Southwest Airlines is a Dallas-based passenger airline that offers scheduled freight and passenger transportation services, with a particular emphasis on point-to-point, budget services across the US and near-international markets. Founded in 1966 by Rollin King, Southwest’s vision commits it to connecting people to what is important in their lives, by offering friendly, safe, reliable, and low-cost air travel. To this end, the company seeks to ensure excellent customer service, “delivered with a sense of warmth, friendliness, individual pride, and Company Spirit”. From its inception, Southwest’s business concept has remained cost leadership convenience, reliability, and ensures excellent customer experience. A simple fare structure, all-inclusive pricing, and deep price discounting
The US (and the global) commercial airline industry is thriving following a sharp fall in oil prices since 2008, and as a strong player in the US, Southwest Airlines that had posted excellent results amidst the economic/financial turmoil, it should do even better. The company made a profit even with record high fuel prices, and has been consistently profitable for many years. High profitability allows the company to finance its operations and expansion strategy from internal resources as against costly borrowing. Even most importantly, as a publicly listed company, Southwest has access to funding through share offerings, particularly given its appeal to shareholders.
Leadership at Southwest has been instrumental. From Rollin King and Lamar Muse to the present leadership under the current CEO and Chairman, Gary C. Kelly, Southwest’s success has always depended on its ability to attract and retain the best talents in the industry (Southwest Airlines 1). As Muse explains, the teams were not only allowed, but were required to think like mavericks in order to get the job done (Thompson, Strickland and Gamble 65). The vast majority of the company’s team have risen through the ranks over the years, and even worked directly under Muse and/or Kelleher. The existence of strong, experienced, and passionate leadership in the company allowed for bold strategic decision-making, but perhaps most importantly, the employee-first strategy allowed the company to attract and keep the best talents (pp.71-73). Human capital is critical in creating sustainable competencies compared to financial and physical capital through its creation of dynamic capabilities. It is unsurprising therefore, that Southwest has the “most competent and thorough aircraft maintenance programs” in the industry and was widely considered the best carrier in the industry.
Human capital is particularly critical in a fast-paced and competitive industry such as the passenger airline industry. To this end, Southwest has implemented recruitment, training, and motivation strategies that attain high employee satisfaction, commitment, and motivation. The employee first policy is certainly the most important for the company. This strategy is supported by inventive and potentially costly policies including rigorous recruitment measures, training, onboarding program, generous compensation, job security, excellent employee relations, and career development (Thompson, Strickland and Gamble 84-8). Southwest also has a relatively flat organizational structure, which allows faster and effective decision-making, besides the fact that employees at all levels are free to make decisions to meet customer needs. An approachable leadership only makes this structure even more effective.
The point-to-point route system is efficient and time-saving relative to the hub-and-spoke system because the latter is concentrated on a limited number of major cities that were largely served by connections. Even most importantly, Southwest’s routes were carefully chosen to ensure high demand (at least eight flights originating from an airport) and complementarity, which cuts down operational costs and ensures profitability. Other important pillars of the cost leadership strategy include avoidance of congested airports, simplification of the check-in processes, eliminating cleaning crews, using easily-maintained leather upholstery, using more efficient aircrafts, investing in customer service/operational technologies, and using its first mover advantage in some markets to consolidate its position in the market (pp. 79-81).
Strategic creativity has also had a strong impact on Southwest’s success and competitive advantages. From the ingenious marketing campaigns in the 1970s, which saw the company establish a strong brand and foothold in the market, to frequent flyer program that is based on the trips flow as against mileage. The basis of the program ensured that customers were motivated to fly more, and the company derived more value from repeat customers that was possible from those who flew more miles (pp. 74-5). In addition, the company increased operations on routes where competitors were cutting back, while at once limiting flights on marginally profitable routes. This was not only possible because of Southwest’s business model that allows it to succeed where many of its competitors can fail, but its ruthless choice of routes ensures that the operations are ultimately profitable (p. 78).
Threats, Failures and opportunities
The aviation industry is a regulation-heavy industry, and subject to government, industry and other entities. Tight regulations are characterized by high compliance, competitive pressure, opportunities, and operational costs, which in turn, have an adverse consequence on the bottom line. The Wright Amendment of 1979, for instance, limited the ability of Southwest to offer non-stop flights between Dallas and Love Field. Other legislations such as the Aviation and Transportation Security Act and regulators such as the Federal Aviation Authority remain a major challenge. Even most importantly, passenger and freight airline industry is intensely competitive, with cutthroat price competition. As an oligopolistic market structure, performance is heavily influence by competitors’ strategies.
Perhaps one of the most important changes in the competitive environment is possible consolidation of smaller airlines. The US industry is concentrated, with the five largest players controlling 90% of the market and continued consolidation could be significant for Southwest. In 2013, for instance, US Airways and American Airlines merged into the largest airline in the world, and similar mergers could see players gain considerable market power. As such, Southwest’s organic growth strategy could prove to its long-term detriment. Particularly, the company should look to merging with other players in the US as well as in other markets in the region, and the rest of the world. Expansion into other markets will help Southwest avoid the intensifying competition in the US, while at once capitalizing on the emergent opportunities in the expanding global air travel demand due to expansions in tourism and middle classes in the emerging economies.
SWOT Analysis
Conclusion
The company has a carefully crafted organisational culture that ensures that its mission is consistently met, and the organisation operates both smoothly and profitably. The high regulatory pressure, intense competition, and high operational costs barely impeded Southwest’s success, just as it did not stop most of the company’s competitors. The company’s has been immensely successful, and it is set to be even more successful in the near term given its dominant market position. However, Southwest’s successful business model can thrive elsewhere, and the company should be more aggressive in pursuit of inorganic expansion strategies to gain a foothold in other markets.
Works Cited
MarketLine. Company Profile: Southwest Airlines. Market Research. MarketLine. New York: MarketLine, 2015.
Southwest Airlines. About Southwest. 2016. 20 March 2015 <https://www.southwest.com/html/about-southwest/index.html?clk=GFOOTER-ABOUT-ABOUT>.
Rugman, A. M. and S Collinson. International Business (6th Ed). London: Pearson Education, 2012.
Teece, David, J., Gary Pisano and Amy Shuen. "Dynamic capabilities and strategic management." Strategic Management Journal 18.7 (1997): 509–533.
Thompson, A.A., A.J. Strickland and J.E. Gamble. Crafting and executing strategy: The quest for competitive advantage: Concepts and cases: 2009 custom edition (17th ed.). New York: McGraw-Hill-Irwin, 2010.
Yip, G and T Hult. Total Global Strategy. New York: Pearson Education, 2011.
