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Southwest Airlines Case Study

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Updated: Aug 19th, 2019

Background information

Southwest Airlines operates in the US airline industry as a passenger carrier having been incorporated in 1967. Since its inception, the firm has been focused at profit maximization. Consequently, it has integrated expansion as one of its strategic management practices in its quest to stimulate high growth rate.

By 31st December 2011, the airline operated in 72 US cities and transported approximately 106 million passengers. Its average annual revenue at the beginning of 2012 amounted to $15 billion. The firm’s adoption and continued sustenance of the low cost structure has enabled it to sustain its success (Hawkins, Misra, and Tang 3).

Mission statement: Southwest Airline intends to offer its customers the highest level of customer service, which will result to the creation of a friendly and warm environment. Southwest Airline holds that such an environment will result in development of individual pride and enhanced company spirit.

Southwest airline is committed towards the creation of a conducive and stable work environment that provides all employees with an equal opportunity for personal growth and learning. The firm encourages its employees to be creative and innovative in its quest to attain high effectiveness and efficiency in its operation.

In the quest to attain a high level of employee retention and public image, the airline is focused at ensuring that its customers are treated with respect and caring attitude(Hawkins, Misra, and Tang 3)..

Analysis of the external business environment

Porters’ five forces

Rivalry: Currently, the US airline industry is characterized by intense competition and a high degree of volatility. Additionally, the industry is extremely technology and capital intensive, heavily regulated, and taxed hence reducing the profit margins of domestic firms.

Over the past decade, firms in the industry have experienced a conundrum emanating from the increment in cost of operation. Rise in the cost of fuel is one of the major challenges that the firms have faced in the past. From 2000, the cost of fuel has risen with over 300% hence making it a challenge for firms to operate (Hawkins, Misra, and Tang 12).

Threat of entry: Despite the rise in cost of fuel, Southwest Airline is grappling with a high degree of industry concentration. The concentration has emanated from an influx in the number of new entrants. Deregulation Act of 1978 has provided a window for foreign companies to venture into the industry.

Minimal differentiation in the industry is another major hurdle that Southwest Airline is currently facing. Price has become the main market variable that firms in the industry are hedging their competitiveness against in their operations.

Therefore, firms in the industry are continuously experiencing a significant reduction in their profit margins. However, the threat of entry is currently minimal due to the high startup and operational cost and the intense competition from incumbents. New entrants into the industry usually fail while those that survival will take a considerable duration to position themselves as credible competitors (Hawkins, Misra, and Tang 13).

Threat of substitute: Over the past decade, the industry has been experiencing an increment in the number of substitute due to the development of alternative means of transport such as car, train, and bus (Hitt, Ireland, and Hoskisson 65).

Most individuals prefer these means of transport when travelling for a short distance, which is a major challenge for Southwest Airline as it focuses on short hauls. Emergence of intercity railroads also presents a major threat to the firm’s future survival. The high cost of fuel and an increment in baggage fees in the US airline industry are pushing consumers to train transportation hence making it a viable substitute.

The pressure on the US government to upgrade the country’s rail system and develop high-speed rails is a major threat that Southwest Airlines will have to deal with in the future. In a bid to counter the threat of substitute, Southwest Airline has integrated an effective reservation system that makes customers to prefer the firm as their travel alternative (Hawkins, Misra, and Tang 14).

Supplier power: The primary sources of supplier bargaining power in the airline industry include labor, jet-fuel, and aircrafts (Hawkins, Misra, and Tang 15). Over the past few years, jet-fuel has become a major source of supplier bargaining power in the US industry. However, Southwest Airlines has effectively addressed the threat of high supplier power by adopting a hedging strategy.

This adequately shields the firm from experiencing enormous swing in its operating expenses (Carter, Rogers, and Simkins 3). Aircraft manufacturers have a relatively high bargaining power, which emanates from a high switching cost. The main aircraft manufacturers, which include Airbus and Boeing, can increase the price.

In its operation, Southwest Airline solely procures aircrafts from Boeing, and it might be affected in the future in the event of Boeing increasing the price of its airplanes (Hawkins, Misra, and Tang 14). Labor costs also form a significant proportion of supplier power.

The US airline industry has experienced an increment in the number of unions seeking for premium wages over the recent years. However, this trend is changing constantly due to increased bankruptcies in the industry.

Consequently, most airline companies are cancelling their pension plans hence diminishing the threat of supplier bargaining power. Additionally, firms in the industry are reviewing their employee compensation policies.

Buyer power: the buyer power in the US airline industry is minimal. The low bargaining power has emanated from the prevailing price wars amongst industry players in the quest to remain competitive. Consequently, buyers are unable to push the price down.

SWOT analysis

Strengths

  1. Incorporation of point-to-point route strategy has provided the firm with flexibility with regard to selecting the most profitable routes.
  2. The firm mainly relies on secondary airports located in major cities thus resulting into improved on-time reliability.
  3. Short turnaround duration enable the firm to utilize its aircrafts optimally.
  4. Effective customer relations leading to high level of customer satisfaction
  5. Integration of strong marketing campaign hence leading to improved customer reputation

Weaknesses

  1. The firm’s rapid growth presents a major challenge with regard to sustenance of its reliability in offering services. The firm’s on-time performance has continuously dwindled. In 2011, its on-time performance in Alaska increased to 88.2% from 87.6% in 2011 and 81.3% in 2010 (Stevens Para. 3). The acquisition of AirTran in 2011 is likely to worsen the situation.
  2. The firm also faces a challenge emanating from increasing its fleet by incorporating 88 Boeing 717s. The firm did not have such type of planes.

Opportunities

  1. The firm’s acquisition of AirTran presents a unique opportunity for the firm to grow by increasing the number its routes and venturing into new markets.
  2. The firm can improve its customer base by integrating internet technology such as WiFi. This will attract customers.
  3. In 2013, Southwest Airline started to offer customers onboard. With live television and satellite-enabled WiFi Internet technology through its contract with Row 44 (“FierceWireless” Para. 1)

Threat

  1. The firm is experiencing intense competition from other major industry players such as EasyJet and Jetblue. If the firm does not focus on improving its competitiveness, it might experience a reduction in its growth.
  2. The firm is also facing a major threat emanating from increment in cases of terrorism.
  3. Increase in the cost of operation if not addressed may result in a decline in the firm’s level of profitability. The firm is currently facing a major threat emanating from the fuel price volatility.
  4. Changes in the legal environment for example institution of environmental sustainability rules and regulations may limit the firm’s ability to compete with regard to price.
  5. Occurrence of another economic recession such as the one that occurred in 2008 may adversely affect the firm’s operation

Conclusion

From the above analysis, it is evident that Southwest Airline is facing a dynamic business environment. The competitive nature of the US airline industry is a major challenge that the firm has to deal with in its operations. Therefore, to sustain its growth, Southwest Airlines will be required to formulate and implement effective business and corporate level strategies.

This move will enable the firm to sustain its competitive advantage. Additionally, the firm’s management team will also be required to deal with external challenges such as rise in oil prices, economic recessions, and terrorism, which are some of the major challenges facing the industry.

Works Cited

Carter, David, Daniel Rogers, and Betty Simkins. “Hedging and value in the US airline industry.” Journal of Applied Corporate Finance18.4 (2006): 1-33.

FierceWireless: Southwest Airlines and Row 44 announce milestones in WiFi partnership 2013. Web.

Hawkins, Owen, Rahul Misra, and Hao Tang 2012. . PDF file. Web.

Hitt, Michael, Duane Ireland, and Robert Hoskisson. Strategic management: Concepts and Cases: Competitiveness and globalization, Mason, OH: Cengage Learning, 2007. Print.

Stevens, Suzanne. Alaska, Southwest Airlines rank high in quality, 2012. Web.

Appendix

Timeline

  • 2009: The airline ventures into new domestic routes by unveiling the Boston Logan, Reno/Tahoe and Denver routes.
  • 2010: The airline decides to increase its fleet size by incorporating the Boeing 737-800.
  • 2011: Acquisition of AirTran Airlines.
  • 2012: The airline company enters into a deal with Row 44 for the firm to offer baseball and football games to customers onboard through WiFi.
  • 2013: Completion of satellite enabled WiFi internet technology and live-TV on 400 Southwest Aircrafts.
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IvyPanda. 2019. "Southwest Airlines." August 19, 2019. https://ivypanda.com/essays/southwest-airlines-6/.

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IvyPanda. (2019) 'Southwest Airlines'. 19 August.

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