Southwestern Airlines

Southwest Airlines Co. (“Southwest”) is a major U. S. airline that primarily provides short Haul high-frequency, point-to-point, and low-fare service. Southwest was incorporated in Texas and commenced operations on June 18, 1971, with three Boeing 737 aircraft Serving three Texas cities; Dallas, Houston, and San Antonio. Today Southwest operates nearly 400 Boeing 737 aircraft to 59 U. S. cities. Southwest has the lowest operating cost structure in the domestic airline industry and consistently offers the lowest and simplest Fares. Southwest also has one of the best overall customer service records. LUV is Southwest’s NYSE symbol, selected to represent the company’s home at Dallas Love Field, as well as the theme of Southwest’s employee and customer relationships Within 30 years, Southwest Airlines has become the fifth-largest major airline company in America. It currently operates 520 Boeing 737s throughout the United States. The mission of Southwest Airlines is a dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit.

It primarily provides short haul, high-frequency, point-to-point, low-fare air transportation service in the United States. The company essentially functions as a “point-to-point” operation rather than a “hub and spoke” service like its competitors. This provides for a unique competitive advantage, which has led this company to be a strong performer within the industry. The major success to their continued success is due to their low-cost model, as compared to their competitors, which allows Southwest airlines to differentiate itself from the competition and perpetuates its success and popularity among consumers.

When we look at southwestern airlines competitive environment using porters five forces we find that the bargaining powers of Customers in the airlines industry have many options and are price sensitive. If driving is cheaper than flying southwest may lose customers. There are also over 100 carriers in the U. S. market therefore there are many options for customers. The bargaining power of suppliers: Southwest is at the mercy of the labor Unions and Gas suppliers. If these costs become too high then price raises will mandatory.

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The threat of new entrants: With so many major airlines going bankrupt there is a large supply of airplanes and personnel. This means that it is easier than ever to start up and airline and try and compete with Southwest. The threat of substitute products: Flying has very few substitutes in the U. S. market if you need to be somewhere in a hurry. However there are other forms of transportation including busses, trains, and cars. The intensity of competitive rivalry: There is intense industry competition. Every route is hotly contested with price wars and a grab for customers.

Price margins are low, and airlines need to be able to trim costs any way they can. Southwestern airlines has got the following strengths; Southwest's commitment to customer service has led to an excellent track record. They held the unofficial Triple Crown in customer service for three consecutive years. The Triple Crown consists in being the best in on time performance, baggage handling, and customer satisfaction. This is an amazing feat considering no other airlines have held all three components for a single month. Southwest has a major advantage over other airlines because it operates a single type of plane, the Boeing 737.

This means that all their pilots, facilities, and crews are trained on any plane that Southwest owns. Southwest also operates a fleet with an average age of 7 years. This means that they have less maintenance problems, and this leads to fewer delays, and higher customer service. Sensible expansion policy. Southwest has developed a very sensible strategy for expansion, paying particular attention not to strain the balance sheet. It has also achieved a national presence through flights to 59 airports in 58 cities. Southwest has been able to become a national airline by strategic expansion to airports where there is less competition.

For example, it opened a major operation at Baltimore-Washington International and therefore avoided the presence of other major airlines at Reagan National and Dulles. The continued growth of the Company is testament to the strategic direction taken by management, particularly considering the difficult business environment. Southwest relies on direct ticket booking and does not heavily utilize travel agents this is a cost saver. They also do not have full food service on their flights, leading to a faster turnaround. Southwest also has a unique open seating system, with no assigned seats the planes load faster.

Due to a change in passenger profile, business class and first class seats have suffered declining demand. Many companies have been forced to introduce low-cost fare options. Since southwest has been an industry leader and “ahead of the curve” in providing low cost, standardized travel options, it has no need to change strategy, thus saving on restructuring costs. The Company also benefits from its long establishment in the low-cost airline market, allowing the Company to capitalize on significant customer awareness of the brand. Southwest has a highly efficient operation.

The Company was first to introduce to the Airline industry the ten-minute turnaround (between arrival at the gate and departure). This has subsequently increased demand for short flight routes. Strong financials. Southwest has the strongest market capitalization and balance sheet of all rivals in the sector. A market capitalization of $14,022 million accounts for twice the market capitalization of the five largest rivals put together. In the current volatile market, it should allow southwest to overcome short-term downturns in demand more Successfully than the other main carriers.

The continued ability of Southwest to produce positive results highlights it among rivals. 2003 saw quarter-over-quarter increases in income, representing 51 consecutive quarterly profit rises. Revenues for the full year 2003, which were $5,937 million, increased 7. 5% against 2002 revenues. Southwest does not fly into major hub airports in most cities, this leads to lower gate costs, less congestion, and quicker turnaround times. Southwest has been marketed as the low price leader, and their planes have been painted in funky colors.

Southwest views its major competition as the automobile and not other airlines. Southwest airlines operate a single type of plane B737 in an all coach configuration. They do not offer meals, and do no transfer bags to other airlines leading to lower operating costs. The airline has won the Triple Crown and is setting the industry standard in customer service. Southwest has come under intense competition from United. They are not a full service airline and do not offer the amenities and services for international travelers. They also do not have a higher cost first class option on their planes.

Marketing. Southwest is a low-cost carrier. They provide themselves on cost efficiencies, which enable them to offer good service at lower prices to the customer than their competitors. Their marketing strategy was to convey the message that what Southwest had to offer was of value. Southwest markets itself as the only major short-hop, low-fare, and point-to-point carrier in the U. S. airline industry. Their marketing style is known for being unconventional, unique, unpredictable, and attention-getting in order to create and reinforce the Company’s maverick and fun-loving, combative image. They continually look for ways to make their distinctive image come alive and strike a spark in the minds of the consumer. Finance. In the year 2000, Southwest reported its 28th consecutive year of profitability as well as its ninth consecutive year of increased profits. In many years, Southwest was reporting profits while many other airline companies were reporting losses. Southwest is able to maintain and increase their profit margin by keeping costs low, being highly efficient, and creatively cutting costs.

One of Southwest’s most important strategies is keeping its costs low and moving customers in above-average times. In an effort to move customers along quickly, Southwest tries to avoid congested airports. Southwest also encourages passengers to make reservations and ticket purchases through their website. By serving smaller airports near major metropolitan areas and in medium-sized cities, Southwest is able to produce better-than-average on-time performance, as well as reducing fuel costs of idle planes waiting for clearance to land.

Serving smaller airports also lowers landing fees and terminal gate costs. Southwest’s operative principal is “employees come first and customers come second. ” Southwest employees are “hired for attitude and trained for skill. ” The Company’s strategy is that it can train people to do the tasks and hold the skills that are required, but a person’s attitude is not something that can be changed. The hiring process involves an interviewing approach called “Target Selection,” which aims at matching people’s traits (or target dimensions) for performing a specific job successfully.

New hires are trained at Southwest University for People. Managers trained in this program take leadership courses that emphasize a management style based on coaching and encouraging rather than supervising or enforcing rules. The Company has the lowest turnover rate in the industry, which may be partly due to the fact that 80% to 90% of supervisory positions are filled internally. However just like any organization, despite the fact that they have strengths, south west also has weaknesses which include: Little room for strategic development.

The main weakness of the Company results from operating in a highly competitive market, one that is increasingly susceptible to a volatile political environment. The airline industry is highly competitive as to fares, frequent flier benefits, routes, and service. Some carriers competing with Southwest have larger fleets and a more established brand name. Many carry passengers from the major hubs in the U. S. , holding long-standing relationships with key airports. To enter these markets, the corporate strategy of Southwest will have to be adjusted. No established alliances. Certain major U. S. irlines have established marketing alliances with each other, including Northwest Airlines/Continental Airlines, American Airlines/Alaska Airlines and Continental Airlines/America West Airlines. In 2001, AMR Corp. , parent of American Airlines, completed its acquisition of the assets of Trans World Airlines. This puts enormous strain on the Company to maintain its position in the industry while running a smaller fleet. Fully valued share price. Despite Southwest holding the strongest financial position in the airline industry, the stock of the Company is considered fully valued, particularly in the short term.

This will disconcert the investor searching for quick gains resulting in the potential loss of capital to its competitors. The strong financial position will apply pressure to the strategic direction of the Company, forcing the directors of Southwest to consciously pursue the same level of growth if they are to maintain investor confidence. South west airlines have got the following opportunities; Southwest’s greatest opportunity is directly related to its greatest strength: to continue to develop its low-cost position in the airline industry.

Southwest must maintain an emphasis on low-cost flying, and brand association that has served it well so far. After September 11, customer numbers dwindled due to consumer fears over flying. One way the Company hopes to regain the trust of the public is through lower airfare. In 2002, no fare was more than $399. However, in August 2002, the company reduced fares even further, lowering last-minute fares while maintaining the full schedule of frequent flights in order to further stimulate travel. As of 2003 Southwest was offering fares as low as $39. The company must keep prices as low as possible in order to stimulate demands, and look to edistribute expenses through other areas. Continual streamlining and automation is necessary in order to both aid in cost-cutting and maintain the competitive advantage on which the company brand is based. Southwest has expanded ticket counters and security checkpoints and has increased its airport workforce. The boarding process has been streamlined through replacing the traditional plastic boarding card system with an automated one, and the carrier is in the process of rolling out new self check-in technology. This should result in a reduction of boarding times, and contrast sharply with those carriers that still have extensive queuing.

Expand geographically. The market share Southwest holds has grown substantially, particularly since 9/11. Fifty percent of the core market is under control of Southwest and this is expanding. With the increase in the number of cities and networks to which it is linked, southwest could begin to target large city markets and with such a strong brand name, both marketing and PR costs will reduce. Furthermore, the timing appears perfect, if it wishes to capitalize on the pressure currently endured by many of the established carriers. Southwest could strengthen its position through an alliance.

Many competitors have reduced share price due to poor financials. Southwest could exploit this through a merger or a favorable acquisition. This could provide an easier route into the major hubs and remove many of the challenges associated with entering new markets. A major threat comes from the unstable airline industry as the result of the 9/11 attacks. Immediately after the terrorist attacks, and in the face of falling demand for air service, most major carriers announced significant service reduction, grounded aircraft, and reduced employee levels.

These events negatively impacted industry profits. Despite the absence of subsequent attacks, the political environment remains unstable, throwing into question the airlines’ ability to make long-range strategic plans. Following 9/11, Southwest was able to offset losses through lower jet fuel prices and internal cost reduction initiatives. However, there can be no assurance that Southwest will be able to continue to offset future cost increases resulting from the changing commercial airline environment.

Another threat derives from the Company being subject to varying degrees of competition from surface transportation in its short-haul markets, particularly the private automobile. The short-haul air services that compete with surface transportation regard price as a competitive factor for customers. Similarly, frequency and convenience of scheduling, facilities, transportation safety and security procedures, and customer service may be of equal or greater importance to many passengers. These can limit the number of customers who choose southwest.

However, southwest airlines need to put up the following strategies; it needs to launch a new promotional campaign. They need to remind customers in the California market that they are the winner of the Triple Crown, and that low cost means high service and customer satisfaction when it comes to Southwest. With lower turnaround times, and fewer delayed flights southwest has great unique selling points. They just need to remind the public about how great an Airline they are. This can be done with more TV ads, and more sponsorship of major sporting events. Southwest also needs to continue to be southwest.

They have a winning business model, and have made money every year of their existence. They cannot abandon what their core competencies are. They need to keep prices where they are, or even lower prices, and they advertise that fact to the public. Southwest airlines have been able to successfully implement its fuel hedging strategy to save on fuel expenses in a big way and have the largest hedging position among other carriers. In the second quarter of 2005, Southwest’s unit costs fell by 3. 5% despite a 25% increase in jet fuel costs. During Fiscal year 2003, southwest had much lower fuel expense (0. 12 per ASM) compared to the other airlines with the exception of JetBlue as illustrated in exhibit 1 below. In 2005, 85 per cent of the airline’s fuel needs has been hedged at $26 per barrel. World oil prices in August 2005 reached $68 per barrel. In the second quarter of 2005 alone, Southwest achieved fuel savings of $196 million. The state of the industry also suggests that airlines that are hedged have a competitive advantage over the non-hedging airlines. Southwest announced in 2003 that it would add performance-enhancing Blended Winglets to its current and future fleet of Boeing 737-700’s.

The visually distinctive Winglets will improve performance by extending the airplane’s range, saving fuel, lowering engine maintenance costs, and reducing takeoff noise. In an overall effort to improve customer’s in-flight experience, in-flight entertainment is something that Southwest is currently evaluating and which JetBlue has been very successful at already because of its introduction in its long-haul flights. In comparison, Southwest has 415 airplanes to consider and that represents an investment decision at a whole new dimension. Additionally, Southwest has to consider how things may fit into their environment.

At this point, 60% of its service is still very short haul. Southwest needs to be mindful of the fact that a certain approach that has been successful for its competitor may not be necessarily work to its advantage. In summary, Southwest has long been regarded as a benchmark in its industry for operational excellence. Southwest Airlines is a fine example of a company that is committed to its core competencies - efficient operations to drive its low cost structure, outstanding delivery of customer service and innovative HR management practices. We hope this paper provided a good insight into Southwest operations, as part of its overall strategy, to achieve success and gain competitive advantage.

References

1. www. southwest. com] (Southwest airlines official web site www. mba-tutorials/marketing/southwesternairlines. html www. answers. com/topic/southwesternairlines. html
2. Allen, Margaret. "Ground Controller. " Dallas Business Journal. August 3, 2001 Southwest Airlines: High Tech, Low Costs” - Eweek. com, April 2005

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