Southwest Airlines’ Business Strategy in the Global Environment


According to Freiberg (1996), Southwest Airlines is the sixth largest airline by revenue collected annually in the United States and it is also the largest airline in the number of passengers carried domestically every year. The Airline flies over sixty four destinations throughout the United States. That amounts up to sixty four cities in thirty two states and it had also introduced online bookings which led to the increased generation of passenger revenue.

For the combined domestic and international passengers, the airline carries more customers than any other airline in the United States. This is a fact that has contributed to it being one of the most profitable airlines in the world posting a profit for the thirty fifth consecutive Year. This great feat is contributed to by the fact that it makes more than three thousand three hundred flights per day.

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A SWOT analysis can be described as a strategic planning tool which can be used to assess the Strengths, Weaknesses and opportunities and Threats which may be inherent in a business. (Aruvian research) when doing the SWOT analysis the objectives of the business must be specified and both internal and external factors which could be constructive and unconstructive for the business to attain its goals must be pointed out. In the analysis of the southwest airlines I will use the SWOT analysis.

Strengths of Southwest Airlines

According to the Haris Interactive research (2000) of airline reputations in the united states that measured the attitude the attitudes of over 20,000 regular air travel customers/ consumers, using the airline reputation quotient (ARQ), southwest Airlines was among the top favorites in the international category. It was only second to the Singapore airlines. In the domestic category it was tops. The research gave the different airlines rates on factors such as safety of the airlines, trust in the customer service provided and the food served by the airline. In the area of reputation which is very vital for an airline, southwest has made a distinction. This has enabled them attract and maintain their customers for long, improve their services and compete very favorably with the other players in the industry.

Market opportunities available to the company

With the increasing size of the airline and the high number of passengers who keep increasing constantly, the management of the company is proving trickier with time. Therefore to solve this problem, the airline can consider having another subsidiary airline with a different management. This will reduce the current workload on its current managers thus making more convenient to use for the increasing customers.

Even though the airline has a huge share of the market in the United States, it has not dominated the domestic air travel industry. This means that there are still other areas which it has not yet ventured into. For it to make the most out the domestic market where it is favored by many, it should consider expanding the number of its routes to other cities e.g. Washington D.C. This will increase its market share and its revenues.

There are also more big cities which are not serviced by Southwest airlines are Minneapolis, Charlotte, Atlanta, Cincinnati, Memphis and Milwaukee. The airline also does not have services for the midnorthern sections of the United States. This part covers Wisconsin to Montana/Wyoming and also Alaska. (Wikipedia). It could be profitable for the company to increase expand its services to these cities in the United States.

For the airline to reduce congestions at its gates at the airports, it should increase its efforts at acquiring more gates. This will help to instill its image of no frills no fuss which it has started losing due to its increasing number of passengers. While on the issue of expanding its market share, the airline could consider forming mutual business associations with other airlines which also enjoy a big market share in the United States. This will enable the tickets for southwest airlines to be sold by those airlines and it would also sell their tickets. This would also help to improve on their sales revenue and increase their customer base.

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Southwest airlines only operates in the domestic market in the United States. This has limited its market size in the sense that there are other markets it can still conquer. The airline should venture onto the international market. This will expand its market area. If Southwest was to go international, it might have to start using the long haul strategy with its planes. Even though this long haul strategy has proved disadvantageous for some airlines, southwest would only have to apply it to some destinations like the international destinations. To maintain its competitive advantage it would still have to continue using the short haul strategy for the domestic flights.

Some of the weaknesses of southwest airlines are: the airlines only operates in the domestic market. This is a weakness in that it limits the size of its market and also the possible profits it could make. The airline does not feature any electronic entertainment in any of its planes. Though the management has made up for this by having a relaxed atmosphere for its customers, it could still be advantageous to have them just so as not to be seen as left behind by the other airlines.

The airline also does not have seat reservations like other airlines do. This is also a weakness because some customers might want to reserve their seats early in advance. Southwest does not have different classes for their passengers. They have one plane for all policy without the economy , the business or the first class. This is also not very attractive to some travelers who might want to have the first class treatment.

Southwest competitors

In as much as southwest airlines enjoys a solid customer base, it is operating in a very competitive market with some of the biggest industry players. Some of the major competitors for southwest airlines are American airlines, continental airlines, Dallas FT, Jet Blue.(wikipedia)

Strategies

The definition of strategy according to Johnson and Scholes (Exploring Corporate Strategy) is “Strategy is the direction and scope of an organisation over the long term which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations” In a single business entity there are different strategies which are employed to ensure that the organization achieves its objective. The organization corporate strategy is devised to integrate the general span and purpose of the business in terms of satisfying the investors need for profits. (Johnson and Scholes) South west airlines has put into place strategies which ensure it makes profits always. This it has maintained for the past many years without fail.

The Business Unit Strategy is devised to guide the business in its competition with the other players in the market. The objectives of this strategy is to ensure the business makes the right choices when selecting the products and services to launch, how to service customer needs, attaining competitive advantage over the other players and also how to create and use new markets and opportunities for the business. (Johnson and Scholes).

According to Johnson and Scholes, the Operational Strategy of a business is made for the operational managers. Its main objective is to give guidance on the management and organisation of each of the smaller parts of the business to aid in attaining the business unit and corporate level strategies. Operational strategy centers on the management of resources, the different processes in the organisation and the management of the people i.e. the staff.

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For Southwest Airlines to get to the top of the airlines industry, it has put into place several policies which are congruent with its strategies right from the operational, business unit and to the organisation corporate strategy.

When the airline was starting it had to create a niche for itself. This was done by creating a new market segment that was not exploited. The airline aimed at drawing in new passengers who normally either did not fly or only flew very rarely on special occasions. Their flying was limited due to the high cost of tickets. For the airline to attract this unexploited market they had to reduce their fares considerably to a point where most agents did not like them because their air fares drastically reduced the commissions they earned from the tickets. (Herb Kelleher, 2005 interview).

Southwest Airlines’ main target is the domestic routes in the United States. Most of the passengers traveling locally do not usually go for long flights and the shorter they can take to fly the better for them. To satisfy this need the airline ensured that its flights went for the short distances. Since its launch Southwest Airlines has used the short haul and point-to-point or city to city approaches as opposed to other strategies applied by other airlines.

In this strategy, the airline ensures that a particular plane is only filled by passengers who are destined to one particular city. Most of the customers they attracted came to find it very cheap to fly and were therefore able to fly to their destinations more often. The airline thus ensured that their planes flew to many different destinations more frequently than any other.

To be able to achieve this frequency of flying, the airline had to purchase some of the best aircrafts. To build customer confidence in them, they have had to use the best. To attract more customers to maintain this high frequency of flying the airline had to establish their presence in the market. Southwest also has to show to all and sundry that it can offer them the services they require and without any inconveniences. For the proof they always have the best planes. This strategy of short haul is very much hassle- free and convenient for the passengers. This is because there is no changing of planes or waiting for hours on end at the airports.

When southwest operates using the short haul strategy, its planes end up spending very little time on the ground at the airports therefore enabling them to make more trips than the other airlines. This increases their revenues and eventually translates into more profits. With this high frequency of flights, it is more convenient for the customers to just go to the airports and board their planes without necessarily going through the travel agents. This together with other methods of payment of the crew by trips and lack of assigning of seats and the use of less congested airports are what makes the airline stand out. It was once described by the Fortune magazine as “the hottest thing in the sky” (Serwer, 2004).

The profitability of the company has not always been that good as it had to deal with losses and financial constraints especially in the early 1970s. However, the airline adopted newer and more stringent financial techniques which were meant to boost its profitability and deal with some of the fuel complications which normally arise in the course of operating an airline. The fuel cost containment is one of the key reasons why the company has been able to maintain its impressive profit margins. This is among some of the things the airline has implemented intending to ensure that even future occurrences like the fluctuations of fuel costs are predicted and planned for in advance (Freiberg, 1996).

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For instance, the airline has a longtime program to hedge fuel prices or what they prefer calling “The Hedging Strategy”. This particular strategy was implemented with the sole aim of making use of the available resources whenever it was in a position to take advantage of the prevailing market conditions. The company was therefore able to secure fuel in future years for later use while at the same time paying low prices for fuel to be used when the fuel prices would have already risen much higher. It also suffered losses especially with the threat of oil prices going much lower than they already were, but the biggest hope that kept the company focused on the strategy, was the promising possibility of reaping large gains incase the oil prices appreciated.

Though it involves a lot of risk taking and requires careful planning, the hedging strategy was of great use since Southwest Airlines was able to maintain its profitability following the oil shocks that followed related to the War in Iraq and Hurricane Katrina. It somehow managed to go through these crises unscathed. The fuel hedging has allowed the company to grow with huge profits. This is attributed to the low prices at which the company buys its future fuel supplies and then using the fuel at the times when the fuel prices will have gone up. The method has proven to be an easily adoptable service model (Bonesetter, 2002).

The Southwest airline has invested in the low operating costs but a look into the future shows that since it has been exposed to the raw oil market each year, the airline’s growth must be slowed down to cater for the costs it has to deal with. This and the tough competition from other carriers are some of the difficulties the airline is dealing with (Bonesetter, 2002).

Strategic management enables different companies to reach their goals or to achieve coherence among the internal and external factors of the organization as the key element to success in any company. For these goals to be achieved, the company must react to the environment and be in a position to interact with it through the actions displayed by top management (O’Brien, 2003).

Southwest Airlines has a Strong Management team and an equally motivated staff. The management therefore ranks lean and has been productive over the years. Most of the airlines’ employees belong to a union and they get their salaries and benefits making them some of the most highly paid in the industry. This is because the founder realized that for the company to prosper it must first treat its employees well and in return the employees will treat customers well. When customers are treated well in a place, they would always seek to come back again for the services. In an industry crowded with players, Southwest airlines will have to do much better to retain its present customers and also attract new ones,

Serwer (2004) points out that Southwest Airlines is the only airline that maintains an investment-grade rating on the debts they make which in the airline industry is a great accomplishment. But this according to the company’s top officials is part of the company’s culture. Having an organization culture instills a sense of discipline in the stakeholders who in turn would also work hard to maintain the culture.

According to Barney (1991), firms which can focus on the development of distinctive capabilities like Southwest’s fuel hedging strategy, can provide sustained sources for competitive advantage, though this requires big and continuous investment in research and development. This might not be necessarily easy to be tried out by other airlines if they don’t have adequate financial resources for the undertaking.

Barney (1991) also points out that “…with the notion of equifinality, firms are assumed to be heterogeneous with respect to resources, capabilities and endowments, which are acquired and developed through idiosyncratic and path-dependent processed that can not easily be duplicated by competing firms”. This can be related to the continuous profitability of Southwest Airlines. The company’s competitors like the American United, Delta, Continental, Northwest and US airlines keep reducing their passenger capacity and grounding hundreds of their daily flights. The company has plans of increasing aircrafts to increase the number of passengers carried annually.

The Airlines success is attributed to how they keep things simple and consistent. This leads to the driving down of costs and maximizing of productive assets which plays a major role of managing the expectations of the customers (Brancatelli, 2008).

The Airline can save millions of dollars in maintenance costs since it flies just one plane type unlike the other network carriers which use all types of aircrafts. The airline can move its aircrafts throughout the route network without expensive disruptions and reconfigurations. This helps to increase convenience for the customers and reduce time wastage for both southwest airlines and their passengers as well.

The Southwest Airlines network ensures that all the planes are in the air for more than an hour longer every day than by the jets from other airlines. The strategy is called “Avoid-the –hubs” and it has over the years paid dividends in on-time operations. The longer their planes are on air the more the passengers they fly and thus more revenue. The Airlines also has simple In-flight service which is tailored to be less costly for the airlines and also relaxing for the customers. Their efficiency in saving is what allows them to save more and the jets to fly an extra flight daily earning more revenue.

The other opportunity which Southwest Airlines has been known to exploit is on the charges on their customers. It sells one-way tickets and this is what keeps their customer service transparent and streamlined. They do not have to deal with complex fare structures. The seats are all identical so the customers already know what to expect (Brancatelli, 2008). This way the customers feel that it is always easier to deal with them than with other airlines which complicate the booking process and thus reducing flexibility of schedules on the side of the customers.

In the United States airlines industry, there are several small airline companies which are finding it difficult to stay a float amidst the chocking cut throat competition. Their problems could be ranging from financial difficulties, low customer base, low capital availability, poor management or may be using the wrong strategies. These companies with myriad of problems present good opportunities for southwest airlines to make takeover bids for them. The takeovers would pay off in the long run because southwest management would apply their management strategies to turn them around. Also the advantage of this is that it is much easier for the company to expand by taking over an already existing company than may be starting another subsidiary.

Challenges faced by southwest airlines

According to Serwer (2004), some of the challenges the Airline is bound to face include the increased costs. It still has some of the lowest prices in the industry but the fuel prices have risen significantly. This will most definitely increase their variable costs and start eating into their profits. There is also the issue of high compensation among the company employees especially the pilots. It might be hard to reduce these rates or refuse to increase them because if they are to maintain the best pilots then they will just have to increase their pay packages. If not they would risk losing their employees to other airlines which would be more than happy to receive them.

The other challenge the Airline is likely to face is the issue of keeping its culture alive while at the same time ensuring that their costs are under control. The culture of not serving meals but snacks, not charging any fees to change same-fare tickets, absence of electronic entertainment but in its place, fun flight attendants who have the duty of amusing visitors among other things. As times change, there will always be pressure for southwest airlines to also change and try to provide in addition to what they have, what their competitors have and the customers would like to have.

It is a fact that once in a while the customers would like to have meals instead of just snacks. The customers may also want to have electronic form of entertainment instead of having the fun flight attendants who entertain them. This is because after sometime this form of entertainment will take a monotonous turn. This is different from the electronic entertainment where the passengers would be free to choose for themselves whatever pleases them.

Another challenge that Southwest airlines faces is one of its creation. This is the rate at which the company is growing. In 11 years, Southwest has increased its planes from 124, a staff of 9,800 and 1,200 daily departures to 370 jets, 35,000 passengers daily and 2,800 plane departures daily. It has become bigger and the bigger it becomes, the sloppier they become as they stop arriving on time, customer complaints increase and generally their services quality deteriorates. Reed, D 2008, ‘Southwest’s challenges grow’, USA Today.

Nowadays there is a general decrease in the demand for air travel due to problems like terrorist fears and the recession. This is a problem which all airlines are facing and Southwest has not been spared. This automatically means less revenue. Since Southwest has for a long time used the strategy of low rates for tickets, it has ended up attracting so many customers and their objective of ‘no muss, no fuss’ has been completely overridden as many people now think it is synonymous with queuing. This is not good for its reputation. If anything the customers are finding that apart from the fact that they pay less than they would on the other airlines, they are starting to have just as many problems of congestion at the airlines airport gates as the customers on the other airlines usually do.

The competitors can not be ignored but they do not seem to be posing a big enough challenge to Southwest Airlines which “has wide enough Margins to take a hit” Serwer (2004). The Airlines faces other strong, low-cost and innovative competitors like Jet Blue and Air Tran. This has left the management looking into what they had not necessary earlier as an executive, Jim Parker, puts it, “we have looked…at in flight entertainment”.

The airlines with the airline-within-an-airline concept which is perceived to be low-cost also pose challenges to the Southwest Airlines though some people feel that the competing airlines still have to address some of their fundamental cost issues. This is because in as much as an airline may try to prove competitive, it will still have to ensure that they make profits to continue operating, or else they close down.

The airline could have some of its planes could be grounded on the basis that either they haven’t been inspected or they are not airworthy. It is of utmost importance for the airline to adhere to the inspection requirements of the Federal Aviation Administration (FAA) which is responsible for the inspection of the planes.

The United States economy has been on a recession. This has brought with it many problems which have affected all sectors of the economy. One of the main effects of this recession is that there has been the credit crunch which has had adverse effects on businesses in the country. Inflation has been on the rise. When inflation is high, the purchasing power of money is reduced. This has had the effect of reducing the ability of possible customers to buy air tickets thus reducing their revenues considerably. The recession is still progressing and if it continues un abated, the effects will be felt deeper in the industry by all the players and further across the whole economy. For southwest airlines, the company might have to invest more money in its fuel hedging bids.

Even though it is leading in domestic passengers numbers, Southwest airlines is also facing stiff competition from the other airlines. This tends to reduce its revenues. The other airlines might also start imitating southwest’s strategies of saving fuel. This might greatly eliminate its competitive advantage on energy and spell disaster as the other airlines may start reporting just as high profits

For an airline to be licensed to expand its fleet or make some major moves, there are some federal regulations which have to be complied with and may prove to be burdensome to the company. Some of these restrictions could be in increasing the number of planes. Terrorism is a big threat to everyone. Any threats of terrorism have great ramifications in the airlines industry which happens to be very sensitive.

This is a problem that is not specific to southwest airlines alone but is general in that all the airlines in the industry are affected by it. Whenever there is a terror threat, people tend to shy away from traveling both locally and even internationally. This would lead to a drastic decline in the revenues of the airline. A case in point is that of the September 11th attacks on times towers. The airlines industry was affected to great depths.

The challenges of rising fuel prices can only be rectified if the company takes advantage of technological advancements which if used wisely, can be quite efficient by providing the necessary tools, increasing the supply and ensuring there is less use of fuel which will in turn lower the input costs within the company. Though this route might prove very expensive at first when developing new technology, it would certainly pay off to the airline in the long run.

The airline however is credited for its successful model which applies low pricing mechanisms to retain and attract its customers. This technique will only favor them in an environment where the other competitors’ prices are greatly different from theirs. When their prices are lower than others’, then they will always have more sales revenue and due to the high number of passengers, take advantage of the returns to scale. Using technology is the only recommendation that is likely to help the Airline be more efficient especially in response to the rising costs of fuel.

In as much as southwest airlines may try to save time by using the less congested airports, they can not do this forever. At some point the airlines management will just have to contend with the congestions at the airports and instead just fight it out with the other airlines. The reason for this is because in as much as the airports are not normally built frequently, over the years when there is calm the numbers of travelers will just keep increasing and the airports will continue being congested.

Works Cited

Banstettor, T, 2002, “Ahead of the pack” Fort Worth Star-Telegram.

Barney, J. 1991, Firm Resources and Sustained Competitive Advantage. Journal of Management, 17:99-120.

Brancatelli, Joe, 2008, Southwest Airlines’ Seven Secrets for Success.

Freiberg, K & Freiberg, J 1996, NUTS! Southwest Airlines’ Crazy Recipe for business and Personal Success, Bard Press, Inc, Austin.

Haris interactive company. Reputation Institute / Harris Interactive Study Shows Domestic Airline Reputations Lag Those of International Carriers. (2005).

O’Brien, JP 2003, “The Capital Structure Implications of Pursuing a Strategy of Innovation” Strategic Management Journal 24 (5) 415-432.

Reed, D 2002, ‘Southwest’s challenges grow’. USA TODAY Serwer, A, 2004.

“Southwest Airlines: The hottest thing in the Sky”, Fortune.

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