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Southwest Airlines Challenges

Southwest Airlines Challenges

  1. Executive Summary/Problem Statement

So far, Southwest Airlines has a history of incredible performance. Reports and financial statements show that the company is performing extremely well. By 2016, Southwest Airlines was named world’s second largest airline in total passengers (144.5 million in 2015) coming second to Delta Airlines. The airline emerged no.7 in Fortune’s list of most admired companies having being named in the prestigious list for 22 consecutive years. It has a reputation of being a major carrier that has been profitable for 43 consecutive years. Further, the airline has great relationship with its employees, having the lowest employee turnover in the industry. It has formed an even better relationship with customers and is a favorite of many due to its excellent customer service (Thompson & Gamble, 2016).

All the same, Southwest Airline is operating in a very competitive industry. In the past, its competitors have gone through major efforts to frustrate the growth of the company. Even so, Southwest Airlines has been triumphant in these battles. Though soaring high, the main challenge that Southwest Airlines is facing is how to remain competitive in the future amid the competitiveness of the industry.

2. Detailed Analysis of the company

Southwest Airlines SWOT Analysis

Strengths

Brand equity and good reputation

Excellent Customer service

Preferred Airline for convenient and affordable flights

Great Leadership

Consistent flexibility

Empowered employees

Good safety record

Weaknesses

No flights to international destinations

Offers only one class of seating (no first class)

Dependence on American market

Opportunities

Increasing disposable income of customers

Air travel predicted to increase

Technology advancement to offer even better services

Expansion to new destinations

Threats

Increase in fuel prices

Terrorism threats

Competition

Competitive positioning strategies

  • Cost leadership

The generic strategy adopted by Southwest airlines is cost leadership. The company offers low cost flights with no frills providing the most convenient way to travel between cities within 500-1000 miles range. The reason this strategy has been successful is because Southwest has found ways to cut costs. Such ways are that Southwest airlines only uses one type of aircraft, Boeing 737 in order to minimize the size of spare part inventories, repair experts, ensure proficiency in maintenance and simplify scheduling procedure. The airline also uses point-to-point strategy, fuel save strategies, ticket-less strategies as well as choice of less busy airports (Thompson & Gamble, 2016).

One notable way of cutting cost that the company used was cutting fuel expenses. Fuel prices had made fuel expenses rise from 16.5% of total operating cost to 28-38%. As a result, the company installed blended winglets on all the planes to reduce lift drag and allow planes reach flight levels quicker cutting fuel cost. New engines were introduced to which cut idle speed while on the ground. The company further prefers to use airports that are congested to reduce fuel wasted during idle time on crowded taxiways or circling airports waiting for clearance to land (Thompson & Gamble, 2016).

The fuel hedging strategies that Southwest Airlines has been implementing have aided the company’s cost leadership strategy. As of the first and third quarter of 2017, this strategy is already paying off as the airline realized a $503 million net income comparing that of the third quarter of 2016, $388 million which is a 29.6% and yet the revenue increase between the two years had only been 2.6% (Cooper, 2017)

Functional strategies

  • Operational Excellence

One of the main strategies that have played an important role in contributing to Southwest Airlines competitive advantage is reducing turnaround times. The industry average is 40 minutes while at Southwest the average turnaround time is 15-20 minutes. This enables the airline to have more flights without having to purchase more aircrafts. This strategy is made possible by having airline personnel clean up the planes after landing so the next boarding passengers don’t have to wait for clean-up time, and this strategy is cheaper too.

  • Customer Intimacy

Consumer intimacy is probably the core competency of Southwest airlines. The company’s customer service is based on offering the customer with; convenient flying schedules, good experience and competitive fares. Southwest uses two main words; LUV and FUN to make their customers experience unforgettable. The in-flight strategies are aimed to ‘make it fun to fly on Southwest and provide customers with a top-notch travel experience.’ The fare structure strategy comprising Wanna Get Away, Anytime and Business Select offer customers with options to select the most convenient packages for them at competitive prices and sometimes with refundable and changeable options. A further boost to impressive way of luring customers is by use of “bags fly free’ offers which does not charge customers first and second bags checked in.

Marketing, advertising and promotion strategies

Southwest Airlines puts much effort into the adverts and promotions it makes in order to have the desired response from customers. Adverts such as ‘The Low-Fare Airline’ and ‘The All-Time On-Time Airline” are put in such a way that they communicate the company’s main selling points; low cost and operational excellence. The company periodically launches national and local campaigns to communicate that they are the only company that does not charge for first and second checked in bags, not impose fees for change of travel schedules and offering a wide range of convenience for passengers (such as in-flight internet service). In 2015, advertising and promotional expenditures totaled $218 million (Thompson & Gamble, 2016) and spent $203 million in measured media in the US in 2016 (Graham, 2017).

Human Resources

Southwest Airlines have had the benefit of having excellent human resource personnel who have contributed to the company’s success. This stems from great leadership such as Herb Kelleher the CEO from 1981 to 2001. When he was taking office, the company had 27 planes to 14 destinations, $270 m revenues and 2100 employees. By the time of his retirement in 2001, the company had 350 planes, flights to 58 airports, $5.6billion revenue, 30,000 employees and 64million passengers. His competitive nature taught other human resources to be resilient during the tough times the company faced in the earlier years.

The same spirit continues under the leadership of Gary Kelly who believes in treating employees right. Kelly believes in the slogan, “Employees come first, Customers second.” The belief behind this slogan is if employees are treated right, they will treat customers right. Southwest Airlines hires people with a great attitude and trains them on expectations of the company. Employees are encouraged to be goofy and entertain customers in order to keep the flights ‘fun’ as promised to customers. Further, Southwest remunerates its employees better than others in the industry and takes pride in the low employee turnover it records.

Quantitative analysis of the company

Operating Costs (spotlight on fuel cost)

201320142015
Total operating costs

(in cents) per available seat per mile

12.6012.5011.18
Fuel and oil (in cents)4.424.042.57

The company’s efforts to reduce operating costs have been effective as observed. Such efforts continue to enable the company have cost leadership. This analysis also shows that fuel saving efforts by the airline were effective.

2015 “000” ($)2014 “000” ($)
Revenue (millions)$19,820$18,605
Operating expenses$15,704$16,380
Net Income$1,298$1,136

There is considerable observation in increase in revenue and decrease in operating expenses. This is as a result of fuel hedging strategies that Southwest Airlines has been taking.

Proposed solution to the company’s problem

Facing a challenge remaining competitive in the future, here are some solutions that Southwest airlines should consider to implement.

First, the airline can increase the number of flights per day in areas they are already operating in. The benefit of this strategy will be economies of scale where the revenue and variable costs for the additional flights will increase but fixed costs will remain adding a source of income for the company. Further, the airline is already familiar with these regions and has captured the customers; hence not much cost will be undergone to acquire new customers.

The second option that the company may consider is expanding to new regions. The airline, as earlier noted, is very dependent on the American market which is very competitive and may be saturated. In 2014, the airline introduced flights to the Caribbean islands. Exploring neighboring destinations without increasing mileage coverage by far may be the break the airline needs from the saturated market.

Lastly, the company has gain competitive due to cost leadership and should maintain this strategy. This means the airline should explore more ways to cut costs so as to increase its income and remain competitive.

Optimal solution and evaluation

The optimal strategy is to expand to new regions. This strategy is most suitable because Southwest airlines will be penetrating a new market away from the saturated competitive areas. Further, it will exploit the growing economy and disposable income of the people who now have financial capability to travel to destinations such as the Caribbean Islands for holidays. Solution is also optimal as it is consistent with the company’s current growth strategy which includes adding new cities to its route schedule.

Implementation

January 2018Research potential destinations
June 2018Introduce first flight to chosen destination
December 2018Evaluate success of the introduced flight

If successful, consider additional flight to the same destination

June 2019If Destination1 is successful, consider destination 2

Also Study: Southwest Airlines Case Study Solution

References;
  • Cooper, J. (2017). Fuel hedging tailwinds will propel Southwest Airlines to a great 2018. Retrieved from Seeking Alpha: https://seekingalpha.com/article/4117286-fuel-hedging-tailwinds-will-propel-southwest-airlines-great-2018
  • Graham, M. (2017). Southwest Airlines begins media review after three decades with one agency. Retrieved from Ad Age: http://adage.com/article/agency-news/southwest-airlines-puts-media-account-review/309808/
  • Thompson, A. A., & Gamble, J. (2016). Southwest Airlines in 2016: Culture, values and operating practices. Case 25.

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