Executive Summary
The study focuses on identifying the major issues related to Southwest Airlines. It uses internal, external, and financial analysis for the company and the results show that information system of Southwest Airlines, the risk of competition, lack of long route flights, and integration issues are the current problems faced by the Airline.
The internal analysis reveals that the company faces major threats in the market, and the specific threats are as under.
Competition,
Legal infrastructure,
Unemployment and inflation, and
The shaky economy of the US.
The SWOT analysis also explains that the company is dependent on different sources that create specific weaknesses for the business. The dependence of Southwest Airlines is provided below.
Revenues through passengers,
Single provider/supplier,
Limited domestic presence,
No international presence,
Lack of segmentation,
Conservative growth strategy of Southwest Airlines is the major weaknesses.
The external analysis (Porter’s five forces model) helps to determine some key factors that are mentioned below.
Level of competition is high,
Entry barriers by the US government and authorities are low,
Threats of substitute products and services are low,
Bargaining power of suppliers is high, and
Bargaining power of buyers is also high.
Finally, the financial analysis explains that the business is highly profitable and able to sustain its market share. There are opportunities for the future that can help Southwest Airlines to reach new heights.
The paper provides different alternative source of actions and the main alternatives are defined below.
Market penetration – focus on current routes and improve the efficiency,
Product development – improvement in the current fleet to enhance the seating capacity and future profitability, and
Market development strategies – to fly on long routes. All these alternatives are identified from the use of Ansoff marketing model.
Southwest Airline is recommended to penetrate in the market. The most crucial issue in the current case is to improve the operational efficiency of the business. It is the basic need of Southwest, and therefore, the company needs to carry out market penetration activities shortly.
Body of the Report
Summary
The case study provides information relating to Southwest Airlines. The company is known for providing low-cost flight experiences to its customers and currently flies to fifty-eight destinations/U.S. airports. In the year 1981, the company had 2,100 employees and operations were limited to 14 destinations, but things have changed for Southwest Airlines. In 2015, the company had approximately 49,600 active full-time equivalent employees (21,100 flight, 2,800 maintenance, 17,300 ground, customer, and fleet services, and 8,400 management personnel) (Southwest Airlines Co., 2015).
In the United States, more than thousands of people use airlines to travel. Southwest Airlines provides low-fare flights throughout the U.S. The case study provides an insight to the situation after 9/11 when most of the companies in the airline industry suffered heavy losses and had to take out significant debt. On the contrary, Southwest Airlines remained to hold a strong position and is consistently earning profits even in the last three years from 2013 to 2015. The main reason for success and steady sales/profits of the airline is their low-cost business model, employee commitment, and competitive advantage. The business model of Southwest Airlines is simple, and the Rolling King and Herb Kelleher stated that they offer quickly, on time, low cost, and soothing/comfortable flight experience to the customers and this is the main reason that customers are loyal to the services of Southwest Airlines.
The case study also presents the positive attitude of the business relating to many legal, competitive, and regulatory conflicts that allowed the Airline to win the conflicts and gain market recognition. The organizational culture of Southwest Airlines is exceptional. The rigorous selection and hiring process, employee empowerment, support from management, training and coaching, ingrained principles, values, and norms are the most exceptional cultural stability adopted by Southwest Airlines. Other positive points explained in the case study are sustained growth, employee-first principle, executive leadership, low-cost, no-frills, low prices strategy, customer services, rapid rewards by the company are all discussed in the case study.
Analysis
The analysis of Southwest Airlines is carried out using internal, external, and some financial analysis. The internal analysis includes identifying the major competencies of the business and explaining the risks associated with the operations (Hill & Jones, 2012). On the other hand, the external analysis helps to identify the major threats, problems, and risks associated that are not in control of Southwest Airlines (Hill & Jones, 2007; Campbell, Edgar, & Stonehouse, 2011). The external analysis provides a complete description/identification of important aspects of the business that can impact performance. Finally, financial analysis is undertaken with the help of annual report for 2015. The analysis reveals aspects relating to profitability, performance, and growth of Southwest Airlines (Southwest Airlines Co., 2015).
Internal Analysis
SWOT Analysis
The SWOT Analysis explains the major internal strengths, weaknesses, opportunities, and threats for Southwest Airlines Co. Analysis of these factors explain the need for improvements and efficiency by the management.
External Analysis
Porter’s Five Forces Model
Porter’s Five Forces model explains the impact of the industrial environment of Southwest Airlines and helps to evaluate and analyze the overall competition in the industry (Ahlstrom & Bruton, 2009). The model explains the competitive landscape, entry barriers, threat of substitute, bargaining power of suppliers, and bargaining power of buyers for the industry and Southwest Airlines.
Competitive Landscape
The mergers and acquisitions in Airline industry are increasing in the current era, and the increase has resulted in intensifying the competition among companies operating in the industry. Southwest Airlines have local presence; whereas, other airlines like United Airlines and Continental Airlines provide local and international reach to its customers. The market share of Southwest Airlines is under consistent pressure due to the new rivals like JetBlue and Allegiant Airlines. Southwest Airlines is operating in high competition within the U.S (Teresa, 2014).
Entry Barriers
The initial capital requirement to enter the Airline industry is high that restricts new entrants to enter the market. The regulatory bodies do not put any restriction on the entry of companies in Airline Industry. Most of the companies are competing on price and margins that provide difficulty in making huge profits in the industry. The availability of slots is also a major issue since most slots are booked/reserved by established airlines. The analysis reveals low-level Entry Barriers (Teresa, 2014).
Threat of Substitute
The substitute products for air travel are cars, trains, ferries, etc., and all these are cheaper than air travel. Therefore, the airlines cannot increase their prices too much extent. The main factor that allows the airline industry to take advantage is the time to reach a specific destination. It can be concluded that threat of substitute is low in Airline Industry.
Bargaining power of suppliers
The bargaining power of suppliers of Airline industry is high. There are limited suppliers that offer the fleets like Boeing and Airbus. The oil prices are also a major concern for low price flight providers like Southwest (Cederholm, 2014).
Bargaining power of Buyers
The consumers of Airline Industry of the United States are highly price sensitive, and an increase in prices causes them to switch to other service providers. The value of money is important, and therefore, the bargaining power of buyers is also high in the U.S. Airline Industry (Cederholm, 2014).
Financial Analysis
Ratio Analysis
The use of ratio analysis helps to identify the operational performance and profitability of Southwest Airline Co. The analysis is based on identifying the profitability, growth, liquidity, and efficiency ratios of the company to get the idea about its operational effectiveness. The calculation is done for two years that is 2014-2015. For the purpose of evaluation, the annual report of 2015 is collected from the official website of Southwest Airline Co (Southwest Airlines Co., 2015).
Profitability Ratios
The analysis of profitability ratios shows that the company can sustain its market position. The net margin, asset turnover, return on assets, and return on equity are increasing which show higher profitability in 2015. Figure 1 shows that financial leverage shows a downturn that explains that the company has reduced its debt in 2015.
Figure 1 - Profitability Ratios
Growth Ratios
Growth ratios presented in Figure 2 explains the increase in overall values from 2014 to 2015. The analysis of the ratios explains that revenues for Southwest Airline have increased from 5.12 to 6.53 in 2015. On the other hand operating income, net income, and EPS – Earning per share, also show a positive increase from 2014-2015 (Southwest Airlines Co., 2015).
Figure 2 - Growth Ratios
Liquidity Ratios
Figure 3 shows that the overall liquidity of the business decreased from 2014-2015 and payments of debt are the major influencers of the decrease. The company paid more and therefore, had less in its current assets. The debt to equity ratio shows a slight improvement that represents that Southwest Airline Co. has taken debt financing to support its financial requirements in 2015 (Southwest Airlines Co., 2015).
Figure 3 - Liquidity Ratios
Efficiency Ratios
Figure 4 explains two year’s efficiency of the business. Efficiency ratios explain the level of efficiency/performance of the business in the current scenario ratios for Southwest Airline Co. show a low level of decrease in receivable turnover, inventory turnover, and fixed assets turnover ratios. The decrease is so minimal that it can be referred as sustainability of current values (Southwest Airlines Co., 2015).
Figure 4 - Efficiency Ratios
Problems Identified from the Case and Analysis
The analysis of internal, external, case study and financial ratios explain that the information system of the company is not efficient to handle overall ticketing mechanism. Southwest Airlines faces a huge risk of competition since new companies are competing on low cost, no frill marketing strategies. The Airline is unable to fly long routes due to strict low cost and no frill strategy. Air Tran and Southwest’s’ integration plays a crucial part for future performance. The absence from the international market and long route flights is a major disadvantage for the company.
Alternatives
The alternative course of action is identified with the help of Ansoff model (Ramaswamy, 2013).
Market Penetration: The current analysis reveals that Southwest Airline needs to consolidate and focus on existing routes. The company is also advised to exit the routes that are less profitable.
Product Development: The management of Southwest Airlines is recommended to improve the current fleet of the business. The improvement in the current fleet would help to increase the seating capacity of Southwest and it may lead to increase in profitability. The use of same Boeing aircraft provides the leverage to management to operate in a cost-effective manner. The airline can provide new perks and options to attract business travelers to increase revenues that can allow mitigating operational cost challenges in future.
Market Analysis and Development: Southwest Airlines must focus to enhance its opportunity to fly to long routes to gain the advantage of international expansion in future. The network development after the acquisition of Air Trans must be effective and efficient as it can help the business to reach new heights.
Recommendation
Southwest Airlines is recommended to penetrate into the market by increasing its travel base and cover more airports. The most crucial issue in the current case is to improve the operational efficiency of the business. It is the basic need of Southwest, and therefore, the company needs to carry out market penetration activities shortly. The use of effective and efficient market penetration tools and techniques can allow the business to improve further and develop the products and services, and to analyze and develop the market for Southwest Airlines.
Implementation
The implementation of penetration strategy is only possible when Southwest ensures that its employees and upper management are on the same page. It means that all of the people are willing to change their fortune. The current routes of the business are the source of competitive advantage for the business and it is recommended that Southwest must continue to do what they do best in, that is to provide low-cost flights and strategies, can do culture, bag free policy, and employee empowerment.
References
Ahlstrom, D., & Bruton, G. D. (2009). International Management: Strategy and Culture in the Emerging World. Cengage Learning: Mason.
Campbell, D., Edgar, D., & Stonehouse, G. (2011). Business Strategy: An Introduction. Basingstoke: Palgrave Macmillan.
Cederholm, T. (2014, December 30). Bargaining power of the airline industry’s customers and suppliers - Yahoo Finance! Retrieved June 21, 2016, from finance.yahoo: http://finance.yahoo.com/news/bargaining-power-airline-industry-customers-141114991.html
Hill, C. W., & Jones, G. R. (2012). Strategic Management: An Integrated Approach. Mason: Cengage Learning.
Hill, C., & Jones, G. (2007). Strategic Management: An Integrated Approach. Mason: Cengage Learning.
Ramaswamy. (2013). Marketing Management. Noida: Tata McGraw-Hill Education.
Southwest Airlines Co. (2015). Annual Report to Shareholders. Dallas: Southwest Airlines Co.
Teresa, C. (2014, December 29). Competition in Airline Industry. Retrieved June 21, 2016, from marketrealist: http://marketrealist.com/2014/12/low-entry-barriers-intensify-competition-airline-industry/
