Southwest Airlines Internal and External Environment Analysis

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There are several attributes in Southwest that help this particular air carrier maintain a competitive edge over other airline companies. In the same capacity, the business experiences various weaknesses, but does appear to recognize opportunities for business improvement as a means to maintain longevity in the airline industry. Competition, regulation and even consumer habits are external threats facing the company, creating the necessity to create diverse business solutions and increase Southwest Airlines’ competitive position. The SWOT Analysis tool is the most viable method for examining Southwest’s internal culture and the influence of the external business environment.

The Business Mission

            Southwest Airlines maintains a relatively simple mission statement: “(We are) dedicated to the highest quality of warm-hearted customer service …” (Swamedia.com, 2006). With Southwest Airlines all employees are allowed to offer suggestions and freely express their unique views as important contributors to the success of the airlines (Bunz and Maes, 1998). Southwest is a people-focused organization in fulfillment of mission principles.

Southwest Airlines Internal and External Environment Analysis

Southwest Strengths

Southwest Airlines had experienced 17 consecutive years of profitability despite very recent economic trends, with the recent decline attributed to rising prices of oil commodities (Baer, 2008). Despite this recent loss which is largely-beyond the business’ ability to control effectively, the business has sustained a profitable model when other airlines could not always produce similar, consistent financial results. One particular strength of the company which contributes to this success is Southwest’s ability to maintain flexibility in order to meet customer needs. This represents the flexibility to invest millions of dollars into new landing regions at major airports, suggesting an aggressive posture in seizing more business territory to expand the firm’s reach. Southwest, for example, is currently bidding on 14 takeoff and landing areas at LaGuardia Airport in New York as a competitive tactic to improve market share for the company (Prada and Keaton, 2008). This is an area where Southwest has little reach at present, suggesting a positive strategic objective to expand the business.

Competition among the various airline service providers in the U.S. is fierce, with competitors seeking the most strategic (long-term) value for the country’s various regions when establishing passenger scheduling and coordination. Maintaining the cash and/or credit position to create such a significant presence along the East Coast is a company aimed at gaining increased market share and dominating it various passenger routes with lower domestic fares. This flexibility further gives consumers options by providing them with alternative methods of reaching destinations without necessarily having to deal with connecting flights.

Closely tied to its strategic strengths as being an expansion-oriented company, Southwest maintains a solid understanding of what drives customer decision-making, allowing the company to serve various regions of the country which are suited to the consumer. Says Richard Sweet, Southwest Airlines senior marketing director, “The customer makes the decision based on destination, schedule, fare and do you have the frequency that they want” (Beirne, 2005: 18). Interestingly, amidst a business culture where competitive marketing tactics make up a great deal of the business focus, such as in brand positioning strategies and intensive target marketing, Southwest Airlines has rejected the traditional marketing model and replaced it with straight-forward, common-sense customer relationship management. If straight-forward, destination-oriented issues will be driving consumer purchases, then costly expenditures into the marketing budget are not as necessary as with other competitors. This gives Southwest Airlines a significant opportunity to spend those resources toward the firm’s ultimate goal: Expansion, growth and profitability.

Recognizing that elements which drive customer purchases is the focus of Southwest’s business philosophy is closely connected with the company’s plans for expanding route and service capability. Providing value to the customer is genuinely expressed as a cultural norm in a variety of the firm’s publicized documents and the business utilizes a customer-focused mentality to deliver on this promise. Giving consumers a variety of options regarding service variety and destination only serves to add value to an already profitable airline business.

Another significant strength at Southwest is its focus on diversity in supplier relationships, which build more effective networks in the supply chain. For instance, Southwest created its Supplier Diversity Program which was designed to offer disadvantaged businesspersons the opportunity to become affiliated with Southwest Airlines (Southwest.com, 2008). This type of focus on external corporate social responsibility and positive business relations is prevalent throughout the entire organization. The idea is to create a genuine welcoming environment to diverse supplier organizations or individuals which promote warmth and friendliness as a primary business policy.

Southwest Weaknesses

Southwest Airlines maintains a large fleet of planes totaling 520. However, the average age of these planes is nearly ten years, causing the company to consider whether to scrap any aged planes or pay considerable costs to have them continuously maintained (Pasztor and Trottman, 2008). In a situation when whatever decision made regarding the fleet will require extensive financial expenditure, it becomes increasingly important to assess issues of fleet integrity in terms of being able to compete effectively over the long-term.

Additionally, Southwest’s dependency on oil (though this is a competitive reality) and assessing its future price trends is still a considerable weakness at the company. In a volatile market where oil prices nearly triple over a few months period, long-term financial planning and ticket pricing are exceedingly difficult to manage effectively. In a price-conscious consumer marketplace, small variations in ticket price between competitors might make the difference between making a purchase or choosing competition. Though Southwest attempts to hedge against this oil increase (Shareholder Report, 2007), this did not produce results to avoid a recent, unexpected revenue loss in 2008. Lack of a quality external trend, predictive model is a weakness at Southwest Airlines.

Southwest Opportunities

Opportunities for positive public relations exist within Southwest Airlines as well as opportunities to exploit its highly-ethical and team-oriented organizational culture. Southwest, unlike many companies today, recognizes that ethical treatment is a common sense social practice, therefore the business does not produce complicated manuals and coerce formal rules (Blank, Wood and Wood, 2003). Gary Kelly, then-CEO of Southwest Airlines, states “We (simply) treat each other with common sense – that people would know how to be honest” (Blank et al, 2003: 27).

Also study: Southwest Airlines Challenges

Southwest maintains the opportunity to utilize the media and marketing literature to positively promote the company’s contributions to diversity campaigns and ethical business practices. Utilizing low-cost, however consumer-oriented marketing focus will illustrate how the culture within Southwest can impact the travelling consumer. For instance, Vivek (2006) describes a real-life situation involving a Southwest stewardess in which the woman proclaimed over the cabin loudspeaker “If you are missing any valuable items when you depart, you will find them tomorrow morning on eBay!” (Vivek, 2006: 5). Southwest maintains the opportunity to extend this philosophy of business into the broader consumer audience by capitalizing on this business strength of positive culture and creating brand connection with people of similar values.

Southwest Threats

The largest threat to Southwest, currently, comes in the form of potential increased regulatory activity regarding daily operating practices at the airline. Lawmakers are asking for very comprehensive reviews of existing FAA (Federal Aviation Administration) guidelines regarding repair, compliance, and safety (Pasztor et al). Increased regulatory activity will complicate already strained schedules regarding national air travel destinations, thus potentially eroding profitability in the event of regulatory-induced business disruption.

Additionally, Southwest faces threats from the current global economic situation which fluctuates share price, affects oil prices, and impacts consumer ability to travel via airways. Though much of this is out of control of the company, it is a significant threat to the stability of the business and having the ability to predict short-term strategy.

An Expansion of Ethical Discussion

Ethics are an everyday component of the Southwest business model and it is more than merely an opportunity, it appears to be a company-wide philosophy. Maintaining warm, mutually-rewarding relationships is at the forefront of ethical business policy, which suggests treating others under the golden rule principle of business. Much like many of Southwest’s more progressive policies which do not create the need for formal, inter-office literature, there is little evidence of innovative ethical guidelines uncommon to other airline carriers in the industry. Developing diverse relationships and treating them with long-lasting respect, as well as providing programs to help develop disadvantaged businesspersons, speaks to the general ethical make-up of Southwest Airlines and the positive impact ethical business practices can leave on the communities where the company conducts business and serves passengers.

The SWOT Analysis Model for Southwest

The SWOT Analysis Model for Southwest

The Legal Environment

Southwest consistently deals with various federal and local regulators in relation to issues of property ownership, air and noise restrictions, and many other scenarios. In 2007, an area of land known as the Dallas Wright Field, which had been disputed legally for 27 years, was finally allowed to be a connection for Southwest Airlines, giving the business the right to offer service from Dallas, Texas to anywhere in the United States (Annual Report). It is through the efforts of a dedicated legal team and perseverance that the project gained $11 million in extra revenue for 2007.

Company accidents, though minimized, are still the reality of the airline industry and the company was recently involved in a minor accident at the Chicago Midway runway. The aircraft rode further than the runway provided, ultimately crashing into a car on the freeway (Annual Report). Though Southwest does not intend to experience a financial payout for this incident, it is a reminder that the legal environment is intensive and may require contingency-minded legal representation in the event of unexpected business situations.

Financial Analysis

When others in the airline industry have been experiencing quarterly losses totaling billions of dollars, Southwest, as previously identified, experienced its first loss in 17 years. In fact, according to Keeton (2008) Southwest Airlines maintains an outperform rating in their particular market in relation to liquid value of the company. Analysts expect that Southwest Airlines maintains the necessary liquidity and capital to weather out the economic issues occurring today.

This professional assessment is supported by the company’s financial earnings releases which identify a net income for the year of $500 million, up nearly 100 percent from 2004 (Annual Report, 2006). Net income represents the full scope of profitability after all other liabilities have been considered, giving them a strong cash position for the year.

The cash assets available at Southwest Airlines at the end of 2006 were 1.39 billion dollars. This likely accounts for the company’s more aggressive strengths in the pursuit of using cash assets to restructure and improve the existing airway routes available to the firm. This is a superior strategic strategy rather than leveraging the expansion activities by diluting stock and reducing per-share value in the process from the investor’s perspective. This represents a company which has a solid potential investment both for liquid value and the ability of the firm to implement business decisions without excess stock issuance. The move towards greater productivity is a “pattern unprecedented in the history of commercial airlines” (Annual Report, 2006: 2).

Southwest’s current business model also allows for high employee wages, which likely attributes to the positive organizational culture at the company. In 2006, employee wages made up the majority of operating expenses by a wide margin, suggesting a company with a positive benefits and compensation structure. High cash value for the company combined with a goal toward a team-oriented organizational culture attributes to the success of the firm’s payroll model.

Investment activities at Southwest, however, have not given the firm a sufficient return on investment (ROI). The costs of purchasing new short-term assets outweighed the income from the sale of similar assets, giving Southwest a negative return on investment in the short-term for 2006 (Annual Report). Cash losses from the repurchase of common stock served to erode the firm’s total profitability for the year, however this is a sign of company strength which adds greater value to common stock for the investor.

One area in which the company differs from other competition in the industry is in risk-taking. The company believes itself to be a risk-taker, only periodically relying on both quantitative and qualitative research data when making decisions (Beirne). Risk activities include expansion efforts into fluctuating market areas for the provision of services to the local community. Changes in consumer behavior or different infrastructure developments could leave Southwest’s contracts with various airports unnecessary for forward profitability, creating the necessity to liquidate certain investments if necessary. However, despite being a risk-taking organization, the firm’s efforts have brought significant, overall financial value to the firm by making decisions based on an understanding of what drives the consumer to buy a ticket.

In virtually every capacity, Southwest Airlines is working with a quality business plan and a strategic focus which bring substantial financial benefit to the company. Being able to outperform even larger carriers which are consistently experiencing losses and maintain the cash necessary to improve the business gives Southwest an A rating for financial strength. This is especially true when comparing Southwest to various other competitors who are striving to merely break even.

Conclusion

Southwest Airlines maintains a comprehensive understanding of what drives customer behaviors and makes this the focus of the majority of business decisions regarding strategic positioning for the company. This knowledge is utilized to determine the most appropriate areas to consider expansion and to provide ticket prices which fit both company pricing expectations as well as strained consumer pocketbooks. The company uses this knowledge of customers to market to desired customer demographics in a way that suggests common sense values and lack of business dependency on complicated marketing guidelines and practices. These are costly activities to a modern business and should be avoided when possible.

Despite Southwest Airlines’ strengths, the firm does have areas requiring improvement, including having a more predictive system to identify contingency plans in the event of changes in the external environment. Such a system would provide back-up solutions in the event of a spontaneous change in customer, business, airport, or legal behavior so that the business is prepared to implement a new strategy relatively quickly. As no evidence of such a system could be identified through research, Southwest requires improvement in this area.

Legal issues will consistently be a part of everyday business activities including various regional regulations on airport compliance as well as satisfying federal standards on aviation safety. The company balances the potential impact on its financial portfolio in the face of potential legislation against the company and determines whether it might impact future strategic decision-making by impacting budget. Though there was no research evidence of a secondary cash supply in the event of legal judgment in favor of a party other than Southwest, the business appears to be equipped with the legal knowledge and expertise necessary to combat legal issues in the firm’s operating environment.

Clearly, Southwest’s strengths outweigh any measurable weaknesses and the company has considerable control over its forward strategies with an ample cash balance and investors which are both rewarded with dividends and do not experience large-scale common stock dilution to erode shareholder value. The financial strengths of the business should be recognized as a product of good leadership, risk analysis, and a focus on delivering on promises.

References
  • Annual Report. (2006). “Southwest Airlines Annual Report”. Accessed 30 Nov 2008 from http://www.southwest.com/investor_relations/swaar06.pdf
  • Swamedia.com. (2006). “The Freedom to Buy and Supply: Procurement at Southwest
  • Airlines Company”. Retrieved 30 Nov 2008 from http://www.swamedia.com/about_swa/procurement_policy.pdf
  • Baer, Justin. (2008). “Southwest reports first loss in 17 years”. Financial Times, London. 17 Oct 2008: 18. Accessed 30 Nov 2008 from ProQuest database.
  • Beirne, Mike. (2005). “Southwest Diverts Path with Product Placement”. Brandweek, New York. 46(26): 18.
  • Blank, D., Wood, A. and Wood, C. (2003). “A Matter of Ethics”. The Internal Auditor, Altamonte Springs, 60(1): 26-32. Accessed 29 Nov 2008 from ProQuest database.
  • Bunz, U. and Maes, J. (1998). “Learning Excellence: Southwest Airlines’ Approach”. Managing Service Quality, 8(3): 163-169. Accessed 29 Nov 2008 from http://bunz.comm.fsu.edu/southwest.pdf
  • Keeton, Ann. (2008). “Airlines Set to Ride Out the Storms”. Wall Street Journal, New York, 15 Oct: B.9B.
  • Pasztor, A. and Trottman, M. (2008). “Southwest Rethinks Plan Retirement, Shelves Outsource Plan”. Wall Street Journal, New York, NY. 17 Mar: A.2.
  • Prada, P. and Keaton, A. (2008). “Corporate News: Southwest Seeks LaGuardia Slots – Airline Bids $7.5 Million for ATA Assets as It Looks to Fill Void in Its Route Network”.
  • Wall Street Journal, New York, NY. 20 Nov 2008: B.4.
  • Shareholder Report. (2007). “2007 Report to Shareholders”. Southwest Airlines. Accessed 29 Nov 2008 from  http://www.southwest.com/investor_relations/proxy_stmt_07b.pdf
  • Southwest.com. (2008). “Supplier Information”. Accessed 29 Nov 2008 from http://www.swamedia.com/about_swa/supplier_information.html
  • Vivek, Ranadive. (2006). Power to Predict: How Real-time Businesses Anticipate Customer Needs, Create Opportunities, and Beat the Competition, New York. McGraw-Hill Professional.

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