart, C. (2009). The Global Airline Industry. Chichester: John Wiley & Sons. Gittell, J. H. (2003). The Southwest Airlines way: Using the power of relationships to achieve high performance. New York: McGraw-Hill. Rouse, P., Maguire, W., Harrison, J., & Business Expert Press. (2011). Revenue management in service organizations. New York, N.Y., Business Expert Press. Southwest Airlines One Report. (2011). Southwest Airline is America’s leading low-cost air carrier. Retrieved from http://www.southwestonereport.com/2011/#!/performance/2011-performance/operating-costs Vasigh, B., Fleming, K., & Tacker, T. (2013). Introduction to air transport economics: From theory to applications. Farnham, Surrey, England: Ashgate. Read More