Copy of Southwest - Case Analysis
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Southwest Airlines – Case Analysis
MGT 527 02W (Fall 2011)
Submitted By
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Contents
Contents..................................................................................................................... 2 Strategic Profile and Case Analysis Purpose...............................................................3 Situation Analysis....................................................................................................... 4 General Environment Analysis.................................................................................................4 Industry Analysis......................................................................................................................5 Competitor Analysis.................................................................................................................6 Internal Analysis.......................................................................................................................7 SWOT Analysis............................................................................................................7 Strategies to Address Key Management Challenges..................................................9 Maintain low fares....................................................................................................................9 Violation of Safety Requirements...........................................................................................11 Union Walkout........................................................................................................................12 Expansion Plans....................................................................................................................13 ...............................................................................................................................................16 References...............................................................................................................17
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Strategic Profile and Case Analysis Purpose
Southwest Airlines, originally known as Air Southwest, was founded by Rollin King and Herb Kelleher. Southwest took first flight in June 1971, serving three major US cities: Dallas, Houston and San Antonio. Southwest turned the first annual profit in 1973. By 1977 southwest operated six airplanes and had transported five million customers. Between 1979 and 1980, Southwest established its first interstate service to New Orleans and Albuquerque, followed by Okalhoma City and Tulsa. Southwest expanded west in 1982, when it added servcies to Phoenix, Las Vegas, and San Diego. After 25 years of service, Southwest owned a fleet of 243 aircraft and continues to grow as provider of high frequency, point-to-point, low-fare airline services (R. Duane Ireland, 2011). Southwest has a solid low-cost business model that was instituted largely by strategic decisions such as fly a single aircraft type; operate an efficient point-to-point route system; and utilize assets in a highly efficient manner. The power of Southwest Brand today——that sets it apart from its competitors——is its magnificent People. In 2007, Southwest Employees did a remarkable job embracing the many changes in its products and processes and rose to the occasion to took care of each other and its Customers. That focus on service helped Southwest to be named to BusinessWeek magazine’s first-ever list of “Customer Service Champs.” (2008, Southwest Airlines 2007 Annual Report) Southwest airlines reported an operating profit of $449 million for the year 2007, despite rising operating expenses marking 71 consecutive quarters of profitability. The total opearating expenses for the year increased 16 percent compared to 2007 and where driven primarily by higher fuel costs (44 percent), as well as ongoing maintenance costs (exhibit 6 - R. Duane
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Ireland, 2011). However, Southwest did make 2008 its thirty-sixth consecutive year with annual operating profit (R. Duane Ireland, 2011). Airline industry is facing ever increasing need to keep the costs low to stay afloat. The current issues and current decision of the company are more critical than ever. The purpose of this case analysis is to identify key strategic issues by conducting situation/SWOT anlysis, suggest strategic alternatives to address the issues so that Southwest can continue delivering above average returns to the shareholders .
Situation Analysis
Financial distress in the airline industry can be tied to the high costs incurred by the airlines to offer their services and low costs demanded by customers to travel. Southwest also faces dilemmas associated with its growth strategy, costs incurred to meet safety regulations on its aircraft, and a dispute with labour union. Southwest’s technological innovations, procedure changes, price increases, and recent acquisitions are attempts to overcome the looming challenges in the airline industry (R. Duane Ireland, 2011).
General Environment Analysis
Since the inception of commercial flight, more than 200 airlines have tried and failed in the commercial airline industry. Some of the best minds in business, including Warren Buffett have invested in commercial airline industry and failed. These failures are a reminder that airline business is tumultuous, complex, and in many cases, futile. Financial distress in the airline industry can be tied to the high costs incurred by the airlines and the increased customer demand for low cost travel due to current economic conditions (R. Duane Ireland, 2011). TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Economic downturn decreased the demand for business travel while leisure travelers choose surface transportation. To stimulate the demand, businesses are often forced to keep the prices low and in such situation long term sustenance is possible only if the costs can be kept low (2008, Southwest Airlines 2007 Annual Report).
Industry Analysis
Factors such as increased fuel costs and other high operating costs, a decrease in business travelers due to budget cuts, and increased regulations have placed strains on all airline companies. Many airlines have subsequently been forced out of business or acquired by competitors. This is illustrated by the fact that the large group of airlines that made up the industry 30 years ago has narrowed to six major firms that control the majority of the market (Figure 1). These six carriers constitute five traditional airline companies and Southwest, the low-cost leader. Many airlines have been forced to file bankruptcy in the recent years. From 2005 to 2007, US Airways, UAL Corporation (United Airlines), ATA Airlines, Northwest Airlines, and Delta Air Lines all emerged from bankruptcy proceedings. In 2008, Frontier Airlines, Skybus Airlines, Inc., Aloha airlines, and ATA Airlines (for the second time) filed for bankruptcy. All of these demonstrate the difficult and competitive nature of industry (R. Duane Ireland, 2011).
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Figure 1: Airline Domestic Market Share (March 2009)
17% 29% 14% 8% 8% 13% 11%
Delta Am erican S outhw est United USAirw ays C ontinental O ther
Competitor Analysis
Southwest considers any airline offering a flight on the same route it does a competitor, regardless of the overall size of that competitor’s operation. Since Southwest now operates in many geographic markets throughout the United States, essentially every airline that offers services to domestic cities is viewed as a competitor. New competitors still occasionally try to replace southwest as low-cost leader. Some of those companies Skybus, Frontier filed for bankruptcies. JetBlue, founded by an ex-Southwest employee, emerged in 1999 and is one of the few new entrants to successfully become a principle competitor to Southwest both in terms of route coverage and low-cost, low-fare strategies (R. Duane Ireland, 2011). Traditional carriers have recently also adopted cost-cutting practices to more effectively compete with their low-cost counterparts. More than 200 aircrafts were grounded in 2008, Continental cut 3,000 jobs, and airlines offered fewer flights. Although the major carriers are still offering higher fares overall, their business models are beginning to mirror those low-cost rivals.
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Thus, Southwest has to increasingly improve its marketing efforts to differentiate itself (R. Duane Ireland, 2011).
Internal Analysis
Southwest’s solid business model was instituted largely by strategic decisions to fly a single aircraft type; operate efficient point-to-point route system; and utilize assets in a highly efficient manner. The power of the Southwest brand – which sets it apart from its competitors – is its magnificent people (2008, Southwest Airlines 2007 Annual Report). In 2007, Southwest was recognized for eleventh consecutive year by Fortune magazine as one of the 100 Best Corporate Citizens for eight year in a row (America's most admired companies, Fortune, 2008). Southwest was also included in the Top 100 Most Innovative Technology Organizations by InformationWeek magazine in July 2007. Southwest employees our 34,000 employees who are passionate about their mission to give Customers an affordable air travel with highest satisfaction (2008, Southwest Airlines 2007 Annual Report). To reduce fuel costs, Southwest is replacing older airplanes with more fuel efficient newer models. Southwest will purchase 29 new, fuels efficient Boeing 737-700s scheduled for 2008 delivery and plans to reduce fleet by 22 aircraft, to end 2008 with seven net aircraft additions (2008, Southwest Airlines 2007 Annual Report). As a result of their continued attention to detail, SWA is definitely an excellent example of how a positive corporate culture benefits not only the overall success of the company, but also of its patrons and employees.
SWOT Analysis Strengths Weakness
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Consistent, proven low-cost airline operating business model. Punctuality, shortest turnaround time. One type of aircraft – reduced cost of operation, provides flexibility of use. Strong organization culture; Most admired company; Profit sharing plan - Employees own 8% of the company stock. Highest customer satisfaction. Use of technology to simplify and reduce operation costs.
Union walkout – unequal pay for members of ground crew, no salary raises since 2005. Violation of Safety Requirements Only uses point-to-point business model unlike competition.
Lack of alliances.
Cut throat operating model leaves no room for errors. Risks associated with fuel hedging strategy.
Opportunities
Replace aging fleet with fuel efficient next generation fleet. Marketing initiatives such as ‘no baggage fees’ – which are hated by customers Attract business travelers. Expand operations to neighboring courtiers, popular tourist destinations near USA.
Threats
Increasing fuel costs.
Increasing safety regulatory requirements.
Lack of alliances, limits customer affinity. Increased competition from companies emerging from bankruptcy which have improved efficiency, cost control than in the past.
Acquisition of flights previously owned by defunct airlines. Implement proven, successful low-cost model in developing countries Campaign safety initiatives, commitment to flying safe fleet.
Prolonged economic downturn.
Potential catastrophes, such as terrorism acts can severely affect the industry. Rival distribution channels.
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Innovative methods, procedures in reducing turnaround time, efficient utilization of assets
Strategies to Address Key Management Challenges
The key identified challenges Southwest’s management is facing can be categorized as: 1. Maintain low fares. 2. Violations of Safety Requirements. 3. Union Walkout. 4. Expansion Plans.
Maintain low fares
During the past 36 years, Southwest implemented many cost saving approaches to keep the operating costs low which include fleet standardization, fuel hedging, upgrading fleet with blended winglets, and using Pratt & Whitney’s EcoPower engine wash services etc. Most traditional carriers after emerging from bankruptcies have adopted cost-cutting practices to effectively compete with their low-cost counterparts. New entrants such as JetBlue were successful in implementing Southwest’s model. Fuel costs, which depend on many economic, political and social factors around the world, are on the rise (R. Duane Ireland, 2011). Raising the fares is not an option in airline industry where customer affinity is low. Southwest needs to look for strategies to reduce the operating costs (Refer to Tables 1 & 2):
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
•
Load Factor: Southwest’s load factor is 8% less than the average load factor of its competitors. Southwest should form partnership, alliances to sell available seats to improve the load factor which will increase the revenue with minimal or no increase in costs.
•
Wage Benefits: Southwest’s wage benefits as a percentage of operating revenue is 5% higher than that of its competitors. Southwest won awards as one of the best company to work for. Money is not the highest priority for employees as per Maslow’s hierarchy of needs. Southwest’s employees have shown loyalty for three decades and may be persuaded to take 2 to 3% cut in wage benefits. Alternatively, to a certain extent, the company can control costs by keeping the employee head count constant while the business continues to grow.
•
Long-term debt: Southwest’s long-term debt as a percentage of operating revenue and long-term debt as a percentage of assets are significantly lower than that of its competitors. Southwest should increase its financial leverage and invest the additional capital for upgrading their fleet, fuel hedging, upgrade maintenance infrastructure and improving fleet safety.
•
One model fleet: Southwest has the largest fleet of Boeing 737s in the industry. It should use its loyalty, size to partner with Boeing in identifying solutions for reducing the fuel costs, use alternate fuels, improvements in aerodynamics, etc.
•
Fuel Hedging: Southwest has used its credit situation, access to cash wisely and was successful in its bets with respect fuel hedging. While such fuel hedging practices can continue, the benefits cannot be always guaranteed as it is hard to predict when the oil prices have reached a peak and will begin dropping, or if it is still climbing. To minimize
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
the risks, Southwest should either look for alternate sources of revenue or increase the fuel efficiency of the fleet.
Violation of Safety Requirements
Early in 2008, it was revealed that Southwest has flown at least 117 aircraft that were in violation of mandatory safety checks. Southwest ended up paying $10. 2 million in fines to FAA and had to temporarily ground 47 aircrafts (R. Duane Ireland, 2011). Aircraft safety is a paramount concern with airline customers. Non-conformance to safety requirements/regulations tarnishes the image of the company, reduces the revenue and leaves door open for the competition to entrench. Southwest needs to look for strategies which will reduce the customer safety concerns: • Long-term Debt: Southwest should increase its financial leverage and invest the capital in inspection equipment, inspection procedures, send employees to trainings and upgrade the fleet if necessary. • Marketing: Southwest should initiate marketing campaigns to fix/enhance brand value by emphasizing its proven history and commitment to safety. • One model fleet: Southwest should work collaboratively with Boeing to identify procedures for detecting safety related issues as early as possible. By identifying safety issues earlier, it can reduce the costs associated with fixing the safety issues. By setting its safety standards better than those of its competitors, better than those required by FAA regulations Southwest can make a bold statement in its commitment to customer safety.
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Union Walkout
Southwest as a company, which once enjoyed superior employee relations compared to its competitors, ran into problems in year 2008. Complaints such as unequal pay for members of ground crew and no raises since year 2005 prompted a walkout by labor union on November 20, 2008. Wage increases, boost in 401K contributions, were promised only to the degree that such increases will allow Southwest to keep its low-cost advantage (R. Duane Ireland, 2011). Southwest was the first airline company to adopt the profit sharing plan in US airline industry. Southwest enjoys one of the lowest employee turnover rates among US airline industry (R. Duane Ireland, 2011). Southwest need to use its reputation, commitment and history in formulating strategies which will reduce union related problems: • 36 year commitment: Southwest established “no layoff policy” to demonstrate its commitment to employees since 1973 (R. Duane Ireland, 2011). Southwest rewarded employees for outstanding customer service. Southwest always communicated to its employees that they are integral part of the company’s DNA. Southwest is the only major airline company which had stayed profitable even in tough economic conditions. Southwest employees take pride in working for the company. Southwest management need to highlight the partnership model that exists between the company and employees and prepare policies, procedures to avoid, or resolve union related issues before they start to hurting the company. • Wage Benefits: Southwest pays higher salaries to its pilots, flight attendants, ground staff and its management per operating revenue its competitors (2007 Airline Performance Summary, 2008). Southwest is a profitable company offering continuous employment. Southwest has the lowest employee turnover in the industry. By preparing salary guidelines
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
which can be consistently applied across the company, employee ranks; Southwest can limit employee dissatisfaction due to wages, benefits. • Employee Growth: Companies which can offer continuous employment and opportunities to grow will have to face less union related issues. Southwest is one of the few jewels in airline industry which had continuous growth during the last three decades. Southwest has aggressive growth plans. As Southwest grows in size, the employees must be provided opportunities to grow.
Expansion Plans
Southwest continues to grow in the domestic market by adding new routes. Southwest is exploring options to launch services to international destinations such as Caribbean, England. Southwest is extremely successful in using point-to-point methodology unlike traditional airline companies which use hub-and-spoke methodology. Some of the growth initiatives include possible acquisition of flights owned by defunct airlines such as Ted (R. Duane Ireland, 2011). While Southwest is pursuing expansion plans, it should be cognizant to maintain its very defining characteristics such as low cost of operation, high employee satisfaction, exceptional customer service and punctuality. Southwest should always watch out for the initiatives from competition to erode its existing business. Southwest should use following strategies for expansion: • Long-term debt: Southwest’s long-term debt as a percentage of operating revenue and long-term debt as a percentage of assets are significantly lower than that of its competitors. Southwest should increase its leverage and invest the additional capital for acquiring companies or by adding more destinations.
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
•
Diversification: Southwest has built proven, successful, point-to-point, low-cost business model in USA. Southwest should consider deploying a similar model in developing countries such as India and China.
•
Hub-and-Spoke System: Southwest should not implement hub-and-spoke system as it complicates the scheduling of flights, create operational inefficiencies as it adds activities such as baggage transfers, ensuring reservations in all legs, creating dependencies between one flight departures with another flight arrivals etc. Hub-and-spoke complicates evaluating competition for each route as competitor airlines may not use the same connecting cities. Although some large traditional airlines are using such a model, Southwest should stay away from using such model.
•
Alliances: Southwest should enter into partnership, alliances with other airlines to improve its load factors. Southwest should evaluate opportunities in forming alliances to sell tickets with websites such as expedia.com, orbitz.com such that the revenue per ticket sold is not impacted significantly. Southwest should enter into mutual alliances with similar low-cost airlines in routes where they do not compete.
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Table 1: 2007 Airline Analyses (2007 Airline Performance Summary, 2008)
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Table 2: 2007 Airline Analyses (2007 Airline Performance Summary, 2008)
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
References
1. 2007 Airline Performance Summary. (2008). Retrieved from airlinesfinancials.com: http://www.airlinefinancials.com/uploads/2007_mainline_summary.pdf 2. 2008, America's most admired companies, Fortune. (2008, March 17). Retrieved from http://money.cnn.com 3. 2008, Southwest Airlines 2007 Annual Report. (n.d.). Retrieved from http://www.southwest.com 4. R. Duane Ireland, R. E. (2011). The Management of Strategy Comcepts and Cases (9 ed.). Canada: South-Western.
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
MGT 527 02W (Fall 2011)
Submitted By
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Contents
Contents..................................................................................................................... 2 Strategic Profile and Case Analysis Purpose...............................................................3 Situation Analysis....................................................................................................... 4 General Environment Analysis.................................................................................................4 Industry Analysis......................................................................................................................5 Competitor Analysis.................................................................................................................6 Internal Analysis.......................................................................................................................7 SWOT Analysis............................................................................................................7 Strategies to Address Key Management Challenges..................................................9 Maintain low fares....................................................................................................................9 Violation of Safety Requirements...........................................................................................11 Union Walkout........................................................................................................................12 Expansion Plans....................................................................................................................13 ...............................................................................................................................................16 References...............................................................................................................17
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Strategic Profile and Case Analysis Purpose
Southwest Airlines, originally known as Air Southwest, was founded by Rollin King and Herb Kelleher. Southwest took first flight in June 1971, serving three major US cities: Dallas, Houston and San Antonio. Southwest turned the first annual profit in 1973. By 1977 southwest operated six airplanes and had transported five million customers. Between 1979 and 1980, Southwest established its first interstate service to New Orleans and Albuquerque, followed by Okalhoma City and Tulsa. Southwest expanded west in 1982, when it added servcies to Phoenix, Las Vegas, and San Diego. After 25 years of service, Southwest owned a fleet of 243 aircraft and continues to grow as provider of high frequency, point-to-point, low-fare airline services (R. Duane Ireland, 2011). Southwest has a solid low-cost business model that was instituted largely by strategic decisions such as fly a single aircraft type; operate an efficient point-to-point route system; and utilize assets in a highly efficient manner. The power of Southwest Brand today——that sets it apart from its competitors——is its magnificent People. In 2007, Southwest Employees did a remarkable job embracing the many changes in its products and processes and rose to the occasion to took care of each other and its Customers. That focus on service helped Southwest to be named to BusinessWeek magazine’s first-ever list of “Customer Service Champs.” (2008, Southwest Airlines 2007 Annual Report) Southwest airlines reported an operating profit of $449 million for the year 2007, despite rising operating expenses marking 71 consecutive quarters of profitability. The total opearating expenses for the year increased 16 percent compared to 2007 and where driven primarily by higher fuel costs (44 percent), as well as ongoing maintenance costs (exhibit 6 - R. Duane
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Ireland, 2011). However, Southwest did make 2008 its thirty-sixth consecutive year with annual operating profit (R. Duane Ireland, 2011). Airline industry is facing ever increasing need to keep the costs low to stay afloat. The current issues and current decision of the company are more critical than ever. The purpose of this case analysis is to identify key strategic issues by conducting situation/SWOT anlysis, suggest strategic alternatives to address the issues so that Southwest can continue delivering above average returns to the shareholders .
Situation Analysis
Financial distress in the airline industry can be tied to the high costs incurred by the airlines to offer their services and low costs demanded by customers to travel. Southwest also faces dilemmas associated with its growth strategy, costs incurred to meet safety regulations on its aircraft, and a dispute with labour union. Southwest’s technological innovations, procedure changes, price increases, and recent acquisitions are attempts to overcome the looming challenges in the airline industry (R. Duane Ireland, 2011).
General Environment Analysis
Since the inception of commercial flight, more than 200 airlines have tried and failed in the commercial airline industry. Some of the best minds in business, including Warren Buffett have invested in commercial airline industry and failed. These failures are a reminder that airline business is tumultuous, complex, and in many cases, futile. Financial distress in the airline industry can be tied to the high costs incurred by the airlines and the increased customer demand for low cost travel due to current economic conditions (R. Duane Ireland, 2011). TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Economic downturn decreased the demand for business travel while leisure travelers choose surface transportation. To stimulate the demand, businesses are often forced to keep the prices low and in such situation long term sustenance is possible only if the costs can be kept low (2008, Southwest Airlines 2007 Annual Report).
Industry Analysis
Factors such as increased fuel costs and other high operating costs, a decrease in business travelers due to budget cuts, and increased regulations have placed strains on all airline companies. Many airlines have subsequently been forced out of business or acquired by competitors. This is illustrated by the fact that the large group of airlines that made up the industry 30 years ago has narrowed to six major firms that control the majority of the market (Figure 1). These six carriers constitute five traditional airline companies and Southwest, the low-cost leader. Many airlines have been forced to file bankruptcy in the recent years. From 2005 to 2007, US Airways, UAL Corporation (United Airlines), ATA Airlines, Northwest Airlines, and Delta Air Lines all emerged from bankruptcy proceedings. In 2008, Frontier Airlines, Skybus Airlines, Inc., Aloha airlines, and ATA Airlines (for the second time) filed for bankruptcy. All of these demonstrate the difficult and competitive nature of industry (R. Duane Ireland, 2011).
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Figure 1: Airline Domestic Market Share (March 2009)
17% 29% 14% 8% 8% 13% 11%
Delta Am erican S outhw est United USAirw ays C ontinental O ther
Competitor Analysis
Southwest considers any airline offering a flight on the same route it does a competitor, regardless of the overall size of that competitor’s operation. Since Southwest now operates in many geographic markets throughout the United States, essentially every airline that offers services to domestic cities is viewed as a competitor. New competitors still occasionally try to replace southwest as low-cost leader. Some of those companies Skybus, Frontier filed for bankruptcies. JetBlue, founded by an ex-Southwest employee, emerged in 1999 and is one of the few new entrants to successfully become a principle competitor to Southwest both in terms of route coverage and low-cost, low-fare strategies (R. Duane Ireland, 2011). Traditional carriers have recently also adopted cost-cutting practices to more effectively compete with their low-cost counterparts. More than 200 aircrafts were grounded in 2008, Continental cut 3,000 jobs, and airlines offered fewer flights. Although the major carriers are still offering higher fares overall, their business models are beginning to mirror those low-cost rivals.
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Thus, Southwest has to increasingly improve its marketing efforts to differentiate itself (R. Duane Ireland, 2011).
Internal Analysis
Southwest’s solid business model was instituted largely by strategic decisions to fly a single aircraft type; operate efficient point-to-point route system; and utilize assets in a highly efficient manner. The power of the Southwest brand – which sets it apart from its competitors – is its magnificent people (2008, Southwest Airlines 2007 Annual Report). In 2007, Southwest was recognized for eleventh consecutive year by Fortune magazine as one of the 100 Best Corporate Citizens for eight year in a row (America's most admired companies, Fortune, 2008). Southwest was also included in the Top 100 Most Innovative Technology Organizations by InformationWeek magazine in July 2007. Southwest employees our 34,000 employees who are passionate about their mission to give Customers an affordable air travel with highest satisfaction (2008, Southwest Airlines 2007 Annual Report). To reduce fuel costs, Southwest is replacing older airplanes with more fuel efficient newer models. Southwest will purchase 29 new, fuels efficient Boeing 737-700s scheduled for 2008 delivery and plans to reduce fleet by 22 aircraft, to end 2008 with seven net aircraft additions (2008, Southwest Airlines 2007 Annual Report). As a result of their continued attention to detail, SWA is definitely an excellent example of how a positive corporate culture benefits not only the overall success of the company, but also of its patrons and employees.
SWOT Analysis Strengths Weakness
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Consistent, proven low-cost airline operating business model. Punctuality, shortest turnaround time. One type of aircraft – reduced cost of operation, provides flexibility of use. Strong organization culture; Most admired company; Profit sharing plan - Employees own 8% of the company stock. Highest customer satisfaction. Use of technology to simplify and reduce operation costs.
Union walkout – unequal pay for members of ground crew, no salary raises since 2005. Violation of Safety Requirements Only uses point-to-point business model unlike competition.
Lack of alliances.
Cut throat operating model leaves no room for errors. Risks associated with fuel hedging strategy.
Opportunities
Replace aging fleet with fuel efficient next generation fleet. Marketing initiatives such as ‘no baggage fees’ – which are hated by customers Attract business travelers. Expand operations to neighboring courtiers, popular tourist destinations near USA.
Threats
Increasing fuel costs.
Increasing safety regulatory requirements.
Lack of alliances, limits customer affinity. Increased competition from companies emerging from bankruptcy which have improved efficiency, cost control than in the past.
Acquisition of flights previously owned by defunct airlines. Implement proven, successful low-cost model in developing countries Campaign safety initiatives, commitment to flying safe fleet.
Prolonged economic downturn.
Potential catastrophes, such as terrorism acts can severely affect the industry. Rival distribution channels.
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Innovative methods, procedures in reducing turnaround time, efficient utilization of assets
Strategies to Address Key Management Challenges
The key identified challenges Southwest’s management is facing can be categorized as: 1. Maintain low fares. 2. Violations of Safety Requirements. 3. Union Walkout. 4. Expansion Plans.
Maintain low fares
During the past 36 years, Southwest implemented many cost saving approaches to keep the operating costs low which include fleet standardization, fuel hedging, upgrading fleet with blended winglets, and using Pratt & Whitney’s EcoPower engine wash services etc. Most traditional carriers after emerging from bankruptcies have adopted cost-cutting practices to effectively compete with their low-cost counterparts. New entrants such as JetBlue were successful in implementing Southwest’s model. Fuel costs, which depend on many economic, political and social factors around the world, are on the rise (R. Duane Ireland, 2011). Raising the fares is not an option in airline industry where customer affinity is low. Southwest needs to look for strategies to reduce the operating costs (Refer to Tables 1 & 2):
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
•
Load Factor: Southwest’s load factor is 8% less than the average load factor of its competitors. Southwest should form partnership, alliances to sell available seats to improve the load factor which will increase the revenue with minimal or no increase in costs.
•
Wage Benefits: Southwest’s wage benefits as a percentage of operating revenue is 5% higher than that of its competitors. Southwest won awards as one of the best company to work for. Money is not the highest priority for employees as per Maslow’s hierarchy of needs. Southwest’s employees have shown loyalty for three decades and may be persuaded to take 2 to 3% cut in wage benefits. Alternatively, to a certain extent, the company can control costs by keeping the employee head count constant while the business continues to grow.
•
Long-term debt: Southwest’s long-term debt as a percentage of operating revenue and long-term debt as a percentage of assets are significantly lower than that of its competitors. Southwest should increase its financial leverage and invest the additional capital for upgrading their fleet, fuel hedging, upgrade maintenance infrastructure and improving fleet safety.
•
One model fleet: Southwest has the largest fleet of Boeing 737s in the industry. It should use its loyalty, size to partner with Boeing in identifying solutions for reducing the fuel costs, use alternate fuels, improvements in aerodynamics, etc.
•
Fuel Hedging: Southwest has used its credit situation, access to cash wisely and was successful in its bets with respect fuel hedging. While such fuel hedging practices can continue, the benefits cannot be always guaranteed as it is hard to predict when the oil prices have reached a peak and will begin dropping, or if it is still climbing. To minimize
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
the risks, Southwest should either look for alternate sources of revenue or increase the fuel efficiency of the fleet.
Violation of Safety Requirements
Early in 2008, it was revealed that Southwest has flown at least 117 aircraft that were in violation of mandatory safety checks. Southwest ended up paying $10. 2 million in fines to FAA and had to temporarily ground 47 aircrafts (R. Duane Ireland, 2011). Aircraft safety is a paramount concern with airline customers. Non-conformance to safety requirements/regulations tarnishes the image of the company, reduces the revenue and leaves door open for the competition to entrench. Southwest needs to look for strategies which will reduce the customer safety concerns: • Long-term Debt: Southwest should increase its financial leverage and invest the capital in inspection equipment, inspection procedures, send employees to trainings and upgrade the fleet if necessary. • Marketing: Southwest should initiate marketing campaigns to fix/enhance brand value by emphasizing its proven history and commitment to safety. • One model fleet: Southwest should work collaboratively with Boeing to identify procedures for detecting safety related issues as early as possible. By identifying safety issues earlier, it can reduce the costs associated with fixing the safety issues. By setting its safety standards better than those of its competitors, better than those required by FAA regulations Southwest can make a bold statement in its commitment to customer safety.
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Union Walkout
Southwest as a company, which once enjoyed superior employee relations compared to its competitors, ran into problems in year 2008. Complaints such as unequal pay for members of ground crew and no raises since year 2005 prompted a walkout by labor union on November 20, 2008. Wage increases, boost in 401K contributions, were promised only to the degree that such increases will allow Southwest to keep its low-cost advantage (R. Duane Ireland, 2011). Southwest was the first airline company to adopt the profit sharing plan in US airline industry. Southwest enjoys one of the lowest employee turnover rates among US airline industry (R. Duane Ireland, 2011). Southwest need to use its reputation, commitment and history in formulating strategies which will reduce union related problems: • 36 year commitment: Southwest established “no layoff policy” to demonstrate its commitment to employees since 1973 (R. Duane Ireland, 2011). Southwest rewarded employees for outstanding customer service. Southwest always communicated to its employees that they are integral part of the company’s DNA. Southwest is the only major airline company which had stayed profitable even in tough economic conditions. Southwest employees take pride in working for the company. Southwest management need to highlight the partnership model that exists between the company and employees and prepare policies, procedures to avoid, or resolve union related issues before they start to hurting the company. • Wage Benefits: Southwest pays higher salaries to its pilots, flight attendants, ground staff and its management per operating revenue its competitors (2007 Airline Performance Summary, 2008). Southwest is a profitable company offering continuous employment. Southwest has the lowest employee turnover in the industry. By preparing salary guidelines
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
which can be consistently applied across the company, employee ranks; Southwest can limit employee dissatisfaction due to wages, benefits. • Employee Growth: Companies which can offer continuous employment and opportunities to grow will have to face less union related issues. Southwest is one of the few jewels in airline industry which had continuous growth during the last three decades. Southwest has aggressive growth plans. As Southwest grows in size, the employees must be provided opportunities to grow.
Expansion Plans
Southwest continues to grow in the domestic market by adding new routes. Southwest is exploring options to launch services to international destinations such as Caribbean, England. Southwest is extremely successful in using point-to-point methodology unlike traditional airline companies which use hub-and-spoke methodology. Some of the growth initiatives include possible acquisition of flights owned by defunct airlines such as Ted (R. Duane Ireland, 2011). While Southwest is pursuing expansion plans, it should be cognizant to maintain its very defining characteristics such as low cost of operation, high employee satisfaction, exceptional customer service and punctuality. Southwest should always watch out for the initiatives from competition to erode its existing business. Southwest should use following strategies for expansion: • Long-term debt: Southwest’s long-term debt as a percentage of operating revenue and long-term debt as a percentage of assets are significantly lower than that of its competitors. Southwest should increase its leverage and invest the additional capital for acquiring companies or by adding more destinations.
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
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Diversification: Southwest has built proven, successful, point-to-point, low-cost business model in USA. Southwest should consider deploying a similar model in developing countries such as India and China.
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Hub-and-Spoke System: Southwest should not implement hub-and-spoke system as it complicates the scheduling of flights, create operational inefficiencies as it adds activities such as baggage transfers, ensuring reservations in all legs, creating dependencies between one flight departures with another flight arrivals etc. Hub-and-spoke complicates evaluating competition for each route as competitor airlines may not use the same connecting cities. Although some large traditional airlines are using such a model, Southwest should stay away from using such model.
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Alliances: Southwest should enter into partnership, alliances with other airlines to improve its load factors. Southwest should evaluate opportunities in forming alliances to sell tickets with websites such as expedia.com, orbitz.com such that the revenue per ticket sold is not impacted significantly. Southwest should enter into mutual alliances with similar low-cost airlines in routes where they do not compete.
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Table 1: 2007 Airline Analyses (2007 Airline Performance Summary, 2008)
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
Table 2: 2007 Airline Analyses (2007 Airline Performance Summary, 2008)
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
References
1. 2007 Airline Performance Summary. (2008). Retrieved from airlinesfinancials.com: http://www.airlinefinancials.com/uploads/2007_mainline_summary.pdf 2. 2008, America's most admired companies, Fortune. (2008, March 17). Retrieved from http://money.cnn.com 3. 2008, Southwest Airlines 2007 Annual Report. (n.d.). Retrieved from http://www.southwest.com 4. R. Duane Ireland, R. E. (2011). The Management of Strategy Comcepts and Cases (9 ed.). Canada: South-Western.
TAMU – Fall 2011 – MGT 527 02W – Dr. Mildred G. Pryor – Southwest Case Analysis
