External and Internal Analysis of Southwest Airlines - Case Study Example

Case study Table of Contents About the Company 3 External analysis 3 Industry Life cycle 3 Internal Analysis 5 Porter’s Generic Strategy 5 Engaging in Price Elasticity 6 Effective Route Utilization 6 Unique Membership for Passengers 6 Customer Satisfaction 7 Current Issues 7 Implementation of the Wright Amendment Act 7 Fluctuation in Fuel Price 8 Compromise on the Safety Factor 8 Generation of Strategic Options 8 Evaluation of the Strategic Option 10 Description of Selected strategy 11 Conclusion 11 Reference 12 About the Company The US based Southwest Airlines was founded on the ideas of developing a low cost airline by Rollin King and Herb Kelleher. The main value proposition for this entire business idea is to provide airline travelling at a competitive rate as compared to that of driving. The Southwest Airlines is positioned in domestic aviation markets of the US as a low cost leader. As of the year 2010, the airliner has the record for providing airline services to the largest number of passengers in the domestic air routes of the US (US Dept. Of Transportation, n.d.). The mission of the company is to provide airline services to the customers, while generating high amount of customer satisfaction through the intangible factors of warmth, friendliness as well as high quality customer service (Southwest Airlines, 2013.). External analysis It has to be said that the external analysis needs to take into account the various factors of the outside world that can seriously impact the business prospects of the low cost airlines. The external analysis can be best judged by evaluating the competitive business environment of the airline sector. Industry Life cycle The global aviation sector is highly integrated with a lot of macro level factors, which has to be taken into consideration while judging the business prospects associated with this sector. The high and tremendously complex level of integration of the multiple numbers of macro factors of various regions and countries has significantly pushed up the risk quotient that is associated with doing business in this particular sector. While studying the trends that have existed in the aviation sector all around the world, it has been found that the competitive scenario in the last decade shared an inverse relationship for the growth of the airline business all over the world. The analysis of the performance of the airline sector in the period of 2000 and 2009 revealed that the sector of global aviation was subjected to a net loss of more than 52 billion USD. The expert analysts of the aviation sector cited that the issues related to fragmented nature of the airlines sector all over the globe as well as mismatch in terms of demand and capacity are the main reasons for the loss based upshots. The experts have predicted that with the continued existence of these factors, there will be a significant impact in the global airline sector. It has to be said that these factors will trigger a loss of more than 52 billion USD in the next couple of years (Brueckner and Lee, 2010). Talking about the potential threat of the domestic airline sector of the US, the regulatory policy based issues has to be discussed. The passing of the Airline Deregulation Act in the year 1978 provided the perfect opportunity to the low cost carrier to introduce flights between Houston and New Orleans. However, because of the rising popularity of the popularity and the airline’s potential to significantly disrupt the airline business of that region through the introduction of low cost air travel services, a group of regional airlines as well as the local government resisted the move. This resulted in the formation of the Wright Amendment Act, which eradicated the possibility of value communication for the services it provided other than the permitted five states. This seriously impacted the value earning capability of the airline and therefore can be seen as a major threat that might emerge in the upcoming future. Talking on the lines of the company’s opportunities, two very important factors have to be mentioned. The airline company in order to tackle the cost of rising fuel prices used the tactics of hedging and derivates, which resulted in significant amount of savings of airline finances from potential losses. Also, the company’s acquisition of AirTran has provided significant amount of opportunity to enter new markets. This move of the low cost carrier will automatically help to secure the growth potential of the company in the upcoming future. Internal Analysis Internal analysis forms a very critical arena in the entire planning process as it helps in identifying the resources and competencies of the organization (Hill and Jones, 2012, p. 19). While doing the internal analysis of the low cost carrier, Southwest airlines, considerable amount of focus has to be given to the previously implemented strategies. It has to be said that the critical success factors that are associated with providing low cost air services is to continuously focus on the fact of providing low cost services to the passengers as well as continuously concentrate on reducing the operating expenses for the airlines. Porter’s Generic Strategy As per Porter’s generic strategy model, an organization trying to compete in the market can position itself in regards to differentiation, cost leadership or even on the basis of focus (Griffin, 2010, p. 244). However, the Southwest Airlines has always positioned itself as a low cost leader in the domestic market of aviation. A variety of factors that are mentioned below essentially substantiates the positioning strategy of the airline in the domestic market of the US. Engaging in Price Elasticity The airline carrier has focused on the process of providing low cost fares all the time to its passenger. It has to be said that during the incidence of tremendous hike of fuel prices for the aviation sector, the airline company refrained itself from imposing additional charges on the air travelling through the unbundling of products and services. However, the company focused on generating profits by increasing the passenger volume to attain an increase in sales. Effective Route Utilization It has to be said that one core strategy that was implemented by the airlines is the factor of effective route utilization. Unlike the rest of the aviation sector, which engaged in implementing a hub and spokes network for the conduction of airline operations to various location, the leading low cost carrier of America took a different approach. It has to be said that the airline has focused on the process of conducting operations in a particular route, only if it provided ample amount of passenger traffic. Unique Membership for Passengers It has to be said that the low cost airline has always focused on keeping its promises in regards to providing low cost services towards the customers. The airline for the generation of significant profits has always focused on increasing the volume of passengers serviced rather than hiking the airline fares. For the purpose of retaining existing customers as well as engage in significant value communication for the loyal consumers, the low cost airliner has focused on introducing a range of customer oriented incentives like the frequent flyer programs, awards based programs etc. This helped the airline to secure a steady inflow of customers who were looking forward to avail the low price offers and other incentivized services offered by the airline. Customer Satisfaction It has to be said that the low cost airlines provided a strong focus on the importance of customer satisfaction. It is highly relevant to mention that the employees were given the empowerment and authority to engage independently with the customers for providing them better service and thereby increasing the satisfaction quotient of the customers. While summarising the points that substantiates the positioning of the low cost carrier in the aviation market of the US in regards to Porter’s generic strategy, it has been realized that the airline company has always focused on maintaining its edge in regards to the critical success factors that are crucial for the conduction of its business operations. The endeavours of the airline in regards to price elasticity, route optimization, customer satisfaction as well as membership services for the passengers all highlight the focus in regards to gaining edge in the market in regards to increasing the volume of passengers serviced by the airline. Current Issues It has to be said that the low cost airline company faces a series of key issues that needs to be handled properly for the purpose of smooth conduction of airline operations in the upcoming future. Implementation of the Wright Amendment Act It has to be said that the potential for the low cost airline of the US can be seriously impacted in regards to the Wright Amendment Act which might come into effect in the year 2014. Talking in a little elaborate manner about the challenge coming from the implementation of the Wright Amendment Act, it has to be said that the Act restricts direct flights for airlines operating from the Love Field airport to any city in the US. The ban however permits the airlines to provide direct flight to five selected locations that are excluded from the Act. The ban also restricts the potential of engaging in value communication activates for the Southwest airlines, outside the permitted five states, that does not fall within the boundary of the ban. Needless to say, that this will automatically limit the airline’s ability to operate while increasing the volume of the passengers and thereby will hamper the profitability of the low cost airline in the long run. Fluctuation in Fuel Price Since jet fuel is a highly critical component in the entire aviation industry, hence a significant amount of threat emerges from the tremendous fluctuation of aviation fuel prices. Though, the airline company was highly instrumental in indulging in hedging of jet fuel in the previous years, yet it has to be said that the hedging strategy resulted in a considerable amount of loss, when the fuel prices depreciated much below the hedged prices. Compromise on the Safety Factor It has to be said that the low cost airlines has always focused on providing secured low cost aviation services to its passenger along with high customer satisfaction. Yet, the mishap of the year 2005, which resulted in human fatality, seriously, impacted the safety factor associated with the airline. Also, the late detection of possible defects in a number of Southwest airlines also tarnished the safety image that the low cost carrier proudly boasted. Generation of Strategic Options The process of designing of various strategic options for the purpose of better tackling of the challenges and issues related to Southwest Airlines in the upcoming future can be to some extent outlined by the using the Ansoff Matrix. It has to be said that the Ansoff Matrix discusses the options related to market penetration, product development, market development and even diversification (Kotler and Armstrong, 2008, p. 41). While making strategic recommendations, it has to be increasingly taken into consideration that no single strategy can address all the issues that are currently faced by the low cost airline carrier. Having said that, it is important to highlight the fact that the airline carrier needs to prioritize its challenges on the basis of urgency and criticality that is faced by the Southwest airlines It needs to be mentioned that the implementation of the Wright Amendment Act, will significantly curtail the profit making abilities of the low cost carrier. The reason behind that is the fact that the airliner is faced by the policy based challenges, which restricts the airline from engaging in value communication as well as providing direct flights outside the permitted five states. Hence, while ideating on the lines of the Ansoff’s matrix, thoughts have to be focused on market development and market expansion. It has to be said that since the airline decides on flight route on the basis of consumer demand emerging from a particular region, the airlines needs to look for entering into new market which provides significant opportunities of growth on the basis of growth on consumer demand. While talking about tackling the issue related to fluctuation in jet fuel prices, it can be said that the airline needs to implement a two tiered strategy. For the process of implementing a protection from paying excessive charges for acquisition of highly necessary jet fuel, the low cost carrier needs to continue with the process of hedging of jet fuel. However, it will also be effective for the company to opt for competitive fuel sourcing by providing competitive bidding options to various international oil companies for supplying of highly important aviation fuel. Finally, while trying to handle the issue related to safety factor of the low cost airlines, the airline can evaluate the financial option in regards to outsourcing the maintenance of the airline to third party service providers. Evaluation of the Strategic Option It has to be said that the choices outlined above needs to be evaluated on the basis of the levels of criticality associated with the particular issue. While talking in a broad note, in regards to the challenges faced, it has to be said that the focus on the recommended strategies has to be analyzed on a case by case manner. It is highly important to consider the fact that the implementation of the Wright Amendment Act in the year 2014 will seriously limit the airline’s profit making ability. The airline currently uses the strategy of focusing on providing services to regions where the traffic flow is very high. This helps the airline to compensate on low air fares while trying to gain up in regards to passenger volume. The limiting factors of the act will put a cap in the ability of the low cost airline to implement this particular strategy and thereby will pose a significant threat in regards to conduction of the business operations. Hence, it can be said that the criticality of this issue is very high. While analyzing the risk associated with the fluctuation of fuel charges, it has to be said that the airline already indulges in the practice of hedging of fuel. This result in mitigation of the risks associated with regular fluctuation to some extent. Hence, the risk factor is considerably low. Finally while determining the risk association of the safety issue, it can be pointed out that the lapse of safety measures is a standalone issue that has happened in the long course of conduction of business operations by the Southwest airlines. Hence, the risk factor for this issue can be considered low as well. Description of Selected strategy Judging on the grounds of risk factor associated with the various outlined strategies, it has to be said that the risk is maximum in regards to the implementation of the Wright Amendment Act. Hence, it can be said that the most important strategy is to focus on market expansion and development. It is important to mention that the company has already taken a step forward to enter new markets by the acquisition of AirTran. However, the company needs to make similar moves to acquire a few other low cost carriers existing in other regions which provides similar kinds of facilities to the air travellers. It has to be said that acquiring new low cost carriers in other regions, will help southwest Airlines to build on its core competencies, while capitalizing on potential opportunities. Talking in regards to resources needed, it has to be said that Southwest Airlines needs tremendous amount of financial resources for undertaking a functional low cost carrier. Talking in regards to manpower resources and other asset based resources, it can be said that the acquisition of a low cost airline will provide the necessary and relevant resources. Conclusion On a concluding note, it can be said that the acquisition of other low cost carriers of areas of high consumer demand will provide a great sustainability factor of the Southwest airlines, as it greatly mitigates the risk associated with the implications of the Wright Amendment Act and its associated limitations. Reference Kotler, P., and Armstrong, G., 2008. Principles of Marketing. 12/e. India: Pearson Education. Griffin, R.W., 2010. Management.10th ed. USA: Cengage Learning. Hill, C.W.L., and Jones, G.R., 2012. Strategic Management Theory: An Integrated Approach. USA: Cengage Learning. Brueckner, J.K., and Lee, D., 2010. Key Policy Issue [Online]. Available at: http://www.iata.org/publications/economics/market-issues/Pages/competition.aspx [Accessed Mar 21, 2013]. Southwest Airlines. One Report, 2009. [Online]. Available at: www.southwest.com [Accessed Mar 21 2013] US Dept. Of Transportation, n.d. Air Carrier Statistics, Form T – 100. Bureau of Transportation Statistics. 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