How does Southwest make money when other airlines do not? What are the factors contributing to Southwest’s success?
Southwest Airlines is one of those unique airline companies that has continued to be profitable over the years. It has done so for 33 consecutive years and, on its 127th financial quarter which happened to be last week, it was still able to pay a modest dividend to its shareholders. Thus it continues to serve as an example in an industry that is ravaged by cash and other problems. (Brancatelli, 2008)
There are many factors that led to the success of Southwest Airlines. First and foremost Southwest Airlines positioned itself as an interstate carrier adopting a point-to-point system instead of the conventional hub and spoke structure used widely in the industry. This allowed it to save excessive costs and provide a more convenient service to its customers. This system also helped the company in reducing their turnaround times and use their fleet of planes, which were also procured at comparatively cheaper prices, to provide a cheap and effective solution to airline travel.
Costs and Turnaround times were further reduced due to many other factors. These factors include the fact there was an absence of meals on all flights, approximately standard configuration of all aircraft, a team orientated approach towards providing ground services with an emphasis on creativity and novel ideas to ensure that everything was completed on time. Furthermore, the company successfully implemented a ticketless policy and continued on to effectively use its website to provide online services to its customers.
Southwest Airlines also adopted a culture that was very rewarding and motivating for its employees. Employees were given a free hand and were encouraged to find creative and innovative ways of conducting tier day to day operations. Thus this kind of empowerment meant that Southwest had lower employee turnover rates than the industry average. The style of leadership was also very highly charismatic and effective. Leaders served as an example to others as to the promotion of Southwest Airlines’ main value of doing “Whatever it takes” to preserve the Southwest Airline Culture, Service, and Values.
Depending upon the industry, intangible assets are more important than tangible ones. How is this evident at Southwest?
Southwest Airlines, has proved itself as one of the most successful U.S.-based airlines over the years. It has done so by consistently making wise decisions such as point-to-point systems, keeping the customer’s convenience as a top priority, utilizing one type of aircraft, reducing turnaround times; and is dedicated to employing the best talent for each job. More than 10,000 people apply to Southwest for various positions. These people are meticulously selected, developed, and trained to maintain and deliver the Southwest brand and promise.
In an industry ravaged with issues like rising operating costs, the rising price of fuel, rising need for shrinking working capital, and the decreasing profit margins, the value of a company’s tangible assets—equipment, facilities, technology, resources, hold little sway as to determining the probability of the future success, competitiveness, and survival of the company.
Instead, the intangible assets of the brand, interactive and involving culture, nurturing relationships, talent, and the ability to be creative and innovative while handling problems can contribute up to 85 percent of the market value of companies such as Southwest (Forman, 2009). Southwest employs fun and innovative culture to prioritize customer satisfaction and convenience. This has not only enabled the company to acquire brand loyal customers but has also made Southwest an Employer of choice for many workers across the United States. It is due to the Intangible worth of the company that Southwest was able to post profits for 33 consecutive years even though the industry it was working in was facing huge problems.
How should Southwest respond to the short-term, on-time operating challenges?
There are many options stated in the case and each option has its pros and cons. The first option proposes to provide the best possible service and performance in the resources available to Southwest. However, this could decrease both profits and employee morale as this option is clearly against the adopted culture in Southwest. The second option was related to increasing scheduled times and turnaround times to improve on-time service as compared to its competitors. However again this option would take the uniqueness out of the Southwest business model and pose a serious problem regarding profits. A third available option was to re-design passenger and baggage handling processes. However, according to the proposed redesign, passengers who were singled out for security checks ended up having inferior seats regardless of the fact whether they had arrived earlier in search of a good seat. The solution to this problem was posting additional security guards but that would increase the operating cost of the company. Passenger boarding policies could be altered but these would be a direct contradiction to the airline’s past policies that made it a favorite with customers. Finally, open seating could be abandoned in place of assigned seating. This would mean retraining existing customers some of which like the idea of open seating and could lead to increased chances of delays on full flights.
What should be Southwest’s long-term growth strategy?
Southwest Airlines should be prudent when developing the company’s growth strategy. Such a strategy should be planned carefully. I do not think Southwest should adopt any major radical shift in business policy at this time. They should continue with their strategy of cost leadership in the price-sensitive airline industry to gain a completive edge over rivals and gain market share. Southwest enters new markets only when they can achieve frequent flights.
Southwest should continue with its market development strategy, domestically focusing in the United States. There are still various untapped markets within the US that company has yet to enter. Plus Southwest has the advantage that some of these markets are actively seeking Southwest’s presence. However the practice of entering into new markets only when the company can achieve frequent flights should be retained. The company should also retain its system of providing frequent, “point to point” flights. The expansion into new markets and cities should be made at a moderate and carefully preplanned pace in conjunction with the past practices and policies of the airline so that effective coverage of new markets could be ensured. New cities and markets will also allow for long haul non-stop flights which are evidently more profitable. Thus an optima mix of flights should be configure and adjusted to suit the customers as well as the company’s need. As the range of the aircraft and type of flights (long haul or short haul) expands, the potential markets will also expand.
And finally, Southwest should continue to develop, maintain and foster its remarkable friendly, innovative, interactive and highly motivating culture. The company’s fun-loving attitude and commitments to its customers and employees have resulted in the increase in value of the intangible worth of the company over the years. This has blessed the company with a true competitive advantage and the company should spare no effort in retaining its culture.
Reference
Brancatelli, J. (2008). Southwest Airlines’ Seven Secrets for Success . Web.
Forman, D. C. (2009). Establishing a Talent-Driven Culture. Web.