Background Information
Southwest Airlines is a low-cost airline company that was founded in 1967 in San Antonio, Texas. The first flights were operated by Southwest Airlines in 1971 and connected Houston, Dallas, and San Antonio. Today the company focuses on domestic flights and offers low-cost and no-frills services to its customers (Southwest Airlines, 2012).
While the idea to start the company belonged to Rollin King, an entrepreneur from San Antonio, the key figure in the formation and in the development of the company was Herb Kelleher. He was a CEO of Southwest until 2008, when Kelleher was replaced by the current CEO Gary C. Kelly.
The total revenues of the company for 2011 are $ 15,658,000,000, and the profit realized in 2012 is $152,000,000 (Forbes.com, 2012). High performance is consistent with the overall U.S. airline industry, where, considering the major airline companies, only American Airlines have ended 2011 with an operating loss (AirlineFinancials.com, 2012).
Company culture has been one of the main success factors of the company. Southwest Airlines believes that hiring people should be based not only on their skills but on their attitude. Customer focus is achieved through employee satisfaction, and the latter is based on the casual atmosphere, individual approach to every person and socialization activities.
Swot Analysis
SWOT analysis is a common tool to assess the internal and external company environment.
Strengths
The main strength of the company is high efficiency that allows lowering operating costs and offering lowest fares in the industry.
Employee relationships and company culture allow low turnover and employee commitment.
Innovative approach to business has successfully attracted customers and helped the company to sustain its market leadership.
Weaknesses
Strong competition from companies, which duplicate low-cost strategy.
Deterioration of employee relations and unionization.
Limited differentiation of the products, thus the company does not operate international flights and doesn’t offer car rentals etc.
Opportunities
Improvement of customer satisfaction through additional services.
International flights, in case low-cost model can be adopted for long distances.
Threats
Increase in fuel costs put additional pressure on ticket prices.
High competition from the companies, that offer low-cost flights but with more ancillary services.
Analysis via Porter’s Five Forces Model
New Entrants: The threat of new entrants is relatively low due to high consolidation of the market, industry maturity and significant entry barriers in the form of start-up costs, competition and post-entry rivalry.
Rivalry: In the U.S. airline market the competition is high due to a large number of companies, market maturity and limited differentiation of the product offerings. Companies mostly compete on the basis of price that is why industry profitability has been eroded. Non-price competition usually fails due to price-sensitivity of the customers.
Substitutes: Airline industry has several substitutes. While for long distances, there are few travelling alternatives, for short-trips people choose among planes, cars, and trains. The speed advantage of airline transportation is greatly reduced on short-distance trips by additional security measures and by the arrival to the smaller airports.
The bargaining power of buyers: The bargaining power of individual consumers is quite low, since there are many of them and they are not consolidated. However, the high number of competitors increases the power of Southwest’s passengers.
The bargaining power of suppliers: The bargaining power of suppliers in the industry is quite strong. Suppliers are usually consolidated and there are only few of them in the market. In particular, the dependency of airline companies on jet-fuel suppliers makes the industry vulnerable to the changes in fuel-prices. Moreover, the power of aircraft producers is high as well. Once an aircraft is purchase, airline companies are committed to buy spare parts that are compatible from the producers of the aircrafts, mostly from Boeing (Bundgaard, Bejjani & Helmer, 2006).
Strategy Used
The company’s competitive advantage is based on its successful business model and its low-cost no-frills strategy. This strategy allowed implementing reversed positioning, which shifted the offered service from the maturity of the traditional airline business to the growing low-cost segment by stripping off the standard service features, such as catering, and focusing on just a few core ones (Moon, 2005). Southwest Airline’s business model has put the company in competition with trains and cars rather than other airline companies, by operating only point-to-point connections and by using mostly small and less congested airports. This approach allowed the company to capture just enough market to fill their planes mostly by attracting customers to air travel from other means of transportation rather than by directly competing with major airlines. The low-cost fares are achieved by fleet standardizations and processes automation. However, the main source of sustainable competitive advantage is the people in the company. Southwest managers put a lot of effort into creating the most enjoyable working environment and a sense of a family in the company, while maximizing personnel efficiency by continuously retraining people and changing personnel responsibilities (Hill & Jones, 2008).
Issues and Challenges Facing This Company
The competitive advantage of Southwest has been built on its ability to reduce costs and to offer lowest fares in the market. However, the current situation in the airline industry is changing. The increasing implementation of IT technology, cost reduction initiatives of the competitors and the emergence of copy-cats create additional pressure on profitability. Moreover, the market for low-cost air carriers has entered the maturity phase, therefore there is little opportunity for growth and the competition for the existing market share is fierce.
Furthermore, the culture of the company and high employee loyalty that have been the cornerstones of Southwest Airline’s success start to deteriorate as the company becomes more mature. While the size of the company makes it hard to maintain family atmosphere, unions demand higher benefits and better working conditions. This situation shows that the current culture no longer fits the needs of Southwest Airlines, therefore gradual changes should be implemented to adjust the culture to the reality of the present market environment.
Recommended Course of Action
Firstly, the company should appoint strong leaders, who will be able to maintain the legacy of Herb Kelleher and to preserve the spirit of the company, while making adjustments according to the current environment. Secondly, the strategy of low-cost and no-frills service should be re-evaluated. By adding a few additional services the company may significantly enhance customer satisfaction and leave the competition behind. Thirdly, Southwest Airlines should reconsider its policy of standardizing the fleet. Today fuel costs represent one of the major concerns for airline industry, therefore, investment into new smaller aircrafts with higher fuel efficiency may in the long-run offset the expenditures required for personnel retraining.
Opinion
The case study reveals the importance of analyzing market environment and latent consumer demands in order to achieve growth and profitability. Clear understanding of the needs and the right positioning allow companies like Southwest airlines to thrive and to find its niche even in the mature industries. However, it is crucial to sustain the initial success and to continuously adapt the company to the current market requirements, in order to avoid motivational and profitability issues, such as those faced by Southwest airlines.
References
AirlineFinancials.com. (2012, March 30). Airline industry – year 2011.operational and
financial side-by-side comparisons with ratios. Retrieved from
http://www.airlinefinancials.com/uploads/Airline_Industry_-
_Year_2011_Review___Outlook.pdf
Bundgaard, T., Bejjani, J. & Helmer, E. (2006, April 12). Strategic report for Southwest
Airlines. Pandora Group, Retrieved from http://economics-
files.pomona.edu/jlikens/SeniorSeminars/pandora/reports/southwest.pdf
Forbes.com. (2012). Southwest Airlines co. income statement. Retrieved from
http://finapps.forbes.com/finapps/jsp/finance/compinfo/IncomeStatement.jsp?tkr=LU
V&period=qtr
Hill, C. W. L., & Jones, G. R. (2008). Strategic management, an integrated approach.
(8th ed.). Boston, MA: Houghton Mufflin Company.
Moon, Y. (2005). Break free from the product life cycle. Harvard Business Review.
Southwest Airlines. (2012). Our history. Retrieved from
http://www.swamedia.com/channels/Our-History/pages/our-history-sort-by
