Southwest Airlines’ Strategic Management

Abstract

The Southwest Airlines business model shows that it has been effective for nearly 40 years now. This case analysis focused on competitive advantage and competition, SWOT analysis, Porter’s Five Forces, and strategic steps the enterprise now needs to implement and recommendations. The company has created a competitive advantage through its employees, spreading low-fare strategy, products, and service differentiation, and a focus into the future. A SWOT analysis shows that Southwest Airlines can overcome its challenges through effective strategic planning and relying on its industry expertise alongside opportunities presented through various means to promote competitive advantage. Southwest Airlines must avoid poor investment decisions and evaluate the potential impacts of international trade on its business model of low-fare. Porter’s Five Forces present the environment in which the company operates in and challenges it faces. While Southwest Airlines has overcome many of the industry challenges, it must review its model to determine whether it will accommodate international flights without negative financial impacts. Nevertheless, the company must continue with the merger and acquisition.

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History of Southwest Airlines

Southwest Airlines Co. was established more than 38 years ago. The company founders wanted to get people to their destinations on time, whenever they wanted and at the lowest possible fares (Southwest Airlines Co., 2014). Today, Southwest Airlines remains the largest low-cost airline in the US. It serves many domestic customers than any other airline companies in the US. The company does not include many other fees known in the airline industry. In addition, Southwest Airlines has stressed the importance of its employees and excellent customer service. It also maintains high safety standards and reliable operations supported by a strong corporate culture.

The mission of Southwest Airlines is “dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit” and its purpose is to “connect People to what’s important in their lives through friendly, reliable, and low-cost air travel” (Southwest Airlines Co., 2014).

This analysis focuses on the competitive advantage of Southwest Airlines, its SWOT analysis, Porter’s Five Forces, and strategic steps the enterprise now needs to implement and recommendations.

Competitive advantage and competition

To achieve a highly competitive position in the commercial airline industry, Southwest Airlines promotes four major strategies, which include spreading low-fare farther, employees as a competitive advantage, a focus into the future, and differentiation.

Spreading low-fare farther

Southwest Airlines was established on a model of low-cost. Today, the company focuses on promoting the strategy farther. For instance, in 2010, Southwest Airlines announced a plan to acquire AirTran Airways (Southwest Airlines Co., 2014). This strategy would ensure that the company spreads its low-cost strategy farther. The integration process would create a synergy for the company. According to the company’s CEO Gary Kelly, the acquisition of AirTran was a bold, strategic approach that would ensure that the company survives and grows during the recession (Kelly, 2014). It has given the company-wide access into new key markets, including “Hartsfield-Jackson Atlanta International Airport, New York’s LaGuardia Airport, and Ronald Reagan Washington National Airport” (Kelly, 2014, p. 16). At the same time, Southwest Airlines has used the acquisition to spread its low-cost model to international markets. For instance, the company recently launched international air services to the Caribbean and Mexico.

The company maintains fast, no-frills services throughout its destinations. The company does not offer any meal services for passengers. As a result, Southwest Airlines can control costs during economic downturns and mitigate rising costs of operations. For instance, during the economic recession and slow down, Southwest Airlines did not resort to drastic changes observed in other commercial airlines because of its low-cost model. While some of the commercial carriers engaged in cost-cutting measures by reducing the number of destinations and employee retrenchment, Southwest Airlines managed the crisis through pay cut but without employment termination.

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Employees

“Our people are our single greatest strength and most enduring long-term competitive advantage” (Kelly, 2014). Southwest Airlines has recognized the role of its employees in creating a competitive advantage. They are reliable and important part of the general Southwest Airlines’ strategy. The company ensures that its employees are satisfied and, in turn, meet customers’ expectation. Therefore, the company has been able to deliver exceptional customer service through its competent employees. Southwest Airlines believes in motivated employees to help it achieve a competitive advantage in the commercial airline industry. As a result, employees consider their roles at the company as a part of their life. Job satisfaction has resulted in high performance for the company. Relative to other airline companies, Southwest Airlines has the highest employee retention rate. This shows that employees prefer to work for the company.

Differentiation

Services at the company are customer-driven, but employees facilitate all processes. The internal strategy of the company accounts for the role of the employees as ensuring customer satisfaction. The internal strategy has resulted in differentiation for Southwest Airlines. While differentiation is associated with high-end services and products, the low-cost airline company ensures that it works in the airline industry too. Southwest Airlines has the Rapid Rewards for their frequent flying passengers. Passengers under the program can redeem their accumulated points and use them to fly free, at any time, and to any destination, but not on blackout days. Moreover, the accumulated points do not expire if the customer is a frequent flyer within 24 months. While other airline companies have similar reward systems and loyalty programs, they offer complicated systems that limit rewards. On the other hand, Southwest Airlines has focused on developing a flexible reward system for its customers. Customers can use other credit cards to collect reward points. As a result, Southwest Airlines has been able to acquire new customers, generate revenues from existing customers, and develop effective partnerships through the reward program. Today, the company has been able to exceed its growth targets and ensure continued growth. Southwest Airlines focuses on what customers want for differentiation.

Southwest Airlines promotes its services aggressively. The company communicates through simple means and lets customers make their own choices. For instance, the company emphasizes that ‘bags fly free,’ shows its competent employees, and attacks other airline firms for excessive charges. As a result, the promotional strategy has differentiated Southwest Airlines from its competitors.

A focus on the future growth

The company makes a decision to facilitate its progress into the future through long-term strategies. For instance, the company had a long-term goal with a clear focus on the future when it acquired Air Tran Airways. Through this acquisition, Southwest Airlines has embarked on aggressive expansion strategies across various destinations, including international ones. This strategy would result in the growth of revenues, market shares, and profitability.

The company has recognized the strength of the acquisition and integration of employees. Southwest Airlines recognizes that it would expand its low-fare strategy to other new markets as a way of ensuring route diversification. The company has increased its current domestic market share, as well as expanded into other lucrative leisure destinations (Southwest Airlines Co., 2014). This strategy shows how Southwest Airlines focuses on the future to create a competitive advantage. The acquisition allowed the company to leverage on destinations previously served by AirTran Airways. This strategy would ensure that the company expands its services and mitigates challenges from the competition as it focuses on future growth. The initiatives would ensure that the company remains competitive and profitable in the future. Given several challenges in the current economy, the airline industry requires flexibility to manage several unprecedented events.

With the concentration into the future of the company, the company aims to acquire efficient fleets from Boeing and increase carrying capacity. For instance, Southwest Airlines acquired new Boeing planes in 2012 to increase carrying capacity and increase profitability. While the company will benefit from increased fleets and destinations, it will also incur increased costs. Nevertheless, Southwest Airlines has managed to control costs. The increased fuel efficiency would result in cost-saving for the company and reduce operating margins.

A Southwest Airlines SWOT analysis

After 38 years of providing low-cost commercial airline services, Southwest Airlines has focused on differentiating itself, competitors. Today, it continues to offer reliable services alongside excellent customer service in the USA and other international markets. In addition, it relies on Boeing fleets to enhance efficiency in fuel consumption and carrying capacities.

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Although it is a low-cost airline company, the company still manages to deliver excellent customer services.

Strengths

  • Fleet standardization for efficiency
  • The best low-fare airline company in the US
  • Flexibility in employee relations, union issues and work hours
  • Automated booking
  • Competitive abilities through competent employees
  • A focus on customer service
  • Flexible operating strategy
  • Dominant domestic market position
  • Strong customer base
  • Over 40 years of industry experience
  • A strong brand with supporting commercial promotions

Weaknesses

  • Contractual obligations on the acquisition of new flights
  • Decline in profit margins during economic downturns
  • Dependence on revenues from passengers
  • A single model of growth – a low-cost model
  • Limited domestic markets
  • Not diversified relative to competitors
  • A lack of business segmentation (passenger class) leading to missed revenue opportunities
  • Limited space for cargo

Opportunities

  • Acquisition and integration of AirTran Airways has allowed the company to access new domestic markets
  • The current growth and long-term projected growth in the domestic airline industry in the US
  • Spread low-cost model farther into domestic and strategic international destinations
  • Opportunities in increasing business and tourism travel
  • International partnership and expansion with Volaris
  • Leveraging costs on fuel efficiency flights
  • Attracting new customers and sustain current ones with the Reward program
  • Increased focus on customer service
  • A strong focus on corporate social responsibilities
  • Employee satisfaction and high rates of retention
  • International merger and acquisitions in emerging markets

Threats

  • Threats from new entrants into the low-fare segment
  • Intense competition within the industry, particularly from JetBlue,
  • Unstable US economy associated with downturns, which reduce frequencies of traveling
  • The constant fluctuation on fuel prices
  • Limited booking opportunities
  • Security issues, especially terrorist attacks

Southwest Airlines will continue to grow and achieve success as it embarks on fuel efficiency fleets and minimizing fluctuating fuel prices through hedging. The company aims to manage costs through controlled budgets and no-frills approach. This strategy reduces the effects of economic downturns in the US. Moreover, it will continue to focus on exceptional customer experience to attract new customers and retain their existing ones through loyalty programs.

Porter’s Five forces as it relates to Southwest

Rivalry

Rivalry in the airline industry has a significant impact on the market share and profitability of Southwest Airlines. In addition, high market concentration in the airline industry has also affected the company’s competitiveness. While there is no single airline company that has dominated the industry, the major carriers, such as Southwest Airlines, Delta, Continental, and JetBlue, among others, have significant market shares. As many airline companies use specific routes, airports, and specific hubs, competition, and rivalry in the industry have intensified. This implies that Southwest Airlines must also compete in highly profitable destinations with various airline companies with different market models (Desai, Patel, & Quach, n.d).

Southwest Airlines has been able to beat the competition through its flexible, low-fare model that supports various destinations and many passengers. In addition, the rivalry in the airline industry has resulted in “high fixed costs, price wars, poor differentiation and service and price comparisons through the Internet” (Desai et al., n.d). The airline industry experiences high fixed costs, which affects its overall profit margin. On this note, Southwest Airlines must focus on cost management, particularly on costs of fleets, operation, customer service, and baggage. The rivalry has pushed companies to hire highly trained and experienced employees and offer high compensation to retain them. Southwest Airlines has succeeded in human resource management because of its low rates of staff attrition.

Southwest Airlines has relied on technologies to mitigate the impacts of fierce rivalry. Today, many airline companies rely on high-tech systems to track the activities of their customers and develop specific products and services that appeal to the needs of such customers. While such technologies offer efficiency and improved customer experiences, they are costly and strain the company’s operational costs.

Southwest Airlines must maximize carrying capacities and charges per mile to recover associated fixed costs. Today, there are many airline companies on many routes and destinations. As a result, there has been a shift to price wars as they scramble for passengers. Price wars in the industry to attract new passengers highlight the extent of rivalry in the industry. Southwest Airlines already runs a low-fare model, and therefore, it aims to protect its customers through reward programs. Individuals or corporations may forgo benefits associated with frequent fliers. However, this is usually associated with expensive switching costs. Since passengers cannot transfer their accumulated benefits to a new service provider, they tend to remain loyal to Southwest Airlines.

While many commercial airline companies adopted frequent flier programs to protect their customer base and acquire new ones, low-fare airline models have acquired greater market shares because of their flexible reward programs.

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Threat of Entry

After the deregulation of the airline industry, there were significant numbers of new entrants into the industry. Today, for instance, Frontier Airlines and other foreign airline companies have introduced several low-cost flights in the domestic and international markets (Perkins, 2014). The observed wave of new entrants in the airline industry, particularly in the low-fare segment suggests that the industry is “inefficient and lacks economies of scales and has additional opportunities for new entrants” (Desai et al., n.d, p. 4). This shows that barriers to entry in “the low-cost airline market segment are few, and therefore, new companies can easily join it” (Desai et al., n.d, p. 4). While many airline companies can join the industry, not many of them survive the fierce competition. As a result, there are few companies with significant market shares. At the same time, some airline companies acquire, merge, and consolidate their resource to create synergy for competitive advantage. On the other hand, some carriers may disappear completely from the industry. For instance, Perkins noted that “Only a few airlines tried low-fare trans-Atlantic flying without package-tour-market backup, including PeoplExpress and World Airways, but none lasted” (Perkins, 2014). This suggests that Southwest Airlines faces little threat from new entrants in the industry.

Substitutes

There are several other means of transport than can “substitute air travel, including trains, cars, and buses” (Desai et al., n.d, p. 4). The relevance of these substitute modes of transport has declined significantly as airline companies introduce low-fare and safe flights. While switching costs from the airline industry cannot deter many passengers, passengers usually consider their convenience, destinations, reasons for traveling, and routes. For instance, long journeys and foreign trips may require passengers to use commercial airlines. At the same time, individuals traveling for business reasons may prefer flights while people traveling for vacation may use other means of transportation other than flights. Costs of using substitutes for air transport are generally affordable.

Supplier Bargaining Power

One major challenge facing many airline companies is the issue of strikes initiated by unionized workers who demand higher salaries and better working conditions. As a result, employee compensation has contributed to the growing operating expenses in the airline industry. Southwest Airlines has a flexible approach to employees’ issues, and therefore, the company can effectively negotiate with them. Different employees bargain on various terms, depending on their employment status and contracts.

Boeing is the major supplier of fleets to Southwest Airlines. It has high bargaining power because Southwest Airlines depends on its fuel-efficient and large fleets to reduce costs. Moreover, it would be expensive for the company to switch to new suppliers.

Buyer Bargaining Power

Generally, Southwest Airlines fixes its low-fares to meet its strategic objectives and long-term goals. Individual passengers have limited bargain power over the company. However, Southwest Airlines may only engage in price discrimination based on certain international routes, such as Mexico and the Caribbean. Other routes with several low-cost airlines may not be possible for the company.

Corporate clients could have significant bargaining power over the company due to their influences and contributions to the company’s revenues.

Complements

Few other service providers support the airline industry (Desai et al., n.d, p. 5). Car rental services and hotels may offer complementary services for the airline industry. Hence, a collaboration between airline companies and these service providers could lead to the provision of bundled products and services. However, a low-fare company like Southwest Airlines may not seek such a partnership because of small profit margins. Moreover, customers have noted that bundled services could be expensive, and therefore, they prefer to obtain services separately. According to Desai et al. (n.d), “Southwest utilizes its computer reservation system in an effective manner by simultaneously displaying appealing schedules and deals or packages, thus allowing customers to secure bargain while conveniently making reservations directly from its Web site” (pp. 5-6).

Porter’s Five Forces help analysts and individuals to understand the competitive strategies of Southwest Airlines. As these factors show, Southwest Airlines faces several challenges from various sources. These challenges eventually affect the company’s market shares and profitability. Nevertheless, Southwest Airlines has managed to remain competitive and profitable.

Strategic steps the enterprise now needs to implement and recommendations

Southwest Airlines provides low-fare services supported by friendly, competent employees. As a result, the company has been able to create a competitive advantage and sustain profitability. Moreover, its customers remain loyal because of excellent customer service. Nevertheless, Southwest Airlines requires some strategic steps to create a competitive advantage further and remain profitable.

  • Although Southwest Airlines has started to expand into the international markets, the company must understand how such a strategy will affect its low-cost model in terms of costs. For instance, passengers on international flights will require meals and other services, and this could affect the company’s profitability.
  • Southwest Airlines should continue its acquisition and expansion into new markets globally, particularly in emerging markets based on its low-cost model
  • As many low-cost airline companies enter the US market, Southwest Airlines must improve its services and differentiate itself from competitors
  • The company must continue to focus on product and service promotion to increase its market share
  • Merger and acquisition presents greater opportunities for Southwest Airlines
  • Southwest Airlines must continue to rely on fuel-efficient fleets and leverage on large spaces for maximum passenger capacities
  • The company should diversify its services and look for alternative means of generating revenues other than passengers

As the company expands into international markets, it must observe various laws and regulations, which may affect its operations, employment, and revenues.

References

Desai, K., Patel, V., & Quach, D. (n.d). Southwest Airlines. Web.

Kelly, G. (2014). Spreading Low Fares Farther. Web.

Perkins, E. (2014). 10 cheapest airlines for flying to Europe. USA Today. Web.

Southwest Airlines Co. (2014). About Southwest. Web.

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