Southwest Airlines Eassy free essay sample

Airline sector has to compete for low prices and product differentiation to attract customers and gain a sustainable profitability. The Airline Industry was analyzed through the Porter’s Five Forces to identify grade or rivalry, barriers to entry and exit, possible substitutes, supplier and buyer power. The purpose of this paper is to analyze how Southwest Airlines (Southwest) developed a sustainable profitability based on its different strategies. It also shows how it succeeds in the US Airline Industry and how it ifferentiates its service from its competitors. The analysis includes the Strengths, Weakness, Opportunities and Treats (SOWT) for Southwest and other competitors, reflecting how difficult it is to imitate Southwest’s product and how difficult it is for Southwest to imitate the product of other players. Analysis of Southwest Airline and the Airline Industry in the US Introduccion A Foundation of â€Å"Love Options† Founded in 1967 by Rolling King and H erb Kelleher, Southwest started its operation in 1971 covering Dallas, Houston and San Antonio. We will write a custom essay sample on Southwest Airlines Eassy or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Lamar Muse, its president adopted the â€Å"love† theme for attracting customers: â€Å"love options† was referred to the drinks served on board, the â€Å"love machines† were the ticket machines, and cabin hostesses had seductive voices and used sexy outfits (Muduli Kaura, 2011). Herb Kelleher, CEO of Southwest (1981-2001), received credit for Southwest’s success for its personality and management style. He conducted Southwest with fun, fresh and unique perceptions of loyalty; its legendary humor enabled his employees to enjoy their work. He led the company new standards for himself and the Industry (Peter Donnelly, 2013). Kelleher created a culture at Southwest by making employees feel like part of a big family, achieving team spirit and providing information to enable them to better understand the company. By sticking to a formula of excellent customer service and a positive work environment, Southwest gained an extensive period of profits (Desai et al, 2012). Southwest culture is inherent in its mission statement â€Å"†¦ dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. † (Jackson, W; Jackson, M. , 2009, p. 64). Continuity of Kelleher’s leadership and culture may result in sustain profitability. The present paper is an analysis of Southwest’s strategies, operation, performance and competitors to visualize if the company is successful, imitative and sustainable. For a deeper understanding, an analysis of the US airline industry using Porter’s five forces model, and SWOT analysis for Southwest and its principal competitors is necessary. The analysis of the airline industry reflects that this industry is not very profitable; airlines are not able to capture much of the potential earnings due to intense price competition, high fixed osts, excess capacity and other factors. It also reveals how the company has gained sustainable product differentiation and identifies the key of its success. The SWOT analysis reflects the strengths, weakness, opportunities and threat of Southwest compared with other airline’s competitors showing how its simple operation, culture, strateg ies and performance cannot be copy without incurring in high costs, as how Southwest cannot copy other player’s operation without losing its simple strategies. Southwest Airline’s Strategies Southwest’s first strategy is ‘keep it cheap, and keep it simple’. It is focused on point-to point system with direct routes reducing connections, delays, and trip time. With the acquisition of Morris Air in 1993, Southwest improved on high frequency departures daily, retaining tardy passengers or missed flights (Muduli Kaura, 2011). Its second strategy is to offer low fares to its customers by eliminating frills which reduce cost and time of airplanes turnaround, by using the Boeing 737s which reduce fuel, reduce training costs and inventory levels of spare parts, and by using its own reservation system thus eliminating agents’ commissions. Southwest was scored with the highest online sales performance by the Jupiter Airline Core (Desai, Patel Quach, 2012). Southwest’s third strategy is the devotion to their employees and customers. Respect to people and process, and emphasis on fun for employees and travelers helped Southwest to achieve success. Its major tactics were flexibility at work place, performance and length of service recognition, group decision making, training, profit sharing, positive attitude as well as creative announcements to passengers such as the singing of the messages by employees, the use of catch phrases such as one by Arnold Schwarzenegger â€Å"hasta la vista, baby† or speaking like Donald Duck (Muduli Kaura, 2011). The fourth strategy of Southwest is their aggressive marketing tactics focusing on communicating its real value while making flying fun to customers. Southwest introduced many unique programs such as senior discounts, fun fares, fun packs, ticket-less travel, among others, targeting trips taken instead of miles flown, satisfying two set of passengers: convenience time oriented travelers and price-sensitive travelers (Desai et al, 2012). Southwest Airline’s Operation The process was very efficient, standardized and low-cost, allowing for quick turnaround and low fares, it was based on basic principles such as frequent trips, direct flights, no seats or meals assigned to the passengers, flying only Boeing 737 jets, choosing un-congested airports, and selling tickets through the internet. However, Southwest Airlines made several changes in service in 2007, improved a reservation system, added travelers categories, renovated gates, improved boarding processes and frequent flyer programs, promoted sales and campaigns (Peter Donnelly, 2013). Southwest Airline’s Performance Southwest had more than 45,000 employees by 2011, provided point-to-point, low-fare services in the 72 cities in 37 states in the US. Recorded revenues of more than $15,600 million by the same year, that is an increase of almost 30% over 2010, the net profit was $178 million in 2011, $459 million in 2010 (Southwest Airlines Co. SWOT Analysis, 2012). From 1992 to 2009 Southwest recorded increased revenues of an average of 12% each year with downturns only in 2001 for the terrorist attacks and in the recession of 2008. Southwest earned profits for more than 38 consecutive years (Peter Donnelly, 2013). According to Castro and Arino (2011) the sustained competitive advantage of Southwest makes the firm less vulnerable to economic recessions. From the acquisition of AirTran Holdings in May 2011 for $1. 4 billion, Southwest expects to cover domestic markets like New York, Washington, Boston and Baltimore and international markets like the Caribbean and Mexico. Southwest expect to increase shares from 15% to almost 20% and count 100 million customers per year to 100 destinations in the US and close international airports (Southwest Airlines Co. SWOT Analysis, 2012). According to Mertens and Vowles (2012) low cost airlines allow success when they continue growing in new markets. Southwest Airline’s Competitors Since its origin, Southwest has been competing for lower prices. Its first competitors were Braniff, Continental and Trans Texas (Peter Donnelly, 2013). Southwest now confronts intense competition from major national, regional, foreign, low-cost and ground and rail carriers. The marketing /operational alliances also became its competitors such as Delta Airlines (Delta), which acquired Northwest Airlines in 2008, and United Airlines, which merged with Continental forming United Continental Holdings (UCH) (Southwest Airlines Co. SWOT Analysis, 2012). The Airline Industry in the US The airline industry is expected to experience a strong growth in the coming years even though in the past growth rates suffered from fluctuation. The Federal Aviation Administration (FAA) estimated that the airline passenger travel and the revenue passenger miles will be doubled in the next 20 years, from revenues for little more than $800 billion in 2011 to more than $1,500 trillion by 2032. The FAA also estimates an increase of commercial operations in the airline industry from 746 million in 2013 to 1. 2 billion in 2032 (Southwest Airlines Co. SWOT Analysis, 2012). The global economic downturn in 2008 and 2009 hit the global air freight sector causing demand to fell and operating costs to increase, primarily the fuel and airport fees. The fuels represent one of the major expenses of the air freight sector, in 2011 the price was in $127. 5, about 35% more than 2010, their prices have fluctuated generally due to geopolitical factors that are away from the control of the airline companies. The global air freight sector recovered in 2010 and produced moderate growth of almost 5% in 2011 with about $124,000 million of value of which 35% belongs to America. The estimation is to reach a value of $159,000 million by 2016, which is an increase of almost 28% from 2011 (Southwest Airlines Co. SWOT Analysis, 2012). Airlines are subject to extensive regulatory and legal compliance requirements that result in significant costs for them such as mandates of additional security procedures, increases in the per ticket tax, proposals to address congestion that includes congestion pricing, future regulatory actions for climate change, and aircraft emissions. Such proposals could have a significant negative impact on the airlines operations (Engauce, Hoffman, Busch, 2011). The domestic US airline industry has been intensely competitive since it was deregulated in 1978, and it was characterized by intense rivalry and low profit margins (Cappel Romero, 2003). It has grown dramatically since the end of World War II from 3. 3 billion in revenue passenger miles (RPMs) in 1945 to 130 billion RPMs at the beginning of the deregulation, by the mid 1970s, and reached the 330 billion RPMs after a decade of deregulation. Newer carriers with lower cost structures appear in this sector in 1980s to compete head-on with the established airlines, causing several bankruptcies followed by a wave of consolidation with the fittest carriers surviving (US Airlines Industry, 2011). Rivalry, Magnify for Several Factors Routes, airports, and hubs in high traffic cities with a high demand for air travel, allowed for a variety or carriers, leading to an intense rivalry. Other factors causative of rivalry are high fixed costs such as cost of planes, fuel, pilots, government regulation, and high-tech computer systems, excess capacity on routes which allow to price wars to attract customers at low costs increase rivalry, the low differentiation among airlines and switching costs also magnify rivalry, and internet pricing has also increased rivalry due to the price readily available for comparison (US Airlines Industry, 2011). Treat of Entry: Disappearing from the Radar Screen By 1982 deregulation allowed for the entry of 43 airlines into the sector adding to the 22 already established. However, by 1993 several of them where consolidated into major airline companies, others ended in bankruptcy or simply disappeared from the radar screen, reducing the number to only eight carriers (Ramamurti Sarathy, 1997). There are no significant barriers to entry into the domestic airline industry, and the existing barriers could be outsourced, such as aircraft maintenance, food service, ground services, and reservations. Airplanes and the right to use gates could also be leased. The minimum efficient scale was not very high allowing airlines to compete in a few markets, costs were proportional to number of flights and market and price competition, brand identity and reputation were not relevant. Exit costs were not very high either; planes could be easily sold off and gates and landing rights could be sub-leased to other airlines (US Airlines Industry, 2011). Substitutes: Cars, Buses or Trains? Substitutes for the air travel are the use of cars, buses or trains. The importance of buses and trains had a big decrease over the years due to fairly low switching costs issues affecting this decrease are the route, the reason for travel and the kind of customer. A business trip might encourage flying, while family vacation may inspire driving. Vacation travelers are more price-sensitive than business travelers; utilizing substitutes allow them to consider opportunity costs (Desai at al, 2012). Not travelling at all could be another substitute to air travel, WebEx, NetMeeting, video-conferencing facilitates remote virtual communication in several business (US Airlines Industry, 2011). The use of web technology can also motivate families not to travel in some cases like ordering furniture or cars of specific characteristics. Supplier Power: Low, Moderate or High Supplier power in the airline industry could be low, moderate or high. Employee power varies according to type and if they are unionized. Pilots have low power due to other pilot’s availability, airplane manufactures have high power due to large costs on switching planes, and this power is low for airlines purchasing second-hand aircrafts (Desai at al, 2012). Airplane manufactures could also have low power due to leasing airplanes from the airlines. The aviation fuel is also an input in the airline industry, its prices are determined by market forces and geo-political factors, power may vary due to these forces. The Variability of Buyer Power The buyer power varies based on the options available to them and the origin-destination city pair. The market dominated by one or two airlines tends to overcharge customers, reducing the buyer power; in contrast, routes with multiple airlines offer competitive prices, increasing the buyer power. However, the overall airline industry is characterized by significant buyer power stemming from the intense price competition among airlines (US Airlines Industry, 2011). Southwest Airline’s SWOT Analysis Southwest’s Internal Analysis: Flying High The point-to-point service is a strength force for Southwest, differentiating it from other US airlines. By 2011, the company served almost 480 non-stop city pairs, 19 more than 2010, using less congested airports than other airlines. This strength allowed for the company to use high asset utilization, enabling on time performance and increased revenues (Southwest Airlines Co. SWOT Analysis, 2012). The point-to-point strength force is related to Southwest’s first strategy ‘keep it cheap and keep it simple’. A strong fleet operation is a strength force for Southwest; it is the base to complement its strong route network. In 2010, Southwest operated a fleet of almost 550 Boeing 737s and submitted orders for 88 more between 2011 and 2016 with options of 37 aircraft in 2013-2017 and 98 purchase rights by 2021. With this fleet based on one type of aircraft, the company is able to simplify scheduling, maintenance, flight operations, and training activities gaining a competitive advantage over its peers (DATAMONITOR: Southwest Airlines Co. , 2011). The fleet operation strength force is related to Southwest’s second strategy ‘to offer low fares to its customers’. Increasing cash flow from operations strengthens Southwest providing stability and allowing further grow. In 2010 the cash flow from operation increased more than 50% from the previous year (DATAMONITOR: Southwest Airlines Co. 2011). However, the purchasing of new equipment could decrease its cash flow in the short and long term. Based on Southwest’s strategy and culture, the company has other strengths such as strong culture, strong customer/employee focus, low turnover, low debt, strong leadership, strong web reservation system, and well respected and distinctive marketing allowing an increase in its reven ues and creating customer loyalty. Class action lawsuits, some of them due to acquisition of AirTran in 2010, are a weakness for the Southwest. Results of these lawsuits may have an adverse impact on Southwest’s financial operation or cash flow (DATAMONITOR: Southwest Airlines Co. , 2011). Impact of lawsuits could be offset with positive financial results of the acquisition of AirTran. Dependent on a single aircraft and engine supplier such as the Boeing is a weakness for Southwest. Any fails on additional parts or any regulatory issue may also adversely impact its operation (DATAMONITOR: Southwest Airlines Co. , 2011). However, the use of a single aircraft reduces costs and trainings, depending on a single aircraft also could be strength for Southwest. Heavy dependence on passenger revenues is another weakness for Southwest Airlines. In 2011 the company’s total revenues from freight operations was below one percent, while the passenger sector became almost 95% of its total revenues. This dependence increases the risks of operation for high prices in fuels (Southwest Airlines Co. SWOT Analysis, 2012). On the other hand, passenger revenues have maintained positive profits for Southwest’s operation. Southwest’s External Analysis: Flying Overseas The analysis of the Airline Industry in the US reflected big opportunities for Southwest, such as opportunity for growth in air passenger travel in the US, the growth in global air freight market, and the growth for commercial operations. These opportunities will allow Southwest to a sustain growth in the companys key performance. Another opportunity for Southwest is market expansion through the acquisition of AirTran Holdings, expansion and diversification will provide Southwest growth opportunity in the short and long term. The intense competition for industry consolidation is a treat for Southwest. The increased competition in these international markets, majorly due to consolidation in the airline industry, might affect Southwest’s results of its operation. The presence of low-cost carriers with substantial price discounting has diminished the ability of the network carriers, particularly Southwest, to maintain sufficient pricing structures in domestic markets to gain profits (Southwest Airlines Co. SWOT Analysis, 2012). Increasing fuel prices are treats for Southwest. Jet fuel and oil consumed are the largest expenses for Southwest, representing about 71% of its operating expenses. Southwest cannot control or predict the fuel price, thus significant changes in fuel prices may have a considerable effect on the companys result of operation and financial condition (DATAMONITOR: Southwest Airlines Co. , 2011). Severe regulation from the government or from other countries is a threat to Southwest, those who impose regulations or sales restrictions with significant cost for the company result in an increase of its operating costs and affect its financial operation (Southwest Airlines Co. SWOT Analysis, 2012). Delta Airlines, Inc. SWOT Analysis The strategic merger with Northwest Airlines, the international alliances, the strong brand and consistent top-line growth count as strengths for Delta. New mergers and Alliances allowed Delta to increase flight frequencies and improve customer service, thus gaining a competitive advantage over other competitors. Strong brand image and global presence positioned the company as one of the largest airlines in the world dominating the market with more than 300 destinations in almost 60 countries and a fleet of 775 aircraft. Delta’s consistent top-line growth provides financial stability to the company (Delta Air Lines, Inc. SWOT Analysis, 2012). These strengths help Delta to offset its weakness such as legal contingencies in the recent past which may impact its brand image and increase its cost structure; and substantial indebtedness, with a long-term debt of $11,233 million in 2011 may limit their financial and operating activities (Delta Air Lines, Inc. SWOT Analysis, 2012). Delta also has the opportunity for growth in air passenger travel in the US and to capitalize in the growing global air freight industry due to the growing market auger. Open skies agreements between the US and many other countries are additional opportunities for Delta to increase its top line growth in newer markets, like Brazil, in short and medium term (Delta Air Lines, Inc. SWOT Analysis, 2012). Intense competition, increasing fuel costs and extensive government regulation are threats for Delta. Delta faces high competition with respects to routes, services, and products, among others. Delta competes not only with smaller to medium-sized markets or low-cost carriers like Southwest and JetBlue, Delta also competes with foreign carriers and international alliances. In addition, the increase in global and regional oil prices exposes the company to extreme fluctuations in earnings with adverse consequences on its growth initiatives. Finally, Delta has to comply with government regulations that may increases its operating costs. (Delta Air Lines, Inc. SWOT Analysis, 2012). United Continental Holding, Inc. SWOT Analysis UCH is one of the largest air carriers in the world, operating in North America. UCH employed about 87,000 people in 2011. By the same year UCH had about $37. 1 million in revenues, almost 60% more than in 2010 (United Continental Holdings, Inc. SWOT Analysis, 2012). Extensive operational network and strong alliances are strengths forces in UCH. In 2011 UCH carried almost 142 million passengers, operating in US, Asia-Pacific, Europe, Middle East, Africa, and Latin America with more than 5,000 flights daily to about 370 US and international destinations. Strong alliances with several international airlines enhanced travel options for customers, earning a competitive advantage over its rivals (United Continental Holdings, Inc. SWOT Analysis, 2012). However, significant long term debt is a weakness for UCH. Long term debt was almost $10,500 million in 2011, and $928 million debt under capital leases. The long term debt along with a decrease of almost 23% in cash from 2010 to 2011, places UCH to competitive disadvantage position over its competitors who have better access to capital resources and restricted the availability of future investments and payment obligations of UCH (United Continental Holdings, Inc. SWOT Analysis, 2012). UCH has the opportunity for growth in air passenger travel in the US and in growing global air freight industry, similar to Southwest and Delta Airlines. UCH also has the opportunity for the recovery of global tourism. According to the United Nations World Tourism Organization (UNWTO) international tourism is expected to grow from 2012 at a slower rate through improved economic conditions worldwide. Arrivals are expected to increase by 3% to 4% reaching the historic one billion mark by the initial year 2013. Continued growth of worldwide tourism is projected to increase the number of passengers for UCH. It will allow for topping line growth in the short and medium term (United Continental Holdings, Inc. SWOT Analysis, 2012). On the other hand, the increase in aircraft fuel costs, stringent governmental regulation and intense competition are threats for UCH. The fuel costs constituted 36% of the company’s total expenses in 2011 from 31% in 2010. In addition, the UCH incurs in substantial costs in maintaining its current certifications and complying with the laws, rules and regulations affecting its margins. Finally, UCH has to compete with domestic and international competitors such as Airlines Holdings, JetBlue Airways, Southwest Airlines, Air France-KLM, and Turkish Airlines, among others. Increase in fuel costs, in government regulations and intense competition could lead to price wars and negatively impact the company’s operations affecting its margins and profitability (United Continental Holdings, Inc. SWOT Analysis, 2012). Spirit Airline’s SWOT Analysis: Fly With Spirit Spirit Airlines (Spirit) is a low-cost carrier operating a single-class fleet of A320 aircraft with faster turnarounds, short service to customers and a la carte pricing. Spirit uses two airports for its activity located in Hollywood and Detroit. Spirit operates in north- south network, focusing strongly in services to Florida, the Caribbean and Latin America in holiday times (Spirit Airlines, n. d). Major strengths for Spirit are affordable prices, high category, availability of seats types, and reward programs; these strengths help to improve its operation and allow for profits, however, Spirit has to confront several weaknesses, the company does not have customer entertainment, has hidden fees like baggage fees that are unknown to the customer, do not offer food service and their destinations are limited as well as lack of employee training (Lara, 2012). Lack of entertainment to customers could affect customer demands especially for the service used in holidays or vacations, and may affect its operation and profitability. Based on its weaknesses, Spirit has opportunities to improve in technology to cover more destinations, to offer customer entertainment, and to reduce flight time. Spirit also could offer non-stop flights and improve in training to employees. One of the major threats that Spirit has to confront is the increase of gas prices or gas shortages. Conclusions The Industry analysis reveal that Southwest has been successful in the US airline industry in distinguishing itself from other players by offering to its customers a differentiate product. Through their low cost, fun and simple service with no frills, with its loyal customer base, its unique customer service, and its employee’s loyalty, Southwest created a product different from other competitors. For all these characteristics Southwest gained sustain profitability for more than thirty eight consecutive years in this competitive industry. The SWOT analysis shows that it is difficult to imitate Southwest Airline’s low cost strategy, competitors may incur big losses in trying to eliminate frills, or by using only one kind of fuel efficient jets, when they have international long trip flights that demand full meals and big planes. On the other hand, it will be difficult for Southwest to imitate an international airline. That would require bigger planes, incurring high costs in re-fuelling and meals would also increase, as well as turnaround times; imitate would go against its low fare and simple strategy.