Southwest Airlines (SA) is not just a market leader in the airline sector but also a fierce rival that should not be disregarded. Worldwide businesses research Southwest Airlines’ strategic initiatives and how this once-small and distinctive airline become what it is today. Southwest Airlines’ creative business practices, models and competitive advantages include reduced ticket prices, cutting away pointless services to boast faster airport turnaround times, and instilled a sense of intrinsic value in each employee.
The Link Between Business Model, Strategy, Competitive Advantage, and Profitability
Southwest Airlines has developed a plan that forms the basis of its business model to gain a competitive edge in the airline sector and maintain profitability in the face of rivalry. SA operates only one aircraft, the Boeing 737, to further cut costs and improve dependability (Hill et al., 2020). According to Hill et al. (2020), SA is well known for its fares, which are frequently about 30% less expensive than its main competitors. Additionally, effective methods to lower customer expenses have increased the sale of flights, boosting shareholder earnings. Finally, by facilitating training, maintenance, and inventory costs, SA has increased crew and flight planning efficiency while concentrating on revenue generation. Generally, their operational framework of low fares balances with the reduced structural expenses giving the firm a competitive advantage and enabling them to record greater profit even during an economic downturn.
Southwest Airlines’ Competencies, Resources and Capabilities
Southwest Airlines has demonstrated its ability to recognize critical strengths, cut operating expenses, increase resource efficiency, and master new capabilities that are not typically seen in other airlines. One of the SA’s distinctive competencies is the ability to fly from point‐to‐point unlike their competitors, who could need two or three layovers to get to their destination, thus reducing the travel time for clients (Hill et al., 2020). SA’s primary resource is the dedicated staff who are committed to working. Beginning with their initial interview, top management at Southwest Airlines instills essential qualities in each worker. SA stresses cooperative behavior and a positive outlook while hiring. There is evidence that teamwork is becoming more crucial in various occupations, and research has examined how the makeup affects outcomes in the workplace (Gander et al., 2020). In essence, SA determines whether the applicant will fit in with the team throughout the hiring process since the airline prides itself on being a customer-focused company. Generally, this reduces the need for technical inspectors, ticket counter agents, and baggage handlers.
Maintaining the Competitive Advantage for the Future
Southwest is devoted to being a safe and secure company, especially during the COVID-19 crisis, to maintain a competitive edge for the future. Passengers are expected to benefit from SA’s increased connectivity and quick travel times. Commute periods significantly shorter than the incubation time for infectious diseases are made possible by greater worldwide connection and accelerating globalization (Sun et al., 2021). SA is aspiring to ensure a meager incident rate almost entirely unrelated to pilot performance and adhere to COVID-19 guidelines. Additionally, SA prides itself on partnering to reduce turnover and ensure efficiency in years to come. Essentially, their motivated, flexible workforce increases productivity and decreases the need for additional personnel. Therefore, Southwest Airlines’ future dedication to its employees is demonstrated by the fact that they prioritized their staff over their aircraft. Generally, this commitment strengthens Southwest workers’ pride in being a family members rather than just a job.
Conclusion
Reduced ticket pricing, eliminating unnecessary services to boast speedier airport turnaround times, and instilling an inherent sense of value in each employee are just a few of Southwest Airlines’ innovative business methods, models, and competitive advantages. In essence, it is conceivable that Southwest Airlines will endure for a very long time in the airline sector. Despite the worldwide epidemic that has afflicted the United States, Southwest Airlines is still anticipated to turn a profit. Generally, to keep their personnel, secure their safety, and preserve their competitive edge for the future, one possibility that may present itself soon may include an expansion to overseas alliances.
Southwest Airlines is the leader in the US domestic flights market. Some of the reasons for that success are the company’s culture and the attitude towards customers and employees. One of the most significant strengths of the company is its culture. Employees are truly the company’s major asset and the company values its staff. Top managers of the company are proud of the fact that there have been no layoffs in the history of Southwest Airlines.
There are numerous incentives that create a very friendly atmosphere in the working place. Thus, employees have corporate celebrations of major holidays. Each employee gets a present or financial aid when there is a meaningful event in his or her life. Employees feel that care and they are willing to give back. Hence, employees have continuously saved the company’s money by suggesting numerous ways to decrease costs (buying parts of PCs instead of buying already assembled ones).
Training (as well as promotion) also plays an important role in this process. Employees are eager to invest their time and go the extra mile to make sure that they contribute enough to the development of the company. Of course, particular attention to customers’ needs is also a reason of the company’s success. Southwest Airlines tries to make fares lower, flight time shorter, destinations more convenient. Of course, the company has always come up with new ideas concerning passengers’ comfort and satisfaction.
At the same time, there are certain weaknesses. Kelleher’s principle concerning planning seems to be still accepted in the company. The company seems to have no particular strategic plan where all goals and strategies could be provided. Southwest Airlines seems to react to the changing trends developing strategies after the issues and/or opportunities have appeared. This can jeopardize further development of the company as it is going through significant growth. Companies need particular strategic plans when they are growing rapidly as the plan makes the process smoother. For instance, it is essential to understand major goals to remain focused. Although the company is now the leader in the market, the business environment is highly competitive and it is important to predict possible issues and be able to address them.
As far as the strategic issues are concerned, it is necessary to note that Southwest Airlines has to undergo significant changes and considerable growth. Southwest Airlines is acquiring another airline company that operates in a different market. Clearly, this process is potentially difficult. Southwest Airlines will need to make sure that there is efficient information technology that will effectively run numerous processes (including operations, customer support, internal communication, and so on).
It will also be important to make sure that the newly acquired company will share the culture of Southwest Airlines. Of course, significant growth of the company may lead to certain changes and can affect corporate culture as well since it may be difficult to remain employee-focused with increased staff. Hence, Southwest Airlines has to address all these issues to preserves its strengths.
The purpose of this report was to explore unresolved conflict at Southwest Airlines Company and provide an alternative creative solution to resolve the conflict. Southwest Airlines Company has been admired for its corporate culture, employee happiness, and customer satisfaction. In fact, it has only experienced one strike in its history.
However, the recent tough contractual negotiation ending in a wider rift and a stalemate between the union and the organization shows ongoing organizational change and development at Southwest Airlines. The subsequent referral of the issue to the mediating body presents an opportunity for both parties to resolve the negotiation through a ‘Requests for Equitable Adjustment’ to ensure that the company maintains customer satisfaction and its “people before profit” philosophy.
Introduction
The purpose of this report is to explore unresolved conflict at Southwest Airlines Company and provide an alternative creative solution to resolve the conflict. This is a case of conflict and negotiation at the company, which is covered under organizational change and development. Course concepts and theories of organizational change and development and conflict and negotiation will be applied in this case scenario.
The Company Being Studied
Southwest Airlines Company, the Dallas-based company, has been in business for the last 44 years. The company has continued to provide innovative services to differentiate itself and create a competitive advantage in the industry. Its hallmark and success factors are noted in exemplary customer service provided. It has over 47,000 employees who serve over 100 million customers every year (Southwest Airlines, 2015).
The company operates “more than 3,600 flights a day, serving 94 destinations across the United States and six additional countries” (Southwest Airlines, 2015). In addition, it has focused on expanding its fleet to cover new destinations such as Mexico and Vallarta across different cities, but these will only be implemented after the government’s approval.
According to data provided by the U.S. Department of Transportation, Southwest Airlines is “the nation’s largest carrier in terms of originating domestic passengers boarded” (Southwest Airlines, 2015). It operates many large fleets of Boeing than any other airline company globally. Most of these fleets have state-of-the-art equipment, including satellite-supported Wi-Fi for connectivity nationally.
One major commitment of the airline company is maximizing shareholders’ value. It has focused on increased share repurchases and dividends to achieve the goals of returning value to shareholders.
The company achieved improved performance because of reducing fares and focusing on increased passenger traffic across various destinations in which it serves.
Consequently, for the last 42 years, it has recorded profitability and has become one of the most celebrated companies in the world. Southwest Airlines is recognized for its triple-bottom-line strategy that enhances performance and productivity. In addition, it recognizes the importance of customers, communities, and focuses on the overall conservation of the environment in places it serves.
Specific Nature of the Organizational Behavior Problem Being Studied
Southwest Airlines has no records of laid-off employees. It has no records of the pay cut. The company has only experienced a single strike in its history of operation due to a six-day mechanics strike of 1980. These attributes make Southwest Airlines unique in the aviation industry, where conflicts, strikes, and negotiations are rampant.
Today, however, Southwest Airlines is involved in one of the biggest contract negotiations ever with its employees in order to control the rising costs of operations.
It is imperative to note that labor strikes and negotiations are common in the aviation industry. However, this is not the case with Southwest Airlines. In fact, it came as a big surprise to industry professionals. This is expected because the company has performed extremely well in terms of employee and customer satisfaction.
However, for some time, the negotiation has proceeded without any tangible results. As a result, the union that represents the company’s pilots resorted to a mediation process to end the stalemate. The National Mediation Board, a federal body responsible for contract negotiations in the railways and aviation industries, will be therefore responsible for the negotiations.
Status of Primary Research
Primary research was conducted with individuals with ties with Southwest Airlines.
The People Problem
It is interesting to understand that the company is currently engaged with several unions that represent employees in negotiations about contract issues, which have resulted in people’s problems.
An interview with Southwest Airlines representative, Brandy King revealed that the company actively engages in negotiations with its unions with the aim of reaching solutions that benefits all stakeholders, including shareholders, employees, and the company, and promoting the company’s vision of being the best and most profitable, flown and loved. Currently, the company is negotiating six contracts with its unionized workers to reach agreements.
However, in the recent past, for instance, it was observed that several planes of the company were stranded on the tarmac for several hours, leading to passenger outrage. Chuck Cerf, a member of the Negotiations Committee, reveals that the recent poor performance for the Airlines is attributed more to carrier’s strained relations with unionized workers, including baggage handlers. In fact, the problem is bigger than imagined. Cerf believes that the current number of baggage handlers in some locations cannot simply meet the workload.
In short, the Union representative argues that the number of bags has risen dramatically while resources dedicated to hand baggage have not. That is, baggage handlers are overworked, underpaid employees at the carrier. Cerf further claimed that Southwest Airlines management does not make provisions for extreme weather to assist regular baggage handlers.
Consequently, the union has been flying some workers from other cities to assist in baggage handling. In addition, the Union representative is not happy about the issue of outsourcing jobs, replacing unionized employees with outsourced ones and/or part-time employees, who are not entitled to any benefits, including health coverage.
Extreme weather factors notwithstanding, people’s problems at Southwest Airlines could be attributed to prolonged poor relations with union representatives. Perhaps longer negotiation periods could be responsible for these poor relations because several unions have not been able to get new contracts with the company for more than two years.
Audrey Stone, the flight attendants union representative, believes that Southwest Airlines is growing because of its recent acquisition of AirTran and a focus on international markets. Growths, however, have always initiated changes in organizations and employee contracts. Stone said that Southwest Airline’s proposals focus on seeking concessionary contracts. She mentioned that Southwest Airlines has concentrated on scaling back sick leave accrual and other related benefits.
In addition, Stone does not understand if these changes will affect the entire organization. She believes that the current people’s problems at the company are related to culture change amidst growth. Stone insisted that negotiations are most likely to shift from the normal flight attendants’ contracts to matters related to compensations and benefits.
She said that these negotiations would go beyond the normal contracts to test if the company’s culture has really changed. While the unions are prepared for similar proposals, they warn that Southwest Airlines should prepare for long, protracted negotiations that can last as long as they take. Mark Richardson, the President of the Pilots’ Association (SWAPA), also shared similar sentiments that times have certainly changed in their relations with carriers and thus the need to opt for a federal mediator.
Brandy King took a neutral approach by stating that Southwest Airlines’ objective in these negotiations with unions is to ensure that it “remains the best place to work” and protects its future. Kings believes that the company can only attain this objective if it enhances efficiency, eliminates unnecessary costs, rewards excellent performances, and continues to collaborate with other stakeholders and workgroups. Stone, however, insisted that much is at stake for the company and flight attendants.
For instance, the company has recently acquired larger Boeing 737-800 planes with increased passenger capacities, which require more time to board, disembark, and get ready for subsequent flights. These new fleets require an additional 25 to 45 minutes to get ready relative to the previous Boeing 737. This implies that flight attendants will have additional hours at work without pay because they are paid per hour when flying but not paid while not flying.
The issue of pilots is another people problem in the company. According to Richardson, the negotiations have concentrated on specific areas to address issues associated with flat fleet growth, poor remunerations, and stagnant career growth for pilots. Randy Barnes, a union representative, said that employees built Southwest Airlines, but the management is now busy tearing it down.
Richardson also shared similar sentiments by noting that for several years, pilots have often demonstrated selflessness and sacrifice when required by the carrier. Consequently, the company has been able to achieve its goals of ROIC. In fact, Richardson argued that these demands are reasonable because carrier’s pilots are highly productive, and therefore, they deserve marginal improvements related to compensations, schedules, and retirement.
The company has performed dismally relative to its peers in these areas. On this note, Richardson asserts that current stalemate in negotiations can only be solved through mediation so that they can avoid the unproductive, disparaging, and combative relations that have been witnessed in the aviation industry.
Nature of the Conflict and Negotiation Highlighted
The company’s strong corporate culture was always admired and considered an effective model, but recent conflicts and negotiations display a form of challenge to the well-established culture. The company’s employees have always admired the jovial culture and close relationships. Today, however, employees have felt that senior management of Southwest Airlines does not appreciate their efforts and only exploits them.
This is the first ever difficult negotiation in the history of Southwest Airlines, which has affected morale, and now employees feel that management is cutting costs at their expense. Employees argue that Southwest Airlines continues to make record profits, but their remuneration has not been increased, and the increment is languishing.
Previously, the union and the company easily reached an agreement on such negotiations. This contributed to a high number of happy employees at the company.
According to Randy Barnes, a union representative, employees built Southwest Airlines, but the management is now busy tearing it down.
Overall, the primary research revealed that Southwest Airlines had introduced changes to the employees’ collective bargaining agreement, which was executed through a concessionary negotiation process. The union claims that such changes are completely unacceptable to employees. The company wants to outsource some jobs, introduce more part-time employees, and reduce medical and other benefits with the aim of cutting operational costs.
On the other hand, Southwest Airlines believes that such changes are necessary for them to remain competitive and offer increased customer services. In this regard, the company was surprised when a mediator was introduced, and the union withdrew from the negotiations. Nevertheless, Southwest Airlines asserts that its mediation will help them to overcome the collective bargaining challenges, and therefore it is focused on working with the mediator to find solutions and ensure an acceptable contract to employees.
Recommended Preliminary Standard Solutions
Since the contract talks between the union and Southwest Airlines have collapsed, the most viable solution is a mediation, arbitration, or litigation. At this point, what the employer offers is considered minimal, and therefore contract talks cannot continue (Lewicki, Barry, & Saunders, 2010).
It is believed that the conflict and negotiation will not reach the stages of arbitration and litigation, and therefore mediation is most likely to resolve the stalemate between the two parties (Zartman, 2008). In fact, mediation experts agree that mediation is a sensible means of resolving contract conflicts (Kelsey, 2010).
The National Mediation Board is a skilled mediator that will encourage the conflicting parties to solve their contract talk stalemate, and in the end, the parties will be satisfied with the final resolution of the contract talks. In this regard, there is no need for arbitration since mediation can help both parties in a fast and cost-effective way.
In addition, no party will lose, but rather they will have to reach a win-win situation during the negotiations. Moreover, since Southwest Airlines and the union will find a solution, they are an extremely high probability that the outcomes will be implemented.
According to Kelsey (2010), mediation offers the best opportunity for “resolution of construction disputes, contract disagreements, and equity claims” (p. 1). It is expected that the parties will benefit from the process irrespective of the causes of the stalemate. In fact, mediation offers an opportunity for Southwest Airlines and the union to avoid arbitration or litigation.
Besides, it involves thousands of employees, a situation which makes the talk a bigger problem. In this process, a facilitated negotiation will be applied to end the stalemate between the union and the company.
Recommended Creative Solution
To resolve the stalemate on the contract negation, a ‘Requests for Equitable Adjustment’ for the contract conflicting issues has been proposed. In this case, employees should not focus on what is legally correct but rather what is equitable based on the ever-increasing profits of Southwest Airlines while they continue to experience a lack of career advancement opportunities and stagnant compensation.
A ‘Requests for Equitable Adjustment’ is effective in addressing conflict situations in the organization. However, parties must recognize that there are compromises and gains in negotiation. This approach will ensure that all areas that require negotiations to focus on equitable issues will be addressed.
Thus, effective management of conflict involves the use of an integrating style where there is a win-win situation for all parties. The outcome will depend on the quality of information and the amount of time both parties provide to solve the conflict. However, Southwest Airlines and the union must appreciate the presence of conflict in the organization and embrace various ways of resolving them to maintain customer satisfaction and “people before profit” philosophy.
What Still Needs to Be Completed
Based on the Requests for Equitable Adjustment, Southwest Airlines, and the union will have to identify issues that they should consider as equitable. They must focus on issues of contract changes and develop internal plans and policies for any future adjustments on the employee terms of the contract.
It is noteworthy that both parties will have to be extremely creative when using the Requests for Equitable Adjustment because only through knowing what is changed in the contract can lead to effective identification of equitable issues and successful conflict resolution.
Any Obstacles That Are Preventing Completion
Once factors for negotiations have been identified, compromise is required from both parties during the process. In this case, Southwest Airlines and the union will have to forgo some contents of the contract and their tough stand on issues. They will, however, still get better alternatives and plan to pursue the compromised issues later. Therefore, reaching a compromise will promote functional conflict that is suitable for enhancing performance for the company.
References
Kelsey, K. P. (2010). Mediation: The Sensible Means For Resolving Contract Disputes. Web.
Lewicki, R. J., Barry, B., & Saunders, D. M. (2010). Negotiation (6th ed.). New York, NY: McGraw-Hill.
Southwest Airlines. (2015). Company Profile. Web.
Zartman, W. (2008). Negotiation and Conflict Management: Essays on Theory and Practice. New York: Routledge.
The success of firms and companies depends on long term objectives rather than the short term ones. Therefore, firms plan with an aim of developing presently as well as in the future. A projection into the future enables the firms to determine their expenditures and income. The United States of America is focused on making long term goals and objectives. The emphasis on the long term objective has constributed to the development of their economy.
As a result, the country has remained economically stable by maintaining economic solvency. The Southwest airlines is one of the main corporations of the USA contributing to the development of the country’s economy. It facilitates local and international trade in the country. Consequently, they apply grand strategies in regards to their long term objectives to realize prosperity. This paper aims at analyzing the grand strategies used by the airlines and determine their efficiency (Banfe, 1992).
Grand strategy Analysis
The Southwest Airlines has adopted various grand strategies aiming at fulfilling their long term objectives. Firstly, the Southwest airlines makes partnerships with other airlines. The partnerships allow the Southwest Airlines to expand their market. In addition, partnerships enable them to work more efficiently than when they operate individually (Brown, 2010). For example, the Southwest Airlines partnered with ATA Airlines, which helped them open flights to Hawaii.
However, the ATA Airlines experienced bankruptcy in 2008. As a result, the partnership was abolished and terminated. Also, the Southwest Airlines partnered with Volaris from Mexico in 2008. The partnership enabled them to make low cost flights to Mexico. However, the partnership was terminated in February, 2013. The grand strategy selection shows that the Southwest Airlines enhances market development through partnering and collaboration.
The selection shows that the Southwest Airlines uses the ability and strengths of their partners to market their products. However, the matrix selection shows that the Airlines should make stable and lasting partnerships. It suggests that temporary partnerships impair implementation of long term objectives and goals. Therefore, the Airlines should evaluate companies and access their future solvency before making partnership.
Secondly, the Southwest Airlines has adopted a strategy that ensures employees’ commitment. It aims at recruiting competent staff. This strategy ensures that the quality of the services is high and satisfactory (Luecke & Hall, 2006). The grand matrix selection shows that the company maximizes its strengths by providing high quality services.
This internal strategy results in innovations and discovery. As a result, it facilitates the development of new product in the market. However, the selection matrix asserts that the company should strike a balance between quality assurance and profit maximization. It suggests that they should not only provide quality services but also make good profits. The balance ensures that the company maintains economic solvency in the business world.
In addition, the company has adopted diversification. Diversification is a crucial strategy in business. It distributes the risks among many arms of a business firm.
The distribution of risk reduces the loss exposure of the business (Kenny, 2009). Therefore, the company has incorporated both, the long and short hauls. This ensures that the risks involved in the two hauls regulate each other. As a result, they incur few losses per unit time. According the matrix selection, diversification of services is a strategy that maintains the company’s competence.
Conclusion
The analysis focuses on the various strategies that the Southwest has adopted in their business structure. It has critiqued and shown why they are inappropriate and unsuitable. As a result, the above analysis is an all-inclusive evaluation that can enable the company to implement their long term goals effectively.
Brown, David R.. Three essays in industrial organization: alliances, mergers, and pricing in commercial aviation. Manhattan, Kan.: Kansas State University, 2010. Print.
Kenny, Graham. Diversification strategy how to grow a business by diversifying successfully. London: Kogan Page, 2009. Print.
Luecke, Richard, and Brian J. Hall. Performance management: measure and improve the effectiveness of your employees. Boston, Mass.: Harvard Business School Press, 2006. Print.
South west pricing strategy was a unique strategy different from the normal conventional industrial strategies. Initially, it sought to retain the lowest air tickets for certain routes that it operated.
Therefore, the airline created some policies which included; flights with no first class, non assigned seats, flying one type of air craft, limited in-flight entertainment and offering no retirement benefit plans for its employees.
Considerably, the formulation of these policies led to the success of this company making it to dominate over the first three decades. The strategy required little cost to maintain its cost centers as compared to other airlines.
Generally, each class of customers desire different qualities and values. For business class travelers, price is not a limitation to them.
However, their major concerns are; the ease at which can tickets can be changed, first class comfort, assigned seating arrangement, convenient and frequent flights to their destinations, convenience in arrival time and availability private airline lounges.
On the contrary, leisure travelers look for low cost airlines with no additional fees.
Compared to their competitors, south west airline has shown better improvements in catering for its customers needs. The airline prefers flying a bus route rather hub to spoke pattern.
Additionally, It has evaluated it’s under performing routes so as to develop profitable city routes with its destinations to non crowded airports. Notably, this has helped the airline to save on time for its customers.
Moreover, the airline has created customer loyalty with leisure travelers as compared to other airlines which only consider business class models. Its destinations are always on schedule with more frequent, non stop flights.
Lastly, the company has pledged to always maintain the best customer care in the most efficient and effective way.
One of the vital internal factors affecting the airline pricing decisions would be lab our costs. South west case clearly shows this aspect through their earlier policies. According to the company, profit sharing for employees would reduce lab our cost. Other factors include, marketing policies, objectives and supply.
For instance, initially, the main objective was to retain low prices and create high profit margin. Today the company has revised its policies so as to curb the increased competition by creating new routes and offering business class travels which have very enticing policies though higher in price.
To eliminate high ticket prices from sales agents they only allow for online booking. On the other hand, Supply depends on capacity the airline can deliver to a specific destination.
South west airline aims at delivering full capacity during flights by incorporating the leisure travelers who are not on a schedule. Additionally, they are offered discounted fares so as to fill in the empty seats.
External factors include; rates and taxes, government regulations, completion, demand and fuel costs. Notably, fuel prices make up the largest component than all the other variables that affect price.
Majority of the airlines are feeling the impact of the increasing fuel prices making their pricing strategies less effective and inefficient.
The airline has managed to increase its prices and still maintained its customer loyalty and reputation through discounts. Among its marketing campaigns include, no charges for baggage and change tickets. This is different compared to other caries which charge up to 50 dollars.
Preferably, this is a major reason why the prices of the company remain high since it incorporates the extra charges in baggage and change fees in its ticket price.
However, other airlines maintain their prices low by distributing the travel expenses so as to lower the normal travel price to extra charges in luggage and travel change tickets. Lastly, the airline has limited its on line ticketing to only one site ‘The south west.com’ which limits the customer to compare prices.
From its background the company has been consistent in its growth. It has managed to make tremendous achievements from maintaining customer loyalty and low prices even with high fuel prices.
Through this we can definitely conclude that the airline can sustain its pricing strategy and freely compete with other airline such as the Jet Blue.
Jet blue is a real threat to the company. Currently, the airline has purchased an Air Tran with an aim of expanding its routes. South west should look unto this matter by purchasing the most modern air crafts such as the dream liner which is efficient on fuel.
The airline ought to continually expand its business destinations to as far as China, Turkey and Dubai which are the current popular business markets. In addition, it should increase its promotional strategies by closely paying attention to the insights of the customer.
Practically, it is very expensive for a round trip ticket noting that some customers will at some point require no luggage either on return from destination or when flying to out. Creating some discounts on these cases might ease the cost for passengers and build more customer loyalty.
Lastly, I would recommend free internet for on all planes in southwest airline. This would be very enticing to business travelers and would be a unique strategy than no carrier has recently formulated.
How does Southwest make money when other airlines do not? What are the factors contributing to Southwest’s success?
Southwest Airlines is one of those unique airline companies that has continued to be profitable over the years. It has done so for 33 consecutive years and, on its 127th financial quarter which happened to be last week, it was still able to pay a modest dividend to its shareholders. Thus it continues to serve as an example in an industry that is ravaged by cash and other problems. (Brancatelli, 2008)
There are many factors that led to the success of Southwest Airlines. First and foremost Southwest Airlines positioned itself as an interstate carrier adopting a point-to-point system instead of the conventional hub and spoke structure used widely in the industry. This allowed it to save excessive costs and provide a more convenient service to its customers. This system also helped the company in reducing their turnaround times and use their fleet of planes, which were also procured at comparatively cheaper prices, to provide a cheap and effective solution to airline travel.
Costs and Turnaround times were further reduced due to many other factors. These factors include the fact there was an absence of meals on all flights, approximately standard configuration of all aircraft, a team orientated approach towards providing ground services with an emphasis on creativity and novel ideas to ensure that everything was completed on time. Furthermore, the company successfully implemented a ticketless policy and continued on to effectively use its website to provide online services to its customers.
Southwest Airlines also adopted a culture that was very rewarding and motivating for its employees. Employees were given a free hand and were encouraged to find creative and innovative ways of conducting tier day to day operations. Thus this kind of empowerment meant that Southwest had lower employee turnover rates than the industry average. The style of leadership was also very highly charismatic and effective. Leaders served as an example to others as to the promotion of Southwest Airlines’ main value of doing “Whatever it takes” to preserve the Southwest Airline Culture, Service, and Values.
Depending upon the industry, intangible assets are more important than tangible ones. How is this evident at Southwest?
Southwest Airlines, has proved itself as one of the most successful U.S.-based airlines over the years. It has done so by consistently making wise decisions such as point-to-point systems, keeping the customer’s convenience as a top priority, utilizing one type of aircraft, reducing turnaround times; and is dedicated to employing the best talent for each job. More than 10,000 people apply to Southwest for various positions. These people are meticulously selected, developed, and trained to maintain and deliver the Southwest brand and promise.
In an industry ravaged with issues like rising operating costs, the rising price of fuel, rising need for shrinking working capital, and the decreasing profit margins, the value of a company’s tangible assets—equipment, facilities, technology, resources, hold little sway as to determining the probability of the future success, competitiveness, and survival of the company.
Instead, the intangible assets of the brand, interactive and involving culture, nurturing relationships, talent, and the ability to be creative and innovative while handling problems can contribute up to 85 percent of the market value of companies such as Southwest (Forman, 2009). Southwest employs fun and innovative culture to prioritize customer satisfaction and convenience. This has not only enabled the company to acquire brand loyal customers but has also made Southwest an Employer of choice for many workers across the United States. It is due to the Intangible worth of the company that Southwest was able to post profits for 33 consecutive years even though the industry it was working in was facing huge problems.
How should Southwest respond to the short-term, on-time operating challenges?
There are many options stated in the case and each option has its pros and cons. The first option proposes to provide the best possible service and performance in the resources available to Southwest. However, this could decrease both profits and employee morale as this option is clearly against the adopted culture in Southwest. The second option was related to increasing scheduled times and turnaround times to improve on-time service as compared to its competitors. However again this option would take the uniqueness out of the Southwest business model and pose a serious problem regarding profits. A third available option was to re-design passenger and baggage handling processes. However, according to the proposed redesign, passengers who were singled out for security checks ended up having inferior seats regardless of the fact whether they had arrived earlier in search of a good seat. The solution to this problem was posting additional security guards but that would increase the operating cost of the company. Passenger boarding policies could be altered but these would be a direct contradiction to the airline’s past policies that made it a favorite with customers. Finally, open seating could be abandoned in place of assigned seating. This would mean retraining existing customers some of which like the idea of open seating and could lead to increased chances of delays on full flights.
What should be Southwest’s long-term growth strategy?
Southwest Airlines should be prudent when developing the company’s growth strategy. Such a strategy should be planned carefully. I do not think Southwest should adopt any major radical shift in business policy at this time. They should continue with their strategy of cost leadership in the price-sensitive airline industry to gain a completive edge over rivals and gain market share. Southwest enters new markets only when they can achieve frequent flights.
Southwest should continue with its market development strategy, domestically focusing in the United States. There are still various untapped markets within the US that company has yet to enter. Plus Southwest has the advantage that some of these markets are actively seeking Southwest’s presence. However the practice of entering into new markets only when the company can achieve frequent flights should be retained. The company should also retain its system of providing frequent, “point to point” flights. The expansion into new markets and cities should be made at a moderate and carefully preplanned pace in conjunction with the past practices and policies of the airline so that effective coverage of new markets could be ensured. New cities and markets will also allow for long haul non-stop flights which are evidently more profitable. Thus an optima mix of flights should be configure and adjusted to suit the customers as well as the company’s need. As the range of the aircraft and type of flights (long haul or short haul) expands, the potential markets will also expand.
And finally, Southwest should continue to develop, maintain and foster its remarkable friendly, innovative, interactive and highly motivating culture. The company’s fun-loving attitude and commitments to its customers and employees have resulted in the increase in value of the intangible worth of the company over the years. This has blessed the company with a true competitive advantage and the company should spare no effort in retaining its culture.
Reference
Brancatelli, J. (2008). Southwest Airlines’ Seven Secrets for Success . Web.
Forman, D. C. (2009). Establishing a Talent-Driven Culture. Web.
Southwest Airlines Fulfillment of Maslow’s Need Theory
According to Maslow, individual needs are in a hierarchy, beginning at physiological conditions, security, social, esteem needs, and self-actualization (Bauer & Erdogan, 2010). Physiological needs are met through paychecks, employee benefits, incentives, retirement plans, and compensations (McNerney, 1996). The company has a salary and wage compensation package following union structures, similar to other airlines. However, this is different from other airlines since it offers employees profit-sharing funds, which can be invested in stocks. This also represents social, and self-esteem needs, where employees feel part of the company by owning company stocks.
Security needs are met by providing job stability by offering employees job security and a better work environment. The company’s leadership strives to provide employees a stable working environment that has equal opportunities for personal growth and learning (Southwest Airlines Annual Report, 2010). Social needs are also fulfilled by creating a robust corporate culture, where there is a practice of business fair play, trust, and inadequate supervision (McNerney, 1996). Social needs are also met by creating a working environment where employees can work hard and still have “FUN” and be connected (Southwest Airlines Annual Report, 2010).
Self-esteem needs are met by receiving rewards and seeing their names on “the share the spirit volunteers of LUV wall” (Southwest Airlines Annual Report, 2010). Self-actualization is provided through growth opportunities. Since the company offers stable employment, employees are guaranteed that they can grow, acquire skills and knowledge, and get promotions through the various job classes. The company encourages self-actualization by motivating employees to be creative and innovative to be all they can, to improve effectiveness (Southwest Airlines Annual Report, 2010).
Reinforcement Theory
Apart from motivation, reinforcement has been recommended by Bauer & Erdogan (2010) as a means for managers to intervene in employee behavior. Therefore, to determine if southwest airlines use reinforcement theory, its leadership and human resources management styles are analyzed based on the four intervention measures; positive, negative reinforcement, extinction, and punishment.
For example, to discourage absenteeism, the company uses positive reinforcement by offering two free airline tickets to employees absent or late in three months. This also shows that the company uses a fixed ratio reinforcement schedule since it rewards a lack of absenteeism after three months. Positive reinforcement is also used when employees contribute to increasing productivity and profit margins for the company, upon which the company shares the profits, which can be turned into stocks. According to McNerney (1996), this profit-sharing strategy has turned several employees into millionaires and led to the airline’s excellent financial performance.
Southwest airlines use punishment to eliminate specific behavior in employees. Since the threat of punishment and coercion can elicit fear and reduce employees’ productivity, the airline operates a performance management system that emphasizes the creation of positive relationships (Nelson & Quick, 2007). The airline uses this reinforcement intervention but realizes that too much punishment leads to negative response and a reduction of motivation. The airline uses praise and recognition to motivate employees not only verbally but through certificates, prizes, and plaques. For example, the airline rewards employees with their names on the “share the spirit volunteers of LUV wall” for participating in non-profit organizations (Southwest Airlines Annual Report, 2010). This is a fixed ratio reinforcement scheme, along with other employee reward schemes like “President’s Award” and “Winning Spirit Award,” which are carried out annually.
The excellent success of the airline
There is a direct link between the excellent success of the airline and the high motivation of its employees, as indicated from research. This is revealed in the annual report of the company and the message by Gary Kelly, the company’s chief executive officer. The company attributes its success to its employees, who are considered the most valuable asset and the competitive advantage for the company (Southwest Airlines Annual Report, 2010).
The company has managed to survive the recession, high fuel prices, fewer passengers, terrorist threats, and fewer aviation jobs to be one of the fortune 500 companies. This was made possible through their passion and focus on “performance, people, and the planet.”
The company’s passion is directed at creating a family culture where its 35,000 employees are encouraged to be creative, innovative through programs that increase productivity, develop new ideas to cut back costs, and give back to the planet and community (Southwest Airlines Annual Report, 2010). The company strives to increase productivity by highly motivating these employees through the provision of a stable working environment, equal opportunity for personal growth and learning through its “University for People,” “Manager in Training Program,” and “Onboarding” program for new recruits (Southwest Airlines Annual Report, 2010).
Additionally, this strategy has been heightened by the company’s plan to create a citizenship team, which identifies performance indicators. One of the key performance indicators is the increment of employee involvement.
Therefore, by encouraging creativity and innovation, the airline realizes higher productivity through its employees. Moreover, programs that encourage personal growth and learning allow employees to develop skills and knowledge that increase productivity through new experience that has enabled them to survive the recession. Since the company a given deep concern, respect, and a caring attitude, they reflect it in their work and service to customers, who make Southwest Airlines a preferred domestic airline.
References
Bauer, T., and Erdogan, B. (2010). Organizational Behavior. Web.
McNerney, D. Jr. (1996). Creating a Motivated Workforce. New York: H.R. Focus. Web.
Southwest Airlines uses various approaches to achieve its competitive advantage. The airline’s current strategy focuses on reducing costs to attract and retain more passengers. This firm has gained a cost advantage by using its low-cost model. It has been charging reduced fares to become the leading player in the industry. The firm has also fitted its planes with comfortable seats. It has also acquired cost-efficient crafts to reduce costs.
These approaches have made it possible for Southwest Airlines to remain competitive. The firm has also gained a differentiation advantage by maintaining low costs for its passengers. The 15-minutes turnaround approach has been used to minimize costs. This strategy reduces operational costs because different individuals work as teams. The differentiation strategy has increased the company’s brand loyalty.
The company should identify new competitive strategies to gain a future cost advantage. For instance, the firm can offer reduced prices to its customers. This can be achieved by purchasing large aircraft. Discounts should also be offered on specific occasions to attract more clients. The firm can use alternatives to produce a new differentiation advantage. The airline company can have different aircraft especially after acquiring AirTran. The firm can offer free internet services and better loyalty programs for its customers. The targeted passengers should be equipped with new resources such as free internet (Wi-Fi), proper customer support, comfortable seats, and loyalty programs. Such strategies will eventually make the firm more profitable.
Several competitive strategies can be used to support Southwest’s future goals. The first strategy should focus on the weaknesses and opportunities identified in the SWOT analysis. To begin with, the firm can purchase large aircraft. Such aircraft should also be fuel-efficient. More people are willing to use air transport. The firm can target such individuals using quality services. Many students are getting new skills in business management. The company should hire such graduates to deliver quality services to targeted passengers. The company can also improve the level of security. The firm can also improve its services by offering free meals and by using Online Reservation Systems (ORS). Proper leadership practices will also be required to deliver the best services.
Reference
Hitt, M., Ireland, R., & Hoskisson, R. (2010). Strategic Management: Concepts and Cases. Boston, MA: Cengage Learning.
Southwest Airlines was founded in 1976 and has its base at Dallas. The company has grown so much since its inception (Lee and Maxton, 2000). It is now serving fifty-nine airports and has three hundred and eighty one planes in operation. This expansion is ongoing and it is expected to grow further (Oldham, 1996). Southwest Airlines is well known for its number of offers and its uniqueness among other known airlines.
These offers include the lowest fares among other airlines, its low costs, having the best labor relations, the level of asset usage that surpasses the rest and paying the highest wages to its staff. It seems to offer the best in everything!
To some, the success of the company may be thought to have come from some malpractice from the side of management but in the contrary, everything practiced there is legit. These are among the strategies that the airline has employed in order to achieve its success.
It has also targeted and concentrated on markets that have been disregarded by other airlines as being unimportant. This paper will analyze the service delivery (and manufacturing process), identify what should be done to improve these processes and discuss the reasons why the Southwest Airlines is successful (Compart, 2009).
Service delivery and manufacturing process
One thing Southwest Airlines is known for in terms of service delivery is its very low fares. This has been made possible by the fact that the airline has targeted the middle-sized airports and hence experiences less competition. Less congestion in the airport also implies that service is fast. This helps eliminating queuing for services hence customer satisfaction (Blanco and Shimoda, 2005).
The airline offers fares at competitive rates, provides swift and efficient service and hence encourages travelers to shift from other modes of transport including trains and vehicles to using air travel. This has led to the success of the airline in increasing the numbers of its passengers, which is one of the goals of the company.
The company respects the customer’s choice and a passenger is allowed to leave the airport when they so desire. They operate more like buses. The passengers get to choose what time to leave and it is not the airline’s choice. This makes it very reliable and flexible and hence a choice for many.
Another aspect that makes the services attractive is the fact that the hustle of getting ticket reservation and collection is eliminated. People only need to swipe their cards at a dispenser and it takes only about twenty seconds before they are good to go.
Another advantage of boarding the Southwest Airlines is that there are no connection flights. This also means that there is no need to transfer baggage. This eliminates the hustles and bustles associated with other airlines. The airline has clearly defined its niche as being the commuters since such people usually need to go places for particular reasons and need to do so as quick as possible and with the least distractions as possible.
Reasons for company’s success
One of the reasons for the success of Southwest Airlines can be attributed to its great management, courtesy of its president and founder, Herb Kelleher. This leader has been very inspirational and has influenced the company by maintaining a good working environment. He also created strong and lasting culture at the workplace.
The other reason for its success is the fact that the activities in the company, since inception, have been based on some specific success principles. The airline also readily embraces change but at the same time, tries to avoid change in order to avoid some risks.
Some of its basic strategies employed when the company is considering change include those that specifically touch on either cutting its costs or increasing the number of its passengers.
Among its strategies in fighting off competition with other big airlines is the employment of what may be referred to as a guerilla war. This involves being anywhere but where the other airlines are. This is the reason why the airline is situated far from where the other airlines are.
This included targeting airports and routes that were avoided by other airlines. They stayed apart and maintained routes located far from the overused airports. The airports mainly targeted by the airlines include the middle-sized ones.
This strategy of choosing mid-sized airports means that the airline faces less competition in terms of fares, faces less traffic and less congestion. With these conditions, the airline can easily compete with the other airlines by offering faster service and lower prices compared to the rest.
Most of the flights by the company are short distance flights, which is avoided by other airlines. However, this strategy has worked for the airline since – in most of the airports it operates – it is the airlines with the largest number of passengers.
Southwest Airlines has been identified for having the ability to enter a market and making it very profitable (Kaiser, 1997; Maxton, 1996). One example is given of a case where the airline established a new route between Oakland and Burbank in order to avoid other existing busy and congested routes (Mutzabaugh, 2011).
Using its cheap fares, it was able to attract many passengers and made the route the 21st busiest, rising from the previous 200th position.
Southwest Airlines has been regarded as not only competing with the airlines but with all other modes of transport including road and rail since they offer short trip flights (short-haul commuting). Another strategy employed by the airlines to ensure its success is the lack of a central base.
There is no particular center of operations and its routes form a kind of a network that resembles a spider web. This way, the airline avoids the risks of being vulnerable to competition and consequently losing market.
Southwest Airlines avoids several costs incurred by other airlines. One of them is the cost of selling tickets through agents since there is the payment of agents’ commissions. Another is the avoiding of costs incurred with the installation of computerized systems required to process reservations and other customer services.
To cut down on costs incurred in maintenance of aircrafts, Southwest Airlines invested on only one type of aircraft. This is the Boeing 737. This ensures the maintenance practices are made standard (Ivanovich, 2008). The airline also works with new aircraft rather than maintain old fleet that is not fuel-efficient (Lunsford, 2008; Koenig, 2005).
Kelleher, the founder, has contributed a lot to the success of the company by leading by example. He has practiced the art of employee motivation and made the working environment conducive. When an employee works over time, Kelleher goes there in person to thank him or her.
This way, he maintains good relationships with the employees. Once in a while, he goes and works with the employees, serving drinks, moving baggage and selling tickets in order to lead by example instead of leading by direction.
Another aspect that the company employs in order to be successful is the involvement of the customers. The customers are allowed to give feedback about the services and this helps the company to make adjustments where needed. Both the manager and the employers make a point of interacting with the clients at a more personal way and the staff members are often known by their first names by the customers.
This allows them to report about their likes and dislikes about the staff and this gives the company good grounds on dealing with any form of misconduct. Thousands of letters stream into the company’s office every month and the company takes every issue very seriously and answers all of them (Sartain, 1998).
What should be done to improve the services
Too much has been done by the company already and that explains why it is very successful. It has exploited every aspect of service delivery and has succeeded in making an impact both within and without the company. I would only recommend that the company with the same team spirit and hard work.
Conclusion
Southwest Airlines is a company that has grown over the many years and has been one of the most successful airlines around. This success has been attributed to many factors, some of them including the good management, good working conditions and good working principles. The customer service is amazing and this has led many customers to choose Southwest Airlines.
References
Blanco, C& Shimoda, N 2005. Airlines hedging strategies: The shareholder value perspective. Pearson Prentice Hall, Upper Saddle River, NJ.
Compart, A 2009. Southwest offers $170 Million for frontiers, The McGraw-Hill, New York.
Ivanovich, D 2008. ‘Inspector: Southwest’s FAA ties let planes fly with cracks’, Houston Chronicles, vol. 2, no. 1, pp. 12-15.
Kaiser, R 1997. ‘Southwest may add cities to Iceland deal’, Baltimore Business Journal, vol. 15, no.1, p 131.
Koenig, D 2005. ‘Airlines that hedged against fuel costs reap benefits’, The Washington Post, 21 October, p. 3.
Lee, C & Maxton, T 2000. ‘Southwest to announce expansion at the Love Fields $72 million project would add jobs, but no more flights’, The Dallas Morning News, 13 March, p.2.
Lunsford, J 2008. ‘Airlines dip into hot water to save jet fuel’, Wall Street Journal, vol. 4, no. 3, pp 102-107.
Maxton, T 1996. ‘Council OKs Southwest land lease Headquarters addition, training center planned’, The Dallas Morning News, 14 March, p. 4.
Mutzabaugh, B 2011. ‘Oakland gets Mexico City nonstop on Volaris’, USA Today, 22 August, p.1.
Oldham, J 1996. ‘Southwest Airlines expands its corporate headquarters to prepare for the next century’, Business Wire, 11 December, p.7.
Sartain, L 1998. ‘Why and how Southwest Airlines uses consultants’, Journal of Management consulting, vol.21, no.3, pp.10-16.
Southwest Airlines has been a strong growth organization over the 40 years and has been a pacesetter in the US airline industry. Using its low fares, fun-loving culture, friendly service, on-time flights, point-to-point operational strategy, the airline has been able to maintain profits and a record growth rate through the years while other airline companies run out of business and file bankruptcy due to depressed market conditions.
Southwest begun offering hauls between Dallas, San Antonio and Houston, and it has diversified its markets and now carry more passengers than any other American air company (about 90 million during 2010) and lately announced the buyout of AirTran Airways for $1.4 billion.
The airline now has a market capitalization of over US$ 14 billion and is placed as one of the strongest airlines in the ailing air transport business (Bamber, Gittell, Kochan & von Nordenflytch 2009).
The entire airline industry appears to be on the mends after enduring expensive labor contracts, soaring fuel costs and reduced consumer demand. However, Southwest has experienced growth in the harsh airline industry because it’s no frills business model focuses on controlling costs.
Southwest targets routes with high customer demand and the advanced experience of Southwest’s staff allow Southwest to fast turnaround aircraft and keep their planes in the air more hours per day than its rivals.
However, although Southwest is in many ways has been a success story for the U.S. airline industry, Southwest airlines is currently facing stiff challenges that are threating its enviable success. Though these challenges do come as a surprise to the company as they have already been experience actross the airline industry and have brought to knees many of the industry leaders to an extend of bankruptcy.
Business Problem and Critical Issues
The airline industry has been faced by a lot of challenges lately, which have brought big companies to their knees and even others files for bankruptcy to avoid litigations and eventual dissolution. Issues are:
Economic crises
The economic hard times have really hit on the airlines industry, with most consumers reducing on travelling to say holiday destinations, and preferring even cheaper modes of travelling like road for shorter distances.
This has really affected the operations of Southwest airlines as the number of flights per day have decreased significantly, while its costs like employee maintenance and plane maintenance have remained constant or even gone up (Rob 1997).
However, this might not seem as a great challenge for Southwest as its well know for its low-cost flights and at a time when customers are cutting on their transportation costs, the airline comes in handy and is expected to reap from the hard times.
Increase in fuel costs, shift in fuel hedging contracts
The high cost of fuel is conceivably the most apparent challenge facing the airline industry currently, with many imposing fuel surcharges on customers. The high costs are a factor for most industries, but fuel is a particularly important factor for airlines.
Fuel represents 25% to 40% of the airlines operating expenses and experts approximate that a $1 per barrel price increase in fuel costs the airline industry US$175 million annually.
With the price per barrel hanging in the high US$ 60 plus mark (the price moved above US$ 50 at the end of February 2005), airline companies are feeling the heat on their bottom-line.
This is so evident that each time crude prices go up, airline stock prices dwindle down because of the knee-jerk reaction from the airline industry investors (Terry 2007).
For the Southwest airlines most of its fund hedge contracts were running until 2010, and now the company had to sign new hedging contracts. Given the uncertainty of the oil industry the company is forced to sign expensive contracts with are rather not in tandem with its cost cutting austerities.
For 2012, ticket prices are expected to jump about 15% and this is a major challenge to Southwest as it aims to provide cheap transport options with effective travel packages.
Increase in maintenance costs
With the cost of almost everything in the global markets going up, every aspect of the airline industry has gone up. Maintenance costs have soared up as the cost of labor and materials have almost doubled up over the last decades. The maintenance engineers are demanding new pay packages
One of the move Southwest airlines has taken to reduce the maintenance costs it to have its maintenance done at overseas facilities, which are rather cheaper considering the extensive overhaul needed for airplanes on a time-to-time basis.
However, American maintenance workers are far more efficient doing the maintenance, but they are very expensive and demand as much as three fold what others demand in the global market (Rugman, Oh & Lim 2012).
The increase in maintenance prices may make its way down to the consumers, thus Southwest may be forced to increase its prices to remain profitable though this might hurt its business models of cheap transport means.
Demand by employees, pilots for more pay
Southwest airline’s mainly unionized employees have been pushing for pay increases to equal the rich contracts negotiated by other airlines.
Currently, Southwest offers a first-year minimum pay of US$ $49,572 for its pilots, considering that the company normally recruits more experienced pilots than other airline companies. Though as of 2010, it was ranked the best paying airline company its pilots are demanding for an increase in their pay.
Parameters for Analysis
Porter’s Five Forces
According to Porter, the success of Southwest’s strategy is due partly to its consistency and integration and the unity that ties everything together. Instead of the classic hub-and-spoke system used by most major carriers, Southwest applies a point-to-point strategy which allows it to pick the most profitable routes to ply.
The airline provides service to 61 airports in 31 states with its fleet of over 500 Boeing 737s. In terms of annual revenue and available seat-miles (ASM) Southwest outdoes many of the legacy carriers and is ranked as one of the largest American carriers.
Nevertheless, Southwest is also categorized as a regional or discount carriers due to its point-to-point operational system and discount services.
Internal Rivalry
The airline industry is typified by several carriers who have very little differentiation in their product. Thus, due to these factors and the current market conditions, the airline industry is in a vulnerable situation.
Over the recent times, four major airlines filed bankruptcy; Delta Airlines Inc, Northwest Airlines Corp., United Airlines and ATA Airlines. The partial differentiation of the products of most major airline companies together with the rising demand elasticity has seen the airline industry use price competition as its major way of rivalry.
This unhealthy price competition has eroded profits as the price-cost margins have reduced tremendously.
Southwest came into the market with its niche as discount airlines. Southwest Airlines is in a unique situation since it is one of the principal driving forces in the current price competition. Presently, Southwest has the lowest cost per available seat mile (CASM) of the major airlines and this makes the company control prices to maintain its profitability level.
Nevertheless, Southwest Airlines cost per available seat mile has been gradually increasing due to increased labor costs and a decreasing fuel hedge.
Though Southwest could be facing challenges, Southwest is expected to have a competitive advantage over other airlines even discount airlines as they are trimming their margins and thus have the potential of a lower cost per available seat mile.
Entry
The airline industry is a highly centralized industry with the top ten players taking more than 90% of total American air traffic as of 2004.
In spite of the consolidation of industry and the depleting earnings of most major carriers, many new players are attempting to venture into the airline industry in past years, for example Jetblue which came into the market in 2000 and has registered positive margins.
However, entry into the industry is rather difficult considering the stiff barriers in the industry.
The big financial liabilities experienced by many major carriers in recently and the decreasing customer demand that has been experienced resulting in the tightening of the capital markets for the financing of start-ups.
However, industry analysts predict that there could be a significant change in both industry demand and profitability that could match with increased access to capital markets for new ventures and thus create an incentive for new entrants (Raynor, 2011).
The distinctive approach of new entrants could be to pursue regional markets that have more profitable routes and offer lower prices that the existing airlines given their low marginal costs since they have lower labor and maintenance cost.
Substitutes and Complements
Airlines compete with other forms of transport. The primary substitute for the airline industry is the automobile. The integrated inter-state highway system in America makes it possible to go almost anyplace by car.
Road travel leads short distance travel because of the unrealistic nature of flying such short distance, though as distance needed to travel lengthens usage of carriers considerably increases and vice versa.
In 2010, only 13% of road trips were longer than 1000 miles, comparing to 75% of airline trips. Also rail transport is another substitute to the air transport.
These regional forms of transportation don’t correspond to a direct substitute for the air transport but they may be a competitive advantage that regional carriers have to consider.
That why Southwest Airlines operates a point-to-point destination schedule between regional cities that may also be connected by considerable bus or railroad traffic.
Increased lag times at many airports as a result of increased security checks means the time advantage gained by using air travel has diminished. Thus, the marginal benefit of using air carriers for transport has decreased and the use of train or automobile may become more viable options.
Supplier Power
The airline industry is susceptible to supplier power through three principal inputs; jet fuel, airframes and labor. However, jet fuel suppliers have the strongest supplier power.
Jet fuel prices may not perfectly correlate with oil prices but since 2005 when the historical price level of oil reached US$ 70.85, the effects have got worse for the airline industry.
Like the rest of the airline industry, Southwest Airlines has been facing dwindling margins due to increasing fuel costs, especially now that the company has got into new fuel hedging contracts after its contracts expired in 2009.
Southwest now utilizes dynamic hedging strategies that allow it to apply hedging to control the episodic nature of jet fuel prices by countering anticipated higher prices in the future.
Southwest currently has an advanced hedging program that is continually trying to determine future cash flows relating to jet fuel prices to optimize their hedges.
Buyer Power
Consumers recently have a significant buyer power over the airline industry. The economic crisis and terrorist threats have had a considerable effect on consumer demand. From their high in 2000, revenue passenger-miles (RPM) have decreased significantly and though they have rallied lately they remain at a low level.
The industry has attempted to reduce available seat-miles to react to reduced RPM but the reaction hasn’t been sufficient thus there is a lower load factors.
Carriers excess capacity and the perishable nature of plane seats have made customers to put a lot of pressure on the price of airline tickets. The demand for airline services is highly demand elastic and consumers react fast.
Southwest was the first airline to offer online reservations as a way of reducing costs (this saves the company over $40 million annually) and the commissions paid to travel agents.
Southwest does not offer joint travel website like most carriers do as the management argues that their competitors will gain competitive advantage over it and work negatively on its brand loyalty.
Action Recommendation
Southwest has suffered considerable criticism from the investment world because of its increasing CASM. Other new regional entrants airlines have entered the market in the attempt to challenge Southwest’s dominant position. As CASM increases, Southwest becomes more susceptible and appears to be losing its most important market advantage.
Southwest needs to counter increasing fuel costs with improved non-fuel cost management and fuel hedging strategy. The non-fuel costs Southwest needs to focus on are maintenance and labor.
Many of the other operational costs will be harder to control but with its current market position, Southwest can take steps now to ensure that it retains its low cost advantage.
Over 40 percent of Southwest’s total CASM is due to salaries, wages and benefits for a labor force that is over 80 percent unionized. Many of these unions’ contracts will become amendable during the next several years.
The outcome of these agreement negotiations, especially the pilots’ union, will have a considerable effect impact on the carrier future cost structure. The airline is currently in a strong financial position but it must take into account the dramatic reduction in labor costs that are occurring throughout the rest of the industry.
Also Southwest’s traditional strategy for growth may not continue to work in the future due to its hub airport strategy of the legacy airlines. Southwest traditionally selects only highly profitable city pair routes on which they can establish a strong market share through low prices and high load factors.
However, Southwest has already entered many of the most profitable markets. Growth opportunities still exist for Southwest in expanding operations in cities already serviced.
It is recommended that Southwest enter new cities especially those that have been serving as hubs for weakened legacy airlines. Also Southwest should to expand by opening service to international destinations using their current operational strategy (Owen, 1999).
Also the company should continue to successfully hedge fuel prices and Improve employee-management relations to avoid disruptive contract negotiations.
Conclusion
Through consistent focus on operational efficiency and cost control, progressive human resources management, upbeat marketing, service to understand markets, and a dedication to quality at every level, Southwest Airlines is poised to remain profitable and dynamic.
References
Bamber, G.J., Gittell, J.H., Kochan, T.A. & von Nordenflytch, A., (2009). Up in the Air: How Airlines Can Improve Performance by Engaging their Employees. Ithaca: Cornell University Press.
Owen, B., (February 22, 1999). Southwest’S Now In A New York State Of Mind | Nuts About Southwest. Blogsouthwest.com.
Raynor, M. E., (2011). Disruptive innovation: the Southwest Airlines case revisited. Strategy & Leadership 39, no. 4, 31-34.
Rob K, (February 21, 1997). Southwest may add cities to Iceland deal. Baltimore Business Journal, 56-89.
Rugman, A. M., Oh, Chang H. & Lim, D., (2012). The regional and global competitiveness of multinational firms. Journal of the Academy of Marketing Science, 40, no. 2, 218-235.
Terry, R. J. (December 10, 2007). Icelandair stopping flights out of BWI. Web.