Case Analysis Southwest Airlines Co.

4. Howard Putnam

President and Chief Executive Officer, from 1978-1982

5. Bob Montgomery
   Vice President - Properties and Facilities
6. Donna D. Conover
   Executive Vice President - Customer Service
7. Gary C. Kelly
   Executive Vice President and Chief Financial Officer
8. James C. Wimberly
   Executive Vice President and Chief of Operations
9. Joyce C. Rogge
   Senior Vice President – Marketing
10. Deborah Ackerman
    Vice President - General Counsel
11. Beverly Carmichael
    Vice President - People Department
12. Gregory N. Crum
    Vice President - Flight Operations
13. Ginger C. Hardage
    Vice President - Corporate Communications
14. Robert E. Jordan
    Vice President – Technology
15. Camille T. Keith
    Vice President - Special Marketing
16. Daryl Krause
    Vice President – Provisioning
17. Kevin M. Krone
    Vice President - Interactive Marketing
18. Pete McGlade
    Vice President - Schedule Planning
19. Rob Myrben
    Vice President – Fuel
20. Ron Ricks
    Vice President - Governmental Affairs
21. Dave Ridley
    Vice President - Ground Operations
22. James A. Ruppel
    Vice President - Customer Relations and Rapid Rewards
23. Ray Sears
    Vice President – Purchasing
24. Jim Sokol
    Vice President - Maintenance & Engineering
25. Keith L. Taylor
    Vice President - Revenue Management
26. Ellen Torbert
    Vice President – Reservations
27. Michael G. Van De Ven
    Vice President - Financial Planning and Analysis
28. Tammye Walker-Jones
    Vice President – Inflight
29. Greg Wells
    Vice President - Safety, Security, and Flight Dispatch
30. Steven P. Whaley
    Controller
31. Laura H. Wright
    Vice President - Finance and Treasurer

III. External Environment

1. Societal Environment

1. Economic

Opportunities

• Increasing globalization increases demand for need to travel longer distances
• Existing market share in the low-cost airline travel market
• Simple fare structure compared to competitors
• Market capitalism lower for competitors
• Increasing number of consumers using online booking for travel

Threats

• The airline industry is one of the worst businesses in the history of business
• The airline industry is hugely capital intensive with enormous fixed costs—airplanes are very expensive
• The airline industry is fuel intensive with no alternative source of energy and therefore subject to world events
• The airline industry is labor intensive. As a service business, many Employees are required to meet Customer expectations
• The airline industry is intensely operational
• The airline industry has no product inventory or shelf life
• The airline industry is intensely competitive
• The airline industry is intensely cyclical
• The airline industry is intensely taxed

2. Technological

Opportunities

• Increasing number of travelers are using web sites to book airline tickets, hotel rooms, and car rentals
• Advantage to using only one model of plane, the Boeing 737
• Performance-enhancing Blended Winglets are being installed on the current and future fleet of 737-700s

Threats

• World events slowed research and development of aeronautic technology products

3. Political-Legal

Opportunities

• Though federal regulations are strict, it affords Southwest the opportunity to use it’s excellent reputation in the industry to acquire additional market share through tough times after 9/11
• Congress created a nine-member commission to investigate the pricing, practices and exclusive marketing agreements of various airline and independent websites

Threats

• The airline industry is intensely regulated.

• A plane can’t move without FAA’s permission.
• Airports are natural monopolies controlled by governments.
• TSA controls passenger and baggage processing

• The airline industry is subject to regulation by a number of federal, state, and local departments and agencies
• The Department of Transportation (DOT) has regulatory jurisdiction over passenger airlines

• The Federal Aviation Administration (FAA) regulates

4. Sociocultural

Opportunities

• Consumers demand drives demand for new aeronautic products

Threats

• Highly competitive personal computer industry, characterized by:

• Aggressive pricing practices
• Downward pressure on gross margins
• Frequent introduction of new products
• Short product life cycles
• Continual improvement in product price/performance characteristics
• Price sensitivity on the part of the consumer
• Large number of competitors

2. Task Environment

Opportunities

• In order to stay competitive and continue its’ success Southwest must:

• Through alertness to danger and an awareness that real threats exist
• By remaining quick and responsive—not becoming bureaucratic
• By giving great Customer Service

• Southwest accounts for approximately 90% of all discounted air travel in the United States – This is a huge market share, they dominate the industry
• Ranked number one in fewest customer complaints – Customers who are satisfied will continue to use Southwest as their airline of choice. They will also refer others to the airline
• 46% of bookings are made on-line – Today’s consumers want convenience and with Southwest’s on-line booking service they can book from the convenience of work or at home.

• Southwest flies out of many regional airports making it more convenient for passengers to get in and out of the airport.
• By preserving our high spirits, sense of humor, mutual and self-respect, and respect for their joint enterprise
• Through low fares—the Freedom to Fly—which are only possible if they preserve their low cost structure
• By recognizing and acting upon some fundamental precepts:

• that theirs is a very dangerous and very vulnerable business; by its very nature, you can be profitable one quarter and nonexistent several quarters later;
• that complacency and its handmaiden, lack of understanding, are the death knell of an airline;
• that they must always look out, instead of in, and forward, instead of backward
• that a tribalistic, schismatic airline, divided against itself, is doomed

Threats

• Obstacles to success:

• Complacency
• Greed
• Selfishness
• The competitors, who are lowering their labor costs through furloughs and wage/benefit “givebacks.” With lower costs, they can charge lower fares and take passengers away
• New competition in the form of lower cost carriers that have new amenities and nonunion lower-paid workforces
• Excessive seat capacity relative to demand

• World events such as 9/11 or SARs

• The airline industry is hugely capital intensive with enormous fixed costs—airplanes are very expensive

• The airline industry is fuel intensive with no alternative source of energy and therefore subject to world events.  Higher fuel costs – Southwest will have to pass these costs on to their consumers which will increase their rates.

• The airline industry is labor intensive. As a service business, many Employees are required to meet Customer expectations
• The airline industry has no product inventory or shelf life

• The airline industry is intensely competitive, cyclical, operational, and intensely taxed

• Increased start-up competition – many new start-up airlines have become a bigger player in today’s airline market. Southwest will have to distinguish its self as the premier discount airline.
• General decline in travel due to fear of terrorist activities – this will be hard to avoid but Southwest’s strong balance sheet will help it through periods of low income.
• Lack of participation with on-line travel centers line Expedia and Orbitz – Some consumers like the ability to make all their travel arrangements in one location. By not participating, Southwest stands to lose out on that market.

IV. Internal Environment

1. Corporate Environment

• Southwest is a very equality oriented organization. Everyone helps in making the company goal a reality.
• Decision making is very straight forward – deliver the highest quality service to the customer at the most economical price.
• The company is rather set in its ways. They only use the Boeing 737 and have no plans to expand to other planes.
• Southwest is very customer oriented and has received the least amount of complaints out of all the major airlines.

2. Corporate Culture

• Southwest has a very non-traditional corporate culture that focuses on having fun while servicing the client
• All employees are treated as equals – even the pilots help to clean the plan and transfer baggage.
• Southwest strives to provide the highest quality service and they do this by having a high quality staff.
• Employees of Southwest like their jobs and feel secure.
• Southwest did not layoff any of its workforces after 9/11 – this had a huge impact on employee moral.
• Southwest is positioned as the leading provider of low cost short distance flights.
• Their no-frills approach has enabled it to keep costs down and customers happy.

C. Corporate Resources        

        

        1. Marketing

Strengths:

• Southwest has the lowest cost per available mile seat flown, this company’s low-cost position is supported by low reservation and ticketing cost, type of plane flown, and low food cost.
• Since Southwest runs primarily short flights which range from 60 to 90 minutes in length they can have one aircraft in their fleet.  This plane is the Boeing 737.  By flying only one plane, maintenance, inventory and operating costs are greatly minimized.  For Southwest this means having fewer mechanics, fewer parts kept in inventory, and lower paid pilots who only have to be adept in flying one type of aircraft.
• The first airline to establish a home page on the internet and offer online bookings.46% of its passenger revenue was generated by inexpensive online bookings.
• It was also the first airline with a frequent flyer program to give credit for the number of trips taken, not just the number of miles flown, and also pioneered senior discounts, Fun Fares, Fun Packs, a same-day air freight delivery service, ticket-less travel, and many other unique programs
• Southwest delivers consistently high level of service, on-time performance, baggage handling. And point-to-point route system provides more direct, non-stop flights so that connections delays and total trip are minimized.
• Southwest operates newer aircrafts; the average age of the aircrafts in the company is less than 8.5 years.
• Southwest has created a uniform and constant service since all flight crews and pilot are trained in the same Boeing 737 aircrafts.
• New boarding pass that reduces the amount of time a passenger spends in lines at airports.

Weaknesses:

• Southwest does not offer meals, only peanuts and drinks. Most flyers would expect fine food during their flight.
• Southwest does not interline with any other airlines. This leads to a decrease in a number of passengers on board and unable to reach all 50 states.
• Classic perception: low price, low quality. Many flyers still believe that Southwest provides a very low quality of service.
• Travel agents would not recommend flying on Southwest due to the low commissions. Southwest offers a ticket-less travel system to trim travel agents’ commissions, run its own reservation system, and sells a significant portion of reservations through its Web site. Unfortunately most flyers are used to traditional booking system: through travel agents.
• The aging of the US population results in more interest in leisure travel not drinks, peanuts, and fast travel.

                2. Finance

        

        Strengths:

• Had approximately $1 billion in cash and cash equivalents on hand, enabling it to meet the severe demand on cash flow faced by all airlines as they began to restore service on September 14.
• Southwest had the strongest balance sheet and highest credit ratings in the U.S airline industry. This enabled it to quickly borrow, at reasonable rates, the cash is utilized to sustain operations, fund employee profit sharing commitments and meet contractually obligated capital expenditures.
• Although the company’s net income decreased 82.3% in 2001, Southwest was the only major carrier to post a profit for the first quarter of 2002. This because of the low operating expense and low airfares that attracted most flyers.
• Primarily due to an increase in sales growth, the profitability ratios of 2003 are beginning to return from their decline in late 2001 and 2002. Net income increased from 24 millions in 2003 to 26 millions in 2004
• Effective December 15, 2003, the Company eliminated its travel agency commission, which will lower operating costs by approximately $40 million annually.

        Weaknesses:

• After September 11 terrorist attacks. Southwest net income decreased 82.3% from the same quarter in 2001.
• Maintenance materials and repairs per ASM increased 1.6 percent primarily due to an increase in repairs for 737-700 aircraft engines, which is based on a time and materials basis.
• Average aircrafts have 8.5 years, the age of the planes as well as the high maintenance cost.

        3.        Research and Development

        

        Strengths:

• Southwest has successfully developed a cost leadership strategy.
• Southwest has developed the new boarding pass to reduce the amount of time a passenger spends in lines at airport and to reduce cost.

 

Weaknesses:

• Improved computer technology will allow more ticket-less transactions and reservations can only be made by PC

4.         Operation

                Strengths:

• Southwest have lower cost per available seat mile compare to other carriers which is $0.0731 per seat mile in first quarter 2002 VS $0.0769 in the same quarter 2001.
• Southwest expects fuel consumption savings in excess of three percent annually for each aircraft outfitted with the winglets.
• Company which rank number one in fewest customer complaints for the last eleven consecutive years.
• The first airline to establish a home page on the internet and offer online bookings.
• Southwest has created a uniform and constant service since all flight crews and pilot are trained in the same Boeing 737 aircrafts.

Weaknesses:

• Southwest does not interline with any other airline and does not have ticketing arrangements with major online travel services.
• Southwest’s low fare slogan is very risky if existing airlines launch counterattacks such as significantly lowering fares.
• As the result of its steady, planned growth strategy, Southwest flies to only 58 cities. There are numerous untapped domestic markets.

        5.         Human resources

        Strengths:

• Southwest’s employee productivity is very high because Southwest a lean staff and avoid layoffs.
• Employee satisfaction is ensured by both tangible and intangible benefits.
• Southwest is ensuring its employees economic satisfaction by continuous raise system, efficient reward, it was also making them feel comfortable, excited about work and happy, by various means such as sharing as much information as possible with them so as to create trust, mutual respect and non-adversarial relations.
• Strong customer service that is excelled through employee satisfaction. As employees were happy, comfortable and excited about their work, they performed a way above industry standard.
• To support their belief that people take better care of things they own, and that this special care is ultimately passed on to the customer, Southwest created a profit sharing program and a broad-based stock option plan which allows employees to participate in the financial benefits of an ownership culture.
• Culture begins with strong leadership. CEO Herb Kelleher is known for his relaxed management style.

Weaknesses:

• Internal communication and responsiveness to the employee needs can easily be hurt as the company grows. It would be hard to keep high level of service standard in all levels.

6. Information System

Strength:

• Improved computer technology will allow more ticket-less transactions and reservations made by PC
• The company’s point-to-point route system provides more direct, non-stop flights than the traditional hub

Weaknesses:

• Depend most of the sales on online booking will need more affiliates to gain maximum sales. This will increase commissions to the affiliates.  

VI. STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY

        A. Strategic Alternatives

1. Stability

Pros:  Will give Southwest more time to create a new strategy in order to take over Southwest competitors’ customers. Southwest also can create a new advertisement to gain more interest from customer, advertisement is the best way to affect customers’ attention so if these strategies succeed Southwest will definitely gain more revenue in sales.

 Cons:   Without any improvement in services, it will be very hard for Southwest to improve in the competition with others airline companies.

Southwest will not get any better improvement in the competition. During this period of time, other competitors might have the chance to take over the market.

2.   Retrenchment

Pros:   Will give Reduction of expenditures and stay focus on existing aircraft (737) and beverages without spend more money on new development will help Boeing to increase their revenue and keep the employee working in good performance.

Cons:  It will be disaster for Southwest if other airline companies could provide better beverages and service on their airplane with lower price. Southwest might loss its customers.

        

        3.   International Growth

Pros:  By expand its market internationally like put some international route will lead Southwest to start competes against other foreign airline companies and also local competitors like American Airlines. If this strategy succeeds, Southwest’s revenue will increase more than before and will be able to hire more employees and help all college students that are looking for job.

Cons:  Southwest will spend more money for go international. Southwest have to buy new aircrafts and take risk for this strategy, if it’s failed, Southwest will loss a billion dollars for it. Another negative thing is Southwest’s competitor can take this chance to improve their sales while Southwest is too busy with the new improvement which is international growth.

B.  Recommendation

We recommend Southwest to Starts international growth by putting new route to another country instead of domestic only. For this strategy, Southwest needs to create a new advertisement that can assure all customers that Southwest provides the best services with the best aircraft and security.

VII. IMPLEMENTATION

• Introducing new long haul flight with the focused strategies could make Southwest success
• Improve customer service and maintain its record as the best airline with the lowest number of complaint.
• Reducing airplane ticket and assortment on beverages.
• Using travel agencies to sell its ticket
• Maintain and improve the sales and try to stay on top in the airline competition.
• Improve the internet sales by adding more advertisement on famous websites or television channels.
• Use new aircraft model in order to increase the number of passenger and reduce the flight from 10-15 per day to 5-10 per day. This will also save cost of fuel for the airplane.

VIII. Evaluation and Control

Southwest Airlines strategy has been successfully implemented, and the above SWOT analysis does not indicate that a major shift in strategy should be made at this time. They should continue utilizing a cost leadership strategy to underprice competitors and gain market share. This strategy has not only resulted in increased market share, but has also increased overall demand for air travel. Southwest should continue its market development strategy, focusing domestically.

 

Exhibit 1

EFAS (External Factor Analysis Summary)

Exhibit 2

IFAS (Internal Factor Analysis Summary)