Southwest Airlines Analysis - Case Study Example

?Running Head: Case Study on Southwest Airlines Case Study on Southwest Airlines Inserts His/her Introduction SouthwestAirline has grown into a big name in the aviation industry since it first started its business in 1971. The company is well known all over the world due to its unique organizational culture and cost effectiveness. It is the biggest domestic airline in United States of America. The company has enjoyed profitability after the initial two years of its inception and has never seen a net loss in any year after 1972. This alone signifies the performance of Southwest Airlines. The company is also a fun place for people to work and is regarded very highly by employees. There are many aspects of this success of Southwest Airlines. In this essay we will present a SWOT analysis alongside with an analysis of porter’s five forces. This will also include the financials of the company. The organizational culture of the company and its operations and leadership will be discussed. Issues the company is facing currently will also be discussed and recommendations will be made. SWOT Analysis Southwest Airlines Southwest Airline has displayed cost leadership in the airline industry by turning cost effectiveness into profits. The culture of the company is also in line with the core values of the airline. Below an in depth view of strengths, weaknesses, opportunities and threats facing the company will be taken. Strengths The most impressive thing about Southwest Airlines is its financial records. The company is yet to report a loss on its balance sheets and this is a big achievement considering the ups and downs airline industry in US faces. Since 1972 the company has given annual returns of around 25%. This shows the impressive performance of the company. The airline believes in friendliness and love in customer relationships as well as employees. One of the main reasons of success of the company is its employees. The friendly culture of the company illicit the best out of every employee of Southwest and that is why innovative ideas are given by lower and middle level employees. This is one of the reasons of Southwest Airline’s success. The management of Southwest Airlines has done an amazing job in crafting its company’s strategy. The strategy of cost leadership has done wonders for the company and I personally think that the idea of being cost effective in the airline industry great. Usually airlines have huge operational costs so they do not go for such a strategy but Southwest has shown the world that this can be done. This strategy has proven itself to be a winning strategy. Southwest Airlines reported a profit of USD178 million in 2008 (Bloomberg, 2011). This was the time when recession had badly hit the US economy but still the company was able to reap profits. The operating expense of the company have not grown significantly even during recession. Operating expenses were $1,280 million in 2007 while in 2008 they grew to $1,385 million. Also the revenue in 2008 increased as compared to 2007. In 2007 revenue figure was $9,587 million and in 2008 it grew to $11,023 million. The CGS also has grown accordingly, in 2007 it was $7,235 million and in 2008 it was $8,590 million (Bloomberg, 2011). This shows that the costs of Southwest have not increased significantly. The company has tried to differentiate its policies from its competitors by doing everything in its own way. Employees were not fired in tough times, cost cutting was given attention rather than value addition, flights for shorter routes was started and a friendly work culture was introduced in the company. All this was not the usual trend in the industry but this became the basis for Southwest’s success. The company has proven that conventional thinking has led many airlines into huge loses (Freiberg & Freiberg, 1997). One of the operating practices in the company is to schedule more flights a day and pilots work an hour more than in other airline companies (Mouawad, J. 2010). The company also pays its employees well above the industry rates. Still the per seat per mile cost of Southwest is 6 to 14 percent lower than US Airways and American (Mouawad, J. 2010). This is because the company utilizes its airplanes in such a manner that more seats are available for customers. The planes do not have a business class section and all passengers sit in economy classes. This also increases the room for passengers. Steps like these have helped the company maintain its cost leadership style. Southwest culture is strong and fun where employees enjoy Halloween parties and charismas treats. The company is strong culture company because it is the culture which motivates employees to perform. Southwest is doing well because its employees work hard for the company. They innovate and follow strategies that are cost effective. This is a vital strength of the company. Weaknesses Apart from the strengths, Southwest Airline also has some weaknesses. Firstly it does not cater to people who value privacy and higher sense of comfort. Because the company has only one class of passenger seats businessmen who are rich prefer lavish airlines. The company is losing a fair bit of market as a result because these travelers are willing to pay high costs in return of high class treatment and separate class. This is one weakness Southwest Airline has regarding its seating arrangement in the airplane. Another problem with the company is that it is dependent on one airplane produce Boeing. This can cause serious problems for Southwest Airlines in case of any production halt or new safety regulation. The supply would badly affect as a result. Using only one aircraft can also cause problems because it is allowing the supplier to enjoy a monopoly. Boeing can charge higher cost for service as it knows that Southwest Airlines has no other airplanes so it has no place else to go. Cargo that passengers can take with themselves is also very limited. This has been done to reduce costs. This is a potential weakness for people who want to go for long holidays cannot take too much stuff with them. This can cause many customers to go towards other competitors and once this happens it will be very difficult to retain them. The biggest weakness of Southwest Airlines is its lack of international flights. The company has not yet started international flight and because of this the company is missing out on potential profits. The company has a strong brand name and it will help the company in global markets as well. This is an area where the company should look into. Opportunities Southwest Airlines has a lot of opportunities to excel in global markets. The reason being that international travel is expensive. The strategy of Southwest will work very well globally because people are cost effective in most countries. By making international travelling cheap the company can increase its profits considerably. People might travel more internationally if fares are low and Southwest Airlines will deliver this. Also customer service of the company is well known so that may also help in company’s global operations. Global markets therefore present a big opportunity for Southwest Airlines. Threats One of the biggest threats the company is facing is the decrease in people flying to one place from to another for leisure. The state of economy is not looking very bright and this has caused people to travel less. This can badly hurt the company in future because it will lower its profits significantly. The company also faces threats from competitors who after witnessing the success of Southwest are trying to implement the same strategy. This can lower the differentiation of Southwest Airlines in the eyes of customers. Competitors can steal routes from the company and can lower its performance in future. Porter’s 5 Forces and Southwest Airlines Now we will analyze the operations of Southwest Airlines under the lens of Porter’s 5 forces. The Threat of Entry of new Competitors As discussed earlier the strategy of Southwest Airlines is being implemented by many airlines in US. This means that competition will increase in future. The main problem is that the demand of Southwest Airlines is price centric. The company has loyal customers but they were mainly attracted towards the company because of its low prices. If another company will give them lower prices they will switch to that airline. This is a serious threat of competitors for Southwest Airlines. Although it is difficult to replicate the strategy of Southwest but it is not impossible. The Threat of Substitute Services Differentiation is something that has attracted many customers towards Southwest Airlines. The uniqueness of its pricing and customer relationship services has caught the eye of customers throughout many years of success. But this will not remain the case for ever. Technology has now developed to a great extent and innovations are taking place regularly. In such a setting it is very easy to create substitute of Southwest. Therefore the threat of substitute is very high when it comes to Southwest Airlines. The Bargaining Power of Customers In airline industry the bargaining power of customers is high because monopolies do not exist. There are many substitutes available and customers can pick and choose for them. In such an environment customer relations and quality is highly essential in order to differentiate the service from other competitors. These barriers can h Southwest Airlines capture clientele. Low prices can only attract customers to a certain extent. It is non monetary value they derive from the service that matters in the airline industry. Southwest Airlines is delivering that service but more steps should be taken in this regard. The Bargaining Power of Suppliers The bargaining power of supplier in the airline industry is high. The reason is that there are very few companies making airplanes. Suppliers can demand high prices from companies and they will have no place to go. This is the case especially with Southwest Airlines because it has only planes of only one company, Boeing. The company can increase service prices and Southwest Airlines can do nothing about it. Labor is abundant but skilled labor is not that ubiquitous. Southwest pays its workers very well. In this area Southwest Airlines is a leader in the industry. The Intensity of Competitive Rivalry Rivalry in airline industry is high. Airline companies have to innovate regularly to retain customers because there are many airlines now. The choice available to customers is widening and this is why rivalry is increasing in the industry. Southwest Airlines had recently outplayed all its competitors through its cost leadership but now rivals are trying to imitate Southwest Airlines. This is why competition is a problem for the company now. Southwest Airlines has to increase its advertisement as well in order to attract customers and create entry barriers for other entrants. Issue Identification and Alternative The main issue staring the company right in the face is its leadership. Southwest Airlines had a dynamic leader Herb Kelleher. He managed the company in a miraculous manner by motivating employees and implementing strategies. The company mainly executed its cost leadership by achieving employee efficiency maximization. Employees were kept busy in their work and more flights were flown in order to earn more profits. This is how Southwest Airlines executed its strategy. For this company needs a very dynamic and influential leadership and Herb Kelleher was the best leader for this. He motivated his employees to work hard and innovate. It will be very hard for the new chairman Gary Kelley because employees had association with Herb. They could relate to him and his strategies. Although Kelly is looking forward to walk in the footsteps of the former chairman, it would be very difficult. Employees may not listen to him as they listened to Herb and this is why it is an issue. Southwest Airlines is famous because of the hard work of its employees. If employees cannot be motivated to work hard then the company will lose all its value. This is why Kelley has to act strongly and should strive to create personal association with employees. This will help them feel at home. The aim of Kelley is not to let employees feel a leadership gap. Recommendations and Implementation It is a tough time for economy so for now Southwest Airlines should not look to expand its operations. Rather it should try to retain its customer at this point of time. Competitors are trying to capture its market therefore steps should be taken to secure original markets. Also the new leader should be given sometime to settle before major growth plans are put to actions by the management. Also the new chairman Kelley should try to start a communication campaign with employees. This will help employees know that his policies are no different from Herb. This is important because employees should realize that the company culture will remain the same no matter what. It is important for the peace of mind of employees. There are no big changes needed in the organizational culture of Southwest Airlines. Only things are required to be carried out in the same way as they were carried out in Herb’s time. Southwest Airlines should also include in its long term growth plans that it needs to grow globally. It is important for Southwest Airlines to explore international market because one day domestic markets will get saturated. Before that company should look for additional markets. This need not to be done immediately but in future such steps are essential. Long term growth plans of Southwest Airlines should definitely include global expansion plans. Southwest Airlines has the infrastructure so that will not be a very big problem. Conclusion Southwest Airlines is well known name in the airline industry. The company has enjoyed profitability in times when airlines were closing time. This success can be attributed to the unique strategies and policies of its leader Herb Kelleher. The friendly culture of Southwest Airlines is another reason why the company is successful. The main strategy of the company is cost leadership and high quality customer service. This strategy is executed by motivating employees to innovate at every level. Employees are also made to work at their full potential in order to fly more flights than other airline companies. The weakness of the company is mainly its lack of international flights. The company should look forward to grow internationally. The new leadership also has to communicate employees in order to ensure that the same strategy of Herb Kelleher will be followed. References Freiberg, K. and Freiberg, J. (1997). Nuts! Southwest Airlines? Crazy Recipe for Business and Personal Success. New York: Broadway Books Mouawad, J. (2010). Pushing 40, Southwest Is Still Playing the Rebel. The New York Times. Retrieved from http://www.nytimes.com/2010/11/21/business/21south.html?_r=1 Southwest Airline Co. (2011). Bloomberg Business Week. Retrieved from http://investing.businessweek.com/research/stocks/financials/financials.asp?ticker=LUV:US Thompson, Strickland, & Gamble. (2008). Crafting and Executing Strategy: The Quest for Competitive Advantage: Concepts and Cases. California: McGraw-Hill/Irwin Read More