Southwest Airlines Case Study

Executive Summary

Southwest Airlines (NYSE: LUV) was established in 1967, as a low cost airline operating throughout the United States. By volume, they are the largest domestic carrier, they transported 106 million passengers last year. In May of 2011, Southwest acquired AirTran airlines, and is in the process of integrating their operations. Using a model of selecting the most profitable point-to-point routes and operating them efficiently and with good customer service, Southwest has been able to sustain solid growth year after year. By the start of 2012, they were serving 479 city pairs and producing annual revenues of over $15 billion dollars. As Southwest continues to grow and integrates AirTran into their operations, it is important that they maintain the low cost structure and ease of customer services that has them so successful historically.

As Southwest expands it is vital that they keep maintaining the low cost structure that has them so successful historically. Also, if Southwest wants to maintain its ease of use and profitability they have to implement AirTran as efficiently as possible and also acquire new aircraft that hold a larger number of passengers. Lastly, Southwest must keep its fuel prices down by implementing new means of fuel efficient technology and its “hassle –free” reputation.

It is of my opinion that these strategies, combined with continued dedication to customer service and loyalty, will help Southwest to maintain and expand its market share in the future.

“The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit We are committed to provide our Employees a stable work environment with equal opportunity for learning and personal growth”. Southwest Airlines’ had its first flight on June 1st 1971, in 1986 the company began gaining much notoriety and built a multimillion dollar training center for flight crew. In 1988, they were first awarded the best on time record, baggage handling, and fewest complaints, which was a huge milestone for the company. In order to continue their low cost operating Southwest implemented many programs within their company. Examples include their “fuel hedging strategy” and in 2004 the online boarding pass, which revolutionized the industry. In 2006, Southwest was named Number 1 in customer satisfaction amongst all airlines. Lastly, in 2008 Southwest deciding to purchase AirTran’s Airlines, who was their main competitor at the time.

External Analysis

The U.S. airline industry is extremely competitive and highly volatile. The industry is also cyclical, capital and technology intensive, heavily taxed, and heavily regulated, which means very low profit margins for domestic airlines. Costs have been rising greatly across all aspects of the industry in recent years. Over the past decade total financial losses incurred by U.S. airlines exceed $50 billion. The increasing cost of fuel has been the primary source of rising costs for the industry, and its volatility making hedging often inefficient. Since 2000, fuel cost have risen over 300%. (Source) With the rising cost, some airlines have been unable to cope with these rising costs, for example American Airlines’ who filed for bankruptcy and United Airlines who just acquired Continental. Compared to the rest of the industry, Southwest operates as a low-cost carrier, focusing on the most profitable routes (point to point) and the best customer service possible. So, they have fewer long-haul routes and avoid some of the more congested airports.

Swot Analysis

Strength

Innovative marketing

Boeing 737

Excellent Customer Service

Company comradery

Weaknesses

AirTran acquisition and implementation

Fuel price

Volative and congested market.

Opportunities

Huge potential growth from AirTran

In-flight entertainment (WIFI and video on demand)

International destinations

Threats

FAA regulation

Renewable energy and subsequent vehicles

Diminishing returns

Economic collapse.

The critical challenges Southwest Airlines and the rest of the airline companies faced throughout their history were the increasing fuel costs, which not only affected the planes, but also made other operations more expensive. Since Southwest does not have a business class they struggled to maintain a steady revenue from Business travelers. Finally, airline regulations have always been strict and seemingly against Southwest Airlines. Throughout the years the increased regulation imposed on airlines has caused much strain on the companies.

Strategic Alternatives

Substitutes to air travel are mainly bus, car, or train transportation. Automobile travel has and still continues to dominate short distance travel. As distances increase air travel is cheaper and more efficient. Another possible substitute would be to travel by railroad, however, unlike many European Countries the United States does not have a comparable system. So trains in the U.S. have many disadvantages, mainly that they are slow. As air travel gets more expensive, from higher fuel prices and increased baggage fees, train transportation becomes a more viable substitute. Especially since the White House has recently pushed to upgrade our rail system and eventually build a high speed train, like we see in Europe. If a high speed train is implemented it could make travel by train a much bigger problem for U.S. airlines.

Recommendation

Southwest does not charge for the first two checked bags, which it has heavily promoted through the ‚Bags Fly Free‛ program. This has served them well, allowing Southwest to distinguish itself from the rest of the industry, even many low-cost carriers. This can be seen in the chart below, where even Spirit Airlines, who handles 20 times fewer customers than Southwest, collects more in baggage fees.

They must either raise prices or make the flights more profitable. Southwest’s board has already approved the purchase of 73 Boeing 737 to be delivered between the first quarter of 2012 and year end 201730, thus allowing a increased amount of seats available. I recommend expanding this order, and expediting delivery if possible. Since slots at these larger, more congested airports have fixed costs regardless of plane size, operating larger aircraft can be more profitable if the demand can sustain it.

If Southwest does implement the larger planes into their fleet, the profit from long flights will also prosper. With these larger planes and the extra seats they offer, Southwest can ticket more passengers on the same plane with only a marginal expense. In order to maximize their profit Southwest would have to keep their demand high to fill the larger planes. Secondly, Southwest should expand their Fuel Efficient Fleet, fuel is the most significant contributor in operating cost. So anything that helps save fuel is going in the right direction.

ConclusionExecutive Summary

Southwest Airlines (NYSE: LUV) was established in 1967, as a low cost airline operating throughout the United States. By volume, they are the largest domestic carrier, they transported 106 million passengers last year. In May of 2011, Southwest acquired AirTran airlines, and is in the process of integrating their operations. Using a model of selecting the most profitable point-to-point routes and operating them efficiently and with good customer service, Southwest has been able to sustain solid growth year after year. By the start of 2012, they were serving 479 city pairs and producing annual revenues of over $15 billion dollars. As Southwest continues to grow and integrates AirTran into their operations, it is important that they maintain the low cost structure and ease of customer services that has them so successful historically.

As Southwest expands it is vital that they keep maintaining the low cost structure that has them so successful historically. Also, if Southwest wants to maintain its ease of use and profitability they have to implement AirTran as efficiently as possible and also acquire new aircraft that hold a larger number of passengers. Lastly, Southwest must keep its fuel prices down by implementing new means of fuel efficient technology and its “hassle –free” reputation.

It is of my opinion that these strategies, combined with continued dedication to customer service and loyalty, will help Southwest to maintain and expand its market share in the future.

“The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit We are committed to provide our Employees a stable work environment with equal opportunity for learning