Southwest Airlines Paper11

The strategic management analysis

------ Southwest Airlines

Team members:

Han Zhijun (Hannah)

Wang Zheng (Elaine)

Song Guiqi (David)

Contents

1. The situation analysis of Southwest Airlines

1) The analysis of US airline industry

2) The current organizational context

2. The SWOT analysis

1) Strengths

2) Weaknesses

3) Opportunities

4) Threats

3. Porter’s five-force analysis

1) Current rivalry

2) Potential entrants

3) Bargaining power of buyers

4) Bargaining power of suppliers

5) Substitute products

4. General environment analysis

1) Economic

2) Demographic

3) Sociocultural

4) Political legal

5) Technological

5. The future development

The strategic management analysis

------ Southwest Airlines

Southwest airlines is a domestic US airlines that primarily provide point-to-point,

low-fare, high customer satisfaction airline services. The company operates only in

the US. In airline industry, it set a record which 36 consecutive years of profitability.

Next, this article will analyze the key of success and strategic management of

Southwest from four aspects.

1. Situation analysis

The analysis of US airline industry

With high fuel costs, dire economic conditions, enhanced security measures and the

shock of September 11th, US airline industry is facing big challenges. In addition, the

emergence of the other two airline companies, America airlines and Delta airlines,

making the competition becomes more and more brutal. In such a complex and

volatile situation, Southwest has maintained its competitive leadership position. It not

only set a record that its 36th consecutive year of profitability but also continued

leadership in customer satisfaction as it once again received the fewest customer

complaints of all airlines.

The current organizational context

Southwest’s overall strategy was to minimize total travel time for customers,

including ticketing and boarding, and to provide service out of airports convenient to

doing business or vacationing in a city. In order to better implement this strategy, it

serves primarily short- and medium-haul routes with single-class service targeted at

business and leisure travelers. [1] In addition, the keys to Southwest’s success includes

the following several strategic factors.

Low-cost advantage

Southwest has enjoyed a significant cost advantage compared to the other traditional

carriers, and low operating costs continue to be one of its competitive strengths. It

mainly includes the following three factors.

One important element of low-cost is its use of a single type of aircraft-the Boeing

737-that allows for simplified scheduling, operations, maintenance, and training. At

the same time, the company also has outfitted its fleet with fuel-saving, performance-

enhancing blended winglet. [2]

Another operational strategy that has allowed Southwest to keep costs low is the use

of technology, especially automated processes. It was the first airline to offer a

ticketless travel option, eliminating the need to process and then print a paper ticket.

Moreover, as one of the first airlines to establish a Web site, southwest.com continues

to be the number one airline Web site for sales and revenues. [3]

The third factor is that it chooses smaller and less congested places as airports and it

achieves low cost by flying from less popular and expensive city airports in the USA.

Legendary customer service

The mission of Southwest is dedication to the highest quality of Customer Service

delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.

[4] All employees who work in Southwest contribute to their efforts for achieving this

mission. From baggage handling and passenger safety to delays and cancellations and

getting a refund, this company has been working to perfect these details in order to

make customers satisfaction.

After 40 years of service, Southwest Airline, is the USA’s leading low-fare carrier,

continues to differentiate itself from other airlines-offering a reliable product with

exemplary Customer Service. It is the most productive airline in the sky and offers

customers a comfortable travelling experience.

2. SWOT analysis

Strengths

As one of the major low cost airline leaders, Southwest is very famous. Because

of its low price strategy, it has a batch of stable and loyal passengers.

Using technology, especially automated process in order to reduce customer

waiting time.

Southwest only purchases Boeing airplanes to reduce costs in operations,

maintenance and training and gets discount on the purchase

It is known to be one of the most profitable airlines in the intensely competitive

industry- 36 consecutive years of profitability.

It has a positive organizational culture and encourages a positive and warm

employee culture. Its people are its most valuable asset.

Weaknesses

Due to only offering single-class seating service, it lost some passengers who

prefer to business class or first class seating arrangement.

Southwest’s market positioning is short –and –medium-haul routes, so it has a

weakness in offering international flights.

Having a reduced amount of maintenance and inspection can lead to irresponsible

employees. It led to the company have the risk of litigation.

Opportunities

Facing with the globalization of world economy, Southwest has a lot of

opportunities to expand to many national and international markets that are still not

covered.

Because of technology updating, it can get the latest technology that would give it

a further cost effective lead, as well as providing new products and services.

Southwest may expand the scope of target customer to leisure or business classes.

It was the first to offer senior discounts, ticketless traveling, and services for air

freight delivery.

Threats

Due to the impact of economic crisis, the number of travelers for leisure is

reducing.

With the increasing of terrorist attacks, more of threats being made for air travel.

Annual airline security cost increment.

3. Porter’s five-force analysis

Combining with Southwest, we will use Porter five-force model to assess its specific

environment.

Current rivalry among existing firms

The airline industry is intensely competitive. Major competitors of Southwest exist

such as JetBlue, American, Delta, and United. There are four conditions that

contribute to intense rivalry among existing competitors. First, these competitors are

equally balanced in terms of size or resources. The competitors are strong, innovative

and low-cost such as JetBlue. Second, the industry growth is slow especially in

domestic. The marker share is fixed in native customers. Third, enormous fixed costs

lead competition to spread out the costs. Fourth, specialized assets lead to high exit

barriers. All the four factors result in intensive competition to Southwest.

Potential entrants

The barriers to entry are high in airline industry so that the threat of potential entrants

is low. There are two main entry barriers. First is tremendously capital intensive.

Second is government policy for example heavily regulated and taxed. The two

sectors make potential entrants to think twice when they want to enter into the airline

industry. It is opportunity to Southwest.

Bargaining power of buyers

The bargaining power of buyers is high in the airline industry. First, customers face

low switching costs. The airline industry is quite cyclical as much of passenger travel

demand is discretionary. Second, customers can get enough prices and fly schedule

information through various ways such as internet agency. These two factors can

make airline industry must pay more attention to customers requirements. Providing

low-cost and high quality service attract more consumers. It is what Southwest has

done.

Bargaining power of suppliers

Southwest face threat in bargaining power of suppliers. First, the major supplier of

aircraft is domination by Boeing because Southwest uses single type of aircraft

Boeing 737. Second, there are no substitute products to fuel the plane. Fuel intensive,

with alternative energy sources unlikely, is subject to global political events. Third,

the above two main equipment and material are important input to airline industry.

Southwest will confront the huge cost problems. Although Southwest adopts fuel

hedging, it still faces the increasing cost problems.

Substitute products

There are substitute products in airline industry such as train and car. But there are

special characters in airplane for instance fast, comfortable and timely especially

during long distance. There are not-so-good substitutes for airline so that Southwest

will face low threats.

4. General environment analysis

Now, we will analyze the general environment of Southwest from five aspects as

follows.

Economic

The economic environment will take threats or opportunities to the industry. The

macroeconomic include interest rates, exchange rate, GDP, GNP, consumer income

and consumer confidence levels and so on. [5] The economic crisis will lead consumer

income down. It will reduce the number of travelers for leisure. So the airline revenue

will reduce. The international crude oil price fluctuation will affect transportation cost

of airline. Fuel price increase will lead cost increase. Fuel per gallon in 2003 is 72

cents, while is 2.44 in 2008. Southwest revenue was up while net income was down in

2008.

Demographics

Demographics consist of gender, age, income levels, ethnic makeup, education,

geographic location, family composition, employment status, and so forth. [6]As of

July 21, 2011, the United States has a total resident population of 311,799,000,

making it the third most populous country in the world. It is a very urbanized

population, with 82% residing in cities and suburbs. California and Texas are the most

populous states, as the mean center of United States population has consistently

shifted westward and southward. [7]

Leading U.S. population centers

Rank

Core city Pop.[32]

1 New York City, New York 8,363,710

2 Los Angeles, California 3,833,995

3 Chicago, Illinois 2,853,114

4 Houston, Texas 2,242,193

5 Phoenix, Arizona 1,567,924

6 Philadelphia, Pennsylvania 1,447,395

7 San Antonio, Texas 1,351,305

8 Dallas, Texas 1,279,910

9 San Diego, California 1,279,329

10 San Jose, California 948,279

2008 U.S. Census Bureau estimatesThe strategy of Southwest is to provide short-distance transportation. The company

wants to become the “air bus” for the office workers. Customers can take the airline

fast and convenient just like taking buses. According to the characters of American

demographic, Southwest focuses on employees living and working in different major

cities as the target market.

Sociocultural

Sociocultural sector encompasses traditions, lifestyles, values, attitudes, beliefs,

tastes, patterns of behavior and so on. Different countries have different cultural.

Southwest has special irreverent, fun and goofy cultural on customers. These

customers are mostly native. Now Southwest is pursuing code-sharing deals with

foreign carriers in Europe and Asia in order to expand its market beyond North

America. So there will be diversified cultural customers. The traditional fun cultural

of Southwest will face a threat. Southwest must modify it to adapt the various cultural

customers.

Political-legal

Political stability is a given in most countries, some still face volatile and unstable

situations. Political unstable can take bad impact on the industry development. For

instance, 9/11, terrorist threats cause less people to fly. The political risk will take

threat to Southwest because it will reduce the revenue.

Major political-legal concerns include taxation, minimum wage, which can have a

significant impact on the financial performance. Airline industry is heavily regulated

and taxed. Government regulation will increase the operating costs which will take

pressure to Southwest.

Technological

Technological innovations create opportunities for Southwest. Online booking, online

check in, self-service rapid check-in boarding pass kiosks make processes automated.

Southwest have Web pages where customers can arrange flight times, destinations,

and fares. And also, these web site and blogosphere advertise the service of Southwest

and attract more customers. Automated processes generate passenger revenue.

Through the use of technology, Southwest keeps the labor cost low.

4. The future development

As Southwest’s clear strategic positioning and objective, making it stand out in

aviation industry. In order to maintain a leading position and competitive advantage,

Southwest will take this opportunity to expand to greater regions and take over more

market share. We believe giving up some of the profit to cut the ticket price even

lower and upgrade hardware can open Southwest to a much larger market that will

bring more profit in future. In addition, Southwest has a huge human capital. The

company will more use of it, develop it, enhance human resources management and

corporate culture building work, making people better service the company.

Citing references:

[1] Mary Coulter, Strategic management in action, 5th:284






[7] http://en.wikipedia.org/wiki/Demographics_of_the_United_States

Southwest Airlines Paper11

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