Business of Southwest Airlines - Essay Example

Running Head: Southwest Airlines Southwest Airlines: Introduction: Southwest airline is one of the largest and most successful airlines given that the company still records profits when its competitors record losses. The company was formed in 1971 and its main strategy was to increase demand for its air travel services by reducing it fare prices. Low fare prices are achieved by decreasing customer services costs. The company has faced stiff competition from its major competitors who are Jet Blue airlines and America airlines, these companies have adopted Southwest Airlines strategy and therefore its competitive advantage is likely to decline. The paper discusses the history of the Airline, strengths, weaknesses, opportunities and threats (SWOT), discusses an appropriate strategy that can be adopted by the airline to achieve growth. Southwest (2009) A. History of Southwest airlines: Southwest airline was formed in 1971 by Herb Kelleher and Rollin King, their main aim was to offer freights to customers at the lowest price possible and also make sure consumers arrived at their destinations on time. The company has expanded over the years and today the airline offers services to over seventy million consumers in a year. (Southwest (2009)) In 1979 the company introduced a self service ticket booking machine, this increased convenience to consumers. However in this year the airline could only offer services to 3 states, in 1983 the airline expanded and increased its destinations to over 34 cities. After the September 11 attack the airline still recorded a profit but its revenue declined by60%, in the following year the number of destinations increased to 58 cities. In 2004 the company was ranked as the fourth largest carrier given that the number of consumers per years had increased and the company had made profits for over 30 year in a row. (Southwest (2009)) Today the airline is still one of the best performing countries and its strategy has helped the company to achieve high growth and make profits over the years, the number of destinations have increased and due to low cost travel tickets the customer base has increased and this has resulted into further increase in the demand for freights. However a major problem is that other airlines have adopted the company's strategies and this has reduced its competitive position in the airline industry. (Southwest (2009)) B. SWOT analysis: This section discusses the strengths, weaknesses, opportunities and threats of Southwest airlines: Strengths: There are a number of internal strengths of the company, these strengths include: 1. Low fare prices: The company offers low fare prices, the low fare prices results into increased ticket demand; increased usage helps the company to realize economies of scale and therefore achieves high profits. 2. Online booking: The company has an advantage in that over 50% of booking are made online, it online booking services helps promote convenience to the customers. 3. unionized workers and flexible working hours: One in four employees of the company is a union member. However the company is still able to negotiate flexible working hours despite many employees being members of a union. (Robinson (2002)) Weaknesses: The company has a number of weaknesses and they include: 1. International freights: The company only offers services to a limited number of destinations, the company offers services to58 destinations only, it offers short distance freights and does not offer international freights that would help the company increase number of freights and revenue. (Robinson (2002)) 2. Boeing 737: The company only uses one product which is Boeing 7373 and this may be considered a major drawback to the company given that its reputation could be highly affected if the safety of such aircrafts is compromised. 3. Unionized workers: A large number of the company's employees are unionized, this affects the company given that negotiation regarding wages and working hours are done by a labor union which may affect the smooth running of the company. (Robinson (2002)) 4. Cost cutting by reducing customer services: Low costs of running are achieved by cutting on customer services. Unlike its competitors the company does not offer a wide range of services and products to its consumers during freights (Robinson (2002)) Opportunities: The company has a number of opportunities it could utilize to achieve growth and they include: 1. Expand and offer international freights: Currently the company offers freights to 58 destinations, the company could expand and increase its destinations to other international destinations and this would increase demand and therefore increase revenue and profits. 2. Increasing internet advertising: Increasing internet advertising will help increase the demand for its services and given that more than 50% of bookings are made online the company should increase online advertising to increase demand. 3. Offering longer freights: Currently the company offers short destination freights. By offering longer freights the company will considerably increase its revenue and profit. Threats: 1. Terrorism: With increased terrorist attack fears among consumers these attacks tend to reduce the demand for airline travel. For example after 9/11 the demand for air travel declined. 2. Security costs: New security measures and government policies the company has increased its running costs which may lead to a reduction in profit level. 3 Gas prices: Fossil fuel prices have fluctuated over time and an increase in the price of fuel results into increased cost leading into a reduction in profits. 4. Noise pollution policies: New noise pollution policies may force the airline to reduce the number of freights per day and this will affect the profitability of the company. The following is the SWOT profile of the company: ((Hartley (2008)) C. Proposed Strategy: External factors evaluation: External factors include opportunities and threats; the following table summarizes the weights of each threat and opportunity: external opportunities weight rating(1 to 5) score Expand and offer international freights 0.3 4 1.2 Increasing internet advertising 0.1 3 0.3 Offering longer freights 0.1 3 0.3 1.8 threats Terrorism 0.3 4 1.2 Security costs 0.1 2 0.2 Gas prices 0.05 2 0.1 Noise pollution policies 0.05 1 0.05 1.55 total 1 3.35 Internal factors evaluation: internal strengths weight rating(1 to 5) score Low fare prices 0.5 5 2.5 Online booking: 0.05 4 0.2 unionized workers and ability to negotiate flexible working hours 0.05 3 0.15 2.85 weaknesses International freights 0.3 4 1.2 one product only the Boeing 737 0.05 3 0.15 Unionized workers 0.03 2 0.06 Cost cutting by reducing customer services 0.02 3 0.06 1.47 total 1 4.32 The best strategy should avoid threats, build on strengths, exploit opportunities and resolve weaknesses. Major goals: Increase customer base by increasing freights Increase revenue and profits Become the leading company in terms of customer services Possible strategies: a. Expanding and offering services to more cities: The company should expand its services to more cities, this will ensure that the company realizes increase demand for its services, freights should make several stops before its final destination and this will increase revenue and profits of the company. Unlike expanding to international markets there will be a possibility of a reduction in terrorist attack. (Hartley (2008)) The increase in number of freights will help build on some strengths such as lower fare prices, due to the increased number of passage the airline will be in a position to reduce prices if the company realizes economies of scale. Through this strategy the company will also be able to increase internet advertising to persuade consumers to fly to more destinations offered by the airline. Security costs will also reduced given that the company will also be reduced given that the company will realize economies of scale whereby security cost is an overhead cost and therefore by expanding operations these costs will relatively be reduced per unit. (Hartley (2008)) b. Offering international freights: This is an appropriate strategy whereby the company will expand and increase the number of destinations, however this strategy has a number of disadvantages which include increased possibility of terrorist attacks given that the destinations will expands to other nations. The cost of security will also increase given that the company will expand to other countries and therefore required to employ security agencies in each country. The other disadvantage of this strategy is that the company may be forced to purchase more Boeings 737 given that the existing ones may not meet domestic and international demands. This may be expensive and may add to the cost of capital whereby the company may result into borrowing. An advantage of this strategy is that the company may expand to other markets is not as competitive ads the domestic one and this will give the company an opportunity to expand its markets, an increase in market size means that the demand for its services will increase resulting into an increase in revenue and profits. D. Plan to implement your strategy: In order to implement this strategy the company should increase and decrease the following: Increase Increasing the number of freights: The company should increase the number of freights per day. However these freights should be to various destinations and not to one particular destination. Several stops: Freights should make several stops before its final destination and this will increase the number of destinations and freights per day from and to each destination Revenue: Revenue should also be increased by ensuring that each freight costs are covered and this will ensure that economies of scales are realized in order to realize economic profits. Decrease: Number of freights to one destination: The company should reduce the number of freights to one particular destination, for example some destinations have over 5 freights in a day and in order to maximize profits the company should reduce these freights to 2 and the other freights should be to other new destinations. Running costs: The company should also reduce running costs in order to realize higher profits. Running costs can be reduced by employing an optimal number of employees and also ensuring that all freight is fully booked. E. Evaluation of strategy: The following is an analysis of the two strategies, Expanding and offering services to more cities - strategy 1 Offering international freights- strategy 2 internal opportunities weight rating(1 to 5) score strategy 1 strategy 2 Expand and offer international freights 0.3 4 1.2 3 0.9 5 1.5 Increasing internet advertising 0.1 3 0.3 5 0.5 3 0.3 Offering longer freights 0.1 3 0.3 5 0.5 5 0.5 threats Terrorism 0.3 4 1.2 5 1.5 1 0.3 Security costs 0.1 2 0.2 5 0.5 1 0.1 Gas prices 0.05 2 0.1 3 0.15 1 0.05 Noise pollution policies 0.05 1 0.05 4 0.2 1 0.05 strengths Low fare prices 0.5 5 2.5 5 2.5 5 2.5 Online booking: 0.05 4 0.2 5 0.25 4 0.2 unionized workers and ability to negotiate flexible working hours 0.05 3 0.15 2 0.1 2 0.1 weaknesses International freights 0.3 4 1.2 0 0 5 1.5 one product only the Boeing 737 0.05 3 0.15 5 0.25 2 0.1 Unionized workers 0.03 2 0.06 4 0.12 2 0.06 Cost cutting by reducing customer services 0.02 3 0.06 4 0.08 2 0.04 total 7.37 7.55 7.3 From the above table it is evident that strategy one has a higher total score 7.55 and therefore it is evident that expanding to other domestic destinations is the most appropriate strategy. (Lorange (1998)) Conclusion: From the above discussion it is evident that southwest Airline Company has grown to become one of the largest airline compan9ies, it has recorded profits for the past 34 years despite its competitors realizing losses. The high profits are achieved by reduced fare prices and this increases demand, however this cost strategy has been eroded by competitions adopting the airlines strategies. There are a number of strengths and weaknesses of the company but the strengths out weight the weaknesses, with the adoption of the new strategy that involves expanding the number of destinations the weaknesses will be resolved and strengths utilized. By adopting this strategy also the costs of running will be reduced as the company realizes economies of scale, further this strategy is preferred due to lower risks of terrorist attacks compared to expanding to international markets. References: John Pearce and Richard Robinson (2002) Formulation, implementation, and control of competitive strategy. New Jersey: Prentice Hall Press. Robert Hartley (2008) Management mistakes and successes. New York: McGraw Hill Press. Roos, J. and Lorange P. (1998) Strategic Alliances: Formation, Implementation and Evolution. New York: McGraw Hill Press South west airlines official website (2009) Brief History of Southwest Airlines: retrieved on 22nd August, from http://www.southwest.com/about_swa/airborne.html . Read More