Southwest Airlines - Research Paper Example

?Running Head: SOUTHWEST AIRLINES Southwest Airlines Module: Lecturer: The airline industry is highly competitive especially in the US market where market players are numerous. Before the 1990s the industry players had a lucrative period but after this and with the increased completion, expansion of internet and intensified competition, few airlines have maintained a steady growth or even profitability. United States offers an expansive market with numerous niche sub-markets which have many Americans who prefer commercial air travel mainly because of time and cost related factors. Low profit margins and stunted growth are the duplicated scenarios in the American airline industry but one notable airline, Southwest Airlines, has defeated the odds in this arena to succeed even where all the rest seem to have failed. Southwest Airlines is a low cost airline that has been in operation since 1971. Introduction Southwest Airlines is simply referred to as Southwest and it operates on short haul basis with point-to-point flights. It is primarily a low cost airline with no frills and it developed this strategy from its inception about 40 years ago. It is based in Dallas, TX and it started operations with only three aircrafts but now boasts of more than 540 Boeing 737, more than 3100 flights daily to over 70 cities, 35,000 employees, net income of almost $100 million and passenger capacity of well over 85 million (Southwest , 2011). The company also boasts of maintaining the best position in respect to customer service. Its management practices have tried to align the company towards low operational costs which in turn have enabled it to consistently charge simple and low fares. The company’s mission states; “… is dedicated to the highest quality of Customer Service delivery with a sense of warmth, friendliness, individual pride, and Company Spirit (Southwest, 2011).” Looking carefully into the mission statement is it clear that huge emphasis is given to customer service and company spirit (meaning the relations that the management maintains within the workforce and with other stakeholders). The company’s current Chief Executive is Gary Kelly who is also the Board Chairman and Company President. This paper aims at looking into this airline’s SWOT analysis, Porter’s 5 forces and PEST analysis together with the strategies it has applied in order to gain its current market leadership position. Southwest Airlines Core Competences The airline has taken the US market in its entirety gaining huge customer base and revenue. It has accomplished this through perfection and continuous appraisal of its core competences mostly towards product strategy, forecasting, facility location and process strategies. In respect to product strategy the airline offers the lowest fares and endeavors to operate at low costs per plane (Barnhart, Belobaba, and Odoni, 2009). This is possible due to the fact that it offers no frills thereby reducing expenses. Due to the low cost of operations, the passengers can pay low fares and easily breakeven. Forecasting is critical in the airline business which is affected by even the slightest economic or political turbulence (Stevenson, 2008). The airlines’ strategies are aligned in such a way that it is possible to maneuver even in the hardest of circumstances. An example is the profitability trend that it maintained between 2007 and 2009 despite the global meltdown crisis that heavily hit its target market. The company’s culture that revolves around customer service and cost cutting measures acts as another core competence that revolves around its process strategies. The airline is able to ensure that its planes remain in the air most of the time than in the airports by cutting heavily on turn-around time. This ensures passengers are not delayed while cutting costs on airport charges. These comprise its location and process strategies that have worked to the airline’s advantage. These are the main core competences that the airline has mastered so as to ensure quality service delivery at low costs. Integrated Low-Cost/Differentiation Strategy This is the basic strategy which ensures the airline maintains competitive edge over its direct competitors like JetBlue Airways, AMR and Regional Airlines (Yahoo Finance, 2011). This strategy incorporates adaptability to the market environment, adoption of technological trends and ensuring effectiveness in its leveraging of core competences at minimal cost. This strategy aims at creating value for the customer on product features at relatively low fares (Stevenson, 2008). However, this strategy is tricky to balance the equation of core competences and Porter’s 5 forces as there is always pressure to further reduce on fares while maintaining differentiation. Southwest Airlines Porter’s 5 Forces Bargaining power of Buyers The airline industry in general takes advantage of low power of individual customers since most are not able to coordinate and organize. However, customer loyalty is low especially where there are many substitutes and it is for an airline’s management to ensure that it captures a market segment aiming to dominate it. Southwest Airlines has a market leadership position in the low-fares category which to an extent has facilitated customer loyalty thereby offering fair bargaining power of buyers. Bargaining power of suppliers Suppliers of aircrafts are just two i.e. Boeing and Airbus and Southwest Airlines purchases only from Boeing. This increases the supplier bargaining power since switching costs are also high as it will involve retraining of majority of the staff. Pilots on the other hand have low power since there are many out there who are willing to join the airline in case of layoffs and the like (Barnhart, 2009). Employees in general will have a bargaining power that is pegged on their union and Southwest Airlines has not had monumental union scuffles especially in the past decade. However, wages still take a huge chunk of the airline’s revenue but it is a sensitive area to try and cut on its influence on the income statement. Substitutes The airline industry faces substitutes from automobiles and trains. It however depends largely on the purpose and distance to be travelled. Southwest Airlines flies short-haul flights that tend to compete with automobiles and trains especially due to time factor mostly for business people. In case of people going on vacation or family visits, driving is the most preferred means. When travelling for long distances and in this case across United States, air travel is preferred (Barnhart, 2009). People travelling for leisure in most cases rely on substitutes more so ground travel as they are more conscious of opportunity costs. Threat of entrants The American airline industry was deregulated in 1978 and immediately afterwards numerous airlines emerged. It was believed by economists then that the market was big enough to support all of them. After two decades or by 2000 it was clear that the industry only had potential of less than 10 major carriers and Southwest Airlines was one of them (Barnhart, 2009). By mid 1990s majority of new airlines merged with big ones in order to survive the competitive arena. This scenario is a good indicator that the American market had and still has low threat of entrants. Rivalry Rivalry is a major determinant of growth and profitability within the airline industry. Southwest Airlines competitors like JetBlue offer similar products but the former’s capital base is 80 percent more than that of the latter. Revenue is also high for Southwest Airlines as compared to its earlier stated competitors. Their financial performance is quite low as compared to that of Southwest Airlines making it the leader in the low cost category presently and far into the future. The comparative financial status of these airlines is shown in the following table; Direct Competitor Comparison   LUV AMR JBLU UAL Industry Market Cap: 8.75B 2.34B 1.70B 8.13B 853.70M Employees: 34,901 78,300 11,121 80,000 11.12K Qtrly Rev Growth (yoy): 14.80% 10.40% 13.00% 101.10% 13.10% Revenue (ttm): 12.10B 22.17B 3.78B 23.23B 2.64B Gross Margin (ttm): 25.13% 23.03% 33.00% 29.30% 28.74% EBITDA (ttm): 1.62B 1.39B 563.67M 2.50B 419.18M Operating Margin (ttm): 8.16% 1.39% 8.81% 7.08% 10.46% Net Income (ttm): 459.00M -471.00M 97.00M 253.00M N/A EPS (ttm): 0.61 -1.41 0.31 1.08 0.88 P/E (ttm): 19.21 N/A 18.71 23.75 16.32 PEG (5 yr expected): 2.29 -15.96 2.20 1.65 2.26 P/S (ttm): 0.72 0.11 0.45 0.35 0.33   AMR = AMR Corporation JBLU = JetBlue Airways Corporation UAL = Industry = Regional Airlines Table 1. Direct competitor comparison. (Yahoo Finance, 2011). SWOT Analysis Strengths The major strengths of the airline are low operational costs and low fares. The airline as a result has gained a huge customer base as compared to its competitors. It has a good record of quality customer service and safety record. It also has a huge capital base and a pool of qualified personnel. The airline has invested heavily in technology and more so in marketing where it recorded more than 80 percent online bookings (Southwest, 2011). Weaknesses Due to the airline’s central strategy of low cost and low fares, its product breadth and depth is low. This results in having little options within its differentiation strategy. In case of a crisis the company’s strategy can hurt its revenues and its recovery. The company does not engage in alliances or baggage transfers. This makes customers to over rely on it in all areas of travel which can cause shifting or hurt customer loyalty (Stevenson, 2008). Opportunities There is still a big room for growth within the industry in the long term. There are chances of increasing passenger traffic, internet sales, product quality and number of aircrafts. There is also the chance to reduce employee turnover through improvement in employee motivation and morale. The airline can further integrate vertically while flying to smaller airports. The economic changes are dictating that people cut on spending which will drive them to low cost airlines. Threats The fluctuating fuel cost is a hindrance to growth despite the hedging strategies that are in place. Government regulations through legislations offer an obstacle to business while the current volatile economic conditions bring market uncertainties (Robinson, 2009). There is a decrease in the number of highly qualified employees who can steer the company to the next stage of sustainability. Communication technology is highly required to maintain competitive advantage but its cost is quite high. Terrorism is the other issue that has increased the cost of operation through increased security measures. PEST Analysis Political environment Stability of the government in the Southwest Airlines market has not saved it from political interference (Robinson, 2009). An example is the case where Southwest Airlines faced problems of inter-state flights after deregulation since bigger airlines feared it will take their market share. The two factions tested their muscle by making allies of influential congressmen and in the end Southwest Airlines was allowed to travel inter-state. The agreement reached was termed as the Love Field Compromise. Deregulatory Act passed by Congress opened opportunities for business meaning that a political organ or body can either open or block an opportunity. Economic environment During its inception, Southwest Airlines met a market where tickets were quite expensive and this made it come up with the low fares strategy to beat competition. Its tickets were more than $5 cheaper on one way flights within Texas than those of its competitors. In the 1970s the industry was in a bad shape and the airline took the opportunity to recruit retrenched and qualified staff from competitors and bought aircrafts cheaply due to low demand saving $2 million on each (Barnhart, 2009). The recent global economic crisis was another scenario that set many airlines on a declining trend (Stevenson, 2008). Southwest Airlines was however not affected as it intensely advertised its reduced fares to cater for the poor economic situation. These and more scenarios depict how the airline has been affected by economic conditions and how it responded successfully. Social environment The US market fundamentally requires an airline or any other business to be familiar with social trends (Robinson, 2009). This includes the values of the people in relation to their diversity, financial situation and timeliness. Low fares strategy hit the market at a time when people were tired of high fares, delays and quality of service. By also observing the social environment Southwest Airlines ensured it stuck in Love Field Airport to be close to customers. Another was introduction of hot pants for air hostesses and calling aircrafts love birds among others. Technological environment The airline industry is technologically intense in terms of computer systems that need to run all operations at the same time. It is financially challenging to install an efficient and all-round system in order to increase efficiency in operations. Many airlines in the US market have established sophisticated systems that monitor all aspects of the airline increasing pressure for others to catch up or upgrade theirs. The internet has been a competitive ground where airlines are encouraging more passengers to book their flights online to save on cost, increase efficiency and add value to customers. Southwest Airlines in all these respects is way ahead of its competitors by having efficient forecasting strategies. Operations Strategies The keep it cheap and keep it simple motto of the airline has contributed a great deal to its growth and profitability over the years. The point-to-point system has acted as a competitive pillar over the 40 years history with planes flying for just an hour or less per flight. This strategy has enabled it to maintain aircrafts in the air for around 11 hours per day which is a feat higher than the industry average (Barnhart, et al. 2009). The second strategy is that of low fares making it the cheapest in this regard in the American airspace. The lack of frills on board has facilitated this strategy since it amounts to cutting on costs as only snacks and a few drinks are offered on board. Other cost cutting measures like purchase of only Boeing 737 planes which are fuel efficient and intensified online booking have ensured that the airline is able to breakeven even after charging low fares. The third is that of ensuring high quality service delivery to customers and devotion to company employees. Customers are well treated in airports and on board by the staff while these employees are also made to feel like part of the company by having an employee share ownership program to ensure employee loyalty. The fourth strategy revolves around the intense marketing campaign that the company engages in. The company’s adverts try to woo customers by informing them of the value they create by flying with Southwest Airlines (Stevenson, 2008). They capitalize in bringing out the low fares aspect that is coupled with high quality service; a rare blend in business operations. These are the most important strategies that are in place for Southwest Airlines to gain competitive advantage even in future. Conclusion Southwest Airlines is a low-cost and a low-fares airline that has stood above the rest in the American market for four decades. Unlike its competitors it has been able to maintain profitability while offering the least expensive and yet high quality service. The strategies put together portray that doing it better is not as important as doing it differently within this market. The opportunities for growth and expansion are many although there are numerous obstacles but judging from the past the airline is able to maneuver through them with success. The low-cost strategy coupled with high quality service to customers will remain to be the most important elements behind Southwest Airlines’ success. In order to maintain the strategies the airline needs to ensure that it continues to be aggressive in its marketing and innovation in differentiation. References Barnhart, C., Belobaba, P. and Odoni, A. (2009). The global airline industry. John Wiley and Sons. Robinson, P. (2009). Operations management in the travel industry. CABI. Southwest (2011). Fact sheet. Retrieved 06 Feb. 2010, http://www.Southwest .com/html/about Southwest /history/fact-sheet.html Stevenson, W. J. (2008). Operations management. 10th edn. McGraw-Hill Irwin. Yahoo Finance (2011). Southwest Airlines Co.: LUV competitors. Retrieved 06 Feb. 2010, http://finance.yahoo.com/q/co?s=LUV Read More