Essay on Southwest Airlines: Analysis of Micro and Macro Environment
In 2018, Southwest returned more than $2.3 billion to shareholders through the repurchase of $2.0 billion in common stock and the payment of $332 million in dividends. From its first flights on June 18, 1971, Southwest Airlines launched an era of unprecedented affordability in air travel described by the U.S. Department of Transportation as ‘The Southwest Effect,’ a lowering of fares and increase in passenger traffic wherever the carrier serves. With 46 consecutive years of profitability, Southwest is one of the most honored airlines in the world. Southwest is known for a triple bottom line strategy that contributes to the carrier’s performance and productivity. The importance of its People and the communities they serve, and an overall commitment to efficiency and the planet.
Southwest’s Internet ticketing saves it $50 million a year, or 1 percent of revenue. However, Parker is facing some significant challenges. Liability insurance for the airline’s 364-plane fleet has soared to $100 million a year from $20 million. Moreover, Southwest’s largely unionized workers have been agitating for raises to match the rich contracts negotiated at other carriers. Southwest’s 4,100 pilots want to renegotiate a 10-year contract, due to expire in 2004, to close a 35 percent pay gap over the next five years. A veteran Southwest pilot makes $142 an hour, or $135,000 a year. Profit-sharing and stock options for the most tenured can add another $80,000, but Southwest’s pilots still trail 737 jockeys at Delta, United, and American. With Southwest’s stock down 27 percent from its high of $23 on January 2001, pilots are unlikely to accept more options instead of cash.
Southwest Airlines’ plans to start flying to Hawaii in late 2018 or early 2019 have attracted a lot of media buzz. The carrier’s steady growth in international markets has received substantially less attention. However, at Southwest’s recent annual meeting, CEO Gary Kelly confirmed that the company is eager to grow in international markets. This suggests that Southwest Airlines will continue to spread its growth around in the coming years, rather than just expanding in Hawaii, which is good news for local leader Hawaiian Holdings (NASDAQ: HA). International expansion still on tap in his remarks at the annual meeting, Kelly noted that Southwest Airlines flies to just 14 international destinations today, spread across the Caribbean, Mexico, and Central America. That compares to 86 domestic cities. Southwest currently deploys a mere 4% of its capacity outside the U.S., whereas many of its competitors get 25% or more of their revenue from international routes. Southwest Airlines probably will always have a lower mix of international routes than its main rivals, but it is just scratching the surface of its potential today. Kelly indicated that Southwest could potentially add 50 more cities to its route map over time, primarily international markets.
Hawaii has been a major focus for Southwest in 2019 as far as our fleet growth is concerned. It is notable that he also highlighted international expansion opportunities – and Southwest’s continuing growth in the continental U.S., for that matter. Investors’ fears that Southwest Airlines will swamp the West Coast-Hawaii market with unneeded capacities devastating rivals like Hawaiian Airlines and Alaska Air. Southwest Airlines also seems committed to maintaining a modest mid-single-digit growth rate (at most). The carrier is scheduled to take delivery of an average of nearly 40 aircraft annually between 2018 and 2022, but many of these planes will be used to replace older planes that have been retired.
The mission of Southwest Airlines is a dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit to its employees. Southwest airlines are committed to providing employees a reliable work environment with equal opportunity for learning and personal growth. Creativity and innovation are supported for developing the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer.
The microenvironment refers to factors that affect firms within a specific industry. These factors include; rivalry; the threat of substitute; the threat of new entrants; consumer power and buyer power. An analysis of these environmental factors has illuminated various opportunities and threats to the organization. Southwest Airlines can enhance competitiveness by making use of the opportunities and countering the threats. Several elements of the political/ legal environment have an impact on Southwest Airlines. One of this element concerns safety regulation, and the government has developed strict security policies, which affect the airline industry. The technological environment has also had both positive and negative impact on the airline industry. Ticketing is one of the areas in which technology has resulted in a positive impact on the company.
To reach its highly competitive position, Southwest Airlines has focused on four main strategies: being low-cost, employee-driven, future-minded, and differentiate Southwest is a low-cost airline that focuses on fast, no-frills service. It has never served meals, does not have advanced seat reservations, and flies only Boeing airplanes. These decisions have helped Southwest be flexible in the face of the recent. The company did not have to make the drastic changes seen in its competitors’ services because it was already operating as a low-cost carrier. While other airlines cut back costs by reducing their services and firing large portions of their employees, Southwest was able to get by with nothing more than pay-cuts – no employee was fired because of economic issues. Although a company-wide pay-cut is nothing to sneeze at, Southwest employees agreed they would rather have their jobs for less pay than try to find work elsewhere. Through this loyalty, Southwest was able to recover much faster than its competitors and maintain its strong customer base.
Southwest’s employees are incredibly loyal, and they are a vital part of the company’s overall strategy. Having happy employees means a company is more likely to have happy customers. Southwest knows this and uses it to its advantage. The company knows how to use motivation tactics that work for their employees. In line with Douglas Theory employees, workers at Southwest enjoy their jobs and see them as a natural part of their lives. They do not need to be coerced with threats or promises. Southwest’s employees genuinely enjoy their jobs and want to pass that enjoyment on to their customers. One of the company’s main focuses is on differentiation.
One of their crucial differentiation strategies is their Rapid Rewards frequent flyer program. According to their financial statements, Southwest has revamped their system so that members can redeem their points for every available seat, every day, on every flight, with no blackout dates. Points do not expire so long as the Rapid Rewards Member has points-earning activity for 24 months. Many airlines have similar memberships, but much more complicated rewards systems, so Southwest’s emphasis on flexibility separates them from the rest of the pack. They also make use of their Chase Visa credit card to help their customers earn and redeem points. This system brings in new customers, increases business from existing customers, and strengthens Rapid Rewards partnerships within its various divisions. Southwest has already seen this new rewards plan pay off by meeting and passing all have there expected growth goals. They have increased their overall business and given customers what they want.
To support a sustainable competitive advantage, Southwest Airline’s perform its value activities in a way difficult to replicate or imitate by the competitors. The competitive advantage is upheld if the cumulative cost of performing the value activities is lower than competitors. A level of value must back up the competitive advantage to the customer that is at least compatible with the competitors. Otherwise, a lower price will have to be charged, and the net effect will be zero. A firm’s relative competitive advantage will be made up by what composition of the value chain the firm has versus the competitors and secondly what position the cost drivers has in each activity. There are several ways to check the sustainability of a firm’s competitive advantage, Southwest Airline’s Competitive Advantages can be best viewed by analyzing six significant factors, their Procedures, Infrastructure, Edge, Communication, Atmosphere, and People. Southwest Airline’s procedures heavily rely on the strategy of keeping the airplanes in the air as much as possible. This has required an integration of operations and procedures to gain full control and to get a tighter organization.
The less congested airports are vital to Southwest Airline’s and are part of what has made them less exposed to cyclical changes in the economy. Capacity utilization is a essential factor for industries that are heavily associated with high fixed costs, such as the airline industry. Every factor that can keep costs down is therefore vital to make the company ‘recession-proof,’ which makes the small airports very important to Southwest Airline’s since they constitute one of the foundations of their low-cost strategy. However, the policy choices made to be low-cost relies on more than operating cheap airports. Southwest airlines were first out on the market with their innovation, and that has given them a head start of the competition. Timing has been a significant part of several of Southwest Airline’s procedures since they have several innovations that have been first out on the market. This goes for all activities in their procedures.
The business cycle has started to catch up with Southwest Airline’s in the last couple of years with new underdogs surfacing and threatening Southwest Airline’s position as the only innovative airline. The competition is likely to thicken further as the business life cycle matures within the low-cost segment. Southwest Airline’s infrastructure focus is on the communication process. This is why they only have four layers between top management and ground personnel. This is a significant factor in achieving smoother running operation and in cutting costs. The importance of interrelationships between value activities will decrease the cost per units and potentially increase scale. Southwest Airline has very ‘thin contracts,’ which means that everyone helps out no matter what level they are on. Also, the quick turnarounds use linkages and interrelations heavily to achieve their goal. By integrating its operations, Southwest Airline’s has a tighter organization that has full control over daily routines. This projects that advantages of vertical integration are high when control over a value activity is demanded, which is the case in Southwest Airline’s and their quick turnarounds. The company also plans for the future and is not afraid to take risks necessary to stay ahead of the competition. Southwest is focused on expanding its services and increasing its market share. They plan far ahead and make sure their plans are sustainable for current and future competitive advantages.
To explain the five forces model for Southwest Airlines, I am using Porter’s Five Forces model. Porter’s five forces model analysis will identify the competitive position of Southwest Airlines in the market, considering the effect of these external forces acting on it. Southwest Airline has been continuously growing, and over the years, it has achieved enough economies of scale, but this is the result of huge investments and growth over the years. Southwest Airline has established its brand name based on cost advantage as it offers low-cost services. The airline industry is very well established throughout the world, and to enter this industry involves a massive amount of investments. This factor makes it very difficult for any company to enter this industry and also take up the market of well-established, trusted airlines. Customers in terms of safety trust Southwest Airline, along with other established Airlines, and this aspect makes it difficult for new entrants to gain this trust and make the customers shift to their airline. Due to these reasons, Southwest Airline is facing the low threat of new entrants as the enormous investments and establishing cots makes it almost impossible for a new entrant to pose a threat to Southwest.
When it comes to transportation, people have many options to choose from. The substitutes present for airlines include train, car, bus, or ship. All these options have their advantages depending on what the buyer is looking for. Every buyer does his or her cost-benet analysis before choosing his or her mode of transportation. If a buyer is looking for low cost, they might shift to other transport modes that are cheaper than an airline, but Southwest is low cost than many other airlines which kind of gives them a competitive edge. If a buyer is looking for convenient and timesaving transport, then the airline is the fastest mode of transport. This means that the cost of switching is not a lot, in almost all cases. Due to all these reasons, Southwest is facing a high threat of substitutes, which is trying to counter by offering convenience and low cost together.
Southwest Airline has two kinds of buyers, including individual and group travelers. The travel agents usually buy tickets for group travelers. They have a lot of various options for airlines, and most of the time they are looking for low-cost tickets. In the case of travel agents, they have very high bargaining power, as the cost of switching to another competitor is meager. While when it comes to individual travelers, they also face little switching cost, so they also have moderate bargaining power over Southwest Airline.
Southwest Airline has a massive competition in the market from its competitors. The competition is from local as well as international airlines, and this rivalry is extreme because it takes years for these airlines to establish their brand name and they are always in the industry for a more extended period because of the massive amount of investments and ports. Southwest has many competitors, including Delta, American airline, and United. With very intense competition in the industry, Southwest always needs to develop on its services and work on its competitive edge that is providing low-cost transportation.
Southwest Strengths includes more departures than any other US airlines, high capacity usage dominates the short-haul segment of the airline industry, one of the most profitable airlines, while many other airlines are unprofitable, low-cost, efficient operations equate to low fares/great value and SWA has only one primary type of aircraft/reduces training times. The weakness of the airlines includes, few morning flights offered, no flights to international destinations, dependent on a single type of aircraft – the Boeing 737, most employees belong to a union, only one class of seating is offered – coach, booking flights is not available except directly through Southwest Airlines, and It does not offer frills such as airport lounges, videos on board. The opportunities include growth of Hispanic population and the elderly generation – potential markets, overall air travel is predicted to increase pretty rapidly this decade Southwest does not yet serve International markets, new technology opportunities for new services and products and better use of the Internet for marketing, ticketing. A few threats are Fuel price increases could reduce air travel, a decline of leisure travel due to terrorism and a depressed economy, and new government regulations could make air travel more costly.
Southwest Airlines have unparalleled customers service due to their mission and vision. Southwest Airlines is always trying to strive for their ultimate mission of providing the “highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit” (Southwest Airlines”). Core Competencies & Value Chain Activities, The core competencies for Southwest Airlines, include efficient operations, outstanding customer service, and innovative HR management practices that make the possibility for the company to follow its stated mission and vision. A value chain includes “all the various activities that a company performs internally, so-called because the underlying intent ultimately leads to a created value for buyers” (Thompson, Peteraf, Gamble, & Strickland III, 2015).
Southwest has learned to use their support activities and costs, including, technology, human resource management, and general administration to provide a mainframe for their primary activities and costs including; supply chain management, operations, distribution, sales and marketing, service and profit margin. They can do this by building upon and continuing to reference their mission and vision in their daily operations. This , in turn, enables them to improve their competitive position. For example, the foundation of Southwest’s corporate message is not that customers are number one; instead, employees always come first with the company, with customers a respected second. Southwest, in turn, expects its staff to extend customers the same level of warmth, respect, and responsiveness they, themselves, receive.
The current strategy is heading in the direction of long term planning through its active organization to meet the market and fulfill the stakeholder’s expectations. The key strategies consist of Employee driven, low-cost, quick service, and no-frills. Currently, the company does not need to make any drastic changes at it is already operating as one of the low fare Airlines while other Airlines cut back the costs by firing a large part of their staff and by reducing the services. Southwest has also implemented a strategy to take care of their employees. Therefore, they have loyal employees, and they are taking care of the business. Southwest Airlines has known as a benchmark in the industry due to its excellent service.
In 2018, the airlines had a strategic plan that included several moves to boost efficiency, including the retirement of some of the oldest aircraft among its fleet of 737s and increased utilization of its new reservation system from 2017. Southwest also faced an unprecedented disaster because one of Southwest’s passengers died aboard a flight due to an engine malfunction. The high-profile event likely contributed to the airline’s lackluster performance during the first half of the year, as it chose to halt advertising and promotional activities in the aftermath of the accident. Revenue, Past 12 Months, $21.54 billion, One-Year Revenue Growth 2.8%, Net Income Past 12 Months $3.69 billion, and One-Year Net Income Growth 73%.
Based on the analysis, I would recommend that the governing board for this company would allow a slight increase in salary and benefits; especially given the success rate. The culture is already one where the employee turnover is low, but it would not hurt to increase salaries and bonuses to all employees if it is financially feasible. Southwest Airlines is doing a phenomenal job in becoming and remaining one of the best airline travel options for consumers. To show continuous improvement and to improve on business operations and strategy, my recommendation would be to focus on strengthening its competitive position by completing an acquisition of a top competitor in the international market within three to five years. Besides, the company must continue to revise strategies as applicable given the acquisition and international growth. In order to achieve this strategic position, the company’s leadership must focus on air travel in the international market, which is lacking in international service and how to fill the gap. They must also be aware of which companies offer the most significant return in preparation for the acquisition and which international market would benefit the most from increasing travel options.