In order to offer low prices and earn healthy profits, Southwest Airlines works especially hard to control its costs. At the beginning they reduced their employee training cost and spare-parts inventories by using only a single type of aircraft. But mostly, Southwest Airlines focused on their low cost measured by available-seat-miles (ASMs), which positioned them to maintain its price leadership. Also, Southwest introduced its “ticket less travel” by reducing their service costs, which saved the company twenty-five million, and many other major airlines did the same. There is a low employee turnover at Southwest, and the reason to that is high employee morale, which also helps to maintain low costs. It will be important for them to maintain that morale.
To fend off the competition posed by new airlines that imitate its low-price strategy, Southwest Airlines should focus more, as they did before, on lower costs. By focusing on and controlling the lower costs, they can offer lower prices, which is the major attraction for the customers.
Southwest Airlines' main strength is that it is a low-fare carrier. Despite the fact that Southwest is flying from coast to coast, it doesn't serve meals. Passengers get peanuts, pretzels, and cookies on flights up to three hours long. On trips longer than five hours, passengers get snack bars including a fruit bar, cheese wedge, crackers and sausages. Nevertheless, Southwest receives few complaints about the lack of food on flight. Moreover, Southwest Airlines recommends customers to bring their own food onto the flight. Also, to keep the costs low, Southwest flies only Boeing jets. That keeps costs low because Southwest's pilots are certified to fly any plane in the fleet. It's also cheaper to keep parts and spares for a single aircraft model.
5. How would you characterize the company’s culture?
The culture of Southwest Airlines is unlike that of any other airlines. A majority of the airlines are business oriented, whereas Southwest has built a reputation as a fun, light-hearted and irreverent airline with a happy staff. It is said that Southwest's biggest hiring criterion is whether an applicant smiles during his or her interview. Southwest feels it can train anyone to do the job, but it can't teach a person to have a positive attitude. The airline industry regularly faces many unhappy, hurried passengers. With flight delays, lost luggage, increased security issues, weather problems and mechanical failures, Southwest Airlines has recognized that smiling staff members can handle negative issues skillfully and still satisfy their customers. Their culture obviously works for them. Southwest receives consistently high ratings for on-time performance and customer satisfaction, and it was the only U.S. airline that did not lay off employees after the September 11 tragedy or during the early 2002 recession.
- What strategy do you recommend for going forward?
Southwest Airlines was able to operate their business relatively undisturbed. It was only in the poor economic conditions where suddenly Southwest Airlines' method of operation became the ideal model for its competitors. While the publicity is beneficial in raising employee morale and raising stock prices, Southwest Airlines is now a target of competitors' focus.
A tactic that Southwest Airlines can do to inflict damage to competitors is to slash prices. This type of tactic is typical of a big company that has a monopolistic rule in an industry squeezing other competitors. This tactic is advisable when competitors are near bankruptcy or are in dire situations. Because competitors cannot match Southwest Airlines' prices, the most they can do is narrow the gap of the price difference. Southwest Airlines, which has consistently made a positive profit, can increase the price gap by lowering their prices. Southwest Airlines will incur losses from this move, but the goal of this move is to drag the competitors further into debt. Because this move affects both companies, this move is very risky and should not be done unless Southwest Airlines is sure that their competitor is near bankruptcy. Possible reasons for this move would be to eliminate the weakest competitor in the industry, which would free up the market held by that company.
The reason for the creation of Southwest Airlines started when its founders saw an opportunity. Frequent trips between cities were exploited by providing a quicker form of transportation. Southwest Airlines has weathered through several crises and has proven itself to have potential to be a leader of its industry. The poor economic conditions have placed many airline companies in debt, while Southwest Airlines was able to make a profit. With its competitors weakened, Southwest can take the initiative and expand--not foolishly, but with the same drive and precise execution the company was founded under. The genius behind Southwest Airlines' success is location; and if researched properly, this can be applied to other areas. The appeal of Southwest Airlines is the cheap tickets, as they offer none of the luxuries such as in-flight meals.
Southwest Airlines' no frills approach may not be pleasing to all; it would be good for Southwest to make a few changes in which the aesthetics would be more accommodating. Upgrading seats may be a costly venture, but it would open Southwest Airlines to a larger market.
The medium of choice for customer referral is the internet. Internet referrals have been the main source of customers; it further cut costs by charging a smaller fee to book seats through the internet than through a travel sales agent. With the saturation of discount websites, however, Southwest Airlines is losing the grip it held by advertising on the internet. More websites offer competitive rates and special discounts, which, if Southwest Airlines does not take immediate action, can end up losing customers. Since advertising through the internet is risky, as people hate pop-ups or spam e-mails, it is our general consensus that Southwest should find ways to be listed on these price comparison websites. Before, there weren't many sites that offered price comparison, and finding deals was difficult. With these sites, information is available at the fingertips of the web surfers who can make better informed choices. Southwest Airlines should ensure that their voice is heard through this medium, as it is sure to attract people in search of deals.
Conclusion. First and foremost, Southwest Airlines has developed a great low cost model for the past thirty years that fits today's economy the best. It has expanded from a tiny company with merely three aircrafts to one of today's major airliners that flies between 58 cities, carrying over 60 million customers each year. As everyone can see, Southwest Airlines has been a big success. Now it is given an opportunity to grow even bigger at this extremely hard and critical time for the airline industry. After the incident of September 11, Southwest Airlines is one of the few airliners that remained profitable; other airline companies are losing millions of dollars due to the insurance raise, the security cost and lack of customers.
I recommend Southwest airline to take this opportunity to expand to greater regions. It is time for Southwest airlines to use its low price tickets to drive its competitors out of business and take over their market. I believe that giving up some of the profit to cut the ticket price even lower and upgrade hardware can open Southwest Airlines to a much larger market that will bring more profit in future. Implementations of cost saving technology, such as the internet, are needed to lower the operation costs to give customers better deals.
Exhibit 1
Results according to the past four years of Southwest Airlines' financial progress. They have maintained steady net sales. In 1999, they had total net sales of $4,735 million which had risen to $5,555 million. Their slight drop in 2002 to $5,521 million was due to the September 11th incident. However, this is nothing compared to other major airline industries that had lost so much more. Since then, many have even filed for bankruptcy and have been forced to close down. In fact, Southwest Airlines was the only major US air carrier to remain profitable since then; albeit Southwest Airlines was affected by the poor economic conditions. A few of their main competitors are Continental Airlines and American Airlines. Substitute products include the train (Amtrak) and bus (Greyhound), which cover long distances. While these alternatives cannot offer the speed of air travel, most of Southwest Airlines' customers are attracted to the low price.
Suppliers include those who provide service/products necessary for Southwest Airlines to their business function (unclear sentence. No suggestions available). For Southwest Airlines, suppliers include mechanics, providers of fuel, and food (the snacks that are offered).
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.
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.
The threat of new entrants is low because the demand is not high. On top of that, there are hurdles, not necessarily the greatest; the FAA. Government regulates and imposes restrictions on those involved in the airline industry. Because of international issues, government sanctions could have unforeseen effects on the airline industry.
At a glance, the company's source of competitive advantage is its low price tickets. Most of its customers are people who are willing to forego in-flight meals, direct routes and fancy seats if that would mean a cheaper ticket. Not to imply that Southwest doesn't provide direct flights, but that is offered at a higher price. Southwest Airlines was in better shape than its competitors after recent attacks on September 11 for a simple reason: their low-cost model.
Terrorist attacks on the World Trade Center had a devastating effect on the airline industry, particularly because the instrument of destruction of these attacks was hijacked airplanes. The public lost faith in the airline industry immediately following September 11th, and for many airline companies this meant going into severe debt or even declaring bankruptcy. Even after some time, the majority of the airline industry experienced lower profits and massive downsizing. However, for smaller companies like Southwest, they were able to turn a profit and were in a more enviable position than their larger counterparts.
The reason for Southwest Airline's success is due to their low-cost model (redundant from earlier sections). The Southwest Airlines consists solely of Boeing 737s and offers only coach seats (there is no business or first class). Southwest Airlines also does not offer in-flight meals, only peanuts and other snacks. Southwest is simple and direct about the goal of their service, which is primarily a short-haul airline that flies directly from city to city, with just one type of plane--the Boeing 737 – at the lowest costs. With a simple goal, Southwest has excised many of the luxuries that competitors have offered, such as luxury seats; this is made evident by their decision to enforce a rule for passengers who could not fit into the seats to purchase an additional seat. This rather unpopular move (whereas other airlines would have suggested a more luxury class seat) is simple in its purpose--get passengers from point A to point B. Services, such as in-flight meals and luxury seats, which have become standard to competitors, have been seen as unnecessary for an airline that provides a short-haul trip from city to city at the lowest cost. To have opted for a first class, business class, or any form of luxury class seat would have been excess baggage; most people would prefer to do without it if it meant a cheaper ticket price.
While Southwest Airlines offers no frills, they do meet customer expectations when it comes to service. They base their model on the motto, which states that "if they're happy, satisfied, dedicated, and energetic, they'll take really good care of the customers. When the customers are happy, they come back. And that makes the shareholders happy," Southwest has very good relations with all their employees. Employees are either from independent unions or have flexible contracts that allow employees to work longer hours.
Southwest Airlines, however, is not without weaknesses. No matter how successful, Southwest Airlines serves only 29 states and cannot compete against the bigger companies that serve nationally or even internationally. Furthermore, Southwest Airlines does not utilize a hub system that allows for bigger competitors to reach further out.
Such competitors are aware that they cannot match Southwest Airline's prices; their market is larger and does not allow the ability to offer cheaper tickets at the cost of no in-flight meals. Instead, competitors narrow the price difference between Southwest Airlines and themselves and stress the quality of these frills (such as roomier seats). Others, through use of flight hubs, are the only ones who can economically serve remote customers.
Another weakness of Southwest Airlines is its preference for Boeing 737s. Being limited to one type of airplane leaves them with little flexibility when the model receives a bad reputation or a critical flaw is discovered. Such would be a costly venture for this company, who has used only one type of airplane, and in the face of a dire situation would face a costly venture of finding replacements or counteracting bad publicity.
A possible threat is that since Southwest Airlines' strategy has proven so effective, it will be duplicated by its competitors to a point where it would lose originality. This could result in competitors offering low rates to the areas covered by Southwest and beyond, making Southwest Airlines' range and limitations more obvious. It would be very possible in the near future where a big company, with its hubs (something Southwest does NOT have), would basically introduce Southwest Airlines' low-cost model to a wider market, encroaching and outdoing Southwest Airlines.
