Southwest Airlines Case Analysis

Group 48
 PROBLEM STATEMENT

How can Southwest Airlines maintain its competitive advantage in the commercial airline
industry?

EXTERNAL ANALYSIS

PESTCL Analysis:

Factors Factor as in the case Impact on the solving the problem

Increased air-traffic control congestion which impacts profitability
P
Open skies agreement
High fixed operating expenses costs
E Setback by recession
Increase in fuel cost
S Change in lifestyle
Introduction of yield
management system
T Internet bloom
Onboard technical
advancements
Customer expectation of
C
hospitable culture
L Aircraft safety maintenance
Causes delays due to air travel demand and airport
Invitation to many European players (No the implication is
more competition.
Regardless of occupancy level it is tough to cut on those
People are price sensitive and prefer low cost airways (No.
it is compulsion not to increase cost)
Increases the operational expenses
People prefer fast commutation and choose air travel more
often
Helps in studying the travel patterns of customers
More options available to book tickets other than counter
purchasing and buying from agents
Customer can now have enriching experience during their
travel
The exceptional customer service is well regarded and
appreciated by its customer
The old aircrafts are no more allowed to fly which
impacted the maintenance cost

Your approach is fine but you should carefully consider what you write in the impact.

INTERNAL ANALYSIS

SWOT Analysis:

Strengths:

Southwest Airlines followed a flexible pricing practice called yield management

system which enabled it to sell more seats in the flight at higher prices thereby
raising earnings.
 It had a Low Debt to Equity Ratio compared to Industry standards and had an
investment grade credit rating.
Brevity.write is as Low DE ration etc.
It employed Differential Strategies to sell high priced tickets( Ex. free liquor)
It capitalized more on Online Ticketing system rather than having travel agents. Also
it was the first airlines to use ticketless travel thereby maximizing customer
convenience.
Union Strikes and Flight accidents had never happened in Southwest Airlines. These
are clearly two different issues. Dont mix them up. Also group the points.
It provided exceptional customer service and recorded lowest customer complaints
since 1987.
Wide Variety of Training programmes were conducted for the employees and
employees were empowered and encouraged to take different initiatives by the
management. Good Rewarding policies were also in place. Thus the employees were
highly motivated to perform efficiently to provide exceptional service and minimize
turnaround time.

Weaknesses:

Though Point to Point Flight Service provided maximum convenience to passengers,

insufficient demand made it economically unfeasible for SouthWest Airlines.
The use of Boeing 737s planes only when other fuel efficient models are available.

Threats:

The Airline De-regulation Act, high competition prevalent in the industry, high fuel
costs and low air fares caused financial problems to the airlines.
Inflation led to a drop in the average employee wages thereby causing dissatisfaction
among the small and remote community airline workers.
Net Profits were very low compared to other industries like banks, automobile,
manufacturing, consumer products and publishing.
Customers were dissatisfied by the services provided by airlines.
Aircrafts had high maintenance costs and eventually needed replacement.
The Airline industry was in heavy debts compared to the other industries in US.
 The European Carriers were looking to enter the U.S Market thereby putting
competitive pressure on existing fliers.
The major carriers like Delta and Northwest had come out of bankruptcy protection
with lower costs and more efficient operations whereas Southwests operating costs
were still rising.

Opportunities:

There had been a tremendous increase in the air travel passenger market in 2007.
There was scope for expansion in the northeast market as well as the markets outside
US.

FACTORS THAT AFFECT ORGANIZATIONAL STRUCTURE:

1. PEOPLE

VRIO Factor Analysis: What is the difference between Valuable and organized to
capture value. The key factors of RBV are valuable, rare, difficult to imitate and non-
substitutable. If you dont group factors you will find it difficult to handle it.

Organized to
Factors Valuable Rare Inimitable Capture Remarks
Value
Temporary competitive
Profitability Y Y N
advantage
Sustained competitive
Leadership style Y Y Y Y
advantage
Temporary competitive
Passenger load factor Y Y N
advantage
Temporary competitive
On time performance Y Y N
advantage
Temporary competitive
Low fares Y Y N
advantage
Temporary competitive
Short haul flights Y Y N
advantage
Temporary competitive
Point to point system Y Y N
advantage
Temporary competitive
High frequency of flights Y Y N
advantage
Temporary competitive
Turnaround time Y Y N
advantage
 Temporary competitive
No frills approach Y Y N
advantage
Temporary competitive
Reservation system Y Y N
advantage
Temporary competitive
Choice of markets Y Y N
advantage
Temporary competitive
3-tier fare Y Y N
advantage
Temporary competitive
Least customer complaints Y Y N
advantage
Temporary competitive
Boarding and gate processes Y Y N
advantage
Temporary competitive
Airline utilization Y Y N
advantage
Temporary competitive
Cost per seat mile Y Y N
advantage
Temporary competitive
Average age of plane Y Y N
advantage
Number of employees per Temporary competitive
Y Y N
flight advantage
Temporary competitive
Employee cost per mile Y Y N
advantage
Sustained competitive
No strike and accidents Y Y Y Y
advantage
Temporary competitive
Debt to equity ratio Y Y N
advantage
Sustained competitive
Investment credit rating Y Y Y Y
advantage
Sustained competitive
Employee culture Y Y Y Y
advantage
Sustained competitive
Employee initiative Y Y Y Y
advantage
Sustained competitive
Customer service Y Y Y Y
advantage
Temporary competitive
Productivity Y Y N
advantage
Temporary competitive
Employee rewarding Y Y N
advantage
Temporary competitive
Power distance Y Y N
advantage

The VRIO Factor Analysis shows us that the vast majority of Southwests competitive
advantages are only temporary and will remain an advantage only until another airline learns
to imitate them. However, six factors (highlighted in Bold) emerged as contributors to
sustained competitive advantage. It is important to maintain these factors going forward.
The most important conclusion from this analysis is that Southwests greatest resource and
therefore, greatest competitive advantage is its human resources. An organizations structure
emerges from the organization of its human resources in a way that maximizes the utility and
potential of its people. Going forward, Southwest needs to ensure it maintains this factor as
its people, their loyalty, their initiative and their culture is what gives Southwest its greatest
competitive edge.

2. PROFITABILITY

Effect of Porters Five Forces on Profitability

Since Porters Model is the best tool to measure the attractiveness and therefore profitability
of an industry, it is important to consider the driving forces that affect Southwests
profitability.

Revenue Cost
+ Turnaround time + Point to point system
+ Passenger load factor (-) No frills system
+ Frequency of flights (-) Number of employees per flight
+ Strength of brand (-) Unique reservation system
+ Customer service and satisfaction (-) Labour flexibility
+ Market share
+ Low fares
+ Employee productivity
 *+ and (-) indicate increase and decrease respectively

The abovementioned table shows that Southwests factors of competitive advantage, although
temporary, directly contribute to its profitability. It is this profitability that allows them to run
their operations in their trademark innovative way.

Going forward, Southwest will need to maintain the effect of these factors on profitability as
constant. Southwest needs to tackle the most important factor of increasing operating costs
caused by rising fuel costs, inflation, maintenance costs, frequent aircraft replacements and
rescheduling. This will be crucial in maintaining its profitability and therefore financial
competitive advantage.

CRITICAL FACTORS IN ORDER OF PRIORITY:

1. Human resources
2. Profitability
3. Operational efficiency
4. Customer service and reputation
5. Growth strategy

ANALYSIS OF CRITICAL FACTORS USING OB/HR THEORIES:

1. Human Resources: Since human resources are Southwests greatest competitive

advantage, the following analysis has been provided to comprehensively understand
why Southwests human resources are crucial to its success.
Leadership Trait Perception: Kellehers unconventional style that included fun and
flamboyance brought out how motivated, honest, self-confident and ambitious he was;
these differentiated him from others in the industry. The supervisors also underwent
training to maintain the decorum and culture of the organisation.
Supportive and Participative leadership: Kelleher made sure that he addressed
employee issues head on and asked after their family thus gaining their trust and
respect. Thus he proved himself to be a charismatic leader in the most positive way.
Innovation: Positively Outrageous Service, Southwest Spirit, New hire
celebration, Leading with integrity, Walk a mile day, Luv, Heroes of the heart , Boner
of the year, advanced training and encouraged employee initiatives at all levels
 Kelleher had these new ideas in mind and put them in practice leading to a
competitive advantage through his engagement management style.
Group Morale: The morale of the group was proved with their involvement in each
task that they carried out, communication amongst each other, enthusiasm with which
they worked towards customer satisfaction and devotion. This gave them a sense of
In-Group Social identity.
Job security: This is the biggest distinguishing factor that helped them achieve a very
low employee turnover rate; they never laid off their workers as they trained them to
reach those standards and believed in their capabilities.
Organisational Values: The organisation strived to be highly achieving by
expanding aggressively but not letting it affect the values with which it started off.
They believed in the Positive Outrageous Service where every single employee went
out of their way to help the customers.
No Power Distance: Kelleher didnt believe in imposing his power and status to get
his job done; instead he collectively worked to serve his customers by helping the
crew.
Collectivism and Long term Orientation: The employees believed in taking the
group interests forward co-operatively and this proved to give them a long term value
system.
Job Satisfaction: The employees were highly connected with the organisation and
were passionate towards their job leading to high job satisfaction, involvement and
organisational commitment. Thus SW had the ability to maintain a 0% attrition rate.
Expectancy Theory of Motivation: People employed were selected, trained and
were given set goals; thus they proved to work very effectively with effort thus
leading to high task performance and this was reciprocated with intrinsic rewards
like Heroes of the heart awards.
Effective Team: The organisations unique culture and job satisfaction gave rise to
high member satisfaction, high task performance and viable long term groups.

2. Profitability: Southwests survival and success depends on continued profitability.

This profitability can be achieved by ensuring optimum cost structures, innovative
operations, strategic expansion and maximum utilization of its unique human
resources.
 3. Operational Efficiency: As seen in the VRIO analysis, many of Southwests
competitive advantages arise from its operational advantages such as its passenger
load factor, employee cost per seat mile, short haul flights, frequency of flights,
average age of planes, turnaround time, no frills policy and so on. Maintaining these
advantages in all strategies going forward is the key to ensuring a competitive
advantage.
4. Customer service and reputation: The hallmark of Southwest its outstanding extent
and standards of customer service. This is key in ensuring customer loyalty and repeat
use of Southwest as the most trusted airline in America.
5. Growth strategy: Southwests decision of what it expands to next will determine
how well it is able to survive and flourish in the commercial airline industry. If
Southwest can maintain its controlled and strategic growth, sustaining this advantage
will be possible.

CONSTRAINTS:

High operating costs: The following are the factors which increase the operating cost,
reduce the net profit margin and thereby constrain expansion:

High fuel cost

High inflation
High maintenance cost
Frequent aircraft replacements
Weather challenges
Frequent flight scheduling due to airport congestions and air traffic control delays

Apart from this the airport deregulation act forced the airlines to impose low fare.

What is common to all is not a constraint for that business. Sometimes that can differ. For
example if you argue that weather will affect the 15 minutes turn around and No of trips per
aircraft which are crucial for the CA of SW, then you can argue that it is a constraint. It must
be argued as such.
 OPTIONS:

Options Pros Cons

Operating in US only make them
Loyal customer base with established prone to regional economic
Cater only to
operations fluctuations
the domestic
Low cost operational strategies Forgoing the profits and expansion
American
Experienced in catering to US opportunities due to
market
cultural needs internationalization
Smaller customer base

Employees need to be trained to cater

to different types of customers from
various regions
Lager costumer base
Lots of international regulations and
Demand will not be limited to a
barriers need to be dealt with
Expanding particular region and also this is
Expansion costs including new
internationally comparatively resilient against
aircrafts purchase and other setup costs
economic shocks in US
would be high
More revenues can be generated
Has to face higher competition
Needs more branding and reputation
building strategies

RECOMMENDATION:

We would like to recommend the 2nd option. The company is currently in a strong financial
position with good human resources making it perfectly suitable to venture into the
international market. The company has been in domestic market for quite a long time now so
they can scale up their operational strategies according. Their well trained and motivated staff
would be able to cater to the foreign customers also.
 ACTION PLAN:

Survey potential markets and identify the most feasible

Step 1 Within the next year
ones
Step 2 Choose final market and implement decision Within the next year
As soon as market decision is
Step 3 Planning of structure and strategy
complete
Step 4 Acquisition of required resources In the next year
Step 5 Planning of operations and training of human resources Simultaneously with Step 4
Step 6 Commencement of operations On the completion of above steps