Southwest Airlines Co. is an American low-cost airline. Southwest is the largest airline in the world by number of passengers carried per year (as of 2009). Southwest maintains the third-largest passenger fleet of aircraft among all of the world’s commercial airlines. As of May 3, 2009, Southwest operates approximately 3,510 flights daily. Southwest has its headquarters on the grounds of Love Field in Dallas, Texas.
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Southwest Airlines has carried more customers than any other U.S. airline since August 2006 for combined domestic and international passengers according to the U.S. Department of Transportation’s Bureau of Transportation Statistics. Southwest Airlines is one of the world’s most profitable airlines, posting a profit for the 37th consecutive year in January 2010.
Southwest’s successful business model involves flying multiple short, quick trips into the secondary (more efficient and less costly) airports of major markets, and using only one aircraft type, the Boeing 737.
The Southwest Effect
The success and profitability of Southwest’s business model led to a common trend being named after the company, the Southwest Effect. Since Southwest’s original mission in Texas was to make it less expensive than driving between two points (in the early 1970s, during the first major energy cost crisis in the U.S.), it developed a template for entering markets at rates that allowed the airline to be profitable, yet only on the basis of lean operations and high aircraft use. The key concept to the Southwest Effect is that when a low-fare carrier (or any aggressive and innovative company) enters a market, the market itself changes, and usually grows dramatically. For example, when fares drop by 15% from their historical averages, the number of new customers in that market may not just double, but actually quadruple, or more.
Southwest has been a major inspiration to other low-cost airlines, and its business model has been repeated many times around the world. Europe’s EasyJet and Ryanair are two of the best known airlines to follow Southwest’s business strategy in that continent (though EasyJet operates two different aircraft models today). Other airlines with a business model based on Southwest’s system include Canada’s WestJet, Malaysia’s AirAsia (the first and biggest LCC in Asia), Sir Richard Branson’s and Australia’s Virgin Blue (although Virgin Blue now operates two aircraft types), Qantas’s Jetstar (although Jetstar now operates two aircraft types), Thailand’s Nok Air, New Zealand’s Freedom Air, Mexico’s Volaris and Turkey’s Pegasus Airlines. Although Southwest has been a major inspiration to many other airlines including Ryanair, AirAsia and Jetstar, the management strategies, for example, of Ryanair, AirAsia and Jetstar differ significantly from those of Southwest.
Goals and Objectives
- Ensure highest quality Customer Service in the air or on the ground.
- Ready to help customers under any circumstances.
- Are there to ensure you make it from point A to point B safely
- To stay the most successful with low-fare, high frequency point-to-point carrier.
History of Southwest Airline
- Ø On February 20, 1968 the Texan Aeronautical Commissions approved plans to fly in 3 states, the c5eators are Rollin King and Herb Kelleher
- Expanded through 1980’s to 1990’s by 1993 Southwest Airlines could fly in 34 states in 15 states
- They also expanded into new destinations California, Northwest, Florida, East Coast
- The competitors could not keep up, “500 pound cockroach that was too big to stamp out:
- Ø While the airfare was dropping the traffic went up tremendously, in 1994 United started a shuttle service, the large air carriers were feeding traffic into transpacific and transcontinental routes, they could not keep up
- In 2004 Southwest Airlines is fourth largest domestic carrier, customer boarded
- In 2002 they traveled in 58 cities and 30 states, it has been 13 years in a row that they are profitable, even after September 11, 2001, net income fell 52.9 percent, Southwest was the only airline company that had a profit all the other companies were in the red
- Was the first airline to achieve the Triple Crown, they had five difference Triple Crown dedicated to the Employees of Southwest Airlines for their excellent achievements.
Southwest Airlines Mission and Vision Statement
- The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. To give ordinary people the opportunity to fly.
- To the employees
- We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth. Creativity and innovation are encouraged for improving the effectiveness of Southwest Airlines. Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer.
- To have a conservative increase growth, capitalize and cutback schedules of other airlines. To continue expanding conservatively in long-haul success.
New Mission Statement
Southwest Airlines is a company that is for anyone and every that wants to get from point A to point B by flying. Our service and philosophy is to fly safe, with high frequency, low-cost flights that can get passengers to their destinations on time and often closer to their destination. They fly in 58 cities and 30 states and are the world’s largest short-haul carrier and we make sure that it is run efficiently and in an economical way. Their technology is current such as our check-ins process is faster. Striving to expand and grow in a conservative manner is key, and being financially stable by keeping quality high and cost low. Their excellence is managing cost by our rapid twenty-minute gate turnaround, a non-stop flight with our airplanes, and a more productive workforce which keeps above our competitors. They treat our employees like customers, family and motivate and compensate them for doing a job well done. They continue to be in the Fortune Magazine’s most admired companies (2nd in 2002) 100 best companies to work for. Since 1972 we have ranked first in Money Magazines featured in “The 30 Best Stocks.” In their communities they make donations to charities to organizations and people in time of need.
New Vision Statement
- Their vision is to expand our locations both domestic and overseas by being the largest and most profitable airline company to achieve both short and long-haul carriers efficiently and with low cost. Also to be an airline carrier that has the most productive workforce to guarantee the best flight possible for each and every passenger.
One airline influenced by Southwest was Morris Air, founded in 1984 by June Morris and David Neeleman, based in Utah and operating in the northwestern U.S. Southwest Airlines purchased Morris Air and absorbed the capital and routes into its inventory and service. David Neeleman worked with Southwest for a short period. When his non-compete agreement expired, Neeleman founded JetBlue Airways, a competing airline that also incorporates (and in some ways, improves upon) many principles and practices pioneered by Southwest, including building a positive, warm employee culture and operating a simple fleet.
Southwest Airlines has mostly pursued a strategy of internal growth, rather than by acquisition of other airlines as commonly occurs. However, in addition to acquisition of Morris Air Transport (see above), Southwest did acquire competitor Muse Air in 1985, which operated McDonnell Douglas MD-80s. Muse Air was renamed TranStar Airlines. TranStar Airlines was then closed in August 1987.
Towards the end of November 2008, Southwest announced it was buying the operating certificate and the remaining assets of ATA Airlines. This acquisition transferred to Southwest Airlines ownership of New York LaGuardia slots formerly controlled by ATA. The transaction did not include any aircraft, facilities or employees of ATA.
- Deregulation in 1978 1st big political win for southwest airlines.
- Government helped two major airlines get out of financial trouble after 9/11 attack.
Economic: – When economic conditions are unfavorable:
- Airliners very susceptible/vulnerable
- Discount airlines see profits
- People look for cheaper travel options
- Flying on planes to get to where you need to be has been the norm for the last 30 years and will continue to be the norm in the foreseeable future.
- As more and more Spanish speakers come to live and travel in the US there is more need for airlines to be bi-lingual.
- Some airlines have converted to e-tickets, and have a self-checking machine.
- Many people use the internet to compare prices to find the best option for their trip.
- Airlines have cut prices and offered expensive frequent flyer programs just to grab customers away from other airlines
- The regular airlines are starting to get away from the hub system and switch to the point to point system that southwest airlines uses.
- Legal issues have hindered airlines from making a full 9/11 recovery.
Porter’s 5 forces Model
Rivalry among competitors: – There is high competition for Southwest airlines because other airlines are also there in US which are providing same services to the customers. Its main competitors are United airlines, Alaska airlines etc.
Rivalry among competitors sets the price-Southwest Airlines is a discount airliner. Rivalry is increasing, as the market decreases, and competitors downsize, the competitors become more or less equal in size and capacity. This means that as economic conditions worsen, competitors downsize and then compete for the same remaining market.
Threats of new entry: – The threat of new entrants is low, the demand is not high. On top of that, there are hurdles, not necessarily the greatest; the FAA. Government regulations and restrictions imposed on those involved in this industry. Such would be government sanctions consequent of international issues.
Threats of substitutes: – Threats of substitutes is very high because many other form of transportation such as high speed trains, video conferencing, buses etc. While these alternates cannot offer the speed of travel, most of Southwest Airlines’ customers are attracted to the low price.
Bargaining power of Buyers: – The bargaining power of buyers is very high because many other airlines are present for which passengers can opt for instead of Southwest airlines.
Suppliers include those who provide service/products necessary for Southwest Airlines to their business function. For Southwest Airlines, suppliers include mechanics (and other maintenance people), providers of fuel, food (the snacks that are offered). The suppliers do not have much bargaining power. Customers include both residential and commercial sectors. There is no bargaining power for customers, as there is no threat of backward integration; it is unlikely that customers of Southwest Airlines are going to build their own airplanes and fly themselves.
Bargaining power of suppliers: – The supplier’s power is low for Southwest airlines because they have to charge the premium according to the strategy of competitors otherwise the passengers can switch off to the other airlines where he can have maximum benefits in terms of quality of service and the monetary value.
The Boston Consulting Group (BCG) Matrix is a simple tool to assess a company’s position in terms of its product range. It helps a company think About its products and services and make decisions about which it should keep which it should let go and which it should invest in further.
In 1970’s, BCG experience curve work led to inside that has a significant impact on business thinking i.e. of rapid growth in market share was the important as the curve suggested then the usual approach resource allocation
in which each business unit funded in on growth seems to be recipe for its failure.
Business with low market share but high potential would never generate enough cash to win the race down the experience curve. Those with the high market share but few changes of growth would generate far more cash than those would use productivity.
The BCG matrix can be diagrammatically represented as follow
Question marks are products that grow rapidly and as a result consume large amounts of cash, but because they have low market shares they don’t generate much cash. The result is large net cash consumption. A question mark has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If it doesn’t become a market leader it will become a dog when market growth declines. Question marks need to be analysed carefully to determine if they are worth the investment required to grow market share.
Dogs have a low market share and a low growth rate and neither generates nor consumes a large amount of cash. However, dogs are cash traps because of the money tied up in a business that has little potential. Such businesses are candidates for divestiture.
Stars generate large sums of cash because of t heir strong relative market share, but also consume large amounts of cash because of their high growth rate. So the cash being spent and brought in approximately nets out. If a star can maintain its large market share it will become a cash cow when the market growth rate declines.
As leaders in a mature market, cash cows exhibit a return on assets that is greater than the market growth rate ± so they generate more cash than they consume. These units should be µmilked extracting the profits and investing as little as possible. They provide the cash required to turn question marks into market leaders.
Strategies for Southwest airlines
Market Penetration Strategy
- Encouraging existing Customer to buy more Showing benefits for using more (associating freebies/extra service/membership with primary offering).
- Try to look for foreign entrant’s weakness.
- Seek additional distribution channels (More tie ups & collaboration: Try seeking collaboration with international carriers, Bilateral discussions over seats and code-sharing between the carriers).
- New product development.
Market Development Strategy
- Try to find out new customer group (Old-retired persons).
- Special offering for first time fliers.
- May go for other services like international flights etc. (concentric diversification).
- May go for arrangement fashion shows (horizontal diversification).
- May go for other things, which can lure the youth.
SWOT Analysis of Southwest Airlines
Southwest has successfully adopted a cost leadership strategy.
- Southwest maintains operating expenses per available seat mile at 15-20% below average.
- The company has no baggage handling, no meals, no central reservations, and no assigned seats.
- Because all of its planes are Boeing 737s, maintenance, turnaround, and training costs are contained.
- The company has embraced technology that will reduce costs (e.g., ticketless travel).
The company has a reputation for great customer service.
- 28 years of safe, reliable operations
- 5 consecutive years of Triple Crown Customer Service
- 5 consecutive years of record profits and 24 consecutive years of profitability
- Top ranking in the Airline Quality survey conducted by The National Institute for Aviation Research for two of the last three years
- A route system that has grown to 52 airport in 25 states, carrying more than 50 million customers on 243 Boeing 737 aircraft, etc.
The company has a strong, fun-loving, employee-oriented culture. The company’s mission statement focuses on these aspects of the business.
The company’s growth has been steady and planned. Southwest enters new markets only when they can achieve frequent flights.
The company’s marketing focuses on its low prices, convenience service and sophisticated combination of advertising, public relation and promotions.
- Gap between Southwest and the rest of the majors has narrowed as other carriers have attempted to emulate Southwest formula.
- Southwest’s competitors are offering shuttle services that compete directly with the company. They are also operating, investing in, and forming alliances with regional carriers.
- As the result of its steady, planned growth strategy, there are numerous untapped domestic markets
- Pilot and Flight Attendant Unions have increased salary and benefit packages to be the highest in the industry. Continued increases in Seat cost per Mile will not allow southwest to remain a low fare carrier.
External Opportunities and Threats
There are opportunities for expansion to new markets.
The new Boeing 737-700 has the ability to fly longer distances nonstop, which may change the definition of “short haul”.
Demographic trends appear favourable to an airline focusing on price and reliability.
The consumer continues to seek convenience and time savings. Flying, rather than driving, will meet that need if the price is right and the airline is reliable.
The competition is looking to international, rather than domestic markets, for growth opportunities.
Improved computer technology will allow more ticketless transactions and reservations made by PC.
Southwest’s ability to hold the line on costs will impact its cost leadership position.
- The largest cost component is labour. This cost could be impacted by union actions, which cover 85% of Southwest’s workforce.
- The second largest cost component is fuel, which could be negatively impacted by economic or political events.
Government regulation could hinder Southwest’s ability to control costs, control fares, or enter new markets.
- Recent government crackdown on safety (e.g., insulation, cargo fire detection) means costly retrofits.
- Proposed re-regulation would limit existing firm’s ability to respond to under-pricing by new companies.
- Prior to deregulation in 1978, carriers were limited in their ability to enter new markets.
- The government recently proposed an increase in facility tax rates, which would have resulted in higher costs.
Improved telecommunications may lower demand for air travel, or may lower demand for “discount” airlines.
- E-mail and teleconferencing can result in less need to travel.
- Consumers may demand “personal” technology on planes, such as movies, phones, games, etc.
Alternative forms of transportation, such as a high-speed railway, could weaken demand for air travel. Also, if the economy weakens, people may choose to drive rather than fly.
Southwest would be hurt if the public perception were that low price equates to low quality.
Competitive Advantage for Southwest airlines
- Focus on Customer Service.
- Embracing the “New economy” through the use of internet tickets sales.
- Focus on lowest cost fares.
- Internal demand
- Keeping fares lower through cost reduction methods
- Lowest cost due to no assigned seating
- No meals on flights
- Lower overhead expenditures
- Use “Hubless” system to reduce costs
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