Southwest Airlines Case Analysis

Team E, Group 6
Megan Haisten
Christopher Hargis
Taylor Jackson
Oyenike Jaiyesimi
Betul Kaya
Asif Huseynli

MGT 527
March 3, 2018
 Introduction
Founded by Herb Kellerher, Southwest began flights in 1971 serving Dallas, Houston and
San Antonio. Known for its flamboyancy and “LUV,” Southwest quickly rose to be one of the
top airlines in the industry.
The general business environment has been rapidly changing over the last several years.
For instance, globalization has increased, deregulation of markets and industries has widened,
technological advancements are apparent, and competition has intensified. These and other
changes have had significant impacts on industry and businesses. The U.S. airlines industry has
significantly changed following deregulation in 1978. New airlines have entered the market
leading to increased competition. Also, fluctuations in fuel prices and terrorism activities have
had substantial impacts on all airlines. Southwest Airlines has experienced the impacts of these
trends.
The objective of this paper is to conduct an analysis of the current issues facing
Southwest Airlines, provide potential alternatives for each issue, selecting the best alternative(s),
and analyzing the airline's current scenario.
The Spirit of Southwest
Southwest’s spirit or organizational culture is one of enthusiasm, friendliness and
extroversion and even has its own name – Positively Outrageous Service. Not only do customers
enjoy and benefit from the organizational culture, employees are proud to work for the
organization and are representative of the spirit put in place from the beginning by Hellerher.
The Southwest spirit is exemplified in the following ways:

o Customer service; Employees go above and beyond to help passengers i.e. volunteering
to dog-watch while a passenger went on vacation
o Flight attendants have a jovial, inviting attitude that make flying a delight
o Company communication and camaraderie are of high value
o Top notch employee training and support
o Low employee turnover – employees truly enjoyed their jobs and wanted to remain with
the company
o Employee stock options
o Employee reward system
 Through Southwest’s spirit, the organization has created a competitive advantage that is hard
to be duplicated by competitors.
Alternatives
Frequent Flier Reviews
It’s not hard to understand why passengers like to fly Southwest and frequently do. To
further increase employee moral Southwest may benefit from implementing a Frequent Flier
Review initiative where frequent flyers are able to give reviews on employees and/or
departments and employees/departments that have consistent positive reviews over a specified
time will be rewarded. One advantage of this initiative is for management to better understand
customer interest and value by reading the reviews while a disadvantage is that employees may
start to only work for the reward and not because they are passionate about their position and
duties.
Communication System
Although company communication and camaraderie set Southwest apart from
competition, there is no mention of a set communication style or practice. An alternative to this
is to implement a horizontal communication structure that enables employees across all functions
to effectively communicate. An advantage of this style of communication is that it is highly
effective and reduces problems and misinformation. However, a major disadvantage is that it can
be quite time consuming because there is no clear path of communication.
Selection and Justification of Alternative(s)
The best strategic alternative for the spirit of Southwest is to implement Frequent Flier
Reviews because it provides the best insight into what customers value and ways in which the
company can achieve these values. Personal characteristics of employees can directly affect
company intangible resources (trust, reputation and quality) and with reviews, management has
increased capabilities to implement change leading to increased customer loyalty and new
customer attraction.
Service Offerings
Known for its “no-frills approach to service,” Southwest provided no reserved seating,
no meals and seating availability was on a first come, first serve basis. To offset the lack of frills,
Southwest provided shorter turn-around time, free liquor with the purchase of a $26-dollar ticket
and two-tiered pricing. However, in 2007 significant service changes were made to improve
travel for business travelers, stay competitive and provide more variety. Service changes
included:

o Three new fare categories, including higher-tier fares for business travelers
o New boarding processes, for example, travelers could pay extra to board first
o Allowing customers with high status in frequent flier program to board first
o Increased emphasis on corporate sales
o Promoted the “two-bags-fly-free campaign” aggressively

To further increase revenue, new customer acquisition and strengthen relationships with
rental car companies, hotels and retailers, Southwest created the new Rapid Rewards frequent
flier program; adding to its significant service changes.
Alternatives
Boarding was a significant 2007 change in an effort to appeal to different types of
travelers, however an alternative would have been for Southwest to base the boarding process
solely on fare price thus removing the need for first come, first serve and simplifying the
boarding process. However, a major disadvantage to this alternative is the loss of value added for
the customer.
Another alternative is to expand the Rapid Rewards program to all fliers and not just
frequent fliers. This will ensure that all customers are able to be rewarded and makes it more
enticing for new customers. However, this alternative can be costly.
Selection and Justification of Alternative(s)
The best strategic alternative is to provide all customers with a Rapid Rewards program.
This cooperative strategy creates value not only for Southwest but for the hotels, rental car
companies and retailers that the organization partners with. Although providing all customers
with a reward will be costly, Southwest will have a more favorable position among competition,
added customer value and continuous product development (reward) options.
Competitive Market
In 1978, the Airline Deregulation Act was signed to allow other airlines to enter in to a
market that had been exclusive to two or three carriers that were regulated by the government.
This act enabled new airlines to form which created a level of competition and shortage in fuel
supplies. The oversaturation of the market led to most airlines including several of the major
airlines to merge or file bankruptcy. There were only three major carriers that survived this
downfall which were Delta, United, and American. Although these major carriers had a large
percentage of the market, there were still a few smaller carriers like Southwest at the time, that
favored in these failures and began capitalizing in the market.
Air-Traffic Delays
A competitive market results in buyers influencing the price of ticket fares to decrease
and the quality of service to increase. All airlines, including Southwest have the power to control
and enhance their customer experience, but there are many issues that cannot be controlled such
as air-traffic delays. The case gives us specific statistics concerning the increase of demand for
travel from 200 million passengers in 1974 to 700 million in 2007. This increase in passengers
brings a positive outlook on the longevity of airlines, but it negatively affects them due to higher
travel demands which results in congestion upon take-off. When travelers have a delay in their
flight, they become dissatisfied with the airline and not the reasoning behind the delay.
This uncontrollable circumstance has a negative impact on the airline which effects the
competitive drive of the business and the overall outlook portrayed by its customers. Southwest
thrived on avoiding hubs for many years to decrease the likelihood of these issues from
occurring, but as they expanded in to new regions, this became a reality. Although the
turnaround time of their flights were not going to be as efficient as the past, they have not seen a
decline in their daily operations regarding this issue. Southwest thrives on offering more flights
to the same destination to increase convenience for their customers. If there are delays, this slows
the process and prevents the main mission that Southwest achieves which is short and convenient
trips to each destination.
Open Skies Agreement
The second competitive market issue is the Open Skies Agreement. As mentioned above,
the legislation has made several decisions on behalf of the airlines that have increased the level
of competition and has brought additional issues that were unexpected. The Open Skies
Agreement created access for non-U.S. carriers to increase their opportunity to compete with the
airlines within the U.S. market. This agreement creates an increased level of pressure on U.S.
airlines to learn a new style of competition and to ensure that their fares and customer service are
unlike any other airline in the world. The necessity for Southwest to retain their current
customers and to offer exceptional benefits to flying with them will only increase the awareness
and knowledge of the service the airline offers. As Southwest continues to expand their brand,
the issue of the Open Skies Agreement will bring challenges as they venture in to non-U.S.
markets with AirTran expecting the same ease of entry that the U.S. now currently offers. This
agreement is also associated with the issue discussed previously concerning the congested
runways.
Alternatives
Air-Traffic Delays
Air-traffic delays typically occur when Southwest uses a major airline hub, but with their
business design to utilize smaller airports, these delays can be reduced drastically. Southwest
needs to analyze the areas that are causing the most delays and correct these issues by altering
routes or finding alternative locations. Southwest must continue to grow and bring more
competition to the bigger cities where most travelers will be, but they do not have to compromise
their well-known passenger convenience with their turnaround time to each city. The image of
Southwest was not built for them being the most conveniently located for travelers, but to offer
fares at a lower rate than anybody else in the market.
As Southwest grows, they need to continue searching for smaller hubs for them to
continue to keep costs low in an increasing market. The approach that Southwest uses in their
business model allows for customers to get from one destination to the next with no
interruptions. If this can be done more times in a day and with fewer delays then consumers will
look for the more convenient route such as this rather than flying with a more congested airline.
In this fast-paced market we are in, passengers do not appreciate delays in their travel and
utilizing smaller hubs allows for Southwest to decrease the likelihood of this happening
tremendously.
Southwest built their original business model based on business customers who are
looking for multiple flights in a day to go from one city to the next. As the company has grown,
this model and clientele has changed with people traveling not only for business, but for leisure
too. Due to congestion of major airports, finding smaller hubs that are within a reasonable
distance of a major hub can be challenging which may decrease the number of travelers that
Southwest has due to the inconvenience of hoping from one airline to the next. Passengers want
convenience, and if Southwest moves to a smaller hub in a big city such as Chicago, then some
passengers may begin to weigh location convenience to a cheaper fare. This concept can be both
rewarding and challenging in figuring out what passengers are more focused on when choosing
which airline they will fly with.
Open Skies Agreement
There is no easy solution to the open skies agreement, but Southwest can use this
increased competition to enhance their AirTran route system to build an extended model for
international travel. This is a new concept for Southwest to develop, so to compete in the same
market will help Southwest create better sales tactics than what their competitors can offer in
their own international markets. This model will increase their brand and potentially offer more
opportunities to service at various international airports.
Southwest can increase their customer base and allow for more passengers to travel with
Southwest with the same competitive low fare rates they are known for. Utilizing the AirTran
deal means increasing passengers and money for the company to offer more benefits for both
domestic and international passengers. The open air agreement allows for more competition,
which increases their publicity for Southwest to offer their services to a larger market than ever
before.
However, competition will increase tremendously which may take away from the brand
that Southwest has built. Southwest has frequent travelers because they enjoy traveling with the
company for a number of reasons, but compromising even a small portion of this view could
decrease their passenger numbers which is associated with higher costs. Inflation is a real issue
and with fuel and operational costs rising, Southwest will have to ensure that their customers do
not take their business elsewhere because of these changes. Smaller airlines with similar low fare
costs are coming in to the market and being a direct competitor with Southwest, so they must
keep their customers and employees satisfied to remain on top.
Selection and Justification of Alternative(s)
The best strategic approach to the competitive market is to increase competition through
their AirTran route system. This allows Southwest to expand flight offerings in turn increasing
customers and sales.
Security
The U.S. government has introduced more invasive security procedures because of
terrorist attacks. The U.S. domestic airlines lost circa $30 billion after the attacks. Terrorism
activities have substantial impacts on the global airline industry. In an attempt to deal with
security threats, the U.S. government enforced more invasive security procedures. These security
procedures have frustrated many passengers. They also cause delays which affect the airline's
operations and performance.
Alternatives
Formulating a new security policy and screening department
Southwest can address the issue of more invasive security checks by formulating a new
security policy and screening department. The policy should define how security procedures
should be conducted and specify who should be responsible for conducting the procedures. The
policy should minimize invasive screening and searching activities should be avoided. The
screening department should be conducting its activities in accordance with the new security
policy.
Advantages for this approach will help to precisely define how security screening
procedures should be conducted. It will help to understand invasive screening and searching
procedures as well as how to avoid them and helping to avoid potential legal issues. More
invasive screening and searching security procedures usually lead to violations of people's
individual rights.
However, this alternative can result in inefficiencies in operations. Southwest serves
more than 100 million passengers annually. It can be challenging to serve a huge number of
passengers using manual screening and search procedures. It may be ineffective when it comes
to the accurate screening of passengers and luggage. Illegal and harmful items are difficult to
detect and discover manually.
Screening technologies
Southwest can address this issue by acquiring more advanced screening technologies.
There are various screening technologies available in the modern world including wave imaging,
imaging technologies, X-ray scanners, and passenger-profiling system. The company can use
these technologies to change current screening procedures. Screening technologies can help to
screen a large number of people within a short period of time. These technologies can also be
used to screen and scan a vast amount of luggage. Screening technologies can enhance the
effectiveness of these procedures, especially in terms of accuracy.
 However, implementing this potential alternative may require the provision of additional
training programs. Screening technologies can result in legal issues and may lead to a violation
of personal privacy.
Customer Service Dissatisfaction
Although Southwest Airlines is well-recognized as the industry leader in customer
service for the past four decades, passengers are dissatisfied with some aspects of their service.
One of the causes of dissatisfaction is the introduction of more invasive security procedures.
Expansion activity is another cause leading to customer dissatisfaction. Southwest expanded by
establishing new routes in the Northeast region of the United States. The new route presents
great opportunities, but the region is characterized by air-traffic-control delays and airport
congestion. These attributes hinder efficient operations, lengthen turnaround time at airport
gates, and cause disorder on frequent flight scheduling.
Alternatives
Leadership change
Changing Southwest’s leadership is a potential alternative for customer dissatisfaction.
Southwest Airlines was recognized for its outstanding customer service under Herb Kelleher's
leadership, who served as the CEO between 1981 and 2000. He set a spirit and created a
corporate culture that encouraged delivery of superior customer service. Kelleher was genuinely
committed to his employees. He also served as a role model of how other organizational
members should be devoted to perform their tasks and deliver excellent customer service. This
may imply that the current leadership has changed the rules of the game, thus leading to
customer dissatisfaction. Changing the Airline's leadership may boost employee motivation and
commitment to the organization and may also demotivate employees if the new leadership is
unpopular.
Employee training and development
Providing employee training and development programs is a potential alternative for
addressing the issue of customer dissatisfaction. Southwest Airlines used to provide different
training and development programs for both new hires and existing employees. For instance, the
airline offered regular advanced employee training in various classes including cultural diversity,
team-building, and leadership, among others. This ensured delivery of superior customer service
and improved customer satisfaction. Thus, employee training and development can help to deal
with customer dissatisfaction with the airline's service. Unfortunately, a disadvantage of
improved employee training is that it consumes resources, thus leading to more cost.
Halt northeast region operations
Halting certain operations, particularly northeast operations is another potential
alternative that Southwest can use to address the customer dissatisfaction issue. After Southwest
entered into the northeast region of the United States, air-traffic-control delays, inclement
weather, and airport congestions became more common. These aspects lead to lengthened
turnaround time at airport gates, inefficient operations, and disruptions in the frequent flight
scheduling. All these aspects are contributors to poor customer service and customer
dissatisfaction. An advantage of halting northeast operations is being able to avoid inherent
issues such as: inclement weather, airport congestion, and air-traffic-control delays which
triggers customer’s dissatisfaction.
However it denies Southwest growth opportunities. The northeast is the most densely
populated region across the United States and is one of the main regions where Southwest is not
operating.
Selection and Justification of Alternative(s)
Security
Southwest should integrate the two potential alternatives suggested to address the issue of
more invasive security procedures rather than choosing either of them. The above discussion has
revealed designing a special department has various advantages and disadvantages. Also, it has
been clear that implementing screening technologies involves various advantages and
drawbacks. This apparently shows none of the two potential alternatives can be considered the
best in isolation. Therefore, combining the two alternatives will complement each other.
Customer dissatisfaction
As far as customer dissatisfaction is concerned, Southwest should consider combining the
two alternatives. That is, it should provide training and development programs and halt its
operations in the northeast region. Despite the cost of offering such programs, the benefits are
greater and long-term.
Increasing Costs
Southwest Airline’s primary driver for success has been its cost leadership strategy.
When the company first entered the market, their focus was “primarily short-haul, point-to-point,
high-frequency flight, low fares, no international flights.” The purpose of this strategy was to
achieve and keep cost leadership and Southwest has been successful in doing so. Although some
airlines tried to copy their strategy, most of them failed.
JetBlue Airlines, a new low-cost airline, established by David Neeleman entered the
market in 2002 with a different approach. JetBlue Airlines did not focus only on short-haul but
also included long-haul flights in its routes. The company added some extra luxury services that
Southwest did not offer like free live tv and leather seats. As a result, Jet Blue was able to reach
higher load factor than Southwest (Southwest had 80.4 Load factor while Jet Blue’s load factor
was 84.3). While Southwest still had a lower operating cost per ASM than all major airlines
(14.18), Jet Blue Airlines was able to reach lower operating cost per ASM (11.34) than
Southwest.
Changes in Southwest’s unit cost is also an issue for the company. In 2002, the company
had nearly 20% lower unit cost than its lowest cost airline rival (North West). But this cost
advantage declined and by 2010 Delta airlines was able to reach lower cost than Southwest. In
Exhibit 6 it is obvious that only Southwest has such dramatical increase in its CASM. Also, in
looking at total labor cost per ASM graph, we can see that almost all the companies can decrease
their labor cost. But while Southwest is decreasing its average employee per aircraft from 9 to
6.3, its total labor cost per ASM increased and passed Delta’s total labor cost per ASM (Exhibit
9).
Alternatives
Southwest has the highest employee satisfaction level between the major airline
companies, and it also has a low turnover rate. But increasing labor costs is a threat to the
company’s competitive advantage. To be able to keep cost leadership, the company could try to
limit its labor costs. For example, Southwest can follow new market entrant’s (Jet Blue) strategy
by adding long-haul flights. Without changing the significant parts of its policy of the point to
point flights, the company can add long-haul flights. Long-haul and short-haul flights both have
nearly same fixed cost. Therefore, including long-haul flights would lower company’s CASM.
Selection and Justification of Alternatives
This alternative is the best option for the company by acquiring AirTran, Southwest is
able to take advantage of long-haul routes to reduce its costs.
 AirTran Acquisition
Southwest bought AirTran Airways for $1.4 billion in 2014. This acquisition helped the
company reach new markets while also helping to reduce costs. Southwest previously had only
one acquisition experience with Morris Air in 1996. Morris Air and Southwest had the same
airplanes (737s) in their fleet, whereas AirTran has mostly 717’s in their fleet. Integrating this
717 fleet with a system built on 737s could be challenging for the company.
Another issue that could affect this acquisition’s success is the integration of the
company cultures. Southwest workers were concerned about losing company culture and unsure
if the new company could successfully integrate with the current culture. The acquisition of
AirTran also allowed Southwest to increase its market share and profits since AirTran has a
lower cost structure than Southwest. However, Southwest has higher labor cost than AirTran,
and this acquisition would transfer these excessive costs to AirTran flights and could possibly
decrease the effectiveness of the acquisition.
Alternatives
Southwest can directly integrate AirTran by incorporating AirTran’s 737 fleet, ticketing
options, services and employee benefits into their own. This option bears some risks and may
cause an increase in the costs. The company can choose to process this acquisition slower so that
they can gather more insider information about AirTran’s capabilities which will help the
company to reach lower costs and focus more on adapting these strategies to all Southwest
operations. The company could also decide to keep AirTran as a sub-brand while not touching its
structure and benefit from its low cost
Selection and Justification of Alternative(s)
Choosing a smooth acquisition process is the best strategic alternative for Southwest. A
fast acquisition, for example, changing fleet by 737 may cause the company to lose synergy. The
company should try to understand AirTran’s capabilities and to adapt some of them. Slower
acquisition process would help to integrate AirTran management to Southwest culture by
exchanging managers between the companies. Also, in this smooth acquisition process, if
Southwest finds out that converting all AirTran operations to Southwest’s structure will not be
beneficial, then the company can decide to keep AirTran as a sub-brand so that it can protect its
low-cost structure.
 International Expansion

Airline travel, by its very nature, is a business that lends itself to building an international
market presence. Gaining the financial and market standing necessary to transition from a local
service provider to an international brand is difficult, however. Although it started as a small
regional domestic carrier with limited service within U.S. borders, by 2013 Southwest had
spawned imitators who were operating successfully in other parts of the world. In East Asia, for
example, Thai Airways and Singapore Airlines had started up small and limited air service
divisions that emulated the Southwest structure – demonstrating that there is an appetite for
Southwest’s particular style of operating philosophy in foreign markets.
These developments didn’t go unnoticed: by 2013, when the company had not had
significant new market expansion (other than the 2010 AirTran purchase) in several years, CEO
Gary Kelly remarked that Southwest’s remaining significant growth opportunities “lie beyond
U.S. borders.” Indeed, the company stood to gain exposure to limited international routes with
the AirTran acquisition announced in 2010, but questions remained as to whether Southwest
would be able to incorporate these new routes and destinations into its existing corporate
portfolio while maintaining its unique culture and service standards. Further, the prospect of
entering other international markets brings a new set of challenges and opportunities for any
business.
There are many advantages to be considered in expanding to international markets.
Opening services in other countries would offer the company access to an entirely new economy
of scale in terms of potential population served. These new markets bring access groups of
customers that a service business would have no way of contacting without leaving U.S. borders.
Finding a way to win over these customers of course would have a sizeable positive impact on
gross revenue.
An additional benefit of entering these new markets is the impact on fixed costs at a per-
unit-sold level. Massive growth allows a company to spread its fixed costs across a much larger
customer base. This would ultimately reduce Southwest’s average cost burden across all
passenger miles sold, leading to increased profitability and operational stability.
Another compelling reason to “go global” is the diversification of risk. Any time a company
begins serving new markets, its business risk is spread across a potentially large mass of new
consumers. Establishing constant streams of new sales revenue from the growing middle classes
in developing and newly-developed countries can provide a cushion against setbacks in operating
divisions in other locations. The risk of financial ruin from political upheaval or a devastating
natural disaster in one geographic region can be mitigated by operating in many different
countries.
As a side benefit to risk diversification, a company can expose itself financially to
differences in interest rates and currency valuations between its home country and the other
countries where it operates. A skilled treasury function can use arbitrage techniques to profit
from these differences and hedge against risk.
While the upside benefits to entering these markets are attractive, there are also potential
pitfalls that could dampen the organization’s ability to operate within them profitably. A
company’s leadership needs to consider risks from changes in economic and political
circumstances as well as the general cultural risk that is present whenever an organization
contemplates expanding beyond its home borders.
Any country has the potential to suffer deteriorating economic conditions and currency
shocks. These events adversely impact the purchasing power of the populace and its available
discretionary income, which can destroy an otherwise well-built business plan in short order.
These economic risks represent the potential for significant harm to a company’s operations
within a foreign country.
Political risk is the risk that an operating division within a specific country could be
damaged from political upheaval, war, or a change in the local government’s attitude towards
foreign businesses. Any time there is civil unrest, businesses in the region suffer. Also,
governments can become more hostile to businesses and implement stifling regulations or
crippling tax burdens. In some cases, political leaders have even expropriated businesses’ assets.
Any of these situations would be detrimental to financial outcomes. Political risk can by
mitigated through careful selection of the country or countries a company enters – however, it is
not possible to completely remove these risks.
Finally, a company also faces cultural risks when trying to penetrate markets in new
countries. These risks may be difficult to quantify or even anticipate, because they arise over
time due to differences in preferences, customs, societal norms, and even language. Recent
history is full of examples of companies making missteps in the way they communicate their
products and services in these new markets, due primarily to inexperience with the culture. Even
countries such as the U.S. and England, who share language and heritage, have cultural and
communication differences that can cause headaches for companies trying to export from one to
the other.
Cultural risks can result in situations that are dangerous and extremely frustrating for a
new market entrant. Weak operating performance can persist for many periods while the
organization’s leadership struggle to understand why their products and advertising, which have
been so effective in their home country, are unable to gain ground in the new location.
Alternatives

There are several different methods by which a service provider can enter foreign markets. For
airlines, the options are somewhat limited. The airline can either start from scratch and build the
service from the ground up, or it could merge with or acquire an existing airline.
Start from scratch
The more obvious, although perhaps riskier, option is to build the new service from the
ground up. The advantages of this approach are that the organization would be able to choose its
own routes, it can capitalize the business at exactly the necessary level, and it can bring on and
train new staff without having to merge cultures with a former competitor. Starting from scratch
is a clean slate – the organization can specifically build the new division to fit its strategic plan.
There are some disadvantages to starting from scratch, though: the airline may have to
compete for passengers on routes that a competitor has already established, or it may have to
establish new routes and market them to drum up demand. Both approaches carry the distinct
possibility that the airline will have to fly these routes at very low capacity for an extended
period of time while it is establishing itself in the market, which is a recipe for net operating
losses.
There is also the possibility that the new entrant will struggle to develop productive
relationships with the local government and regulating bodies. Challenges in this area can be
potentially catastrophic, completely grounding an airline until the authorities clear it for
operation.
Purchase existing competitor
There are several advantages to be considered with the scenario in which the company
purchases or merges with a service provider who is already operating in the area in which the
airline wants to expand. Many of the risks to ground-up development will have already been
mitigated by the existing carrier. That company will have already established and familiarized
the local population with routes and capitalized its operation at a level that is appropriate for the
demand it had been able to capture. The new organization will have access to a trained and
ready staff who are familiar with the routes and the people who fly them. These synergies will
allow the two organizations to merge their power and expertise. Crucially, the existing company
will have developed productive relationships with the local regulators, reducing the political risk
in this expansion.
Of course, buying or merging with another airline also has potential disadvantages.
There is the possibility that the airline being purchased had old or poorly-maintained equipment,
or equipment that is different from that used by the acquiring company. This can be especially
problematic for a market entrant like Southwest, who have built efficiency into the business
model partially by flying only one type of airplane. There is also the risk that the staff being
integrated will not mesh well into the new company’s culture. These new employees may
require extensive re-training in the standard operating procedures of the new organization.
Selection and Justification of Alternative(s)
When Southwest purchased AirTran, it gained a service provider that already flew to
some limited international destinations. AirTran had established routes to the Dominican
Republic, Jamaica, and Mexico. By completing this acquisition, Southwest was able to expand
its footprint and test its model with international travelers and in new cultures whose citizens
were already familiar with a U.S. carrier flying these routes. Given the potential risks and
advantages discussed above, the more prudent course of action would be to continue to acquire
existing service providers. Building from the ground up exposes an organization to many
potential risks based on circumstances that are unknown at the outset. The purchase of a
competitor allows a smaller, leaner company like Southwest to control for some of these
variables as part of the acquisition, and would fit better with their overall business model.

Appendix (Current Scenario)

Financial Analysis

Southwest has experienced success across multiple operational dimensions in the past
several years, and the company’s financial statements indicate excellent financial performance as
well. The company has been very profitable for the last five years, increasing top line revenue
 by almost 5% per year on an annualized basis. As can be seen on Table 1, through year-end
2017 gross revenues had risen to almost $21.2B from $17.7B in 2017.
SOUTHWEST AIRLINES INCOME STATEMENT
Fiscal year ends in December (000's) 2013 2014 2015 2016 2017 growth rate
Revenue 17,699 18,605 19,820 20,425 21,171 4.6%
Cost of revenue 8,307 7,677 6,025 6,132 6,431
Cost of revenue as a % of sales 47% 41% 30% 30% 30%

Gross profit 9,392 10,928 13,795 14,293 14,740 12.0%

Operating expenses
Sales, General and administrative 5,035 5,434 6,383 6,798 7,319 9.8%
Depreciation and amortization 867 938 1,015 1,221 1,218 8.9%
Other operating expenses 2,212 2,331 2,281 2,514 2,688
Total operating expenses 8,114 8,703 9,679 10,533 11,225
Operating income 1,278 2,225 4,116 3,760 3,515
Interest Expense 107 107 90 75 65
Other income (expense) 38 (302) (547) (138) (199)
Income before income taxes 1,209 1,816 3,479 3,547 3,251
Provision for income taxes 455 680 1,298 1,303 (237)
Net income 754 1,136 2,181 2,244 3,488

EBITDA 2,183 2,861 4,584 4,843 4,534 20.0%

Source: Morningstar

Over this same time period, Southwest was able to decrease direct costs significantly on a year
over year basis. This was largely due to two factors: the acquisition of AirTran and the 2014
OPEC decision to maintain oil production despite a supply glut.
The AirTran purchase gave Southwest a major flight hub in Atlanta, a fleet of planes, and access
to a foreign customer base that had been served through AirTran’s international routes. The
company was able to quickly absorb and integrate the Atlanta hub and the old AirTran routes.
The company scaled their operations up and took on a new economy of consumer scale with
existing infrastructure. Southwest’s ability to control employee costs (typically the largest single
expense on a business’s books) with surging demand has been key in the company’s financial
success. The additional planes that came with the purchase were quickly turned around and
leased to Delta, further adding to operating income.
Jet fuel costs, one of any airline’s other largest expenses, plummeted in 2014. Despite rising
global oil supply due to the booming shale industry in the western hemisphere, OPEC decided
not to decrease its own conventional production, which sent oil prices into a tailspin. This
resulted in significant decreases in pass-through costs for fuel. See Table 2.
Table 2. Sharp Decrease in Fuel Costs
Average cost Percent of total
Jet Fuel Prices, 2011-current Cost (M's) per gallon operating expense

2011 5,644 3.19 37.7%

2012 6,120 3.30 37.2%
2013 5,763 3.16 35.1%
2014 5,293 2.93 32.3%
2015 3,616 1.90 23.0%
2016 3,647 1.82 21.9%
2017 3,940 1.92 22.3%

Note Drop in cost per gallon in 2015.

Source: Southwest Airlines SEC Q4 2017 Form 10-K

The organization appears to have used some of the jet fuel price windfall to increase

advertising: since 2015, Sales/G&A expenses have grown by 10% year-over-year. Also,

depreciation has surged due to the expansion of the fleet of jets. However, with the excellent

control of the two largest direct cost categories, Southwest has been able to drive an annualized

20% increase in EBIDTA over the past five years. Financial performance over this period has

been excellent.

Service & Spirit

Since the 2007 changes in service, Southwest has expanded on those changes and provided
new service offerings for passengers. Current service offerings include:
o EarlyBird Check In
o For an extra $15 passengers can be automatically checked in and are assigned
seats 12 hours before general boarding (Southwest)
o Priority lane access
o Expansion of the Rapid Rewards program that now includes Rapid A-List and A-List
Preferred
o WiFi
o $8 additional fee
o Free live and on demand television
o Inflight drink menu options
o Meals are still not available
 o Two-Bags-Fly-Free
Southwest continues to uphold their Positively Outrageous Service. “Southwest Airlines has
figured out how to make and keep a reputation as a friendly airline, including competitive prices,
free checked luggage and friendly employees” (Hyken, 2016). Exceptional service first starts
with quality people. In an article written by Southwest Airlines Vice President of Human
Resources, Julie Weber, she speaks briefly on the company hiring process “we talk about hiring
not for skills but three attributes: a warrior spirit (that is, a desire to excel, act with courage,
persevere and innovate); a servant’s heart (the ability to put others first, treat everyone with
respect and proactively serve customers); and a fun-loving attitude (passion, joy and an aversion
to taking oneself too seriously). The hiring process is also highly selective, accepting only about
2% of applicants.
“In 2013, Southwest was named No. 1 in customer satisfaction by the US Department of
Transportation; earned the No. 2 spot on Consumer Reports' Airline Customer Satisfaction
Survey; and ranked second on Business Insider's list of the best airlines in the US” (Martin,
2015). In a blog post, the company explained that “we believe that if we treat our employees
right, they will treat our customers right, and in turn that results in increased business and profits
that make everyone happy” (Martin, 2015). The airline now has a new statement of purpose:
“We exist to connect people to what's important in their lives through friendly, reliable, and low-
cost air travel” (2016). Below are examples of customer service experienced by actual
passengers:

o Mark, a grandfather that recently lost his grandson was rushing to return home to be with
his family. He was running late and in fear of missing his flight. The pilot of his flight
found out about his story and held the plane for Mark until he arrived. (Harder, 2016).
o A passenger’s luggage was damaged during a flight and Southwest and was given the
option to either have the luggage repaired or replace at no cost to the passenger. (Hyken,
2016).

In keeping with a jovial flight crew and atmosphere, Southwest is now offering inflight
concerts on 20 flights a year through a partnership with Warner Music Nashville. A customer
wrote that “it kind of throws a kink into the mundane act of flying,"… "There was a lot of
excitement with it, and I thought it was pretty neat (Skinner, 2017).
Competitive Market
Air traffic delays are a common attribute to any delays that have occurred since the
beginning of air travel. In the information on air traffic delays above, discussed was the
oversaturation of airlines using one central hub, but other factors can include weather, late arrival
of planes, maintenance, and many others. Southwest Airlines recently experienced a major delay
that is expected to cost millions of dollars due to more than 2,300 flights being canceled due to a
computer failure (Levin & Sasso, 2016). Apart from bad weather, there is no reasoning behind
why these events occur that cause flight delays, but it is an apparent issue with many different
misfortunes that are contributing factors.
According to the National Aviation System, the contributing factors were weather,
congested airports, and air-traffic systems that resulted in delays that totaled in a yearly report of
14.3 million minutes (Levin & Sasso, 2016). In addition to this data, 25 million minutes were
reported last year for undetermined reasons that caused flight delays last year (Levin & Sasso,
2016). That is a great amount than delays caused by severe weather and security delays. Airlines
must be more cautious about these delays for the sake of their customers, because without known
causes of delay it is very difficult to prevent future delays from happening. Air traffic delays
affect all airlines, so they need to join together to figure out where the issues arise and try to
eliminate these delays as much as possible.
Security & Customer Dissatisfaction
Terrorist attacks and customer dissatisfaction may limit the Airline’s capacity to retain its
position. For instance, terrorist attacks led to introduction of more invasive security procedures
which has frustrated many passengers. Also, these events may prevent Southwest from assessing
certain regions. As far as customer dissatisfaction is concerned, it will be absolutely impossible
to retain the market position without ensuring maximum customer satisfaction.
Also, Southwest is experiencing technical and operational problems. It is reported that
one of the airline's plane was forced to make an emergency landing after the engine busted into
flames of fire (Graff, 2018). This apparently reveals lack of appropriate safety measures, which
may discourage many people from flying Southwest, which may lead to low competitiveness in
the future.
Also, competition is taking a new direction. Over the years, Southwest has been
competing against major competitors such as United, American, and Delta. However, emerging
of ultra-low-cost carriers (ULCC) such as Spirit and Frontier is intensifying the competition
(Jansen, 2016).
International Expansion
Southwest’s purchase in 2011 and subsequent integration of AirTran allowed the
company to stick its toe in the international travel side of the airline industry. This expansion
added seven international destinations to Southwest’s network and helped the company increase
profits many times over in just the first several years ($178M in 2011 to $754M by the end of
2013).i At the time of the acquisition, there was significant shareholder concern about whether:
a) Southwest would be able to integrate the new culture and maintain low per-unit costs, and
b) whether Southwest would be able to integrate AirTran’s Boeing 717s into its exclusive fleet of
Boeing 737s. The company was able to address both concerns fairly quickly, absorbing all of
AirTran’s routes into its own schedule (and reorienting the staff to the Southwest model) and
leasing off all of the Boeing 717s to Delta. Through strong messaging and focus on its customer
deliverables, the company was able to mitigate much of the risks that come with expansion.
Further, the work with regulators that had been done, both by Southwest and by AirTran
prior to the acquisition, proved to be very helpful in ensuring a smooth transition for the new
operation.ii The additional international destinations proved to be a hit; not only have profits and
market penetration increased significantly, but Southwest used these routes and relationships
with foreign governments to springboard to several more international destinations. By the end
of 2017, the company had launched service to a total of 16 different global cities in countries like
the Bahamas, Aruba, Belize, Jamaica, Mexico, and Cuba.iii
By diligently working to find the right competitor to purchase, Southwest has been able
to expand its global footprint while mitigating the political and economic risks that come with
foreign investment.

i
Great Speculations (multiple authors), www.forbes.com/sites/greatspeculations, “What Has AirTran Done For
Southwest Airlines?”, December 11, 2014.
ii
Maria Zahid, “Can International Expansion Drive Southwest Airlines’ Growth?”, www.seekingalpha.com, April
13,2015
iii
Conor Shine, “Southwest Airlines gives up two planned routes to Mexico City,” Dallas News, October 18,2017