Southwest Key Operating Metrics - Essay Example

Table of Contents Introduction 2 Strategy 4 Michael Porter's five force analysis 7 Bargaining power of suppliers 7 Bargaining power of buyers 8 Threat of new entrants 8 Availability of substitutes 9 Rivalry among existing competitors 9 Political, Economic, Social and Technological (PEST) analysis 12 Political factors 12 Economic factors 13 Social factors 14 Technological factors 14 Evaluating strategy 16 Looking forward 18 References 19 Introduction Southwest Airlines, in 1971, was onset by Rollin King and Herb Kelleher, with the simple objective of getting passengers to their desired destinations at the right time and at the cheapest rates they want to; not ignoring their comfort. It was started as a small Texas Airline, but with the passage of time it flies over a 100 million passengers annually and over a 65 cities, all over the United States. Southwest Airlines is offering short flights that are domestic only associated with minimal service, accompanied by a simple structure of cheap fare. It substituted the exclusive hub and spoke route composition widespread to most other carriers in the favor of smaller, point to point nonstop flights by utilizing its homogenous convoy of 537 Boeing 737 aircraft. Making use of its point to point flights, the airlines gives regular direct flights for the short distances, for example from Los Angeles to Las Vegas, etc. In 2008, Southwest served 438 nonstop city pairs, in 64 cities in 32 states and carried over 101.9 million passengers, the most of any domestic carrier. As the low-fare leader, Southwest's average ticket price was $119.16 in 2008, up from $106.60 in 2007 compared to an average price of $139.40 in 2008 at its closest competitor, Jet Blue. Following are the operating matrices of Southwest airlines. Southwest Key Operating Metrics1 2001 2002 2003 2004 2005 2006 2007 2008 ASM in thousands (seat capacity x miles flown) 65,295 68,887 71,790 76,861 85,173 92,780 99,636 103,271 RPM in thousands (filled seats x miles flown) 44,494 '45,392 47,942 53,418 60,223 67,954 72,319 73,491 Filled seat percentage (Load) 68% 66% 67% 69% 71% 73% 72.6% 71.2% Revenue per filled seat mile (Yield), in cents 12.1 11.7 12 11.8 12.1 12.9 13.08 14.35 Cost per Available Seat Mile (CASM), in cents 7.5 7.4 7.4 7.7 8.0 8.7 9.10 10.24 Non-fuel (CASM) (cents) 6.34 6.28 6.29 6.42 6.48 6.46 6.40 6.64 Fuel cost per gallon (dollars) 1.16 1.12 1.11 1.28 1.52 2.24 1.77 2.32 Mission2 "The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit." Strategy The Southwest Airlines has a focused strategy, it has defined target market and does not scramble its efforts to gain benefits from all over. Instead, it has selected a niche segment, to cater their needs better. Target market - the market that the company focuses are the low cost and value conscious travellers, with no frills but a comfy journey. It focuses on customers that have to travel short haul, these include passengers that travel for their business, are time conscious as well and also include residential customers that prefer travelling for vacations and seeking best value for their spending. Product offering - With focused target market, Southwest has a differentiated product (service) offering, it describes its service offering as short haul, low fare, high frequency, and a point to point carrier in the United States' airline industry. The informal and casual but dignified journey experience is the whole package. It does not provide meals, a pack of peanuts would do, there are no assigned places, no transfer of luggage and no class differentiation either, in form of first class or the business class etc. Whilst the average cost of a meal serve per passenger in the airlines industry is approximately $5, the cost for Southwest airlines is around 20 cents (Rose, 1999)3. Pricing structure - since Southwest Airlines distinguishes itself as the low fare carrier, this shows that it is not only in competition with the biggest airlines, but also fight in the ground where transportation methods are cheaper i.e. other forms of road transport as well, where social norm is also travelling via road. Zellner4 in 2001 quoted that in areas where Southwest Airlines enter by undercutting its rates by 50% or more, the demand explodes, thus nabbing customers who would not have travelled with Southwest Airlines earlier. Another successful strategy has been that rather than increasing fares when market gets busy and more travellers are flying, the airline just increases the number of flights. For example, from Ontario, the price for a traveller to Las Vegas would be similar to the price of a gas tank. Such great discounts are not feasible unless the passenger load factor is on the higher side - this is an industry jargon for the proportion of filled seats - i.e. approximately 68%, being the highest in the industry (Southwest posts modest profit, 2002)5. Distribution network - Miller6 in 1999, quotes that Southwest Airlines, as opposed to others rely purely on direct marketing techniques i.e. via phone or over the internet, simply stating that intermediaries like travel and reservation agents are not involved. Facilitating the norm is also the automated ticketing kiosks. It also gave rise to a ticket-less culture, eliminating the need for paper as a proof. To encourage a ticket-less culture and discourage the involvement of middlemen, there was a surcharge or an additional fee implemented on use of such. Marketing and promotion - The marketing communication by the company has always kept itself focused on the strategy that the company uses to maintain its niche position. Moreover, Southwest Airlines has always managed to keep up with time and the events happening in the surrounding. The proof is visible from the fact that Southwest was quick to respond to the September 11, 2001 attacks and changed its marketing messages within a week of the attacks, to show its concerns towards the security of the State. Its tagline the Symbol of Freedom was immediately shelved and replaced with a more patriotic theme which displayed the U.S. flag (McCarthy7, 2001) to portray unity and patriotism in a fight against the saddening and mournful occurrence. Furthermore, it has not limited itself to purely the airline focused advertising, but, is active on fronts such as sponsoring sports television programs and has agreements with professional football, hockey and baseball clubs; this has helped it in portraying itself not too much orientation just for the business class travellers, but on the other hand has open avenues for business-to-business marketing. Michael Porter's five force analysis The studies conducted are showing that the balance of power in the airline industry has been changing dramatically and drastically. The six bigger airlines that include American Airlines, United Airlines, Delta Airlines, Northwest Airlines, Continental Airlines and the US airways, are retrenching and the chunk of their share is being moved to the regional airliners and the low fare airlines. A study conducted shows that in May of 1992, 72% of the domestic seats were captured by these big six airlines, whose name are earlier mentioned, the regional big six occupied 11% of the seats, whereas the low fare airlines had 10% of the market, and the rest 7%. Just a decade later, the big six had lost their 16% of the share to stand at 56%, the regional of big six had 15% and the low fared airlines had gained 13% of the additional market, having 23% of the share. These statistics show the unstable industry structure, the industry holds. It becomes imperative to see which of the forces have profound affect on the shape and structure of the industry. The analysis of Porter's five force in the airlines industry and in particular the forces affecting the Southwest Airlines are as follows: Bargaining power of suppliers The suppliers to the airline industry include businesses that make planes, mechanics, maintenance personnel, suppliers of fuel and oil, and suppliers of other items ranging from food and beverages, newspapers, cutlery, curtains, pillows etc. These suppliers are devoid of much bargaining power as they are relatively less in number the size of these suppliers is smaller in size in comparison to the dominated airlines. And the potential threat from suppliers of integrating in to the same business is very minuscule. Thus, Southwest airlines and all the rest have no threat from the suppliers. Bargaining power of buyers The bargaining power of buyers is almost nil, though the customers range from individual (residential) customers and the commercial (business) customers; since nature of the industry is such that backward integration of customers is not a chance, therefore, this isn't a threat to the Southwest Airline. Threat of new entrants Access to higher credits and loans can make a potential entrant easier to enter into the market, especially if these funding sources are available at reasonably lower rates. The threat of new entrants ranges from low to moderate; and it has been seen that the industry was saturated at a point in time, which faced other cost pressures though. Differentiating elements such as brand name, frequent flier programs, and luxury provided serve as factors that can limit the new entrants into the market. Moreover, the government regulations and restrictions as the airport traffic and other rules are under the jurisdiction of the government because of sole aviation authorities normally. The phenomenon that eased the entry of the new entrants into the industry included The Regional Jet - it was a new kind of small jet airliner, which gained momentum since 1997. These were 50 - 70 seater planes, first launched by Bombardier and were followed by even lesser number of seats. These regional jets, commonly known as RJs, commonly assisted the bigger airlines like American Airlines, Delta Airlines and the United Airlines by acting as hubs for them and thus in direct competition with companies like Southwest. The lesser number of seats helped contain costs and full utilization of the airplanes; these proved to be entrepreneurial and economical against the 737s of the low fare airliners. The grouping of jet airlines against the traditional low fair airliners helped them constitute groupings to form smaller airports for regional liners. Availability of substitutes The substitute products include other airlines, and transport modes such as railways (trains) and buses that cover long distances (amongst cities). The main competitors for the Southwest Airlines include Continental Airlines, the American Airlines etc. But, limiting factors such as time and other personal preferences such as comfort or adventure affects the selection among these substitute products. Rivalry among existing competitors The competition based on lower prices is increasing rivalry among the participants in the market; increasing cost is placing pressures on managing that side of the business therefore, huge consolidation in the industry, has been conspicuous of the same phenomenon. And as the participants reduce and the existing becomes large in size, the competition level increases. There are multiple number of airlines that compete on the basis of lower prices including AirTran, American TransAir, JetBlue and Spirit etc. Though there is also competition from bigger and huge airliners such as American Airlines, United Airlines, Delta Airways, Northwest Airlines, Continental Airlines and the US Airways but these do not compete on the basis of low cost freight. Competitors8 The passenger demand is highly influenced by thee rates of the airline fares, especially for interstate trips that are relatively shorter and where the auto (road) and other travel modes as alternatives are easily available; also for the target market that is too price-sensitive and has its plans based on discretionary travel and for leisure travel. The airfares are a function of labor, fuel, and other airline operating costs; debt burden; passenger demand; capacity and yield management; market presence; and competitive factors. Furthermore, another chunk of airfare that is built in the price is increasing portion from the taxes, fees, and other charges assessed by governmental agencies and airports. American Airlines are legacy carrier, which are operational both in terms of international as well as domestic routes in the US. Air Tran Airways is another discount airlines that serves the east and central of the US. JetBlue Airlines are low cost airline major hubs in New York-JFK, Boston, Washing DC-Dulles, Fort Lauderdale, Long Beach, and Oakland. The competition, price wars and low cost operations had kind of become the nature of the industry. Not surviving the game of survival of the fittest, many companies have formed coalitions resulting in to forming alliances and forcing the industry in to the consolidation phase. Entering into alliances has also provided the participants in the airlines industry with the advantages that would have come as a result of mergers. The year 2002, was symbol of the same, a marketing alliance and code-sharing agreement was entered in to between United Airlines and USAirways; then in May 2004, USAirways joined United Airlines in the Star Alliance. In March 2003, another marketing and code sharing agreement was approved by the U.S. DOT among the Continental Airlines, Delta Airlines, and the Northwest Airlines that linked all these airlines' flight schedules and frequent flyer programs into the same. The consolidation via acquisition was seen, US Airways acquired America West and became the largest carrier in the United States under the trade name of US Airways. More marketing agreements were seen in recent times between Air Tran and Frontier Airlines. Merger talks between Delta and Northwest are also taking shape any time soon. This resulted in bigger and more competitive industry, which was struggling to become the low cost leader. Political, Economic, Social and Technological (PEST) analysis Political factors The political factors can range broadly from the international events occurring in the environment and the domestic factors such as industry deregulation, and government control on the industry. The airline industry faced the worst recession, when the September 11 attacks occurred (Masse 2002)9; since the huge jetliners were used to blow up the building. Moreover, the other factors such as the industry deregulation which tends to affect the congestions at the airport, causing considerable delays in flight timings, both departure and arrival, have been at the forefront of the government policy. The government is not in the business of managing the air traffic, hence it deregularized the system; the deregulation goes in the benefit of the passengers; since airlines were authoritative enough in provisioning of the service, where there was enough demand, rather than channelizing and routing planes at low demand routes. However, the scenario is not so; it is still bureaucratically controlled. The airports are not free to expand capacity, permission and time is needed from the Federal Aviation Authority for runway grants or for installation of upgraded landing equipment. Hence, airlines struggle to obtain permission for congested airports, at least at peak hour timings. The deregulation provided many advantages in form of opportunities to the industry, which Southwest Airlines was intelligent enough not to miss. Like the Hub and the Spoke system. The system proved beneficial for the travellers in twofold. Travellers living in proximity of hub airport cities had a greater access to the number of destined locations and the flights. Whereas, for travellers channelling from the spokes of the hubs, though did not have point to point benefit, but had access to various destinations via the hub. Here, the bureaucratic aviation system became troublesome again. This gave rise to another opportune service provisioning, the low fare, point to point system - the growing congestion eliminated the all frills and luxury for the regular travellers; the short destination flights were of short hauls, no frills, low priced and for interstate provisioning. Thus with this strategy, Southwest Airlines avoided direct competition with major airlines and created a favourable niche for itself. Some policy changes that need to serve the dynamic airline market better include commercializing the air traffic control system, eliminating federal restrictions on airport access, permit congested airports by levying access charges during peak hours, etc (Poole & Butler)10. Economic factors Inflation, foreign currency appreciation and devaluation, fuel prices11 all affect the economic well being of the airline industry. But after labor, jet fuel is the next big operational cost for the airline operators, which need to be managed in the deregulated world of the industry. With respect to the petroleum prices (jet fuel) the airline companies face significant risk because of fluctuating prices. The jet fuel price volatility measured as opposed to the volatility in major currencies is 26:11 in percentage terms, according to the study conducted by Guay and Kothari12 in 2003. The highly competitive nature of the industry, makes it difficult for firms to have a pass through pricing structure (i..e passing on the increase in costs to the customers in terms of higher prices). To manage the huge fluctuation in the jet fuel prices, the companies have no option other than to hedge their fuel prices. It has been observes that in the recessionary period of the industry, the companies that were able to hedge their fuel prices were better positioned to control their operating side of the expenses. Swaps, futures, call options were all used to manage the oil prices. Scott Topping quotes: "If we don't hedge jet fuel price risk, we are speculating. It is our fiduciary duty to try and hedge this risk." - Scott Topping, Director of Corporate Finance for Southwest Airlines Social factors The social factors such as increased foreign travel with the development of tourism and other social and demographic factors affecting the lifestyle are encouraging the demand for air travel; but on the other hand recent hike in international terrorism are factors that deter the demand for the same. Moreover, the short haul travel that is the major focus of the Southwest Airlines is somewhat impacted by the changing norms and advancing technologies, by having or doing business at the finger tips. Video conferencing has affected the business travel market to a greater extent than expected. Though the market has changed but has still remained very vital for the airlines. This remains one side of the story, but low fare airlines have also given rise to the leisure travel, and passengers are more willing to swap go to and fro in lieu of good deals. Technological factors The drive of the internet has led towards a knowledge based system. Earlier, customers i.e. the travellers relied on the information provided to them by their travel and airline reservation agents; now most of the airlines themselves offer direct online booking, with powerful search tools and friendly user interfaces. Moreover, providing the customers with all the details, and benefits of reserving their seats for the flight online; not only, the particular airline's own website, but, also the popular travel web pages like Expedia, Travelocity have helped compete with bigger competitors in the online market place in lower expenses. Automation in ticketing was combined with internet and wi fi based check in service. On the other aspect too, technology plays a great role because of increasing costs, the level of service that has to be provided, etc. The Company needs a fleet of efficient airplanes that can run on cheaper and lower fuelled forms; it is known that Southwest makes exclusive use of Boeing 737 series. Since these carriers are more viable and efficient in terms of their functionality. Evaluating strategy The success of Southwest Airlines' strategy can be determined from the fact that when all airlines went into recessionary periods, it was the sole operator that was in profit. The successful strategy can be attributed to the fact that it has maintained a niche positioning and has not taken a middle of the road approach. Instead, it is competing on lowest price basis by maintaining lower fares and actions that translate into no frills and lower costs. To contain its costs, it has managed to hedge its fuel prices to the extent they can be controlled. Where: S/M short and medium L long VP vacation packages C cargo Niche analysis13 Niche Market Size of Market Trend Competition Scope for Manoeuvre Strategy Short & Medium Haul Domestic Largest Growth Cut throat Medium Build Long Haul Domestic Smallest Development Cut throat Medium Hold Cargo Medium Growth Severe Low Build Vacation Packages Medium Growth Severe Medium Build Not only this, the mission is not simply a wordy statement, but the company and its employees does their best to maintain friendly relations with the customers and at all times have handled any lawsuit implications well, hats off to its public relationing strategy. It has been able to do so because of its employees; Southwest Airlines has never downsized or laid off its people unless deemed necessary as it considers its employees as the biggest assets. A part of its mission for its employees is as follows: We are committed to provide for our employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, employees will be provided the same concern, respect and caring attitude with the organization that they are expected to share externally with every Southwest customer. Looking forward Before, saying what direction Southwest Airlines should take, we should conduct and audit, both internal and external to see where it stands. This can be done by preparing a TOWS matrix (as given below). The internal audit is subjected to studying the strengths and weaknesses in the company itself; whereas, external involves studying the environment and the changes occurring in the surrounding to evaluate the opportunities and threats in the market place. Strengths Brand value. People Focus. On-time performance and baggage handling Frequent departures Contained costs Weaknesses Over reliance on Boeing 737 series. Network Size. Shortage of longer haul flights. Opportunities Market Expansion. Legacy slots. Competitors are priced more. Air travel will increase because of changing social climate. Threats Legacy carriers for their own Low Cost Carriers and short haul travel distances. Main competitors are copying the service levels. Southwest Airlines has a glowing future, because short and medium haul travelling will maintain its momentum, at least at the same pace it currently is managing and will dominate as mode for interstate travels, even if the big airliners are bound to be affected by the fears of international terrorism. Though, the company should be focusing on penetrating its presence in more and more destinations for customers in United States. References http://www.wikinvest.com/stock/Southwest_Airlines_Company_(LUV) Rose, S. (1999). How Herb keeps Southwest hopping.Money. Zellner, W. (2001). Southwest: after Kelleher, more blue skies. Business Week Southwest posts modest profit. (2002). Aviation Week & Space Technology Miller, W. (1999). Airlines take to the Internet. Industry Week. McCarthy, M. (2001). Southwest ad's quick return works. USA Todays Websites of American Airlines, Air Tran, and Jet Blue Masse, R. (2002). How much did the airline industry recover since September 11, 2001 Statistics Canada Poole, R. W., Butler, V. The Airline Deregulation: Unfinished Revolution. Regulation Volume 22, 1 http://www.diy-pest-control.com/other/airline-pest-analysis/ Guay, W., and Kothari, S.P. (2003). How much do firms hedge with derivatives Journal of Financial Economics 70:423-461. Southwest Airlines website. Read More