Southwest Airlines 1

Southwest Airlines

Southwest Airlines 2 Table of Contents: Executive Summary... Introduction Analysis . External Environment Analysis . Internal Environmental Analysis Current Strategy . Alternative Strategies ..... Recommended Strategies ... Conclusion ...... References ... 3 4 5 5 7 8 8 10 10 11

Southwest Airlines 3 Executive Summary The US commercial aviation industry has grown dramatically since the end of World War II. Following the1978s Deregulation, new competitors, lower fares and opening of new routes and services have created an intensive competitive war among the airline companies. Airline industry evolution, commercialization and privatization have altered the way people live and conduct business, it has reduced travel time and changed our concept of distance, making it possible to visit and conduct business in places once considered remote. For the US airline industry, the September 11, 2001 terrorist attacks combined with the worst economic recession and astronomical oil prices had an overall negative impact driving the industry to lose millions of dollars and causing numerous bankruptcies and liquidations. In 2010, the US economy improved moderately promoting an increase on air travel demand. This sequence of events has driven airlines to continuously evaluate the fluctuations not only in the local airline market, but worldwide. Since the beginning of Southwest Airlines, operations have focused on the domestic segment, devoting their efforts on being the lowest fare, high frequency, point-to-point carrier. With the assistance of the analytical tools including Stakeholders Analysis, PESTEL Analysis, SWOT Analysis, Porters 5 Forces and VRINE Analysis we can evaluate what possible alternative strategies the company could adopt and what their advantages and disadvantages are. By analyzing the internal and external environment we can determine what strengths and opportunities the company possesses to continue growing and expanding, and evaluate their weaknesses and threats and how they will mitigate them in order to continue succeeding.

Southwest Airlines 4 Southwest Airlines Southwest Airlines (SWA) has evolved to become the largest and most successful low fare domestic airline in the US. After a 3 year legal action initiated by competitors and resolved in favor of SWA; in 1971 the company started operations with only four airplanes serving three cities in Texas. Their business philosophy started with one simple notion: If you get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and make darn sure they have a good time doing it, people will fly your airline (Southwest 2011). With this in mind they were able to create competitive advantages over other airlines. SWAs mission Dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride and Company spirit(Southwest 2011) has driven them during the last 40 years to maintain a high level of commitment and competency, currently flying to 72 cities in 37 states and employing over 35,000 employees. SWAs success has not been possible without their employees. Recruiting people who are energetic, want to work hard and have fun at the same time has been their consistent recruitment philosophy throughout its history (Carpenter & Sanders 2009). Employees and management maintain enjoyable relationships; they feel part of an extended family and take part in the companys success. SWAs philosophy of not following the industrys efforts to pile on additional fees and surcharges, giving the choice to customers to pay more if they want optional services, has helped them remain the top low cost producer of major airlines, with a high level of superior customer satisfaction that continuously improves shareholders interest, the companys position and their financial stability.

Southwest Airlines 5 Analysis Business can chose between being a competitor or a leader. SWA have surpassed competition by being focused, innovative and proactive while providing the best customer experience. As time passes, customer needs change and economies evolve, effective management must continuously re-evaluate strategies and adjust accordingly. External and internal environment analysis provides guidance to do so. But what if we develop a new business division or expand to other countries?

External Environment Analysis: SWAs most valuable stakeholders are their customers, the reason why they do business. They emphasize on providing the best customer experience by promoting a high quality and friendly service, an efficient operation and offering the lowest fare possible. PESTEL: SWAs financial stability, operational efficiencies, reliability record and commitment to safety has reduced the uncertainty and instability political pressures create in the travelers minds. Government regulations, taxes and controls influence on the complexity of their operations. By being innovative, adopting a quality service culture and offering lowest fares SWA has successfully mitigated the economic cycles fluctuations. By continuously evaluating changes in societys vision, behavioral patterns, habits and lifestyle SWA has exceeded their markets expectations. Incorporating modern technology promotes efficiencies, cost reduction and infrastructure simplicity, from wireless communication, internet and e-commerce to aircraft modernization and efficiency. The industrys performance can be affected by uncontrollable environmental factors like weather and air traffic. SWA attempts to forecast changes and positively impact their customers by being empathetic and transparent with their customers.

Southwest Airlines 6 Airlines are pressured to preserve the environment and reduce global warming. SWAs environmental programs support emissions reduction, energy conservation and recycling programs. Complying with environmental legislations, consumer protection, safety and employment laws can be costly, but in the long term reduces litigations risks and noncompliance fines. Opportunities and Threats: SWAs business opportunities includes increasing the number of destinations and longer flights availability, emerging into national and international markets and developing frequent flyer programs and complements. SWAs threats are the decline of leisure travel due to terrorism, the continuance of a depressed economy, governmental and environmental regulations that could result in costly implementations, and fuel price fluctuations. Porters 5 Forces: With a variety of financing opportunities and a deregulated airline market, the barriers of entering the industry are moderate. Brand recognition and low fares play important roles in maintaining a competitive advantage. The power of suppliers including fuel distributors, aircraft manufacturers and airports is fairly high. SWA to mitigate their exposure has focused on a single airplane model, small airports and hedging fuel cost fluctuations. The power of buyers is low. Consumers are very price sensitive, however purchasing power is individual the impact of their decisions are minimal. SWA services an average of 250,000 passengers of the industrys 2 million daily passengers. The threat of substitutes is low. For casual travelers train, buses or cars can be an alternative method of transportation. But the majority of business travelers who are looking for an efficient and reliable way of transportation, this threat would seem minimal. The rivalry degree is high due to the competitive environment of the airline industry. There is a high cost of competition, its expensive to exit the business and the variety of products or services is limited. SWA has maintained a low operational cost while

Southwest Airlines 7 providing excellent customer service; this has helped them maintain a competitive advantage over their competitors. Internal Environment Analysis: VRINE: SWAs most valuable competitive advantage has been the ability of creating value for customers in a niche market segment, outperforming their competition by serving a particular segment that wants low cost fares, point-to-point travel and fast turnaround. Not charging for an inherent travel experience has differentiated them from the competition. Competition has tried to mimic their model of low prices, no meals and excellent service, but has failed to imitate it due to the high implementation costs. Customers can choose from wide variety airlines who offer added amenities, but because of their expensive and complicated hub-andspoke structure models, they have not been able to substitute SWAs product. SWA has been able to exploit their competitive advantages by maintaining low cost operation, short-haul routes, with quick flight turnaround and avoiding larger airports. Strengths and Weaknesses: By maximizing the usage of their strengths, SWA has positioned itself as a market leader in the industry with a low-cost business model and strong financial performance. Strong organizational values and their culture have given the company an excellent relationship with their employees and customers. The fleet uniformity has reduced training and maintenance costs creating flexibility of crew allocations, increasing efficiencies and economies of scales. Standardization of procedures, promotion of skills, versatility among staff, an excellent safety record, quick turnaround times and pricing structure are additional strengths. However, the lack of alternative booking channels and travel agencys relationship limits their exposure to potential customers. Reduced flight destinations and no international

Southwest Airlines 8 presence also limit travel options. Customers could perceive the airline as a second class carrier due to the lack of segmented seating for first and business class. Current Strategy: SWAs business strategy has been a focused low-cost leader. As a low cost competitor, they serve a market of travelers who look for low fares and a reliable service. SWAs low cost operation of using one type of plane, quick turnaround time on the ground, presence on lesscrowded airports, point-to-point routes, no-frills service, superior management and employees commitment have resulted in a sustainable, competitive advantage that is valuable to their customers and is difficult for competitors to imitate. In line with their strategy of growth and financial goals, in 2011 SWA purchased AirTran Airways. The integration of both companies will increase SWAs customer base, expand their route network and strengthen their financial position. Alternative Strategies: As economies and markets evolve, management continuously needs to evaluate different strategic alternatives to sustain and promote business growth. The following recommended opportunities and strategies are some options that management should consider. New Business Entry Focused Differentiation - From flying to driving, all in one. The proposed strategy will require SWA to start up a car rental division or subsidiary. Leveraging on the current customer base, SWA can provide the option to rent a car at a discount during the ticket fare purchasing process. This additional service will complement their current structure, by adopting their competitive advantage of a low cost operational model. By investing on a single model moderate size car fleet, SWA can exert purchasing power over the automobile distributor and negotiate better prices; this will translate into future savings on maintenance and

Southwest Airlines 9 repairs costs. The new business will operate at the same airports SWA currently flies starting with the busiest airports, then expanding to other ones as demand increases. This new business model will generate additional revenues, while ensuring excellent customer service. Some of the disadvantages of entering the business are the startup capital investment required that could potentially affected SWAs cash flows. The increase in level of completion after the 2001 economic turndown has increased over the years due to the shift in the industry to rely more on the vacation sector and less on the relationship with the airline industry. The lack of knowledge of the car rental industry could potentially increase education and administrative costs. Business Expansion Focused Low Cost Leadership The second recommended strategy would evaluate entering the Canadian domestic airline industry, which represents a 10% of the total transportation, and provides services to an average of 40 million passenger. In1988 Canadas airline industry was entirely deregulated, removing the measures designed to control market entry or exit and the regulations governing services and fares. The 1995 Open Ski agreement between the US and Canada provided a unique open access between the countries, increasing the opportunities for better air services, flight options, efficiencies and competition. Currently there is a duopoly system in Canadas airline industry dominated by Air Canada with 56% of market share and West Jet with 36%. The age of professional business class traveler ranges between 24-60 years and live in Canadas metropolitan cities such as Toronto, Quebec, Montreal and Vancouver. Some of the disadvantages of entering the Canadian airline industry are the initial startup capital required that could potentially affected SWAs US division cash flows. The differences in language and culture could potentially threat their development and growth; they would have to hire bilingual English and French speaking staff, in order to maintain the reputation of friendly and high quality customer service. In addition they would have to

Southwest Airlines 10 restructure and invest into their reporting accounting platform due to the differences in US and Canadian GAAPs. Recommended Strategy: After evaluating both strategies, advantages and disadvantages, I would recommend that SWA adopt the business expansion in Canada. By replicating SWAs model of low cost fares, point-to-point service, excellent customer service, quick turnaround time and one single model plane, they would be able to target the frequent flyer business professional travelers who are looking for a low cost reliable service. Maintaining the current usage of their 737 Boeing aircraft they would be able to fulfill the needs of their target customers. By designing a marketing and promotion campaign focused on the business professionals SWA can maximize their exposure and create awareness. The airline industry generates approximately $18 billion CAN dollars in revenues, with SWAs strategy they can gain between 10% and 15% of the market, presenting $3 billion dollars in revenues. With SWAs management experience in dealing with hedging transactions they could mitigate the risk of exchange rates fluctuations.

Conclusion Competition requires companies to deliberate on what to do and what not to do. SWA strategy of not following competitions models and being different has successfully proven their vision statement A sustainable future is one where there will be a balance in our business model between Employees and Community, the Environment, and our Financial Viability (Southwest 2011). Concurrent with the strategy proposed, SWA should not deviate from their current business model which has made them very successful; they should use it to complement and support any future strategy.

Southwest Airlines 11 References Air Canada, (2011). Main Web-Site Retrieved November 12, 20101 from http://www.aircanad.com/ Airlines Activity, (2011). Research and Innovative Technology Administration (RITA). Retrieved November 11, 2011 from: http://www.transtats.bts.gov/ Southwest Airline Co, (2011). 2010 Southwest Airline Annual Report, Retrieved October 27, 2011 from: http://www.southwest.com/ Southwest Airline Co., (2011). Southwest Main Web-site Retrieved November 1, 2011 from: http://www.southwest.com/ Southwest Airlines, (2011). Retrieved November 7, 2011 from: http://en.wikipedia.org/wiki/Southwest_Airlines Statistic Canada (2011). Retrieved November 13, 2011 from http://www40.statcan.ca/l01/met01/met119-eng.htm The Airline Industry, (2011). Retrieved November 1, 2011 from: http://www.investopedia.com/features/industryhandbook/airline.asp The Car Rental Business (08/08/2011). Automotive News, from http://www.masteralfadesir.com/the-car-rental-industry.html Transport Canada, (2011). Commercial and Business Aviation. Retrieved November 13, 2011 from http://www.tc.gc.ca/eng/civilaviation/standards/commerce-menu.htm Transport Canada, (2011). Open Skies agreement with the United States. Retrieved November 13, 2011 from http://www.tc.gc.ca/eng/mediaroom/backgrounders-openskies-5281.htm