Running head: SOUTHWEST AIRLINES: CASE ANALYSIS

Southwest Airlines: Case Analysis Your (alongwith) your fellows name here! Name of your institution Assigned by:

Running head: SOUTHWEST AIRLINES: CASE ANALYSIS

Abstract:
Southwest airline is one of Americas most successful airline companies. This paper investigates the structure of airline industry and strategic position of Southwest airlines within the industry. Critical success factors along with the key strategic challenges faced by Southwests management are identified and discussed. Paper concludes with a few recommendations to the management to compete in a dynamic environment and to sustain its competitive advantage.

Southwest airlines is one of Americas most successful airline companies. It has not only Survived but shown remarkable growth in the most turbulent times by developing and

Running head: SOUTHWEST AIRLINES: CASE ANALYSIS implementing a simple business model. Within the volatile airline industry, it has consistently shown profits every quarter from 1973 to the present.

BUSINESS MODEL Southwest airlines business model is to make air travel accessible to masses by providing a simple and cost effective means of transportation to those who would otherwise have opted for something else. Southwest has successfully carved a niche in the point to point segment of the market providing a low-cost, yet high quality service to its customers. Southwest has specialized in providing a differentiated product to airline industry customers. It does this by offering a lowcost, high-convenience, customer-friendly service to its main focus group, the business traveler. Southwest's business model has proven to be highly successful in providing the company a distinct competitive advantage over its competitors.

COMPETITIVE STRATEGY Central to Southwest's strategy was keeping operating costs low enough to enable the establishment of fares below the cost of driving a vehicle over the same route. This made it difficult for imitators such as the larger airlines, which could not compete on the basis of cost. Having been very successful in their operations, Southwest Airlines is surely a target of competitors focus. Since the success of Southwest Airlines is already well-known, this could entice competitors to emulate their strategies. By copying them and probably making some added strategy modifications, other airlines may also be able to offer low price plane tickets to the areas covered by Southwest Airlines and beyond, which would surely surpass Southwests performance. Such move by competitors would make Southwest Airlines' range and limitations

Running head: SOUTHWEST AIRLINES: CASE ANALYSIS

more obvious. Also, as mentioned, there is a great possibility that in the future, a more advanced airline company, offering a higher quality of customer service, will operate using Southwest Airlines' strategies in a wider market that will greatly outdo the performance of Southwest Airlines. All of these would cause a great loss in the market share of Southwest Airlines and its lead in the airline industry.

THE AIRLINE INDUSTRY: The airline industry is considered an unattractive industry. It is capital intensive, subject to forces beyond its control (fuel costs, terrorist attacks, government regulations). For a company to be Profitable in this industry it must serve the customers better than others.

It is quite known that the airline industry has very high barriers to entry. This means it is somehow difficult for new companies to enter such industry. Aside from the fact that there are already so many established airlines that have good names and reputations, the vulnerability of the industry to economic cycles somehow adds difficulty for new entrants. Such vulnerability means that if the economy is doing well, more people will have the money to pay plane tickets and travel. But if the economy is not doing well, then people will have less money to fly and will use more cost effective means of transportation. This difficulty for new entrants to penetrate the industry is an opportunity for Southwest to minimize the likelihood of additional competition, thereby sustaining its current share in the market. They may now focus more on their current competitors for market share rather than worrying much about others entering the industry. The airline market can be defined as oligopolistic competition as it has such features as strict

Running head: SOUTHWEST AIRLINES: CASE ANALYSIS range of companies that proved airline service, it is difficult for new companies to enter the market, but at the same time customers can switch the airline because of the price changes.

The buyers are sensitive to price which means that the demand for the service is elastic; demand and price are inversely related. Historically, certain operational efficiencies enabled Southwest airline to provide a value service to its customers. However providing such a combination of price and service quality will be a challenge for southwest airline in the future. It will likely become more and more difficult for Southwest to maintain a big cost advantage. This means that southwest will need to add new features to its service in order to remain competitive in the lowfare segment of the industry. It must be emphasized that in trying to differentiate its offerings South- west will need to maintain cost parity with its competitors as companies trying to differentiate their products reducing costs at the same time get stuck in the middle.

Southwests success has brought considerable change to the market conditions of the airline industry. The struggling legacy airlines have been forced to streamline operations and new airlines with aggressive low-cost strategies have entered the industry. Damaging price wars have forced many airlines to drastically alter their cost structure in order to remain competitive. However, in my view Imitation of the southwests low cost strategy which is grounded in some unique operational efficiencies and developed over a period of more than 30 years will be difficult for the competitors.

CHALLENGES POSED BY A RECESSION: The fears of a looming recession pose significant challenge to the industry. The probable impacts of an economic recession will be the tightening of corporate travel policies. In turn, this

Running head: SOUTHWEST AIRLINES: CASE ANALYSIS

will result in a reduction in demand for business travel. Discretionary spending by leisure travelers is also expected to decline as a consequence of recession.

FUEL HEDGING The most notable action the company took to stay ahead of the competition was investing heavily in fuel hedging as a way to combat against rise in jet fuel costs. The strategy paid off for Southwest as it paid much less in fuel costs than its competitors. With the fuel hedging contracts set to expire, Southwest faces the challenge to maintaining its competitive advantage. Fuel hedging saved Southwest Airlines significant amount of money over the last decade. However, Southwest hasnt done a significant number of new hedging contracts. The problem is there hasnt been a good opportunity to enter into favorable contracts due to heightened volatility in the crude oil market. It would make sense to enter into new contracts if Southwest anticipated the price of fuel will be much higher in the future. This is hard to predict with cost being as high as it is. With the expiration of existing contracts, the fuel savings advantage Southwest held may soon dissipate. However, though coupled with several strengths, Southwest Airlines is not without weaknesses. Among such weaknesses is their use of only the Boeing 737 airplane. As it contributes to low training and maintenance costs, limiting itself to only one type of aircraft causes Southwest to have no flexibility at the time Boeing 737 receives bad reputation due to a critical flaw found in it. And it would be a costly undertaking to find a replacement aircrafts for the company whove consistently used only one type of aircraft. Another weakness of Southwest Airlines is the fact that it currently serves only few states in the

Running head: SOUTHWEST AIRLINES: CASE ANALYSIS US, mostly in the South. This limited area of service limits the number of geographical markets For Southwest. This causes the inability of the company to compete against the larger airlines that serve both nationally and internationally, with hubs that allow them to reach a much larger share of the overall market than Southwest. Therefore, I recommend that Southwest Airlines should take full advantage of its financial stability and profitability to expand its operations by extending its services to new territories,

purchasing additional aircrafts and upgrading some facilities to make a few changes in which the airlines aesthetics would be more accommodating. Southwest may consider expanding operations to cover North America. With the addition of Mexico and Canada, Southwest Airlines may be able to make up for lost revenue due to high fuel costs. The challenge here would be to enter new markets in which the barriers to entry especially regulatory constraints may prove to be too costly. The other big challenge would be to gain access to airports where competition already has established strong roots. Additionally, Southwest may also consider offering amenities such as meals and upgraded seats to attract a new segment of customers.

All of these may be costly ventures, but it would open the company to a larger market. This move will help Southwest to sustain their current market and still acquire more, thereby maintaining the companys lead and originality that will prevent copycats from outperforming them. I perceive such recommendation as crucial for the company because if Southwest would just stay as is, there may come a time when they will be left behind by more advance and flexible airline companies that have a more effective low cost strategy. It is important for the company to improve some of its strategies in order to respond to what

Running head: SOUTHWEST AIRLINES: CASE ANALYSIS could be the possible changes in their environment. Moreover, in line with their mission of

providing the highest quality of Customer Service, I believe that it is just expected from them to expand and upgrade. They have already proven to be one of the best, so the issue now lies on sustaining it. And I believe that by advancing the operations of the company, the likelihood of Southwest Airlines being left behind will be very low.

References:

Southwest.com (2010). Southwest Airlines Fact Sheet, 2010. Retrieved May 15, 2010, from: http://www.southwest.com/about_swa/press/factsheet.htm

Running head: SOUTHWEST AIRLINES: CASE ANALYSIS

Hill, C., & Jones, G. (2004). Strategic Management Theory (6th ed.). Boston: Houghton Mifflin. Southwest airlines co. (2010) annual report to shareholders, from: http://www.southwest.com/html/cs/investor_relations/if_ir_index.html?int=GFOOTERABOUT-INVESTOR M.E. Porter (1987), "From competitive advantage to corporate strategy ", Harvard Business Review, May-June, pp. 43-59. Michlitsch, J. F. (2000). High-performing, loyal employees: The real way to implement strategy. Strategy & Leadership, 28(6), 28-28-33. Retrieved from http://search.proquest.com/docview/194363641?accountid=14657 Kling, J. A., & Smith, K. A. (1995). Identifying strategic groups in the U.S. airline industry: An application of the porter model. Transportation Journal, 35(2), 26-26. Retrieved from http://search.proquest.com/docview/204586515?accountid=14657 M.E. Porter (1996), "What is strategy?", Harvard Business Review, November-December, pp. 61-78, and his (2001), "Strategy and the Internet", Harvard Business Review, March, pp. 63-78. The SWA example features prominently in the former. Bharadwaj, S. G., Varadarajan, P. R., & Fahy, J. (1993). Sustainable competitive advantage in service industries: A. Journal of Marketing, 57(4), 83-83. Retrieved from http://search.proquest.com/docview/227793480?accountid=14657 Bharadwaj, S. G., Varadarajan, P. R., & Fahy, J. (1993). Sustainable competitive advantage in service industries: A. Journal of Marketing, 57(4), 83-83. Retrieved from http://search.proquest.com/docview/227793480?accountid=14657

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Lott, S. (2006). Hedging isn't the only reason for southwest's low costs. Aviation Week & Space Technology, 164(14), 45-45. Retrieved from http://search.proquest.com/docview/206177992? accountid=14657 Bond, D. (2007). Southwest could feel cost pinch as hedging benefits wane. Aviation Daily, 368(36), 3-3. Retrieved from http://search.proquest.com/docview/218031411?accountid=14657 Furey, T. R., & Diorio, S. G. (1994). Making reengineering strategic. Strategy & Leadership, 22(4), 6-6. Retrieved from http://search.proquest.com/docview/194371809?accountid=14657