Southwest Airlines SWOT, PESTEL and Five Forces Analysis
To assess the macro-environment of Southwest Airlines, a PESTEL analysis will be used. By assessing the Political, Economic, Social, Technological, Environmental and Legal factors, the Opportunities and Threats can be faced by a company can be identified. Future trends and requirements for change based on these trends can be identified through this analytical tool (Johnson, et al, 2008).
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Political and Legal factors
Southwest Airlines domestic operations are significantly influenced by government bodies; primarily Federal Aviation Administration (FAA) (see www.faa.gov). For instance, the 1979 ‘Wright Amendment’ prohibited the airline to fly non-stop or provide through-plane service from Dallas Love Field to any other than 7 permitted cities. Recently, a law has been passed to repeal the Wright Amendment to be in effect in 2014 (Thompson and Gamble, 2012).
Southwest Airlines has on numerous occasions won legal battles against rivals in the US courts (Thompson and Gamble, 2012).
Airline industry is severely affected by fuels costs. A rise in the price of oil has a major impact upon Southwest Airlines profitability (Mouawad, 2010). The future trends of oil prices are volatile and the fuels cost account for almost 40% of airlines operational costs (Thompson and Gamble, 2012).
Due to economic downturn, customers’ demand for air travel has reduced due to cuts in personal and business expenses across the US; however, the consumer demand for low-fares no-frills air travel has remained undeterred and indeed undergone growth (Southwest, 2010).
Southwest Airline has a strong commitment towards customer service (Thompson and Gamble, 2012).
The overall viewpoint of Southwest Airlines’ is that the company is ‘in the customer service business — it just happens to fly airplanes.’
The company hires a customer service aspirant for employment based on their attitude, regardless of experience.
There is a position of ‘Vice President of Customers’ established within the company.
Technological developments have both created new opportunities as well as threats for Southwest Airlines.
Emergence of information and communication technologies has enabled robust communication and subsequently provided customers with an alternative for frequent travelling.
It has also enabled Southwest Airline to expand its outreach directly to consumers through e-commerce. For instance, Southwest Airlines was able to introduce ticketless travel through the use of technology (Thompson and Gamble, 2012).
Southwest Airlines reservation system is considered to be outdated. It needs to update so that the company can sell international tickets, provide passport information to federal authorities, and better handle customer relationships, along with other services (Mouawad, 2010).
The aircraft’s emissions have a higher impact to the environment as they travel several kilometers above the surface of the earth.
Aircraft emissions cause significant damage to the atmosphere (Penner et al. 2001).
The community noise is another major environmental concern.
Noise from the air traffic is not only the reason for irritation and an unpleasant experience and has serious health issues. (“Aircraft Noise is Unhealthy”, 2008).
Porter’s five forces
In order to analyze the industrial environment of Southwest Airlines and evaluate the nature of the competition faced by the company, this essay uses Porter’s Five Forces tool developed by Porter E.M (Porter, 2008). The Five Forces analysis is as follows:
The competitive rivalry in airline industry has been increasing especially through mergers and acquisitions. Delta Air Lines, which acquired Northwest Airlines in 2008 and recently merged with United Airlines and Continental, have become formidable rivals. They are offering their passengers access to numerous cities throughout the US and connecting them to four continents of the world which Southwest Airlines does not do (Mouawad, 2010). Moreover, new rivals have emerged following the footsteps of Southwest. Airlines – such as JetBlue Airways and Allegiant Airlines – are threatening Southwest’s market share in the no-frill, low-price trade by offering lower costs and attending customer service (Mouawad, 2010).
There are high barriers to enter this industry as it requires a large initial capital investment. In conjunction with the price wars and low profit margins, it has become difficult to make profit in this industry. It is very common for airlines to project losses in their financial statements. Therefore a new entrant must be able to handle losses at the beginning. Another barrier to entry is the limited availability of landing slots at the US airports. The slots are already reserved by established airlines and are difficult to obtain especially in airports with high passenger demand (Czemy 2008).
Threat of Substitutes
There are many substitutes in terms of long distance travel such as cars, trains, ferries; and these are usually cheaper. However, air travel has the absolute advantage in terms of time. Hence, the threat of substitute is relatively low.
Bargaining power of suppliers
Boeing and Airbus are the main aircraft suppliers for large airlines. Boeing is the supplier of aircrafts to Southwest Airlines. During the last few years, Southwest Airlines has renewed some of its aircrafts with Boeing 737-800 aircraft and plans to completely switch over to them in near future (Southwest, 2013). Since there are high switching costs for Southwest Airlines from Boeing to Airbus – related to the training costs of pilots and training engineers to adapt to Airbus aircraft – the bargaining power of Boeing is high.
Also, Southwest Airlines is heavily depended upon on the price of oil for its profit margins, which implies high bargaining power of oil suppliers. Price hedging is limited and high rises in prices can manipulate Southwest’s fuel costs. Additionally, Southwest Airlines primarily uses regional airports and avoids large and expensive international airports. Hence, the bargaining power of both these suppliers is high (Thompson and Gamble, 2012).
Bargaining power of buyers
Consumers have high bargaining power which is mainly attributed to their price based preference. Receiving the same service, the consumers will select the airline which offers them best value for their money. Due to the widely available information technology tools, consumers have the ability to compare flights’ services and prices before making their final selection. Since the switching costs for customer is very low, the bargaining power of buyers is high.
Southwest Airlines gains its competitive advantage through its strategic capabilities that are gained from its resources and competences. Resources are the unique tangible and intangible assets of the company while competences are the ways that the organization uses its competences to gain competitive advantage (Johnson et al. 2008). It is through these resources and capabilities that the company can respond to its external environment and succeed. The following is an evaluation of Southwest Airlines internal resources and competencies.
In addition to Southwest’s strategic resources and competencies, it is also important to analyze the overall strategic direction of the company. For that purpose, this essay utilizes the strategic clock tool proposed by Johnson, Scholes and Whittingham (2008) (see fig 1.)
Considering this strategic clock, Southwest Airlines is positioned between number one and two, wherein it maintains lowest costs for its operations through its no-frill strategy.
Southwest Airlines Issues and Challenges Diagnosis
The following issues and challenges are identified for the company
The company’s existing information system is outdated and cannot serve international travelers, nor can it handle complex ticketing mechanisms.
Increased competition due to the emergence of other low-price, no frill carriers. Other full services airlines achieving economies of scale with increased mergers and acquisitions.
Southwest Airlines strict adherence to low-cost, no frill strategy and its inability to fly long routs and international destination may limit the company’s clientele in the long run. The company is missing on a significant customer segment that is willing to pay top dollar for a full service air travel.
Southwest Airlines’ integration with AirTran should be completed robustly.
Southwest Airlines needs to achieve higher aircraft efficiency to avert economic concerns regarding fuel costs and environmental concerns regarding high emission and noise pollution.
The company has been operation for more than 40 years and is regarded as one of the most profitable airlines companies in US. It no longer has the underdog image it used to have a decade ago. The company has high labor costs, stalled growth, and is looking more like a legacy carrier (Schnurman, 2012)
Despite being profitable in a challenging industrial environment, the company has faced losses in its profits (Schnurman, 2012). The company needs to regain its profits levels to ensure an upwards trend.
Strategic Options for Southwest Airlines
To formulate the strategic options for Southwest Airlines based on the aforementioned evaluation, this essay utilizes Ansoff’s strategic directions model. The Ansoff’s strategic directions model refers to different growth options that a company pursue as its strategic direction. These are market penetration-consolidation, product development, market development and diversification (Ansoff, 1957). (see fig 2.)
Market Penetration and Consolidation
Southwest Airlines should consolidate existing routes and increase its market share on existing routes. It should also plan to exist from less profitable routes.
This should be a key strategic direction for the company. The company should move on with its plan to add 33 new Boeing 737-800s aircrafts and retire 40 of its Classic aircrafts, which will result in a combined fleet of 691 aircraft. With the new larger gauge -800s and additional seats, the company will be able to retain its level of seat capacity despite reducing the number of aircrafts by 7 (Southwest, 2013). This will help the company decrease its operational costs. The fuel and emission efficiency of these new aircrafts will also help the company to comply with environmental standards and bolster a ‘green image’.
Considering already low operating costs and an engrained philosophy of no lay off employees or salary cuts, Southwest should try to increase its revenues in order to mitigate the rising operational costs challenge. Southwest Airline should aim to attract more business travelers by offering more perks and amenities. Southwest Airlines should further expand into ancillary products and services offering such as car rentals, hotels, taxi services, etc. This could be a good strategic fit especially for its popular destinations.
Moreover, to advance the company network of flying routes and destinations, Southwest airlines should speedily complete transition from its existing reservation system towards a new robust information system that can enable it to serve international destinations and allow for other customer relationship management enhancements.
The new Boeing 737-800s planes will allow Southwest Airlines to fly longer distances. This move would be significant because it will help the company to fly to destination such as Hawaii, and, for the first time, to destinations outside the United States (Southwest, 2013). With the acquisition of new aircrafts, the company should explore new long distances destinations.
An important strategic direction in this regards would be Southwest’s integration with AirTran network. Based on the joint schedules of both airlines, the combined network will serve 97 destinations. The acquisition of AirTran will help Southwest to attract more business travelers. It will enable the company to explore some popular destination such as Atlanta, one of the world’s busiest airports. Moreover, this acquisition will provide Southwest Airlines with expertise on international flights and expands its footing in New York and Washington. It will also enable Southwest Airlines to directly compete with full service players such as United and Continental, as well as American and Delta.
In the next few years, the company should not embark upon diversification. Diversification at this stage might spread the company’s resources very thin as it is faced with challenges in its core business, and thus pose high risk of failures.
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