Category: Southwest Airlines

Introduction to Southwest Airlines’ Historical Background

A quick situational analysis of Southwest Airlines would begin with their history or background of their organization and their successes and failures. Southwest actually started their company in the maintenance sector of planes and by 1971 Southwest attained its first three airplanes. Southwest only had three destinations they flew between and they were Houston Texas, Dallas Texas, and San Antonio Texas. It’s wort pointing out they started only in the state of Texas because of how hard it was at the time to join the market with all the contracts an regulation that were needed to be a commercial airline.

Strategic Approach and Early Successes

One of the main successes that allowed Southwest to join the market was that they had a different strategic plan than the other airlines and their idea was/is “get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and make sure they have a good time doing It.” (Coulter, p. 250)

This was very unlike the other airlines where tickets are very expensive, it is a chore to find a good price on a ticket for where the customer wanted to travel, and the “long and inconvenient flying experience.” (Coulter, p. 250)

Challenges and Allegations of Safety Failures

Even though Southwest had a lot of success, it didn’t come from no failures. During 2008 they had allegations of the safety of their planes. Even though they started out being leaders in the market of plane safety, Southwest had a serious problem in 2008 and that problem was, “Two Federal Aviation Administration (FAA) officials who had noticed problems with the company’s planes and Southwest’s failure to do required inspections said they were pressured by Southwest executives to , keep the serious problems hidden.” (Coulter, p. 250)

It is one thing to have a problem but it is another to have management try to cover it up or keep the problem a secret. This was a very serious allegation and will be discussed more, later.

Competitive Landscape and Rivalry with JetBlue

Some of Southwest’s competitors are: United, Spirit, Alaska, Frontier, American, Delta, JetBlue, and Allegiant

One of Southwest’s biggest competitors is JetBlue because of the simple fact that JetBlue copied Southwest’s successful processes. JetBlue copies their process while having newer planes and more leisure items like an individual computer on the back of each seat for each one of their passengers. Southwest only has that luxury in a very limited amount of their planes. Probably one of the biggest reason JetBlue hasn’t surpassed Southwest is because JetBlue has had way more crashes and casualties than Southwest by a lot.

Southwest’s Competitive Advantages and Business Model

Southwest has quite a few competitive advantages compared to the other airlines; with the main one being that they definitely have a guerilla view of competitive advantage because their advantage is very limited because they are heavy on having really low prices and jet fuel being fairly cheap at the moment is allowing them to have way lower costs than some of the other competition. I say they have this type of competitive advantage because jet fuel will rise and price and if it gets just a little too high Southwest will start losing money because their business model is low priced and hassle free ticket purchases. So about the only thing Southwest could do if fuel prices surged would be to raise ticket prices and if they raise theirs above some of the other competition they may lose big time on a lot of their regular customers than only fly Southwest because of their really good prices.

Southwest’s next competitive advantage looking from the resource based view (Rbv) which consist of financial, physical, human, and intangible advantages is where they thrive. This view breaks down their competitive advantages into section with the first being financial. Their financial advantage is definitely their cost of operating. Southwest manages to operate with way less cost than the other airlines because of their strategy to operate as efficiently as possible.

Southwest’s next Rbv advantage is physical or the equipment that Southwest has and uses. Southwest s a huge fleet of planes and equipment and that is a big advantage to them when they need to transport so many customers in different places at the same time.

Next, is Southwest’s human advantage and that is where their knowledge, skills, experience, and competencies come into play. They excel in knowledge of what the customers need and want and the strategic decision makers use their skills, and experience to provide what their customers need and want.

The last Rbv advantage is Southwest intangibles. In other words, their brand and reputation. Brand and reputation seem to go together when looking at Southwest. Airlines are trying every day to be more personable and when customers look up reviews for Southwest airlines they see almost nothing but good experiences and excellent prices.

SWOT Analysis: Internal and External Insights

The next topic I am going to discuss is Southwest’s SWOT analysis or strengths, weaknesses, opportunities, and threats. This topic breaks down into two categories which are internal analysis and external analysis. With internal analysis being the strengths and weaknesses and the external analysis being the opportunities and threats.

Southwest’s has quite a few strengths when it comes to their competition. Their first strength being that they have a very specific way of operation and that is their idea of being a point-to-point airline rather than having a hub-and-spoke type of system. This allows their system to be very easy to understand both for the business and it employees and for its customers, when compared the hub-and-spoke system which is and can be very confusing especially when adding in time zone changes and having to hop form airport to airport and getting on and off multiple planes. This simplification of getting from point A to point B without switching planes has become one of Southwest’s biggest strengths. Not only does this create less confusion for everybody but it is a major time and money saver when you think of all the landing and taking off from airports that hub-and-spoke systems deal with that Southwest’s point-to-point system doesn’t have to deal with.

Southwest’s next strength is their very quick turnaround time, meaning, how fast they can land the plan, unload the plan, clean the plane, reload the plane, and take off to the next destination. They do all this in around 25 minutes. “As Kelleher used to point out, you don’t make money sitting on the ground.” (Coulter, p. 251) This statement is very true and is why turnaround time is one of Southwest’s biggest strengths.

Another Strength Southwest has is their customer service. They have decided that making the customers happy while keeping the lowest price possible is exactly what would make them be successful. As mention in Strategic Management in Action, “the American Customer Satisfaction index has ranked Southwest first among airlines for highest customer service satisfaction.” (Coulter, p. 251) Southwest being ranked first in customer service show that they treat their customers well and when you treat customers well you have customer loyalty. This causes repeat customers for the simple reason that they felt they were treated great during their time on Southwest airlines. Southwest treating their customers well is so important that it is even in their mission statement, which is, “The mission of Southwest Airlines is dedication to the highest quality customer service delivered with a sense of warmth, friendliness, individual pried, and company spirit.”

The last important strength Southwest has is, like I mention before their leadership in pricing. Southwest offers some of the lowest fares in the world while being one of the few airlines to actually be a profitable company.

Moving on to Southwest’s weaknesses. Southwest has many strengths but they have a few weaknesses that need to be paid attention to. The first weakness being their maintenance program. They have had problems with safety because of maintenance a few times and that has costed them their reputation and profit.

Southwest’s next weakness is that a majority of their profit comes from passengers. The reason this is important is because this idea is like when you invest in stock and put all your money in one investment. If for some reason Southwest has a drop in customers they will most definitely start losing money. This goes along with their weakness of being heavily dependent of stable and low jet fuel prices.

The second part to the SWOT analysis is Southwest opportunities and threats. Southwest has a couple opportunities based on their current business modal. It seems like Southwest could easily get into flying globally with global tourism rising every day. The more and more people travel globally the better chance Southwest has at getting a stable global market of passengers which seems like what Southwest wants before deciding to join a market.

Another opportunity Southwest has is getting more into freight vs passenger business. With thing like E-commerce getting exponentially bigger every day it only seems logical for Southwest to be part of transporting all these good to customer around the nation.

The last idea is the threats that Southwest faces. One of the first things that come to mind is the threat of Southwest’s competition. Since many of the other airlines are starting to copy the way Southwest conducts business, it will become easier for customers to try other airlines if they can get their prices just right. I truly believe that Southwest’s biggest threat is other airlines.

The other main threat that Southwest faces every day is jet fuel prices. It is possible that any day jet fuel prices could rise and if they do rise by just a little too much, Southwest could be in trouble because, like I mentioned earlier, they rely heavily on the stable low price of fuel to make a profit and keep their prices low.

Specific and General Environmental Analysis

The next topic is doing an external analysis of Southwest and how they fit into the five parts of the specific and general environment. The first part of the specific environment is existing customers. Southwest’s existing customers like mentioned earlier are every other airline that operates in America. These airlines consist of: United, Spirit, Alaska, Frontier, American, Delta, JetBlue, and Allegiant airlines. There are only so many customers flying so competition between these airlines is really intense. Another thing that keeps the market competitive is the slow industry growth. The less the market grows the more Southwest and its competitors have to adapt or get creative to steal customers from other airlines.

The second part to the specific environment is possible competitors or potential entrants to the airline market. This idea is not quite as important for Southwest airlines because the barriers to entry are so high. Just one plane costs millions of dollars and when you have that kind of entry cost, there will not be many new entries into that market. Not only is the market already full but there are actually thousands of planes just sitting because they are not needed. So with that being said, there is always a possibility of new competition but not very likely for the airline market.

The third part to the specific environment is customers or consumers. Southwest’s primary goal is to please its customers. The only way for the airlines to survive is for customers to keep using their airline. Competitors are trying to steal some of Southwest’s customers by using the same business model as Southwest and keeping fares as low as possible but even to this day, Southwest still does it best. Sell cheap tickets while providing excellent customer service.

The fourth part of the specific environment is resource providers. This part plays a big role in how long it takes Southwest and competitors to make back their investment costs. Like I mention early just one plane can cost millions of dollars. Boeing is one of Southwest main suppliers because Boeing is the one that designs and manufactures Southwest planes. If for some reason Boeing raises prices, there really isn’t anything Southwest or the competitors could do about it because there are not many other options when you need to buy a multi-million dollar plane.

The fifth and last part of the specific environment is alternative industry providers. This one has been hinting at very rapid change recently. With drones becoming cheaper and safer to build there have become many other forms of traveling by air that customers of current airlines could possibly substitute in certain circumstances. There has been multiple announcements of personal planes or drones that have shown up in the market. Yeah, they cost an outrageous amount for the average citizen but now that they are out there, they will only get cheaper and safer as time goes on.

Now for the general environment. The first part to the general environment is the economic environment. Southwest, when it comes to economic power, is the leader in the airline business. “To achieve 39 consecutive years of profitability in an industry that’s know to be challenging and competitive is quite an accomplishment.” (Coulter, p. 252) Southwest faced AirTran back in 2011 and showed just how strong a company Southwest is by still showing a net income even with partial market loss because of a new incoming airline.

The next two general environments are sociocultural and demographics. Southwest is known for its unique culture. Southwest culture is described as “Living the Southwest way, which involves a warrior spirit, a servant’s heart, and a fun-LUVing attitude.” (Southwest.com) Flight attendants are known for dressing up for holidays like Halloween and Easter and love to have fun during everyday flights. All jokes aside Southwest knows its biggest asset is its people. This type of atmosphere causes Southwest’s customers and employees to be very diverse as whole and makes for a very unique environment.

The fourth general environment is political-legal. Southwest like other airlines business is all about their customers’ safety, or at least it should be. Southwest, in their beginning, where know for how safe their planes were. They were leaders in plane safety since they transitioned from only maintaining planes to actually flying them. With customers’ safety being the biggest liability for airlines, it must be heavily regulated and it is. The federal Aviation Administration (FAA) keeps airlines on their toes by doing heavy maintenance and inspections to make sure airlines are keeping safety a top priority. Other airlines have obviously not kept this idea on top because many other airlines that compete with Southwest have had way more accidents that never needed to happen had there just been the correct protocols or inspection made.

The fifth and last general environment is technology. Technology has taken over how airlines have traditionally flown planes. Not only has technology influence how planes fly but it has even effected how the customers get their tickets. Southwest recognized the benefits of automation. It was the first airline to offer a ticketless travel option in 1994, eliminating the need to process and then print a paper ticket.” (Coulter, p. 250) Southwest has showed multiple times that they can compete by constant innovation. They also introduced automation to different parts of their business including security. “The company’s information technology strategies have benefited it in other ways, as well. As one of the first airlines to establish a Web site, southwest.com is the third largest travel site and continues to be the largest airline site in terms of unique visitors.” (Coulter, p. 251) Technology could single handedly keep Southwest at the top if they keep innovation in technology.

Conclusion: Future Prospects and Strategic Recommendations

In conclusion, Southwest has a bright future ahead because of their strategic dominance in the airline market and their ability to adapt and innovate when the market gets tuff but they need to keep paying attention to safety to avoid problems like they had in the past. Southwest has proven based on its history and current operations that they are here for the long run and will keep leading the market in how Airlines should treat their customers while keeping safety of their customers the top priority.

References

1. Coulter, M. (2013). Strategic management in action. Upper Saddle River, NJ: Pearson.
2. Southwest (n.d.). Retrieved March 1, 2019, from http://www.southwest.com/
3. Pace, G (2019). Lecture

External Environment

Southwest Airlines is one of the leading low-cost airlines in the United States. Southwest Airlines praises itself as being an airline that is dedicated to providing the best customer service, that is delivered with kindness, and friendliness, and displays their company pride to each of their customers (southwest.com). This case study analysis will take a look into the external and internal environment of Southwest Airlines, along with the various factors that they face in their business on a daily basis. Southwest Airlines operates under NAICS Scheduled Passenger Air Transportation Code 481112.

Political and Legal Factors

Southwest Airlines operates both domestic and international operations which are greatly influenced by the government under the Federal Aviation Administration (FAA). This agency is responsible for regulating the operations and ensuring a safe operation by implementing laws that each airline and the industry as a whole must abide by. If regulation is significantly changed, the business operation of Southwest could be altered in some way, either positively or negatively.

Economic Factors

The airline industry is greatly affected by fuel costs. An increase in the price of oil has a major impact on the profitability of Southwest Airlines. Volatile oil prices can create some level of uncertainty as fuel costs account for nearly 40% of their profit margin (Southwest Q3 10Q).

When the economy enters a recession, customers will obviously have a much lower demand for air travel and an overall reduced interest in traveling, due to cost cutting. Although, because Southwest is a low-cost carrier, it is likely that the demand for low-fares might benefit Southwest and not affect them as bad as some of the other higher cost competitors like United, Delta or American.

Social Factors

Southwest Airlines has a strong commitment towards customer service, and anyone who travels with them will recognize this pretty quickly. The overall message of Southwest Airlines’ as noted in their ‘About Us’ section on their website, is that the company is ‘in the customer service business — they just happen to fly airplanes’ (Southwest, 2019).

Southwest also hires customer service personnel for employment based on their attitude, regardless of experience level, which certainly stood out for me (Jobtestprep, 2017). Their image is dependent on their employees, so if they hire the wrong people, their image will suffer. Another interesting thing is that there is a position for ‘Vice President of Customers’ at Southwest, so this says just how serious they are about treating their customers right (Senior Management Committee, 2019).

Technological Factors

Technological developments have created both new opportunities and improvements, as well as threats for Southwest Airlines.

Social media has allowed the company to expand their online presence through marketing and sales, while being able to interact with their customers.

The creation of web-based technology enabled Southwest Airlines to grow their presence to consumers through the use of e-commerce. For example, Southwest Airlines was able to introduce ticketless travel through the use of improved technology. This allows customers to access their boarding passes on their smartphones, instead of having to print out a physical ticket (Williams, Jonathan, and Connan Snider, 2011).

Environmental Factors

The emissions released by the aircraft can have a greater impact to the environment (ozone depletion etc.,) because they fly at such high altitudes.

Communities, specifically those who live near busy airports, have also complained about the noise levels created from from aircraft. While this is unjustified, it can be somewhat of a concern because complaints have lead to airport closures by city own airfields such as Santa Monica (LA Times, 2017).

Porter’s Five Forces:

Competitive Rivalry

The competitive rivalry in the airline industry has been increasing, especially through various mergers and acquisitions over the last decade. Delta Air Lines acquired Northwest Airlines in 2008. United Airlines and Continental merged and the most recent being US Airways and American. While the overall number of airlines flying has consolidated, these airlines are offering the flying public access to cities around the United States, while also increasing their service to destinations around the world, this is one area that Southwest does not participate in, even though they recently began service to Mexico. Also, other low-cost rivals have formed since the beginning of Southwest, such as Allegiant Air and JetBlue Airways. These two competitors are competing in low-cost airfare besides Southwest.

Entry Barriers

When it comes to the airline industry, high entry barriers exist, as it takes significant capital to invest. Due to the intense competition, low-profit margins and price wars, it has become increasingly difficult to make a profit being an airline and over-net profit margins have become very thin. It is also to be noted that airlines will often times project losses in their financial statements, so a new competitor to this industry must be able to handle losses at the beginning and still continue the business. Another barrier that might seem rather unknown, is the limited availability of landing slots at most airports around the country. Most of these landing slots are already reserved by well-established airlines and are difficult to get, especially at airports with a high passenger demand such as Atlanta, New York and Chicago (Williams, Jonathan, and Connan Snider, 2011).

Threat of Substitutes

There are many substitutes in terms of travel, such as cars, trains and buses, but flying has a major time-saving advantage, so the risk of being substituted is virtually zero.

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.

Introduction

Airlines exist in one of the competitive economic environments since the depression of 1930s in the United States. Apart from the backwardness resulted from poor economic environment, incidents like the terrorist attack on September 9^th 2001, the outbreak of SARS in Asia, and war in the Middle East have affected the progress of the industry to large extent. Because of the decreased demand and excess capacity in the industry, most airlines have substantial net losses since the turn of the century. In fact two major airlines US Airways and United Airlines had to file bankruptcy and others like American Airlines have narrowly averted it.

The major airlines in order to face the economic challenge were in the look out for new and strategic business models. Several airlines made an attempt to start a low cost airline emulating the model of South West Airlines. In fact several airlines have tried to imitate South West and have failed miserably. The primary problem is that the major airlines had cost structures that are quite high as compared to that of South West. The market structure, competitive forces operating on the industry, governmental regulations and several other factors have their impact the growth of the industry. This paper makes an analytical review of the airline industry with a comparison of the respective positions of United, American and South West Airlines.

Market Structure of US Airline Industry

Because of the economic factors and competitive forces operating on the airline industry the industry could not sustain its profitability and the industry continues to reel under financial turmoil. This position is illustrated in the table below.

Annual Loss and Earnings.

Source: Air Transport Association of America, Inc. Economics; Annual Revenue and Earnings.

Though the industry has made some recovery in the years 2006 and 2007 the airline was industry in a bad shape till 2005 due to the interaction of various general environmental forces. As evidenced by the various problems faced by the airline industry the general environment in which the airline companies must operate especially the economic, political/legal and socio cultural dimensions has significantly affected them.

The airlines are also greatly affected by the industry environment. In fact the major negative effects of dimensions of the general environment have made the airlines industry environment more pronounced. For example the rivalry in the industry is severe as airlines compete for fewer air travelers. In turn, the airline companies have significantly affected the operations of major aircraft manufacturers like Boeing by delaying or cancelling their orders for new aircrafts. Interestingly enough although most analysts point out the airline industry as being an unattractive one there are quite a few new entrants. Learning on the success of Southwest airlines other airlines in the industry are also in the process of restructuring and are desperately trying to reduce their costs.

Porter’s Five Forces Analysis

Compared to the general environment the industry environment often has a more direct effect on the firms’ strategic competitiveness and above average returns (Hawawini et al 2003) The intensity of industry competition and an industry’s profit potential are functions of five forces of competition; the threats posed by new entrants, the power of suppliers, the power of buyers, product substitutes, and the intensity of rivalry among competitors. Research suggests that different geographic markets for the same product can have considerably different competitive conditions. (Garcia-Pont and Nohria, 2002)

The Five Forces Model determines the external competitive threats that act on the market environment of any particular industry. The model was developed by the American Management scholar Michael Porter and the model summarizes the extent to which the external forces acting on the industry to assess the intensity of competition. The Five Forces Analysis of US airline industry takes the following form:

Threat from New Entrants

This force acts when the new entrants could enter the market without difficulty and pose a competition for an existing business. The greater the ease with which new entrants enter the market the higher is the level of competition. The capital cost of entry, the scale economies, product and price differentiation, switching costs, the expected retaliation from the existing player, legislative measures and access to the distribution channels is some of the factors that influence the ease of the new entrants. The market may present the entry barriers in any one or more of the following forms:

• Economies of Scale
• Proprietary product Differences
• Brand identity
• Capital requirements
• Cost disadvantages
• Access to distribution channels
• Government policy

In the airline industry there are high entry barriers; one of the major factors is the substantial capital costs involved. But however this has not deterred new firms entering the industry. For instance Air Trans Airways and JetBlue which were late entrants to the industry have created competitive challenges for the major airlines especially in the midst of economic problems witnessed in the early 21^st century. Both firms compete in the low cost airline segment. With the demand for low cost airline increased the major high-cost airlines were made less competitive and vulnerable to these newer airlines competitive actions.

Bargaining Power of Suppliers

Suppliers can exert bargaining power in an industry by increasing the prices for the product or by making changes in the quality of their materials. There are various determinants of the power of suppliers that act as a market force. The following are some of the determinants that affect the bargaining power of the suppliers:

• Differentiation of inputs
• Switching costs
• Presence of substitute inputs
• Supplier concentration
• Importance of supply volumes
• Total purchases in the industry
• Impact of inputs on product cost
• Threat of forward integration

Any or a combination of the above determinants can influence the market force on the product. Powerful supplier groups can squeeze the profitability of the company or industry. If a firm is unable to recover the cost increases by its suppliers by altering its cost structure then its profitability is reduced by its supplier’s action.

The airline industry is an example of an industry in which suppliers’ bargaining power is relatively low. Even though the number of suppliers is low, the demand for aircrafts is also relatively low. Boeing and Airbus are competing strongly for most orders of major aircraft (99)

Also the shift in the strategy of airline industry to short-haul flights and low costs has enhanced the fortunes of other aircrafts manufacturers who make smaller and more efficient aircrafts.

Bargaining Powers of Buyers

Business firms seek to maximize the return on their invested capital. Alternatively buyers want to buy products at the lowest possible price – being the point at which the industry earns the lowest acceptable rate of return on its invested capital. To reduce their costs, buyers bargain for higher quality, greater levels of service and lower prices. These outcomes are achieved by encouraging competitive battles among the industry’s firms.

There are certain factors which determine the strength of the force acting through the power of customers. Some of the factors are:

• Buyer concentration against firm concentration
• Buyer volume
• Switching costs
• Buyer information
• Substitute products
• Price of total purchases
• Product differences
• Brand identity
• Quality performance

The bargaining power of the consumers appear to have increased with the availability of more information though internet which acts as a shopping and distribution alternative for the consumers. One of the reasons for the increased bargaining power of consumers is that the individual buyers incur virtually no switching costs when they decide to purchase from one manufacturer rather than another.

These realities are increasingly felt in the airline industry and hence they are made to change their strategies for sustaining their market share. There is very little differentiation in air travel and the switching costs are very low.

Threat from Substitute Products

Substitute products limit the potential of an industry by placing a ceiling on the prices it can charge. The more attractive the price performance trade-off offered the greater are the limitations of the industry to improve profitability. The factors that influence the threat of the substitute products are:

• Relative price performance of substitutes
• Switching costs
• Buyer propensity to substitute products

Substitute products that have the potential to improve their performance trade-off with the industry are potential threats. Equally a firm that has a product that cannot be easily substituted either because it is unique or because it enjoys some kind of a protection is in a strong position.

The key question for the analysis of the influence of the substitute products is whether the substitute poses a threat to the organization’s product or provides a higher perceived value or benefit. Another question that needs consideration is what is the ease with which the buyers can switch to substitute?

Thus in general product substitutes present a strong threat to a firm when customers face few if any of the switching costs and when the substitute product’s price is lower or its quality and performance capabilities are equal to or greater than those of the competing product. Differentiating a product along different dimensions that customers value such as price, quality, after sales service and location reduces a substitute’s attractiveness.

As far as the airline is concerned the availability of substitute products is plenty and the travelers have at no cost switch the airline as there is no affinity or brand loyalty involved. It is the question of pricing and quality of service which determine the consumer behavior.

Extent of Competitive Rivalry

Because an industry’s firms are mutually dependent actions taken by one company usually invite competitive responses. Thus in many industries firms actively compete against one another. Competitive rivalry intensifies when a firm is challenged by a competitor’s actions or when a company recognizes an opportunity to improve its market position.

Intense rivalry is related to a number of factors like:

• Growth in the industry
• Intermittent over capacity
• Value added
• Product differences
• Brand identity
• Switching costs
• Corporate stakes
• Diversity of competitors
• Exit barriers

Considering the airline industry there is an intense competitive rivalry between competitors like United, US Airways, American and other major airline companies. Airline service has become a commodity meaning that the price variable is a primary source of competition among the industry participants. Through various marketing campaign, consumers are well award of the discounts and low costs the firms offer to induce them to use the respective airline services.

Although pricing decisions are easy to implement and reverse since the competitors can easily imitate them, it allows only a temporary competitive advantage. Competing principally on the basis of price has the potential to reduce substantially the ability of the airline to operate profitably and eliminates the possibility of winning consumer loyalty. However Southwest operates at such a low cost structure which provides the company the most competitive advantage. Southwest uses the cost as a distinct competitive edge although it has other sources of differentiation that can be used as competitive advantage. The airline is praised for consistently high level of service which is an additional source of competitive edge.

Structure – Conduct – Performance (SCP) Analysis

Scherer and Ross have applied the Structure – Conduct – Performance (SCP) approach to industry analysis. The SCP approach has been found to be in favor in the United Stated for major industry analysis. While the structure of the industry forms the basis of the analysis, conduct is affected by the market structure. In market structure the number and size of the firms in the industry, their cost characteristics become the relevant elements to consider.

In addition the barriers to entry and basic conditions of demand and supply also play a dominant role in the analysis. The performance of the industry on the other hand is determined by mostly the conduct of the market participants. Factors like whether there exists a real competition among the market participants, the legal tactics they employ and the way in which they advertise and price their products determine the performance level of the players. (Mark N. Cooper, 1999)

Structure

According to economic principles when the number of firms operating in the industry is six then the industry is said to be an oligopoly and where the number of firms is fifty or more of approximately equal sizes then there is said to be a competition. Department of Justice has recognized the danger of having only six equal sized firms in its Merger Guidelines. The guidelines follow the Herfindahl-Hirschman Index (HHI) and this index measures the market share of each firm expressed as a percentage, squares it and totals the result.

Usually a market with six equal sized firms would have a HHI of 1667 and accordingly the department has declared that any market with a HHI of above 1800 to be highly concentrated. Thus the key threshold for any industry is at about the equivalent of six or fewer firms operating. Economists view the concentration at this level from a different perception in which they consider the market share of the largest four firms (4 – Firm Concentration Ratio).

Therefore in a market with six equal sixed firms the 4 – Firm Concentration Ratio would be 67%. Since under this condition the ability of the smaller number of firms controlling a large market for competing with each other will be clear this market can be regarded as oligopolistic. Hence it is necessary that there must be 50 or more firms to ensure that competition prevails in the industry. Considering the necessity to have healthy competition the Department of Justice has established a second threshold with a HHI of 1000 where the market will be defined as a moderately concentrated market which would consist of 10 equal sized firms. In this market the 4 – Firm Concentration Ratio would be 40%.

Shepherd describes this a loose oligopoly in which the leading four firms would have 40% or less of the market share and therefore there will be absolutely no chances of colluding with each other to resort to price-fixation. The Consumers Association (1996) is of the view that the concentration in the airline industry is different and according to the Association, having at least three competitors can be considered as the key threshold for the airline industry.

Based on the above discussions on market structures the airline industry in the United States can be regarded as generally highly concentrated. It is so because most routes have fewer than four carriers. National averages indicate that the HHI is around 4000 on a city-pair basis. One of the studies indicates that HHI at the airports is less than 3300 which implies the equivalent of three airlines per airport. When measured by city-pairs the HHI, was found to be over 5000 implying the concentration equivalent to two per route (Hayes and Ross, 1998). With such a high level of concentration prevalent the airfares are bound to have significant influence from the anti-competitive behavior and changes in the market structure.

Conduct

The conduct of the industry is largely influenced by the deregulation of the industry which gave rise to the phenomena of hubs and spoke networks that have raised serious public policy concern. Since the characteristics of the hubs appear to enable the airlines to muster market power. The positive side of hubs and spoke networks is that they increase efficiency. They also promote economies of scale and operating efficiencies that act as a deterrent for the competitors to enter.

Achieving lower costs, achieving greater reputation, facilitating advertising and promotion and better coordination of scheduling and baggage handling are some of the benefits resulting from the creation of hubs. On the negative side there are bound to be anti-competitive actions by sheer exploitation of market power by the incumbents of hubs. The incumbents also act to lock in customers by resorting to a number of market mechanisms like frequent flier programs, deals with travel agents for diverting the traffic, manipulation of computerized reservation systems, code sharing and segmentation of markets.

The incumbents block the entry of competitors into hubs by denying gate space and extracting excessive profits on provision of facilities. The entrants usually are made to suffer from an inability to attract adequate passengers for establishing their presence. Through these anti-competitive activities the incumbents of hubs are able to enjoy higher profits through higher prices in the hubs. Morrison and Winston (1995) have identified that the conduct of the airline industry is characterized by anti-competitive behaviors of hubbing, frequent flier programs, and manipulation of computerized reservation systems.

Performance

Generally it is observed that in a more competitive environment the prices tend to be lower and the output is at a higher level. This situation will be prevalent irrespective of how the competition is measured. At the micro level, this effect can be observed in the act of individual airlines entering into specific markets. At the macro level the changes in the generalized concentration ratios would indicate the effect of higher competition.

PEST and Macro Institutional Analysis

The industry environment can also be assessed using a PEST analysis. The US airline industry can be analyzed using this tool.

Political Considerations

The deregulation of the airline industry is the major landmark in the US which had changed the scope of the industry altogether. In the deregulated market the entry barriers has been reduced and the US airline industry witnessed the introduction of a number of new airlines in the post de-regulated environment – although most of them operated for shorter periods only. This has resulted in creating more competition among the airlines with fares dropping up to 20% creating new sources of demand. The added competition had put more pressure on the high cost full service airlines to compete with smaller low cost airlines.

At the international level groups like International Civil Aviation Organization have established worldwide standards for safety and other concerns of the industry. This had its impact on the functioning of the airline. Similarly the bilateral agreements entered into between the countries have also had their impact on the growth and performance of the airlines.

Economic Considerations

The major factor that impacts the airline industry is the financing of new aircrafts and maintaining the fleet level. Since it is highly capital intensive many of the firms have found it difficult to compete with their fleet strength. Southwest airlines with their reliance on a single aircraft model of Boeing 737 could overcome this aspect to a large extent and have proved successful. Another major financial issue is hedging against oil and fuel prices which are second to the labor cost to the firms in the industry. High level of operating and fixed costs in the case of full service airlines have prevented them from competing efficiently with the low cost airlines who are the new entrants into the industry.

Social Considerations

The changes in the life styles and income levels of the people made the airline travel more affordable when the IT companies were at their peak performance levels prior to the dot.com bubble. This had its effect on the business of the airline industry. However the airlines had to reel into losses between years 2001 and 2005 (see table above). Awareness of the customers of the discounts and lower fares through internet and print media has made competition among the airlines stiffer. New entrants offering lowest possible prices often made customers switch their loyalty among different airlines.

Technological Considerations

The inability of the major airlines to sustain their profitability has disabled them to upgrade their fleet with aircrafts having more advanced features. Most of the airlines had either delayed or cancelled their orders with the aircraft manufacturers and this affected the technological advancement of the airline industry to a large extent.

Sustenance of Competitive Advantage

In order that the firm in any industry retains its competitive advantage it is necessary that the firm has a tighter control over its resources. The sustenance of competitive advantage relies mainly on the resources and their adaptation by the firm. To obviate the better utilization of the resources it is advisable to do a Resource Based View (RBV) of the available resources and form different strategies to ensure rapid corporate growth.

Resources can be defined as “stocks of available [tangible and intangible] factors that are owned and controlled by a firm (Amit and Schoemaker, 1993) In this respect a resource can be identified as something a firm is in possession of or has access to. For instance participation in the computerized reservation systems like SABRE or APOLLO can be considered as a resource. This can be considered as a resource irrespective of the fact that they are not owned by a participating airline. According to Morecroft (1997) aircrafts, staff, reputation, employee morale and airports are some of the valuable resources in the airline industry.

Prahalad and Hamel (1990) identify even core competence as one of the resources possessed by the firm citing the example of core competence in logistics of Wal-Mart. Stalk, Evans and Shulman (1992) supports this view point. However in some cases it may not be possible to acquire such valuable resources over strategic factor markets as observed by Barney (1986) and Grant (1991) Therefore it becomes critically important that such resources of strategic importance are accumulated within the firm so that the firm can sustain the competitive advantage. (Dierickx and Cool 1989) Since there are no clear mechanisms are available to assist the firms to acquire the necessary resources, it is for the firms to increase their ability to coordinate the growth of several tangible and intangible resources.

For the airline industry the number of cities in service results in increase in the number of potential passengers. The passengers in turn are attracted by the perceived service fare ratio of an airline as compared with that of another. As stated earlier fare is a short term phenomena which is subject to implementation and withdrawal subject to exigencies, whereas the reputation of an airline cannot be viewed from a short term perspective.

Therefore it is essential for an airline that its current and potential customers have confidence in the services of the airline and this confidence will turn itself into more number of passengers. Hence it can be deduced that passengers and reputation are the important resources for an airline and both are obviously interconnected to each other. The next important thing is the financial resources which are closely connected with the growth in the number of passengers and the aircrafts.

The resource aircraft is again dependent on the number of passengers that the airline handles and this resource leads to the more important resource of staff. New staff cannot be as productive as experienced ones and hiring of new staff lowers productivity which in turn affects the cost and profitability. The number of aircrafts and staff can therefore be considered as important resources in deciding the employee morale.

It is to be noted that both long-lasting overstraining and unchallenging positions affect the employee morale. This leads to the point that the airline should have sufficient financial resources to adequately compensate the staff to keep their morale high and hence the financial performance is important to maintain the morale of the staff. The staff morale and airport congestions are the two factors that have a strong influence on the reputation of the airline as both these factors are relevant for the service level perceived by the customers.

Since Southwest has understood the necessity to create the tangible and intangible resources the airline is able to function in an efficient manner. Some of the strengths of Southwest are; frequent reliable departures, lean, highly productive ground and gate crews, high aircraft utilization, very low fares and high reputation earned among the passengers due to almost flawless service.

Growth Scale and Scope Analysis

The scale and scope of firms operating in the airline industry ranges from a firm operating with a single airplane though high-cost full service international airlines operating a number of planes in various routes and having considerable fleet strength. The variations in the types of companies, their operating scope, and the routes they serve make the analysis of the airline industry somewhat complex. However some patterns could be witnessed over the last 5 decades of experience in operating the airline industry. The demand for air travel services can be characterized as derived demand.

There are different factors affecting the demand like business needs of cargo shipments, passenger demand both from business and leisure segments. All these factors affect the macro economic activity in the market. The patterns are found to be highly seasonal and not withstanding these patterns demand seems to be increasing over the periods. However the industry has reacted in a cyclical way (See table above) with four or five years of poor performance followed by four or five years of gradual improvements in performance. For instance since the year 1980 the industry could not even earned back the cost of capital during best of times. This is due to the fact that the profitability is generally low with 2-3% net profits after interest and tax. In the periods where there are losses the losses are very dramatic.

Consolidation has been found to be the trend with airlines forming new business combinations, alliances of groups of companies, mergers and takeovers taking place to consolidate the position of various firms operating in the industry. In the US approximately more than 200 airlines have been merged or acquired and quite a few of them have gone out of business since deregulation took place in 1978.

The future trend is focused mainly on cost reduction and improving passenger service. By reducing costs the major airlines should be able to offer low cost advantages to the customers. However the services provided by the airlines will be the main factor deciding the growth in business of the firms. An example may be found in the Southwest airlines.

Analysis of Southwest, United and American Airlines

American was one of the world’s largest passenger airlines in terms of passenger miles flown. American faced serious financial crisis as a result of the terrorist attack on September 11^th. Although the company avoided bankruptcy it found itself in a competitively disadvantageous position as against other airlines. The airline had the highest labor cost and debts in the industry.

Recently the pilots have demanded 50% rise in their salaries. The rise in oil prices had also impacted the revenues of American. Since the older aircrafts operated by American are less fuelfuel efficient than those of the competitors the airline lost its competitive advantage. The finances of the company were further deteriorated and the company had to ground 300 of the total 685 of the aircrafts in order to meet the requirements of FAA inspections. (Wikinvest)

For United airlines high costs are one of the important elements in judging the profitability. Wages have become the dominant factor that made the airline bungle. The descent of United from the world’s largest and highly profitable airline a few years ago to the position of bankruptcy is due to factors which are in addition to the salaries and costs. It was the case that the airline could not bring in additional revenues in addition to its inability to contain the costs.

With employees owning a majority of stakes in the company labor costs have risen even higher than those of its arch rival American during mid 1990s. The employee ownership plan has resulted in United becoming a dysfunctional business model which could not keep its passenger intact. The revenue problems of United arose mainly because of its excessive dependence on bubble spending of technology companies.

With two of its hub airports at San-Francisco and Washington- Dulles international hit hard by the dot.com bubble the company could not meet its exorbitant labor costs due to reduced traffic from then technology companies. The company was making record profits with last minute tickets earlier which avenue was totally lost due to reduced travel by high tech companies. Since the year 2000 there was a steep fall in the revenue of United up to 17% per seat per mile. The internal fights and anger of workers on the fall in the value of stock from $ 100 to nothing had made the workplace less flexible than the competitors. (David Leonhardt, 2002) Therefore the main resource of employee morale was severely which had its cascading effect on the reputation and passenger traffic.

In quite contrast to the operations of United and American, Southwest relies on customer service and organizational culture as its two major competitive advantages. The firm is using its integrated cost leadership/differentiation strategy to garner its success.

As at the end of the second quarter of 2003, for example ‘Southwest’ was the only airline to post profit in every quarter, since the 9/11 attack. The firm had not cancelled any flight or retrenched any employee during that period. The posting of a 14% profit on a 7 percent rise in sales in the second quarter of 2003 is the strong evidence for the competitive ability of Southwest. Because the fares of Southwest are as much as 20% lower than that of the competitors which was the main competitive strength of Southwest coupled with an efficient service.

Implications for Strategic Change and Recommendations

Airlines continue to implement strategic changes to combat the competitive forces operating on them in order to shape the airline industry evolution. There have been an increasing number of routes that are introduced with non-stop services with the growth in demand. In addition technology like 787 allows smaller aircrafts fly to destinations covered by longer distances. There are continued efforts on the part of the airlines to streamline the processes to ensure greater productivity and effective use of employees.

There are attempts to create new market segments to attract more customers. Several actions like removing the window shades from the aircraft to have lesser weight, removal back-packets from the seats to facilitate easy cleaning, having the tightest seating as allowed legally and keeping one mandatory lavatory on board are being taken by low cost airlines like Ryan order to meet the cost considerations. It remains to be seen what other amenities the passengers have to forego in order to fly at a competitively low cost. Another development worth mentioning is the absence of ‘hub control’ that dominated the industry for more than 15 years due to the reason that it is considered no more viable.

Larger airports like Chicago O’Hare and Dallas/Ft. Worth have increased their capacities to accommodate at least two airline hubs. In addition both the cities are provided with secondary airports to handle additional traffic. Dallas has also witnessed reduction in the hub service along with continued air port expansion which has provided space and capacity for a new entrant. Similar expansions have been undertaken in Detroit/Wayne County.

Recommendations for the firms operating in the airline industry may be focused towards increasing the passenger traffic. This is possible only by providing efficient service to the customers at the lowest cost possible. The major airlines should make it a point that they can add the frills at extra cost and offer to only those passengers who want to avail them. In this way they would be able to reduce the cost to a great extent. Commissions to the travel agencies is another area where considerable saving can be effected by offering tickets through internet or through an office servicing three or more airlines established on a cost sharing basis.

References

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Barney Jay B. (1986) Strategic Factors Markets: Expectations, Luck and Business Strategy Management Science Vol.32 (10) 1231 -1241.

Consumers’ Association, (1996) Consumers’ Association Comments on the Proposed Alliance between British Airways and American Airlines.

David Leonhardt (2002) ‘Airline Shock Waves: News Analysis: Costs are Important, But Revenue is Critical’ The New York Times.

Dierickx Ingemar and Karel Cool (1989) Asset Stock Accumulation and Sustainability of Competitive Advantage Management Science Vol. 35 1504 – 1511.

Garcia-Pont and Nohria (2002) ‘Local versus Global Mimetism: The Dynamics of Alliance Formation in the Automobile Industry’ Strategic Management Journal Vol. 23 p. 307-21.

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Mark N. Cooper (1999) ‘Freeing Public Policy from the Deregulation Debate: The Airline Industry comes of Age. Web.

Morrison, S. A. and C. Winston, (1995) ‘The Evolution of the Airline Industry’ Brookings, Washington, D.C.

Morecroft John D.W (1997) ‘The Rise and Fall of People Express: A Dynamic Resource Based View. Paper read at 15^th International System Dynamics Conference at Istanbul.

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Wikinvest ‘American Airlines’. Web.

Company Overview

Southwest Airlines Co. (NYSE: LUV) is based in the United States, Dallas Texas. In terms of domestic passengers carried, southwest airline is the biggest airline in the U.S. with over for decades of service experience, the company is known within the airline industry as a low fare main domestic airline. Southwest has continued to set itself apart from the competition especially the other low fare airlines by delivering its products in a reliable manner coupled with unmatched customer service. The company was incorporated in Dallas Texas on 18^th of June 1971 with its Boeing 737 plane serving three cities in Texas: Houston, San Antonio and Dallas. Currently, Southwest airlines are the US largest carrier in terms of passengers originating from the U.S. (Baker 2010, p.1).

Financial Analysis

Growth

The total sales revenue made by Southwest airlines increased by a margin of 8.50 percent from the 2007 figure of to $ 9,086 to $9,861 in 2008. The company continued to register remarkable improvement in its sales revenues in 2009. The total sales revenues achieved stood at $ 11,023 representing an increase of 11.78 percent over the 2008 figure of $ 9861. However, in 2010, the company suffered a major shock following a drastic decline in its sales revenue by a margin of 6.1 percent ($10,350). The sharp decline can be attributed to the effects of the global crisis. Individuals and corporate bodies were forces to cut on their expenses; air fares included which led to a decline in sales for Southwest Airlines. However, the decline did not last for long as the company registered a significant increase in its sales revenue by a margin of 17 percent in 2011, with the total sales revenue standing at $ 12,104. According to the S&P 500 Capital IQ sales forecasts for the next five years, Southwest Airlines has a bright future as the sales are expected to grow by 3% in 2012; 5% in 2013; 8% in 2014; 9% in 2015 and 9% in 2016 respectively. This can be attributed to the fact that the U.S. economy which is the companys main market segment is on a recovery path, as people get back their jobs and their incomes increase, their travel expenses will equally increase.

Profit Margin

In 2008, Southwest Airlines revenues increased resulting in an increase in its profit margin from 5.49 percent in 2007 to 6.54 percent in 2008. However in 2009 and 2010 following the decline in the companys revenues, the profit margin dipped from 6.54 percent in 2008 to 1.61 percent in 2009 and a further decline to 0.96 in 2010. In 2011 however, the significant increase in its sales revenues resulted into an increase in its profit margin from 0.96 percent in 2010 to 3.79 percent in 2011 representing an increase of 2.83 percent. The significant drop in the profit margins in 2009 and 2010 is largely due to the impacts of the global crisis that led to reduced air ticket sales. Southwest airlines could not keep its margins up when its volume of sales declined. However, from the projections, the company will enjoy a stable profit margin over the next five years. The year 2012 is not yet the best year in the airline industry as most of the companies are still trying to cop up with the high fuel prices and the effects of the crisis.

Earnings Quality

In 2011, the company repurchased close to 27.5 million shares of ordinary stock at a cost of $225 million. This was in response to the decision made by the companys board of directors on 5^th August 2011(Southwest 2011 Annual Report 1). In the same year, total amount spent in debt repayment amounted to $ 638 million. Because of this, the ratio of debt to capital improved from 50 percent in the period following Airtran acquisition to approximately 47 percent in December 2011. Among all the U.S. airlines, only Southwest airline was investment grade rated.

No doubt in the past decade the airline industry has suffered a significant amount of challenges among them the worst aviation recession in history, the global credit crisis, rising jet prices going as much as five fold. These left the airline industry in total financial mess with the industry registering losses approximated at $ 50 billion (Southwest 2011 Annual Report 1). These challenges negatively affected many of the U.S. airlines ending of operations while others reorganized through bankruptcy. Southwest Airlines on its part withstood the challenges. In fact, it is the only major U.S carrier that has successfully delivered yearly profits to its stockholders for 39 consecutive years. The company declares dividends on quarterly basis. In 2007 and 2008, the dividend as a percentage of sales was relatively high 5.49 percent and 6.54 percent respectively. During the bad economic times 2009 and 2010, dividend payments as a fraction of total revenue declined to 1.61 percent and 0.96 percent respectively.

Balance Sheet

Southwest Airlines is a lowly leveraged company. For the past five years, its debt to equity ratio has been consistently low with a high of 0.73 in 2008 and a low of 0.3 in 2007. Within the airline industry, many companies are financially distressed that has necessitated huge borrowings to finance their operations resulting in huge debt to equity ratios for the individual companies and the industry as whole. Southwests debt equity ratio is far above the industry average. According to Morgan and Summers (2005, p. 1), Southwest Airlines are ranked second among the regional airlines in terms of debt-to-equity ratio and it falls within the 81^st percentile. The financial position southwest Airlines is operating under is not ideal because it has a weak balance sheet. It is using more debt to fuel its growth and operations, if this is not checked; it can significantly affect the future prospects of the company (Kaser & Oelkers 2008, p. 42).

Similarly, over the past five years, the company has had a steady current ratio with a low of 0.9 in 2007 and a high of 1.58 in 2009. In 2007 and 2008, the current ratio was a bit low because for it only had $0.9 and $0.92 in its current assets respectively for every dollar worth of current liabilities. However, from 2009, the figure has remarkably improved and the company is in a position to meet its short-term obligations. In the last financial year 2011, the current ratio stood at 1.29 meaning for every dollar of current liabilities, Southwest Airlines has approximately $ 1.26 with which to pay them.

On the other hand, the companys quick ratio has been increasing considerably from 2007 with the highest performance in 2009 and 2010 (1.17 and 1.12 respectively). In 2011 however, the ratio dropped to approximately 0.8. Overall, we can conclude that the company is in a position to repay its short-term obligations and other financial obligations that are due within a period of one year (Cobbs & Wolf 2004, p. 303).

Valuations

Multiple Comparisons

Southwest Airlines (NYSE:LUV) is comparable to Jet Blue Airways Corporation (JBLU, Delta Air Lines (DAL), Alaska Air Group (ALK) all of which operate within the airline industry.

Price Multiple Comparison

The price multiples indicate how much the investor receives on the price paid on LUVs stocks. The price multiples tend to significantly vary with time. They are very useful in the valuation process when we compare them to those of the competitors operating within the same industry (Kotler 1997, p. 56). To begin with, the ratio of price to sales indicates how much an investor is paying for each dollar worth of sales. As at 16^th April 2012, LUV had a price to sales ratio of 0.3973 coming second to ALK at 0.5742, while the other comparables JBLU and DAL had registered 0.3194 and 0.2475 respectively (Brooks 1994, p. 1). In terms of price to earnings ratio which indicates how much the investor pays for each dollar worth of earnings, LUV leads the list at 34.74, followed by JBLU (17.29), ALK (10.48), and DAL at (10.16) respectively as at 16^th April 2012 (Kaser & Oelkers 2008, p. 1).

When valued in terms of price to book ratio, which indicates how much the investor pays for each dollar worth of net assets, LUV comes second last with 0.9046 as at 16 April 2012. DAL leads the list at 5.193, followed by ALK at 2.113 while JBLU scores the least 0.8185.

Comparing the historical figures for the above three ratios to the S&P 500, we deduce the following conclusions. LUVs P/E ratio has outperformed the S&P 500 for the last four years up to 2011. It is only in 2007 that LUV P/E was below S&P 500 (14.5 against 16.5). However, the price to book and price to sales ratios have consistently fallen below the S&P 500 ratio over the same period (Lancaster & Massingham 1996, p. 84).

Southwest Airlines EV/EBITDA was 5.89 in 2011. Compared to the competitors for the four years up to 2009, LUV comes third with an average of 13.41. The airline with the highest EV/EBITDA is ALK (42.44), followed by JBLU (14.25), and DAL at the last position with 3.28. It is evident that LUV is on the tail end, however. ALK is much of an outlier. If we are to compare LUV with the second best JBLU at (14.25), then we can conclude that Southwest Airline Company has a chance to grow its yields within the airline industry. In addition, the company registered a net margin of 1.1 percent. When we compare the 2011 4^th quarter performance of LUV with other comparable companies, LUV takes the third position with a net margin of 3.7 percent. ALK leads with 6.13 percent, followed by DAL 5.06 percent while JBLU takes the last position with a net margin of 2.01 percent. LUVs net margin is relatively small implying that the company has a weak competitive advantage in its operation. However, the company enjoys significant levels of pricing power and capital intensity. The low net margin registered in 2011 can be attributed to significant expenditures on fixed assets following the acquisition of Airtran and the purchase of new planes.

We compute a reverse valuation of the market assumed growth rate for LUV in order for it to be regarded as valued at its existing market price. The growth rate applied to calculate LUVs free cash flow is derived from CAPITAL IQ growth rate projections of free cash flows for LUV over the next five years (2012-2016). Similarly, a discount rate of 7 percent is applied as it represents the yearly average rate of return for the S&P 500 for the last 10 decades. Based on CAPITAL IQ free cash flow growth rate of 7 percent for Southwest Airlines, current price for LUV stock of $ 8.08 and a discount rate of 9 percent, we compute the companys growth price to be $ 15.97 being an undervaluation by a margin of 97.68 percent (Smith 2004, p. 31).

The companys stability price stands at $ -1.07. the stability price ascertains the companys value based upon its capacity to sustain its operations using its average operating margins. The negative stability price for Southwest airlines is a clear indication that the company requires a considerable amount of capital to run its operations. This is because, the capital expenditures made outweigh the companys adjusted operating income. The company heavily depends on the growth of its revenues to sustain its operations. As a result, it has to significantly spend in order to achieve the desired level of revenue growth. These huge expenditures cannot be financed entirely from the companys account, as a result, it will have to borrow externally to fuel its growth (Smith, Berry & Pulford 2002, p. 105).

Valuation of Shareholder Returns

For the last 39 consecutive years, the company has been consistent in the distribution of dividends to its shareholders. Such an outstanding dividend record implies that that the company has a sound foundation in the airline industry market. In addition, such a policy is likely to continue in the near future. Similarly, the company is well known for its efforts in value creation for the shareholders through stock buybacks. These efforts have been significant in enhancing the financial metrics and boosting relative ownership stake of each individual shareholder in the company because of having few outstanding shares and holding the same volume of stocks (Mcdonald 2011, p. 116).

Conclusion and Recommendations for the Future

Generally, the acquisition of Airtran, the Rapid Rewards program in addition to low ticket prices are excellent avenues for Southwest airlines to create a loyal customer base. Frequent travelers will continue to fly Southwest Airlines not just because of the low fares but equally due to exemplary customer service and the fact that they are rewarded for every flight they take. The company can enhance its market leadership by expanding its rewards program especially during the current hard economic times. This will help it create a very new market segment of loyal customers. For instance, when a customer who travels less frequently earns 50 points on first flight, the chances are high that the next time he/she travels, Southwest airlines will be his/her airline of choice because the 50 points can cover the cost of baggage check. Expanding its rewards program in addition to using its strengths in customer service, the company will build a solid, devoted and sustainable customer base. This will boost the companys profitability and further strengthen its position in the Airline industry as a market leader.

References

Baker, M 2010, The Strategic Marketing Plan Audit: a detailed top management review of every aspect of your company’s marketing strategy, Axminster, Devon, Campridge Strategy Publ.

Brooks, C 1994, Sports marketing: competitive business strategies for sports, Prentice Hall, Englewood Cliffs.

Cobbs, R & Wolf, A 2004, Jet Fuel Hedging Strategies: Options Available for Airlines and a Survey of Industry Practices, Springer, Northwestern University.

Kaser, K & Oelkers, D 2008, Sports and entertainment marketing, Thomson South-Western, Mason.

Kotler, P 1997, Marketing Management: Analysis, planning, implementation and control, (9 edn.), Prentice Hall, New York.

Lancaster, G & Massingham, L 1996, Strategic Marketing Planning and Evaluation, Kogan Page, New York.

McDonald, M & Payne, A 1996, Marketing Planning for Services, Butterworth- Heinemann, London.

Mcdonald, M 2011, Marketing plans: how to prepare them, how to use them, John Wiley Chichester.

Morgan, M & Summers, J 2005, Sports marketing, Thomson, Southbank, Vic.

Smith, G 2004, ‘An evaluation of the corporate culture of southwest airlines’, Measuring Business Excellence, vol.8, no.4, pp. 26-33.

Smith, P, Berry, C & Pulford, A 2002, Strategic marketing communications: New ways to build and integrate communications, Kogan Page, London.

The decision by Southwest Airlines to withdraw the planes from the routes they operate because of impending structural technicalities has caught the industry players by surprise as such a move was least anticipated. Such moves can only be initiated when an airline is buoyed by regulatory directions or when the manufacturer of such airbuses recommends their removal from service. Southwest Airlines obviously flouted the two conditions that have to be met before an airline ground its planes because the manufacturer of its brand of planes Boeing Company was not aware of the action they took. Before an airline withdraws its planes from service, it should contact the plane manufacturers and this can be due to mechanical or structural problems. Furthermore, the regulators, in this case the Federal Aviation Administration (FAA), did not give their input into that issue (Martin et al, 2011). FAA supervises all aspects of civil aviation in the US and before a plane is withdrawn or introduced into service, its approval must be sought (FAA, 2010). This article endeavors to critique an article that featured the decision by Southwest Airlines to ground a number of their planes.

Even as the government tries to establish what might have necessitated Boeing 737 jet to rip open in the air in the recent past claiming a reasonable number of passengers on board, Southwest Airlines undertook to cancel a number of their flights with a view to carrying inspection on the air carriers. This bold move can set a bad or good precedent in the industry. Bad precedent in the sense that certain airlines may try to justify cancellation of their flights without following due process by citing issues pertaining to inspection of their plains. It can also set good precedent because safety of the passengers will come first and the issue of following the laid down requisites even when there is potential danger to human life will be a thing of the past. This will allow airlines to shape their own destiny without any due influence from any quarter. Institutions will also be put to task on the kind of opinion they express. This includes government regulatory authorities and the manufacturers of airbuses. This is evident in the resolve by the Southwest maintenance and engineering team manager to subject the Boeing Company officials to a series of questions just before they undertook to carry out the maintenance exercise. The management of their aircraft manufacturer could not comprehend how a gash resembling a paper cut could be found on a plane that has hardly lasted for fifteen years since it was manufactured when the chief engineer engaged them in conference call. This shows how negligent the institutions that are trusted with manufacturing planes can get to an extent of not being able to respond to a very glaring mistake. This is absolute ineptitude magnified by their admitting that they never expected such a thing to happen. This is a defeatist response bearing in mind that Boeing has single handed predicted when planes were due for inspection and when they ought to undergo repair when they have become fatigued. The ripping open of Boeing plane that claimed over 115 passengers was due to system breakdown between the government regulators, the aircraft manufacturer, and the airlines. This system breakdown has necessitated the inability by concerned institutions to keep the aging planes safe. The aircraft manufacturers have as a result decided to remain stymied. The regulatory authorities are consequently unaware of what they are supposed to do. Southwest airlines faced with tough options of whether to ground or not to ground a number of 737 jet flight on grounds of structural uncertainties settle on the former option to carry out inspections. The issue of delay of flights does not bother them. Safety is their number one priority. Financial gains are secondary to them despite the fact that they are doing business in capitalist market structure where profit is the ultimate goal of any business enterprise. Cancelling over 620 flights and delaying over 2700 others is not a decision any business enterprise can effect unless they are so concerned about their brand and how the public perceive it. The bold steps that Southwest initiated will provide a basis upon which companies can handle complex safety hazards in the coming days if they were faced with similar problems. It is not prudent to wait until you are given a nod to facilitate a process that directly impact on lives of passengers especially when management knows there are technical problems that require either repair or inspection. It is evident that when the three bodies: the airline, the regulatory authorities, and the aircraft manufacturers are allowed to undertake their statutory factions concurrently, the time taken to resolve issues of safety can be unnecessarily longer. It is prudent that one party be allowed to implement its duties especially when its activities are done for public good. Bureaucracy only exposes passengers to accidents that claimed over 115 lives.

References

FAA. (2010). FAA Regulations.

Martin, T. W., Pasztor, A., and Sanders, P. (2011). Southwest’s Solo Flight in Crisis.The Wall Street Journal.

Introduction

Airlines in various parts of the World use different boarding scenarios to make the process quick, client-oriented, and efficient. The chosen strategy depends on the company’s size, resources, and the goals they try to achieve. Southwest Airlines considered alternatives and changes to its existing process: dividing the passengers into three groups based on the check-in and arrival time without assigned seats. Each potential scenario has different pros, cons, and bottlenecks to analyze before implementation.

Assigned Boarding Gate Line Positions

The first alternative is assigning the boarding gate line positions based on the group and gate arrival time. The positive effects could include a clear division of the passengers before the start of the process. The airline representative would be able to estimate the number of customers in each seating zone and the time needed to transfer them into the aircraft. Some passengers may also find this division to be organized and useful when searching for family members or lost items. If the gate areas are appropriately marked for the new procedures, there should not be any issues while adjusting to them. The preparations could include remodeling of the waiting space, adding the electricity sockets and chargers, and placing the information monitors so that people could see them from the new seat positions.

However, the negative effects of this strategy outweigh the positive ones. The airports are not only transportation hubs, but large businesses and passengers often expect to engage in shopping or entertaining activities while traveling (Gitto & Mancuso, 2017). Finding a designated waiting area would create additional confusion, especially if some customers have not arrived yet. In addition, people usually choose the preferred seats according to their needs. They may be located near the charging point, bathroom, or close to the information screen. The assigned boarding gate line position requires the passengers to sacrifice some of their personal time at a comfortable location, thus creating potential conflicts. This alternative is unlikely to be implemented as it does not correspond with the signature strengths of Southwest Airlines. The loyal customers value the simplicity of the rules: they wait for their group to be announced and choose the desired seat in the aircraft. Any additional complications may lead to a decrease in the number of customers.

Single Boarding Chute and Many Groups in One Queue

The second scenario is using a single boarding chute and allowing up to nine-passenger groups in one queue. A single line allows company representatives to quickly estimate the number of passengers present and guide them in the needed direction. The group would have to hear one set of instructions applicable to everyone. Adding the monitors with entertaining content along the queue would distract the passengers from the need to stand for some time. This may require receiving permission from the airports’ management as the space for long queues may affect the neighboring areas. It is also possible to move all of the passengers through the aircraft in one line as they choose the seats and allow those behind them to pass.

However, since the queue would belong, the attendant would have to repeat the instructions several times and possibly explain them individually. People tend to be confused about placing the luggage in the overhead bins, which may create delays. In addition, this approach may be somewhat difficult to incorporate because current loyal clients of Southwest Airlines find the initial division into groups based on the check-in time rather convenient (Flying around the World, 2018). Finally, waiting while sitting is expected, but standing in a line may pose challenges for people with back problems or small children. This alternative is also unlikely to be implemented, as the potential issues with available space and instruction explanation could make the customers confused and uncomfortable.

Boarding with a Countdown Clock

The third scenario suggests a countdown clock during the boarding process and incentives provided to those who completed it on time. This could be an attractive option, especially when combined with a mobile application, like the countdown to boarding option by American Airlines (Wood, 2020). The boarding process could include the live schedule of planned procedures with the passengers walking through the checkpoints at particular times. Providing incentives to punctual passengers increases client engagement, which enhances the psychological connection between a customer and a particular brand (Hapsari et al., 2017). The company has to prepare for a scenario where all the passengers board at their designated time and receive the incentives.

However, there are some negative points to this strategy implementation. Running a countdown clock could add pressure to those passengers who struggle with the schedule or have to multitask. Producing the incentives requires resources, whether the clients can receive a free toy or several miles added to their member card. Also, not receiving the reward due to the circumstances not being dependent on the person could make them upset and damage the company’s image. Despite the small deficiencies, adding the countdown clock and offering positive reinforcement for punctuality could be beneficial for Southwest Airlines.

Educational Boarding Video

The fourth suggestion is to show an educational boarding video to the clients to make the process entertaining, informative, and promotional for the company. There are several videos about the safety tips while on board the airplane currently available. The ones that attract much attention involve humor and famous people, like instructions by British Airways (2017). Such content could be sent as a link to the clients together with an electronic ticket and played at the gate before the boarding process. Humor may help decrease the in-flight anxiety for some passengers and create a relaxing atmosphere before traveling.

The potentially negative sides of this strategy would include the cost of the video making, keeping the instructions up-to-date, and continuously monitoring the changes in international ethics and social mood to avoid offending the passengers in any way. In addition, some of the conservative clients may dislike the humorous and technological presentation of the boarding procedure. Finally, it needs to have an in-person alternative in case of device malfunctioning. Despite several potentially harmful effects, incorporating the educational boarding video into the standard registration procedure could be beneficial for the company.

Conclusion

Southwest Airlines have created a good base of loyal and content customers. Their passengers expect to rest until their group is called for boarding, choosing the seat after entering the aircraft, and friendly customer service. Thus, implementing any regrouping or long queues would be inefficient for Southwest Airlines, even if it could decrease the boarding time. Other strategies, such as including a countdown clock and educational video, have the potential to be efficient. They cannot replace the standard boarding process but have the necessary functions to complement it. The company has to consider passengers’ loyalty and comfort when incorporating new approaches to the boarding process.

References

British Airways. (2017). British Airways safety video – director’s cut [Video]. YouTube.

Carstens, C.B. (2019). Standing in line a nightmare? Here’s how airports fix that. Airport review.

Flying around the World. (2018). Southwest Airlines boarding process | How does it work? [Video]. YouTube.

Gitto, S., & Mancuso, P. (2017). Improving airport services using sentiment analysis of the websites. Tourism Management Perspectives, 22, 132–136.

Hapsari, R., Clemes, M. D., & Dean, D. (2017). The impact of service quality, customer engagement and selected marketing constructs on airline passenger loyalty. International Journal of Quality and Service Sciences, 9(1), 21–40.

Wood, M. (2020). Always print your boarding pass (and other plane travel check-in advice). Oyster.

The comparison of the economic performance of the two airlines with similar business models can help identify significant aspects of operation and drivers that influence success in the airline industry. As objects of evaluation, Southwest Airlines and JetBlue Airways are selected, the American low-cost companies. Specific work parameters are analyzed: market strategy, cost and revenue drivers, service-price concepts, pricing policies, and productivity and planning. Based on the results of the assessment, relevant recommendations are given to airline managers, in particular, the need to expand the fleet size, the significance of maintaining sustainable financial activities, and the importance of introducing innovations in the service sector. Southwest Airlines provides wide services inside the country, although JetBlue Airways also operates stably and has a wider range of routes both domestically and abroad.

Business approaches and practices used to manage large airlines differ in many ways. In particular, the financial aspects that form the key economic indicators of development are distinctive for many air carriers, and in addition to pricing policies, other parameters are significant nuances of development. As objects for analysis and comparison, two American low-cost airlines will be considered – Southwest Airlines and JetBlue Airways. The nature of the services provided by both carriers is similar due to the identical strategy of attracting passengers by offering low-cost tickets and, accordingly, the policy of accessibility. At the same time, some unique aspects of their economic activity are different, and such indicators will be reviewed as drivers of costs and revenues, planning concepts, and some other factors that form the individual image of each carrier. The purpose of this report is to demonstrate the characteristic features of two air carriers with similar economic development strategies based on publicly available data on the financial and other policies of the airlines in question.

Airlines’ Description

The characteristic development strategies of the two carriers under consideration differ, despite the similar business model promoted by both companies in today’s market. Each of the two companies follows individual approaches to attracting the target audience and maintaining a stable profit. In addition, unique bonus programs are offered to customers, and these incentives are additional strategic approaches to engaging passengers and communicating with interested parties.

Southwest Airlines

The approaches used by Southwest Airlines’ management to create a sustainable business are in line with current trends in customer-oriented policies. In particular, passengers can obtain all the necessary information about the company through a specially developed mobile application, and bonus points acquired during trips are a unique offer of the carrier (“Southwest,” 2020). In addition, the company is involved in charitable activities, which is reflected in its image favorably.

JetBlue Airways

JetBlue Airways’ business model is also based on the provision of low-cost air travel services. Like Southwest Airlines, this company offers customers a system of bonus points that can be accumulated and used as a means of paying for trips (“Welcome to JetBlue,” 2020). JetBlue Airways also promotes a program of unique proposals based on the sale of tickets at the lowest prices on specific dates, which also serves as an additional incentive to involve customers. However, when comparing the individual economic and development indicators of the two carriers, one can note unique features and distinctive tactical solutions.

Market Strategy and Positioning

Market growth and development require using effective strategies that are individual in a highly competitive environment. In the aviation industry, according to Zaki Ahmed and Rodríguez-Díaz (2020), carriers’ positioning is often determined by customer ratings, and different variables are utilized as determinants, for instance, service quality, brand value, and some other characteristics. When citing the example of Southwest Airlines, one can note that the company covers the entire United States and, based on the information from January 2020, has served 93 markets (Bureau of Transportation Statistics, 2020b). The implementation of low-cost transportation is the main business strategy. Despite the fact that Southwest Airlines performs international flights (in 2018, the percentage of international services was 3%), the emphasis is on the domestic US market (Airline Data Project, n.d.f). Thus, the company positions itself as the largest low-cost carrier in the country.

JetBlue Airways is also a major low-cost airline that has achieved significant results in recent years. In January 2020, this carrier served 96 markets, which is a higher rate than that of the former company (Bureau of Transportation Statistics, 2020a). Also, despite the fact that JetBlue Airways operates mainly in the USA, the share of international market coverage is bigger. According to Airline Data Project. (n.d.c), in 2018, the figure was 22%, which is a greater outcome compared with that of Southwest Airlines’. Therefore, in the context of market strategy and positioning, JetBlue Airways differs from Southwest Airlines in its wider reach of accessible markets, despite the fact that the latter has the status of the largest American low-cost airline (“Southwest,” 2020). This means that over time, JetBlue Airways has the prospect of gaining a leadership position due to broader international activities.

Service-Price Concepts

The provision of air transportation services is accompanied by several significant criteria that form the image of companies among passengers. Among them, Medina-Muñoz, Medina-Muñoz, and Suárez-Cabrera (2018) mention the quality of service and ticket prices as factors that are the basic determinants of airline rankings. At Southwest Airlines, air transportation at the cheapest cost is a priority strategy. The company’s management sees the priority of development in providing low-cost services and, consequently, expanding the customer base. This approach is paid off: in January 2020, 158,385 passengers used the services of Southwest Airlines, and this figure is almost the same as in 2019, which proves consumer recognition (Bureau of Transportation Statistics, 2020b). The market share, in this case, is 16.77%, which is a higher indicator compared with other low-cost carriers (Bureau of Transportation Statistics, 2020b). Therefore, the service-price concept is addressed competently by the airline’s management.

At JetBlue Airways, the aforementioned figures are lower due to the lesser popularity of the company. For instance, the number of passengers in January 2020 was 33,786, which is almost five times less than that of Southwest Airlines’ (Bureau of Transportation Statistics, 2020a). Accordingly, the company’s market share had a parameter of 5.52%, which is logical in terms of lower traffic (Bureau of Transportation Statistics, 2020a). Nevertheless, while comparing the current figures with those of 2019, one can note that they are almost identical, which allows talking about the carrier’s ability to maintain its status and succeed in following the strategy of providing affordable services to the target audience.

Cost and Revenue Drivers

Airlines’ revenues are the factor that allows talking about the sustainability of their business in a highly competitive environment. At the same time, according to Alderighi, Nicolini, and Piga (2019), when coordinating pricing policies competently, air carriers can reduce their costs, which is also a valuable prospect. As Renold, Kuljanin, and Kalić (2019) note, various interventions can affect airline profits, for instance, organizing seat capacity or offering passengers additional services. At Southwest Airlines, in 2019, operating revenue was $22.402 million, which exceeded the 2018 figure by almost one million (Bureau of Transportation Statistics, 2020b). The total passenger revenue per employee indicator was $350,700 (Airline Data Project, n.d.e). However, expense items are also numerous; in 2019, operating costs were $19,290 million (Bureau of Transportation Statistics, 2020b). Also, the additional costs of paying salaries and bonuses to employees should be considered. For instance, in 2018, the average salary for pilots and co-pilots was $234,796 (Airline Data Project, n.d.e). Therefore, a competent assessment of revenue and cost drivers is a valuable aspect of financial activities.

In comparison, JetBlue Airways’ parameters may be given, which are lower. In 2019, the company’s operating value was $8,032 million, and the indicator of costs was $7,234 (Bureau of Transportation Statistics, 2020a). The parameter of passenger revenue per employee in 2018 was equal to $387,800, and pilots’ and co-pilots’ average salary was $188,036 (Airline Data Project, n.d.b). JetBlue Airways’ figures are lower compared with those of Southwest Airlines’, but in the context of the scale of operations, the ratio is similar. Thus, when taking into account the given ratios, one can assume that profit growth is directly proportional to the costs of ensuring business sustainability, and the more the airline earns, the higher are the expenses on maintaining stable operations. For JetBlue Airways, costs may increase as the scope expands, and this will be a logical outcome.

Pricing Policies

Low-cost airlines’ pricing policies are different from those maintained by network carriers. In their research, Wehner, López-Bonilla, López-Bonilla, and Santos (2018) argue that the average ticket price of low-cost companies is 40%-60% compared with identical network company flights (p. 33). There are several reasons for this significant difference, and one of the main ones is the quality of service provided by two types of companies.

In the two companies under consideration, the similarity of business models explains an identical approach to price planning and capital accumulation policies. As Southwest Airlines exceeds JetBlue Airways in terms of fleet size and the number of employees, the attention of the former carrier to pricing is a more responsible task. At the same time, some indicators do not differ based on the business size. At Southwest Airlines, in 2018, the price per gallon of aviation fuel was $2.11 (Airline Data Project, n.d.e). At JetBlue Airways, during the same period, the cost of identical raw materials was $2.16, which suggests the prospect of reducing this item of expenditure and finding cheaper fuel to save (Airline Data Project, n.d.b). The overall purchases are also different between the two carriers. According to data from open access, in 2018, the price of all goods bought by Southwest Airlines as a compulsory purchase amounted to $3,270,434 (Airline Data Project, n.d.d). At JetBlue Airways, over the same period, this figure was $1,386,851 (Airline Data Project, n.d.a). This difference makes it possible to state that the latter carrier needs less control over its pricing policy.

Productivity and Planning

Productivity, as one of the valuable indicators of airline sustainability, is a criterion that reflects success in providing services and maintaining a high level of performance. Gosnell, List, and Metcalfe (2020) note the direct relationship between skilled labor and productivity and argue that air carrier management should make efforts to ensure staff are highly qualified. Pineda, Liou, Hsu, and Chuang (2018) point out the importance of planning as one of the significant aspects of productivity and remark that achieving financial sustainability is impossible without appropriate preparation and the assessment of the operating mode.

As specific indicators that determine the performance of air carriers, one can mention fleet size. In 2018, at Southwest Airlines, this figure was 524, and compared with previous years, this figure decreased slightly (Airline Data Project, n.d.d). According to the latest 2020 data, the airline’s load factor is 83.6%, and the twelfth position among all carriers confirms the tight schedule of movement around the country (Bureau of Transportation Statistics, 2020b). There are different destinations as routes, but the share of passengers from Chicago is the largest, and in January 2020, it was 9.28 million people (Bureau of Transportation Statistics, 2020b). These data allow making specific forecasts: for Southwest Airlines, a gradual reduction in fleet size may result in the loss of a leading position in the low-cost market for carriers, although the passenger flow is stable.

When comparing the same indicators with those of JetBlue Airways’, one can note lower performance results, although the planning characteristics are sufficiently high or the airline to be considered a reliable carrier. The company has a stable fleet (in 2018, the total number was 191) (Airline Data Project, n.d.a). In January 2020, the load factor was equal to 84%, and of all routes throughout the country, the east coast was the most popular destination for passengers (20.18% of the total share of transportation) (Bureau of Transportation Statistics, 2020a). These results give an opportunity to predict the stable operation of JetBlue Airways and a possible increase in its fleet size.

Recommendations for Airline Managers

As recommendations for airline managers, some advice can be offered based on comparing the activities of the two air carriers with similar business models. In particular, productivity is a valuable criterion for sustainable development and overcoming the competitive barrier, and expanding fleet size along with increasing the number of destination routes are significant work prospects. Also, an emphasis on pricing policies should be a mandatory component of managerial interventions. The ratio of revenue and costs should be evaluated and calculated regularly in order to exclude significant financial challenges and prevent the loss of positions. Finally, market positioning as a low-cost carrier does not imply restrictions on operational activities, and any innovations and the optimization of the workflow can always be implemented in order to maintain high outcomes and gain customer recognition as one of the main success factors.

Conclusion

The analysis of the two low-cost carriers’ economic factors of development makes it possible to compare these airlines’ results of operating activities. On the basis of publicly available data, the sustainability of their work is assessed in the context of important operating parameters, in particular, service-price concepts, cost and revenue drivers, and some other aspects. The results of this comparison make it possible to assert that Southwest Airlines demonstrates better results than JetBlue Airways, although the latter is progressing successfully not only in the domestic but also in the international air transportation market. Expanding fleet size, maintaining sound financial strategies, and timely managerial interventions are potentially valuable recommendations for airline leaders.

References

1. Airline Data Project. (n.d.a). JetBlue Airways aircraft operating statistics – Actuals. Web.
2. Airline Data Project. (n.d.b). JetBlue Airways employee data and analysis. Web.
3. Airline Data Project. (n.d.c). JetBlue Airways traffic, capacity and revenue by operating region.Web.
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Introduction

Southwest Airlines has a rich organizational culture. The company has been accredited for excellent customer service due to its fun-loving attitude, warrior spirit, and servant’s heart that emphasize living the Southwest way (Johnson et al. 22). In this light, the human resource factor of the company has played a significant role in the enhancement of efficiencies resulting in the need for expansion to widen the scope of operations and success. Southwest Airlines struck a $1.4 billion deal with AirTran Airways in a bid to expand operations (Merkert and Morrell 854) This move implied that the company’s cancelation of flights to smaller cities would be reduced, thus resulting in more operations in various destinations. Therefore, the human factor had to be catered for in a bid to facilitate an effective merger that would observe the company’s core values that focus on customer satisfaction. This paper will highlight the human resource aspects of the Southwest Airlines and AirTran Airways merger through the utilization of a SWOT analysis to identify the pertinent HR factors before recommending strategies for improved operations.

HR SWOT Analysis

A SWOT analysis focuses on the strengths, weaknesses, opportunities, and threats that a company faces in its operations.

Strengths

Southwest Airlines has recorded impressive financial gains in the recent past. In the 2013 fiscal year, the company recorded a $754 million profit, which was the highest since 2008. In the first half of the 2014 financial year, the company’s cash flows were above $1.6 billion (“CAPA Centre for Aviation” par. 3). In this perspective, the company has portrayed the potential for the growth of its workforce and becoming the preferred employer due to its financial stability.

The company upholds a healthy domestic network that has safeguarded its demand in the US market. The firm’s network of domestic flights resulted in an 8% revenue growth of its passenger unit in 2014 that made the company record the highest gains in the US in its category. The company’s merger with AirTran has facilitated the increase of its seating capacity, which has seen the company acquire a substantial market share of 8 out of 10 cities in the US in 2014 (“CAPA Centre for Aviation” par. 5). In this regard, the expansion of the workforce to uphold the company’s core values in the increasing destinations is essential for its growth.

Weaknesses

Southwest Airlines is faced with minimal revenue opportunities due to the rejection of the strategy to allow custom tailoring of the traveling experiences. Therefore, the company only recorded a 3% increase in its 2013 revenues (“CAPA Centre for Aviation” par. 13). From the HR perspective, the implications of this weakness indicate that the organizational culture is not flexible to accommodate new trends that would enhance its market share. This aspect threatens the security of the workforce due to low investment in hybrid and full-service provisions to its customers. In addition, the company’s product is outdated, and thus against the US industry trends.

Opportunities

The Wright Amendment repeal avails opportunities for the Southwest and AirTran merger to grow since the company can now offer direct flights to various cities in the US (“CAPA Centre for Aviation” par. 18). In this regard, the human resource factor would benefit from growth due to the heightened demand for the products and services offered by the merger, thus resulting in better rewards. Additionally, new internal operations and collaboration with foreign airlines would widen its scope of operations, thus resulting in the HR’s spread of the living the Southwest way culture in new markets.

Threats

An identity crisis has faced Southwest Airlines due to the rise of the ULCCs. This assertion holds due to the high fare prices and sticking to the traditional service provision mechanisms. In this regard, the future of the workers is threatened due to their inability to cope with the new industry trends characterized by hybrid and full-service airlines. The company’s unique culture is also undergoing erosion, thus tarnishing its employee relations and organizational culture. In this light, the living the Southwest way culture fostered by the employees’ fun-loving attitude, a warrior spirit, and a servant’s heart is threatened (Gittell 37). In the long-term, this aspect would render the merger less competitive, thus resulting in layoffs that would affect the workforce’s job security.

Recommendations

The merger of Southwest Airlines with AirTran Airways has posed various challenges to the growth of the human resource aspect towards the realization of its goals that are based on quality service provision. For the sustainability of the merger, the implementation of the following recommendations is essential.

The erosion of the unique living the Southwest way culture needs to be mitigated by improving and harmonizing the reward system in the new merger that facilitates the enhancement of the human resource factor. The merger needs to foster its financial strengths by embarking on new domestic and foreign destinations. This aspect would be in synchrony with the expansive strategies depicted in the merger with AirTran, thus boosting the growth of the human resource aspect.

The merger needs to provide hybrid and full-force operations that allow customers to tailor their experiences. This move would improve the relations with customers and create an organizational culture that embraces modernity in its operations, thus promoting efficiency.

The merger needs to take advantage of the new international operations and partnership opportunities that would improve the company’s market share, thus resulting in the growth of the human resource.

Tasks of the HR in the merger

The HR department of the expanded Southwest Airlines is subjected to various roles that aim at integrating the merger through recruitment and hiring of new staff members. The following is a list of the tasks of the expanded Southwest HR department (Blanchard and Barrett 66).

• Recruitment and training integration of the new staff members
• Communication and blending the organizational cultures
• Changing the roles and structures
• Facilitating smooth transitions of employees
• Staffing alignment

Metrics for evaluating the Southwest’s expansion

The metrics for evaluating the merger of the Southwest and AirTran companies would be based on the recruitment, retention, compensation, cultural diversity, performance, and development aspects. The recruitment metrics would focus on the quality of hire, rate of employee referrals, and yield ratio. The retention metrics would be based on the critical employees’ retention rates and departmental resignation rates. The compensation aspect would focus on the recognition and appraisal of the salary ratio. The strength of company values and the employees’ happiness would constitute the cultural diversity metrics. The performance and development metrics would emphasize the HR to employee ratio, employee output, and satisfaction with the expansion (Mayr et al. 112).

Conclusion

The expansive strategies of Southwest Airlines through the acquisition of AirTran Airlines have brought new developments to the HR department. The SWOT analysis shows the strengths, weaknesses, opportunities, and threats that the HR department is facing. Therefore, upholding the living the Southwest way culture, widening the scope of operations, and embracing new industry trends are essential moves for the sustainability of the merger. The HR department needs to perform tasks that improve the workforce operations coupled with utilizing various metrics for the assessment of the Southwest and AirTran merger.

Works Cited

CAPA Centre for Aviation: Southwest Airlines SWOT: Financial strength is mainstay, but cost and culture challenges loom large 2014. Web.

Blanchard, Ken, and Colleen Barrett. Lead with LUV: A Different Way to Create Real Success. Upper Saddle River, New Jersey: Pearson Prentice Hall, 2010. Print.

Gittell, Judy. The Southwest Airlines Way, New York: McGraw-Hill Education, 2005. Print.

Johnson, Andrew, Lisa Pasciak, Victoria Guerra, and Artur Jazowski. Southwest Airlines Co. Case Study, Colorado: CreateSpace, 2013. Print.

Mayr, Valerie, Katie McCartney, Susan Sapp, Katie Sheehan, and Tamekia Watts. Flying LUV: Southwest Airlines Strategic Analysis, Colorado: CreateSpace, 2014. Print.

Merkert, Rico, and Peter Morrell. “Mergers and acquisitions in aviation–Management and economic perspectives on the size of airlines.” Transportation Research Part E: Logistics and Transportation Review 48.4 (2012): 853-862. Print.

This paper defines the positioning strategy for Southwest Airlines. In the United States, the airline industry is ever-growing. With advancement in newer technology, equipment and better competitive strategies, it has become difficult for airlines to stay on the top, or stay in the industry, for that matter.

The overall positioning strategy that Southwest has chosen for itself is the ‘less for much less’ strategy (Kotler & Armstrong, 2008). This means that Southwest does not offer much; it’s a no-frills airline. But it also does not charge a high price. It prices itself according to the service that it provides; it is a low-price airline. Therefore, it has positioned itself as the no-frills, low-price airline. Passengers fly without luxury; there is no food, no first class sections and no reserved seats. However, they pay an extremely low price for getting to their destinations along with their luggage (Kotler & Armstrong, 2008).

Its major competitive advantage is its lower prices. It has also gained an edge in hedging its fuel needs better than the other airlines. It is a no-frills airline and in many cases, this works for Southwest as a competitive edge. More importantly, its exciting and friendly atmosphere is a significant competitive advantage that many of the other network airlines do not offer or cannot pull it off. Other competitive advantages include just one type of plane for all flights; the Boeing 737 series, point-to-point flying, simple in-flight service, and a relatively happier workforce (Brancatelli, 2008).

Positioning Map Attributes

The two main attributes of the company are price and the other is frills attached within the flight. Based on these criteria, the positioning map is made below (U.S. Air Carriers, 2003).

Repositioning Strategy

One strategy that immediately hits the mind is starting a business class in their airplanes. This will be a new product available to the huge number of business people flying regularly and might give them a sense of pride travelling in a different class to the ordinary people. For the ordinary people an economy class can be started which will be priced slightly lower than the business class. The only difference between the two will be the level of service received for the business class will be better. (Kotler & Armstrong, 2008)

Another product that Southwest Airlines can develop is start international tours at a low price using several connecting flights as a source to keep the costs low. However cities closer to US should only be considered for such an initiation.

Southwest is the most popular domestic airline and carries the most number of passengers domestically. Focusing on the domestic market and giving the lowest fares, Southwest Airline has been able to gain a competitive advantage in the industry and is one of few profitable airlines today in the times of economic recession. Everywhere Southwest starts its flights, the fares of that destination from the competitors fall due to the competitiveness in the industry that Southwest brings (Pounds and Weil, 2001). However even with the intensity of low cost airlines in US, Southwest remains a market leader and does so by coming up with new marketing campaigns, serving the most profitable routes and reducing its costs.

References

Brancatelli, J. (2008). Southwest Airlines Seven Secrets for Success. Web.

Kotler, P. & Armstrong, G. (2008). Principles of Marketing. India: Prentice Hall.

Pounds, S. and Weil, D. (2001). The airline everyone seems to like. Palm Beach Post.

Southwest Airlines (2009). Home. Web.

U.S. Air Carriers. 2009. Web.