Southwest Airline Company: The Background

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Background of the company

The Southwest Airline Company was incorporated in 1967 as Air Southwest Company adopting the current name later in 1971. The Dallas-based Southwest airline company was founded in 1966 by lawyer Herb Kelleher and business executive Rollin King. The company started to offer airline services within Texas. Soon the two competitor airlines, Texas International and Braniff went to Supreme Court in litigation against the new company however; the case was later decided in SWA’s favor. It is in 1971 when the first flight left Love Field in Dallas to San Antonio that is five years after incorporation. To mark its maiden voyage, the company acquired the theme of ‘Love’ or ‘LUV’ for its promotional and advertising campaigns. Since then it is now more than forty years the Southwest is spreading ‘love’ all over America.

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The founder of SWA has based the company work on a ‘joy at workplace’ principle providing excellent and enjoyable working environment to its employees. The company has managed to create strong relations with it stakeholders, something that has played an important role in its success. With millions of satisfied customer all over the United States, the Southwest airline company is a home for thousands of happy employees. The credit goes to the friendly policies of the SWA management. Employees’ unions exist at every level but there had been no conflicts reported between unions and management during the last 40 years. The reason is that the company has an equally caring attitude towards its employees as it has towards the customer. The management believes that only a happy and satisfied employee can provide best and quality services to the clients. In order to make their staff comfortable at work, the company recruits spouses of their employees to work with them. By doing this, the Southwest make the employees feel ‘at home’. Southwest has more than 960 married couples working for the Company (What Makes Managers Effective?).

Competitive Rivalry

The airline industry is oligopolistic market that there few competitors in the market. The company used the quality of services to customers, roles and responsibilities of manpower and the flow of value added work to its competitive advantage. As internal factors of a firm such as distinctive exclusive licenses, patents, strong brands, teamwork, effective leadership, tacit knowledge, technical, marketing and financial capabilities are the strongest capabilities that have been effectively manipulated for the firm’s competitive edge. These factors are maintained to guarantee performance and measured traditionally on the actual performance versus budget scale. Recently, shift has been towards timeliness, cost of providing services and products to customers and the quality of the goods provided. To achieve a competitive advantage through the three parameters of internal organizational competence, allocation and budgeting for resources should be moved from needs for producing individual units and toward cross-group teams. These teams jointly assess resource needs on the basis of flow of work so as to create value to customers. Through such processes, these internal capabilities become more difficult for competitors to imitate or understand. As a source of competitive advantage the capabilities should not be so simple to be imitated or so complex that they cannot be internally controlled.

Southwest Airlines – SWOT Analysis

For three consecutive years, the airlines had been ranked the best low cost airlines (Southwest Airlines SWOT Analysis).

  • Strengths: The Company’s main strength is its dedicated team of ground and air staff doing their best to make it a success. The southwest airlines fleet consists of 515 aircrafts catering to about 100 million plus passengers annually flying them around 63 destinations all over the country (We Weren’t Just Airborne Yesterday). The company manages keeping low fare by cutting down unnecessary expanses. Due to the introduction of online ticketing, the cost has been enormously decreased making it affordable on customer’s pocket. The seats are all standard as there is no business class in Southwest aircrafts. Only simple snacks are offered on board saving the unnecessary cost of proper meals. The airline operates to selected destination through their standard aircrafts, Boeing 737 that are low cost and easy and cheap on maintenance. Similarly the company does not believe in any kind of advertising except what it does on board. The company operates through more than 33,000 contented employees many of them are couples controlled by the highly diverse management in a very friendly way. The top management since beginning has maintained a homely atmosphere making the employees operates with full job guarantee and workplace satisfaction. The Southwest revenues are on continuous increase even in days of recession when many American airlines either collapsed or sought mergers. In fiscal year 2003, the company revenues increased by 8 percent reaching a sum of 5.94 billion and net income augmented by 83 percent amounting to $402 million declaring profits for 31st successive year (Southwest Airlines SWOT Analysis). It is a public limited company with about 80% of shares owned by the employees.
  • Weaknesses: The company also have certain weaknesses, the first being the online ticketing that is both a merit and demerit. Being a virgin concept it worked well initially but due to increasing traffic over the internet, it is difficult advertising effectively and reaching new clients (East Bay Business Times, 2008).The low cost models of Boeing 737 may create problems when it comes to replacement of parts that may go obsolete after some time. The airline only operates on national routes and has no international flights making it a second choice for some passengers. The uniform seating is at time annoying for some people especially for obese or ailing passengers who need extra space to relax. The airline does not offer any morning flights making it difficult for early morning fliers. The cargo and freight capacity is also limited.
  • Opportunities: Southwest currently operates in 29 states only and can expands its operations to others states too. New national and international markets offer greater potentials and opportunities to a company like Southwest. The growing Hispanic population also offers new clientele to the airline. The development of technology provides further innovations and openings to be availed successfully increasing its customer base.
  • Threats and Trends:-The rising fuel costs are an equal threat to the southwest as it is to other competitors in the market. The terrorist threat is always there equally alarming the SWA operators. The online ticketing is no more the exclusive specialty of SWA with other competitors providing a tough competition especially with Southwest’s reluctance towards advertising. The new federal regulations may increase the costs of operations with declining air travelling ratio affecting the revenues.

Strategy and Competitive Advantage

SWA has used generic strategies in gaining competitive advantage such as differentiation that calls for developing products or services with unique attributes valued by customers as better or different from the products in competition. The value addition that results from the product or service is advantageous in setting a premium price for the same thus giving the firm an edge over its competitors. Depending on the type of the organization (whether service or product), internal strengths include access to high quality of scientific research, skilled and creative team that develops products, strong sales team that communicates successfully perceived strengths of the product and a corporate reputation for innovation and quality. In all these internal capacities, organizations specializing in product manufacturing are placed far advantageously than their service counterparts who may take far too much time to prove their inventive and innovative capacities. Similarly, service industry, because of limitations in patents and geography are prone to imitation and quick changes in customer tastes that make them more vulnerable to customer loss.

According to the focus strategy of Porter, concentration on a narrow segment of production to achieve cost advantages or differentiation is a step towards better services or production. This promotes customer loyalty while discouraging other firms from direct competition. This is the basis of focusing on IS/IT to achieve competitive advantage in contemporary production/ service delivery. Firms pursuing focused strategy boast of lower volumes and thus less bargaining power from their suppliers. If this strategy succeeds, firms are ale to tailor a variety of product development strengths while focusing on a narrower segment that they well know.

The use of IS/IT in gaining a competitive advantage lies in making it a religion; creating a culture of innovation and emphasis on opportunities. IT should be used to create a culture change that transforms operations of the firm and establishes it as a market leader. General types of IS in use are financial systems, strategic systems and operational systems but can overlap depending on the operations of a firm. Strategic information systems work better to impact the firm’s business operations and products. Most successful IT/IS ventures are supportive of businesses and are used to mechanize operations so that efficiency, effectiveness and control are attained. They provide the basis for better management and dependable information for the smooth running of the businesses and for analysis helpful in planning new directions. They thus become an integral part of the business when they start to influence market share and marketplace profitability. New products, new market, and new method of doing business are introduced into the market so that the competitive stance of the organization is advanced against its competitors.

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An organization by using strategic information systems or technologies perennially competes with its rival firms. In such competitions, sustainable competitive advantage becomes the focal point of the firm’s corporate strategy since it allows the firm to maintain and improve its competitive position in the market. This advantage allows the firm to survive longer and profitably against its competition. However, many forms of competitive advantage may not be indefinitely sustained for as long as is wished by a firm. This is because the promise of economic rents as exhibited by the firm invites competitors to replicate the competitive advantage of the successful firm. Nevertheless, through strategic IS/IT use, such competitive advantage can be sustained.

Sustainable competitive advantage is never a destination but a journey. To understand the way to sustain it, it is necessary to establish the generic causes for the advantage. After that, through IT/IS, the company must venture into a value-creating process that cannot be duplicated by other firms. According to resource-based view theory, sustainability is possible when such super abnormal rents are created in the long run. According to Porter (1995), cost leadership, differentiation and focus economics are practiced. The use of IS/IT to create cost leadership relies on the firm’s internal ability to manipulate available market information to lower its costs for unit productions. Differentiations from IS conforms to strategies that arise from informational coordination to deliver greater services for the same price as that afforded by competitors. Such positional advantages come with skills in manipulating commonly available IT frameworks for productivity.

Pestel

External factors exist to shape an organization’s manipulation of its resources (which might be the factors themselves) and are associated with a particular country or region to which the firm is inextricably linked (Porter, 1985). This setting comes with multiple contexts and capabilities that a firm manipulates to gain an edge in competition. This environment provides either facilitative or inhibitive influences that affect the firm’s performance. They form the boundaries of operation, shape how the firm defines itself and its operations, or how it articulates it positive products or how appropriate it wishes to achieve such productive ends. Legislation, technology, economic, political and socio-cultural contexts, relationship with competitors and pertinent institutions as well as the needs of external clients and stakeholders, all contribute to how a firm orients to its industry, market and consumers (Kotler,1972, p. 49 and Donald, 1995).

  • Political: Anti labor practices are treated as a counter productive tool to the growth of nations (Goldberg, 1998, p. 103). It tends to show massive political turbulence in the economy. Countries where Southwest Airlines may increase their business fell apart due to anti labor measures. Hence it should be noticed that when a brand like Southwest Airlines enters a third world country wages are bound to get increased and poverty is expected to decline.
  • Economic: How can a airline like Southwest Airlines create an impact in the overall economy? To answer this we must look into the overall economies of scale as well as the managerial experience of Southwest Airlines which can affect the overall economy of a developing nation. This mainly created to protect the small business owners from getting destroyed due to the open market competition. This helps the economy to grow. Also in this context outsourcing is a vital factor that helps the economy to flourish. Labor cost of Southwest Airlines just comprises a small percentage of the total product cost while the other operating costs include ‘R&D’, ‘logistics’, ‘product designing’ are still present in the U.S. economy.
  • Social: Every MNC should have some ‘Corporate Social Responsibility’ & Southwest Airlines is no exception. Along with this Southwest Airlines does look into the other major areas too from which the overall society can be benefited.
  • Technological: SWA has used IT to gain competitive advantages over very stiff industries and niches. This Competitive Strategy elevated it into a market leader in provision of low cost airline service. The model employed innovation of strategy, innovative corporate growth, venture strategies, new management models, new approaches to information, knowledge and idea management, strategic partnerships, new forms of marketing, organizational innovations and an inspiring culture among other factors in its operations. Southwest Airlines has exploited e-commerce; through e-commerce sales Southwest Airlines have increased in value in the fiscal year 2005. Southwest Airlines also benefited from technology by use online ticketing to increase efficiency. Customers used to patronize services from the company by using checks, cash and debit cards.

Success in the airline industry

The airlines make special efforts to extend in-service and after-service guarantees to its workers. The company believes in employee ownership culture. Employees have been equal shareholders of the profits gained by the companies during last four decades. The company introduced profit sharing schemes in 1974 and these enabled employees own 10% of stocks of the company. Employees are liberally awarded through profit sharing programs making them feel themselves as part of the family business. The more the company care for its employees, the most they get in return from them for the customers.

The Southwest has entirely unique traditions onboard. The crew of Southwest is young, charming, friendly, humorous, cooperative and highly professional while onboard. They are especially good to unaccompanied children. The Southwest crew is termed a very unusual crew onboard of any airline. The uniform is strange; behavior is different but always praised and enjoyed by the customers.

Customers’ satisfaction is at the core of the airline’s policy. Providing satisfactory ground and onboard services, in time departures and arrival, low fares, best baggage and cargo handling and other services related to the convenience of passengers has won the airline a prestigious place in the industry. Most of the airlines offer frequent flier programs to facilitate the oft-flying passengers. The program operated by the Southwest is again unique like all the other characteristics of SWA. Passengers have not to wait for months to get avail their frequent flier seats on Southwest as they do on other airlines.

The SWA offers the cheapest rates of air travel and doesn’t believe in formalities. Self-ticketing machines were introduced in 10 cities in 1979. They are the first to introduce ticket-less travel, no seat reservation and contained other extra costs. Seats are allocated on first come first serve basis. For the company to reduce maintenance and training costs for employees they started using Boeing 737s. Meals are not offered at flights, only peanuts and raisins are served as per Southwest’s legacy (Cohan 210). To keep the running costs down, the company operates from less congested airports as on those airports the planes have to wait for lesser times and the air traffic is more rapidly cleared. The company gives its customers discounts and in its airline accounts have been given discounts. Southwest has been recognized as one of the most admired companies in America and termed as a safe airline.

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To further decrease the costs, Southwest utilized the Internet up to its best. SWA become the first company in the industry to have a website (Levinson). After nine months of hectic efforts and with a spending of $ 5 million, it was on March 17, 1995 the company launched its website www.southwest.com, and started selling online ticket. This practice further reduced the costs of selling tickets as selling a ticket online is $1 against $ 10 that costs for selling through a travel agent (Levinson). In only one year. A comparison of online results of SWA with Delta, the third largest airline in the US, shows that Delta generated only 9 percent online passengers’ revenues while SWA produces 31 percent.

The continuous success of the Southwest Airlines is attributed to the unparalleled leadership of its founder, Herb Kelleher and CEO/Chairman Gary C. Kelly. Winner of dozens of performance awards, the company continuously watches the interest of both its crew and customers. The company value employee satisfaction believing it a key to success. This approach has been on top of the operational agenda of the company and has proved fruitful throughout all these years. Southwest continued its operations during oil crisis, recession and war and even the September 11, 2001 terrorist attacks on Trade Tower could not stop them. Adopting golden principles of point-to-point flying, low expenses, low fares, simple in-flight service, low cost snacks, no frills, couples with a happy and satisfied workforce ensured through strong management makes the Southwest Airlines an all time favorite and a true portrayal of the American dream.

The computation of costs requires An aircraft to deliver the services to the customer and the nature and extent of cost management at SWA. Renovations in control technology it should also include the opportunity cost of regulation where possible.

Below is an illustration on cost incurred by a fire producing company to cut on pollution.

cost incurred by a fire producing company to cut on pollution

Showing costs incurred by SWA airline

One of the major reasons for any company’s growth is strong leadership, which can take bold decisions for companies benefit. Southwest Airlines has always been blessed with intelligent and brave leaders, who have survived difficult times in order to make this company an aviation giant. It is the vision of the leader which unifies the people following him. It is due to leadership’s broad and creative vision, that the employees of Southwest airlines developed an organizational culture after facing difficulties in the opening years of its launch.

His leadership played an important role in ensuring that the services of the company are taken up. Apart from his leadership, consumer behavior, such as the needs of the consumer as well as what the consumer wants from the airline ensured that the service is highly patronized. If the consumer creates a negative attitude towards the service the consumer will move to the substitute product and this will ensure that the demand curve takes the following format.

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The demand curve

The quantity will continue coming down if the price remains the same. Assume the income came down and number of customer from Q to Q1. And the price remained the same. It is a clear show that the changes in the demand were not due to price changes but were due to income levels changes.

When the price of oil is increased there will be an increase fare. This will reduce the quantity demanded and consumed in the market. The demand curve for the changes appears as follows.

The demand curve for the changes

In the graph, D0 is the original demand curve if there is an increase of price of oil the fares will increase affecting demand to reduce to D1. When demand reduces to D1 price will not remain the same, it will also change to P1 to create an equilibrium price at which the new demand D1 intersects the supply curve SS1. As a result of increase in the tax, equilibrium amount demand and supply will also fall to OP1.

In the early years of Southwest operations the company was facing severe losses, and the competitors wanted the airline to stay grounded, which is a major loss for any domestic or international airline company. However, even in those situations the CEO of the company managed to solve the problem. Today, Gary Kelly sits in the driver’s seat of Southwest Airlines, with another vision. His vision is to take the company global yet following the basics of Southwest airlines that made the airline so successful, and earned respect from millions for passengers in America.

Conclusions

The company has been successfully operating inside the country showing profits for about 4 decades now. The general performance of the airline has been satisfactory all these years with millions of happy customers around. The airline continued its routine through the 9/11 incident when many of its competitors went narrowing or closing their operations. The Southwest has always maintained its cost-effective policy besides maintaining the service quality is offers. Posting continuous profits since 1973, the Southwest airline is spreading LUV to its customers guaranteed by the balanced policies of its top management and the hard work and dedication of the employees.

Recommendation

After careful analysis of possible strategies of increasing and expanding to international market I have realized that has a potential of successful operating in the international market. This is because over the years due to the amazing leadership and management of the Southwest Airlines, the company has been one of the most profitable organizations in United States. The broader vision of the management helped the airline take decisions which resulted in profit for the airlines. Although, Southwest airlines do not operate internationally, but its success rate indicates that Southwest Airlines has the potential to become successful and rank among world’s most profitable international airlines with the help of its dynamic organizational culture and teamwork. Southwest airlines have a dynamic organizational culture, which is always a positive sign for any business organization.

In Southwest airlines, the management and the leadership of the company played a major role in developing the champion culture that the organization possesses today. Since the birth of Southwest airlines, the company and the chairman Herb Kelleher faced tremendous amount of pressure from the competitors which included legal allegations as well. After coming through all those challenges, Mr. Kelleher and the organization felt stronger than ever and started inventing new methods of creating comfort for the passenger and thinking out of the box in order to get competitive advantage. The colorful personality of Mr. Kelleher surely did play an important role in developing the organizational culture of southwest airlines, where the employees would learn to take them the job easy, but not carelessly. The relaxing and easy going pattern once set up by Herb Kelleher attracted customer attention as well, and people preferred traveling by Southwest airlines because it could give them what the competitors of Southwest couldn’t. A good attribute of a leader is that he thinks about the future and thinks differently. Herb Kelleher did the same and he offered the customers low fares by eliminating unnecessary services and avoiding the “hub-and-spoke” scheduling system used by other airlines in favor of building traffic in secondary airports. All these measures along with the great in-flight service and happy atmosphere attracted millions of customers that have preferred Southwest over the competitors until today.

Although Southwest airlines has been operating in United States only, it Is quite famous throughout the world due to a large numbers of loyal customers, who would hardly choose an alternative airline for travelling domestically in America. The techniques used by Southwest Airlines have proven to be quite successful and can be considered as the difference between Southwest Airlines superiority to other airlines working domestically in America at the moment. With the creative thinking of its leadership and effective planning, southwest airlines have created a comfort for its passengers at a low cost.

Today when we look at the international flight system, there are hardly any airlines that provide us with the ease and comfort as Southwest Airlines at a low cost. The cost of comfort in airlines is very high. The time of international flights is relatively more than domestic flight, and therefore the passengers seek comfort. Cost can be considered as the most important factor when considering international business. The oil prices all over the world saw a tremendous hike and the fare of all international and domestic flights all over the world were raised to a certain extent. If Southwest Airlines can come up with new innovative strategies in order to cover up the extra costs of operation by increase in the number of passengers or any other alternative way, there is a high probability that Southwest Airlines will soon take over the business share of many airlines all across the world.

Teamwork is necessary for every organization. Although the team work of Southwest airlines is very appreciable, when one enters into an international business, more efforts are required in order to keep the standards high. The teamwork depends upon the people working in the organization and what kind of bond they have formed together. If the organizational culture is dynamic like Southwest Airline, there are greater chances of success. However, when operating globally, one has to take in consideration the cultural diversity in mind. Something that can be considered as friendly in the culture of United States may be considered as an insult in some Middle Eastern countries. Therefore, if the company plans to operate internationally, it should keep in mind the different type teams within the company, and create an interaction pattern that would not offend anyone, and enhance performance. Environment is also a growing concern in many European countries today, and research is being done in order to make the airline system pollution free. If Southwest airline decides to operate in European countries, it may benefit from its environment friendliness research pattern as well.

One of the major reasons for any company’s growth is strong leadership, which can take bold decisions for companies benefit. Southwest Airlines has always been blessed with intelligent and brave leaders, who have survived difficult times in order to make this company an aviation giant. It is the vision of the leader which unifies the people following him. It is due to leadership’s broad and creative vision, that the employees of Southwest airlines developed an organizational culture after facing difficulties in the opening years of its launch. In the early years of Southwest operations the company was facing severe losses, and the competitors wanted the airline to stay grounded, which is a major loss for any domestic or international airline company. However, even in those situations the CEO of the company managed to solve the problem. Today, Gary Kelly sits in the driver’s seat of Southwest Airlines, with another vision. His vision is to take the company global yet following the basics of Southwest airlines that made the airline so successful, and earned respect from millions for passengers in America.

References List

Donald, M. M. (1995). Marketing Strategies – New Approaches & Techniques. s.l. : Pergamon.

East Bay Business Times, (2008). Southwest Airlines teaming with West Jet airlines for International flights.

Foxnews, (2008). Southwest tweaks ‘Cattle Call” Boarding Process, Fox Business news. Web.

Goldberg, B. (1998). Relationship Marketing. Direct Marketing Journal, pp. 103-105.

ICFAI Center for Management Research (2005). International Marketing and International Business. Hyderabad : ICFAI Center for Management Research.

ICMR – ICFAI Center for Management Research(2004). Marketing Management (Ref. No. MM – 052K4 25). Hyderabad : ICMR – ICFAI Center for Management Research.

ICMR – The ICFAI Center for Management Research( 2004). Business Strategy. Hyderabad : ICMR – The ICFAI Center for Management Research.

Kotler, P. (1972). A Generic Concept of Marketing. Journal of Marketing Vol: 36, pp. 46-54.

Porter, M.E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance. New York, NY. Free Press.

Southwest Airlines, (2008). Where we fly.

Southwest Airlines, (2008). Southwest fact sheet, Southwest Airline’s recognitions. Web.

Southwest Airlines SWOT Analysis. Web.

Southwest Airlines, (2008). We Weren’t Just Airborne Yesterday. Web.

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