Prospect of Buying Southwest Airlines - Case Study Example

Prospect of buying Southwest Airlines Introduction In the present global economic turmoil, the perception of the general public towards the airline business has been rather negative as most carriers continue to post huge losses. The present industry, especially in the context of the United States consists of major carriers such as Delta, American, and United in addition to the smaller low cost carriers. However, in the present scenario, the latter group, led by the vibrant Southwest airlines has provided some relief to shareholders by posting an uninterrupted profit for the 36th consecutive year (Jody Gittell, 2005). It is not long ago in 2002, when United Airlines, in the wake of the downturn resulting from the September 11 attacks, was forced to file for bankruptcy. Further, American airlines is operating currently with over $18 billion debt in its balance sheets. During the concluding financial year, the three biggest airlines in the United States have posted combined losses to the tune of $15 billion. This is huge considering the millions of money belonging to shareholders, which is at stake (Kevin Freiberg, 2006). In contrast, Southwest airlines have earned a profit of $178 million in 2008, although this figure is substantially less in comparison to the preceding year (decline by 72.4%). As such, the airline happens to be one of the few airlines to post a profit despite the problems being faced in the sector. this puts its profit at a much larger margin than the performances of all the other airlines put together. In terms of passenger traffic, the airline boarded more than $88 million passengers, a figure which has not been surpassed by any other airline, as per the figures from the Department of Transportation. However, it must be pointed out that Southwest is still placed 7th in terms of revenue with close to $11 billion in 2008 (Charles OReilly, 2005). When considered in tersm of its fleet size, southwest emerges the front runner and is capable to carry more passengers especially when including even its overseas routes. All along, especially since the period after the terrorist attacks in 2001, industry analysts have been constantly questioning whether Southwest would be in a position to maintain its upward trajectory. However, it must be recognized that despite the recent decline in sales, Southwest is among the very few airlines that has posted a profit when other carriers are experiencing both decline in sales as well as passenger volumes (Kevin Freiberg, 2006). It is therefore no surprise that Southwest has time and again managed to be included in Fortune magazine’s top ten list of most admired companies alongside respected names such as General Electric and Microsoft. The encouraging performance of its stock from 1978 to 2002 with gravity defying gains has made much news in Wall Street circles. What adds more to the accomplishment of Southwest is that it has managed to humble other industry majors despite being referred to as a snakebit business on account of being a low cost carrier. Southwest has also been acknowledged for possessing the tacit skill of sustaining its growth and ensuring that is surges ahead in terms of performance irrespective of market conditions (Terry Bacon, 2003). In recent years, Southwest has witnessed a major reshuffle in its executive divisions and its unhindered performance in the midst of these major changes has proved the credibility of the management mechanisms operating within the company and the efficiency with which the power of managing the carrier have been passed on. with all the above stated reasons, Southwest stands ahead as one of the most lucrative companies that can be considered for acquisition. Methodology In order to assess the prospect of purchasing Southwest airlines, it is essential to consider the method in which the required information will be obtained. As the preceding section has demonstrated, the entire analysis will rely on the use of historical data and facts obtained through books and journals, which implies that the primary emphasis of the study is dependent on the extensive use of secondary sources of information. In addition, business research resources such as Business week and the wall street journal are believed to be other credible sources of information in the current context. In a basic sense, the research is aiming to perform a SWOT analysis (Strengths, weaknesses, opportunities and threats) in order to determine the airline’s performance, market position and strategy and placement for the future. the analysis uses information from the annual reports published by the company and used the various figures pertaining to parameters such as sales and income to determine the performance of the firm over the years. Further, the scenario in the airline industry after the terrorist attacks of September 11, 2001 is also important to study as it is one where the airline has managed to outrun many of its biggest competitors and industry bigwigs to post constant figures of profit year after year. As such, the analysis will take all such aspects into due consideration as deemed necessary. Analysis Southwest began as a concept in 1967, primarily by Rob Kelleher, who devised the constitution of the airline on a cocktail napkin. Since then, Southwest has had to wage a constant battle over the onslaught of the bigger players and has never made any deviations from its basic approach, which aims to enter new markets that are often ignored by traditional carriers and then captures new customers by offering the cheapest fares. Further, Southwest has always avoided the hub and spoke of traditional airlines and prefers to fly point to point (aka city to city) and only uses the Boeing 737 as the aircraft. Costs are cut and the provision of the cheapest fares is possible by not serving any ob board refreshments or meals and there are no surcharges for any changes such as in the case of changing tickets. The absence of in-flight entertainment has also meant that the airline caters to the basic requirement of ferrying passengers to destinations, thus succeeding in charging them only for such services at the lowest prices (Jody Gittell, 2005). This approach has remained unbeatable and has in fact been used as inspiration by other carriers across the world, especially in Europe. The total Revenue passenger miles has been on the constant rise and stood at 73 billion as of 2008. The passenger load factor stood at an impressive 71.2%, while the total operating revenue was $11 billion. The operation costs for the airline have increased dramatically since the September 11 attacks as the government has enforced additional fees citing security issues at airports. Despite such odds, Southwest has remained one of those few airlines that has remained profitable. The organizational structure at Southwest airlines can be visualized in the form an inverted pyramid with the top management placed at the bottom. The management is known to act as support for over $35000 front line employees, who can be attributed as the experts running the firm. As per the unorthodox management style of its co-founder in the form of Kelleher, management decisions are the result of everyone’s influence in the company. As such, it is not the executives who run the entire show and the structural constraints are quite loose and transparent, which is known to encourage employees on thinking freely and contributing to the growth and strategy without worrying much about titles (Charles OReilly, 2005). The company is categorized as a C-corporation wherein the duration is often differentiated as a matter of usual perpetual existence. Shareholders are not liable for any debts and the preserved operation is usually more structured, thereby calling the need for more analysis and reporting. The top management through the board of directors and officers is more centralized. There is in fact no tax at the corporate level as it is normally paid out in the form of salaries (Terry Bacon, 2003). Southwest’s customer hail both from the business as well as residential sectors, and in the event of no bargaining power in the hands of the customer, there is no threat for any backward integration. As such, it is unlikely that any customers of Southwest airlines are going to be concerned with any of its current offerings. Further, Southwest is predominantly a discount airliner and with increasing rivalry among carriers, the market that can be captured is virtually shrinking. With the worsening economic situation, competitors are forced to initiate a downsize and compete for whatever market exists in such an environment in order to remain in business. The airline industry is not conducive for new entrants as the demand is not very high for the current number of operators. Besides, the additional hurdles in terms of the regulations from the government and the FAA apart from the several restrictions that airlines have to face are additional factors that make the threat of any new entrants a fairly distant possibility. One of Southwest’s most prominent competitive advantages is the low pricing of its tickets and is aimed at a broader customer base who are willing to skip any fringe benefits such as in-flight meals or on-board entertainment. This approach helped the prospects of the airlines even after the turmoil resulting out of the September 11 attacks. The lost faith in airline security has forced many other airlines to post huge losses or even run towards bankruptcy and in the case of smaller companies such as Southwest, the position was much enviable given its capability to post continued profits (Peter Lynch, 2007). However, despite offering no frills, Southwest has often been charged for not being able to match up to the customer expectations when it comes to the service. As such, it is important to understand the direction of the future strategy for the company that can help keep the passengers happy, satisfied and dedicated by taking good care of them as it would help in making them come back time and again (Peter Lynch, 2007). Southwest is known to maintain very good relations with all employees and the contracts in place for employees offer a wide degree of flexibility by allowing them to work for longer hours. Despite these benefits, Southwest is not devoid of any weaknesses. Despite its successes, Southwest operates currently in only 29 states and has not reached a level where it can compete with bigger players on the national or international arena. Further, Southwest does not operate on the basis of a hub system, thereby preventing it from reaching further out to newer destinations. Despite these limitations, competitors are aware that they cannot hope to match the prices offered by Southwest and their market share is considerably larger. Instead, they are depending on reducing such price differences and offer more quality in the provision of these frills for lower prices (Jeremy Siegel, 2005). Others depend on the use of hubs to serve remote customers in a economic manner. Southwest also relies solely on the use of the Boeing 737 aircraft. Such a feature leaves no room for any flexibility whenever the model is credited with a bad reputation or any defect is detected. In the case of such a situation, it would cost a lot for Southwest to revamp its fleet or even make any changes to it as such a situation would lead to bad publicity. Conclusion The success of Southwest is primarily due to their sharp focus on tangible goals and this is evident by their offer of a no frills service. The low cost model allows the possibility for customers to reach their destinations in the fastest way with very little cost in comparison to other alternatives. Driven by the notion that customers can be attracted without forcing them to consider any expensive options has worked wonders for the company and has helped it step the toes of many other bigger airlines. However, the company does have a few deficiencies as mentioned above, which need to be tackled if the airlines is to be made more efficient and lucrative for a wider customer base. As such, it is highly recommended to consider Southwest as an option for purchase. References 1. Jody Gittell (2005), The Southwest Airlines way: using the power of relationships to achieve high performance. New York: McGraw Hill. 2. Charles OReilly (2005), Hidden value: how great companies achieve extraordinary results with ordinary people. Harvard Business Press. 3. Terry Bacon (2003), Winning behavior: what the smartest, most successful companies do differently. Boston: AMACOM. 4. Kevin Freiberg (2006), Nuts!: Southwest Airlines crazy recipe for business and personal success. London: Broadway. 5. Peter Lynch (2007), Beating the Street. New York: Simon & Schuster. 6. Jeremy Siegel (2005), The future for investors: why the tried and true triumph over the bold and new. New York: Crown Business.   Read More