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Southwest Airlines: Analysis of Environment - Essay Example

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Making a detailed study of PEST factors and using the Porter Five Force Model to determine the state of competition and rivalry between existing firms in the airline industry, we see that economic, socio-cultural and technological factors are the main ones impacting the airline industry as a whole and Southwest Airlines in particular…
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Southwest Airlines: Analysis of Environment
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Download file to see previous pages Any company worth its name will undoubtedly have its own strengths and weaknesses. Strength is considered that element or measure that gives it an advantage over its competitors. For example, a well trained and experienced sales team may be considered as strength(Anonymous, 2007). In the same manner a weakness of the company may be inconsistency in its strategy or planning, lack of finances due to already high volumes of debt of weak credit policies. Both strengths and weaknesses are internal to a company. Alternatively opportunities are those external elements that are bound to affect all the firms within an industry in a positive manner. Threats are external elements that will likely affect all the firms in a negative way. A lowering of tax or tariff structure for a particular industry sector may be regarded as an opportunity, while an increase in import duties of raw materials will be regarded as a threat to all the firms (Anonymous, 2009). Opportunities and threats though external, will affect firms in different degrees depending on their individual strategies, pro-activity or even a reaction to the impending factors that enable a firm to reduce or mitigate its effect. This paper will look at the external environment faced by Southwest and the rest of the airline industry in the USA, commenting on the severity of risk factors in the light of a detailed PEST analysis. Porter's Five Forces The five force model of Michael Porter as brought out in his book ‘Competitive Strategy: Techniques for Analyzing Competitors and Industries (Porter, 1980) was a groundbreaking work in that it gave the industry pundits, strategists and planners a basis with which to evaluate the degree of competition and rivalry that existed within a particular industry. We will now discuss the effect and relative strength of each of these factors in the light of the airline industry in general and Southwest Airlines in particular. Barriers to Entry and Exit The airline industry is known for its high investment in equipment and machinery. It has also to meet the high costs of fuel, aircraft purchases, maintenance, security, insurance and technological infrastructure such as booking and registration. These costs are prohibitive for new entrants and the intense competition also acts as a barrier as airlines compete for passengers over the same routes (Crosby, 1992). Loyalty programs such as rewards or discounts given for passenger miles travelled are being used to induce customers to stay with one service provider (Risk Factor: MODERATE). Rivalry among Competitor Firms The degree of competition and rivalry that exists in the airline industry is legendary. This industry is characterized by low profit margins, seasonal demand, high competition among service providers over the same or similar passenger routes and discounted or reduced rates for regular or institutional customers. On the other hand, airlines are using small perks like advance booking and baggage facility, quick processing times and other benefits to encourage travelers to fly with them. (Risk Factor: HIGH). Threat of Substitutes In recent times, the airline industry has been threatened by substitutes like fast bus or train services. Fear of terrorist attacks ...Download file to see next pagesRead More
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