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Strategic Management

1. CASE ABSTRACT

Southwest is an Airline Company, based in Dallas, Texas

Herbert D. Kelleher, Chairman, President, and CEO


Since 1987, when the Department of Transportation began tracking Customer Satisfaction
statistics, Southwest has consistently led the entire airline industry with the lowest ratio of
complaints per passengers boarded. Many airlines have tried to copy Southwest’s business model,
and the Culture of Southwest is admired and emulated by corporations and organizations in all
walks of life. Always the innovator, Southwest pioneered Senior Fares, a same-day air freight
delivery service, and Ticketless Travel. Southwest led the way with the first airline web page—
southwest.com, DING! the first-ever direct link to Customer’s computer desktops that delivers live
updates on the hottest deals, and the first airline corporate blog, Nuts About Southwest. Our
Share the Spirit community programs make Southwest the hometown airline of every city we
serve.
In 2007, Southwest Airlines signs a ten-year contract with Galileo to make low fares
available to all Galileo-connected travel agencies in North America. We returned to San
Francisco International Airport in the Summer and expanded to have an eighth crew base
located in Las Vegas. In keeping with customer demands, we kept our open seating policy but
adopted a new boarding procedure to make the process quicker. Our gate areas are also
undergoing makeovers and we’ve added a new Business Select fare for our most frequent
business fliers.
Southwest's current strategy is to position itself as a cost leader with a focus strategy. The
company’s management and employees aim to cost-effectively and reliably fly large number of
customers on short, non-stop flights, and to have fun doing it. They are devoted to making flying
available to everyone. The company has been successful in implementing this strategy, having
experienced strong growth and profitability. Southwest is now the largest carrier in the U.S. in
total customers. It has operated profitably for 32 consecutive years in an industry with a volatile
earnings history. The main strategic issue facing Southwest at this time is to evaluate this strategy
and determine its future course of action.

CHUOP Theot Therith: Southwest Airlines (2009) 1


Strategic Management

2. PROPOSE A VISION STATEMENT FOR SOUTHWEST AIRLINES


Southwest Airlines’ Vision (proposed) is to be the famous mature and new generation
Airlines Company that provides the most affordable, reliable and comfortable flight
transportation in both domestic and oversees.
3. THE COMPANY’S MISSION STATEMENT
. The currently mission statement
The mission (existing) of Southwest Airlines is dedication to the highest quality of Customer
Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.
. The mission statement proposed
A better Mission Statement proposed is “to provide quality service for the everyday person.
Southwest services air travel to cities all around the U.S with the latest technology and the most
luxurious planes. Through the search for the greatest advantage in today’s busy world, we
competitively provide the lowest air-fare price with ensuring high company sprit and long term
financial prosperity. Southwest is committed to offers the highest standards of safety/integrity for
all our customers at an affordable/reasonable price. We ensure all processing is respect to the
governmental regulations and we also have the policy for annual donation regularly to various
charities throughout the United States. Since the first flight of Southwest in 1971, our employees
have been the vital asset in making Southwest the most recognized airline today.
4. LIST THE CORRESPONDING MISSION STATEMENT COMPONENTS
The mission statement is the most public and visible part of the strategy management
process, it must include the 9 elements: Customers, Products or Services, Markets, Technology,
Survival growth and Profitability, Philosophy, Self-concept, Concern for public image and
Concern for employees. Therefore, the corresponding mission statement components to the mission
statement proposed for Southwest are shown below:
1. Customer: the Southwest’s customer is the everyday person, “to provide quality
service for the everyday person…”
2. Products or Services: the major service of the Southwest is air travel, “…Southwest
services air travel…”
3. Markets: the geographically where the Southwest compete is cities all around the
U.S, “…Southwest services air travel to cities all around the U.S…”
4. Technology: the technologically current of Southwest is the latest technology, “…
with the latest technology and the most luxurious planes…”

CHUOP Theot Therith: Southwest Airlines (2009) 2


Strategic Management

5. Concern for survival, growth, profitability: the Southwest committed to growth


and financial soundness is the lowest air-fare price, “…we competitively provide
the lowest air-fare price with ensuring high company sprit and long term financial
prosperity…”
6. Philosophy: it is, “…Southwest is committed to offers the highest standards of
safety/integrity for all our customers…”
7. Self-concept: the distinctive competence or major competitive advantage is
reasonable price, “…all our customers at an affordable/reasonable price…”
8. Concern for public image: the Southwest responsive to social is governmental
regulation and annual donation, “…We ensure all processing is respect to the
governmental regulations and we also have the policy for annual donation regularly
to various charities throughout the United States…”
9. Concern for employees: it is, “…our employees have been the vital asset in making
Southwest the most recognized airline today…”
5. PERFORMANCE OF AN EXTERNAL AUDIT (RESULT)
An evaluation of the external opportunities and threats – based on the case study
(Southwest Airlines, 2002) and additional references (by 2009) is as follows:
Opportunities:
• There are opportunities for growth markets share, and expansion to new markets
1. More than 100 new cities have encouraged Southwest to offer flight service (2003)
2. There is an increased demand for international travel
3. Increased demand for cities that are currently (by 2009) without Southwest airline
flights such as New York, Atlanta
4. With an increase of nearly 3 million people in the US there is an expansion of
developing cities across the United States
5. Increased amount of upper level business travelers has led to greater demand for
better seats.
• Technological competency and its popularity of Southwest
6. First airline on the web
7. Booked online 13.6% more than American Airlines (in 2004)
8. Top-ranked web site in customer satisfaction among travel sites (by 2004)
9. Increase popularity of internet leads to an expected rise of 22 percent from 2006 in
flight booked online

CHUOP Theot Therith: Southwest Airlines (2009) 3


Strategic Management
• There are barriers to entry for other competitors in the airline industry, the bankruptcy,
and decline.
10. There is a decline of 11 percent in airline companies with funding leading to used
planes being able to be purchased
11. Each year, airline companies (such as Delta and Northwest in 2006) are declaring
bankruptcy leaving more cities existing allowing more airlines to fly to
12. Decline of 11 percent in airline companies with funding leading to experienced
workers being laid off.
Threats:
• Jet Blue Airline
1. Specialization expertise of Jet Blue using one plane model allows them to provide less
expensive mechanics to maintain planes.
2. Jet Blue is the only airline to carry satellite televisions on planes.
• Southwest's ability to hold the line on costs will impact its cost leadership position.
3. The largest cost component (36.9% of expenses) is labor. This cost could be impacted
by union actions, which cover 84% of Southwest's workforce.
4. The second largest cost component is fuel (11.2%), which could be negatively
impacted by economic or political events, high cost of fuel leads to increase in ticket
prices
• Other threats
5. New tax system, higher ticket taxes.
6. Increase in airport security due to possible terrorism, terrorists’ attacks
7. Many companies such as AirTran Airways are offering a business class in their B717
jet.
8. Competing airlines offer satellite radio in their passenger jets, newer and more
technologically advanced jets with luxury items and some of competitors offer in-
flight meals adding luxury
9. Alternative forms of transportation, such as a high-speed railway, could weaken
demand for air travel. Also, if the economy weakens, people may choose to drive
rather than fly
10. Southwest would be hurt if the public perception were that low price equates to
low quality. An incident like the ValuJet crash could reinforce this perception.

CHUOP Theot Therith: Southwest Airlines (2009) 4


Strategic Management

6. COMPETITIVE PROFILE MATRIX (CPM)


Based on the case study and some extra information, it enables to prepare a Competitive
Profile Matrix (CPM) as following:
South West American United
Weighted Weighted Weighted
Critical Success Factors Weight Rating Rating Rating
Score Score Score
Advertising 0.14 3 0.42 3 0.42 2 0.28
Global Expansion 0.07 1 0.07 3 0.21 3 0.21
Market Share 0.12 2 0.24 4 0.48 3 0.36
Price competitiveness 0.09 4 0.36 3 0.27 3 0.27
Financial Position 0.11 3 0.33 1 0.11 1 0.11
Consumer Loyalty 0.09 4 0.36 2 0.18 2 0.18
Management 0.09 4 0.36 3 0.27 3 0.27
Security Precautions 0.09 3 0.27 3 0.27 2 0.18
Customer Service 0.14 4 0.48 2 0.28 1 0.14
Organizational Structure 0.06 3 0.18 3 0.18 2 0.12
Total 1.00 3.07 2.67 2.12

7. EXTERNAL FACTOR EVALUATION (EFE) MATRIX


According to the result of performance an external audit above, the EFE matrix is
presented as below:
Weights Rating Weighted
Key External Factors (KEF)
0.0 to 1.0 1 to 4 Score
Opportunities
1. More than 100 new cities have encouraged Southwest
0.04 4 0.16
to offer flight service (2003)
2. There is an increased demand for international travel 0.09 1 0.09
3. Increased demand for cities that are currently (by
2009) without Southwest airline flights such as New 0.09 1 0.09
York, Atlanta
4. With an increase of nearly 3 million people in the US
there is an expansion of developing cities across the 0.01 2 0.02
United States
5. Increased amount of upper level business travelers has
0.01 1 0.01
led to greater demand for better seats.
6. First airline on the web 0.02 1 0.02

CHUOP Theot Therith: Southwest Airlines (2009) 5


Strategic Management
7. Booked online 13.6% more than American Airlines (in
0.03 1 0.03
2004)
8. Top-ranked web site in customer satisfaction among
0.03 2 0.06
travel sites (by 2004)
9. Increase popularity of internet leads to an expected rise
0.03 3 0.09
of 22 percent from 2006 in flight booked online
10. There is a decline of 11 percent in airline companies
with funding leading to used planes being able to be 0.01 1 0.01
purchased
11. Each year, airline companies (such as Delta and
Northwest in 2006) are declaring bankruptcy leaving 0.04 2 0.08
more cities existing allowing more airlines to fly to
12. Decline of 11 percent in airline companies with funding
0.03 3 0.09
leading to experienced workers being laid off.
Threats
1. Specialization expertise of Jet Blue using one plane
model allows them to provide less expensive mechanics 0.10 3 0.30
to maintain planes.
2. Jet Blue is the only airline to carry satellite televisions on
0.05 2 0.10
planes.
3. The largest cost component (36.9% of expenses) is
labor. This cost could be impacted by union actions, 0.03 1 0.03
which cover 84% of Southwest's workforce.
4. The second largest cost component is fuel (11.2%), which
could be negatively impacted by economic or political 0.10 3 0.30
events, high cost of fuel leads to increase in ticket prices
5. New tax system, higher ticket taxes. 0.04 2 0.08
6. Increase in airport security due to possible terrorism,
0.09 3 0.27
terrorists’ attacks
7. Many companies such as AirTran Airways are offering a
0.04 1 0.04
business class in their B717 jet.
8. Competing airlines offer satellite radio in their
passenger jets, newer and more technologically
0.04 2 0.08
advanced jets with luxury items and some of
competitors offer in-flight meals adding luxury
9. Alternative forms of transportation, such as a high-
speed railway, could weaken demand for air travel.
0.04 1 0.04
Also, if the economy weakens, people may choose to
drive rather than fly
CHUOP Theot Therith: Southwest Airlines (2009) 6
Strategic Management
10. Southwest would be hurt if the public perception were
that low price equates to low quality. An incident like 0.04 1 0.04
the ValuJet crash could reinforce this perception.
TOTAL 1.00 2.03

8. PERFORMANCE OF AN INTERNAL AUDIT (RESULT)


An assessment of the internal strengths and weaknesses – based on the case study
(Southwest Airlines, 2002) and additional references (by 2009) is as follows:
Strengths
1. Southwest has successfully adopted a cost leadership strategy
2. Southwest has a reputation for great customer service: Southwest won the
Department of Transportation’s Triple Crown 5 years consecutively for ontime service,
baggage handling, and least number of customer complaints. The company has
topped the National Airline Quality Rating three years consecutively.
3. Employee loyalty: the company has a strong, fun-loving, employee-oriented culture.
The company's mission statement focuses on these aspects of the business. The result is a
loyal employee base that is willing to work hard to achieve the company's goals.
4. Thirty-seven consecutive years of profitability – 1972 till 2009 (31 consecutive years of
profitability by 2003)
5. Eighty-five percent hedge position on fuel.
6. RPM’s for 42.2 billion
7. Excellent public image.
8. Strong management team.
9. Thirteen billion in market value.
10. In 2009 Southwest has three hundred and eighty-eight new jets (30 new jets in 2003)
11. Average age of jets is least than 10 years – around 8 years
12. Fourth largest domestic airline.
13. Growth rate higher than industry.
14. 54 % of revenues from online booking via SW Website (25% in 2003, 50% in 2004).
15. Seventy-five percent of flights are E-tickets.
Weaknesses
1. The company's mission statement is weak. Although there appears to be clear
communication of the company's goals, the mission statement doesn't even mention
what industry Southwest is in.

CHUOP Theot Therith: Southwest Airlines (2009) 7


Strategic Management
2. Depend on single producer,
3. SW has highest percentage of full-time employees leading to increased overhead.
4. Southwest only flies one plane, the Boeing 737.
5. They will not fly outside the continental United States, 63 cities and 32 states.
6. Difficult to convince customers SW offers benefits other airlines do not.
7. Flying only 737s could lead to negative press if problems with that plane arise.
8. Does not accommodate for severely handicapped.
9. Large cities (Atlanta, Charlotte, etc) are without SW service.
10. No business section on plane, do not provide a first class for passengers, do not provide
assigned seating.
11. Southwest does not offer any type of in-flight meals.
12. Southwest offers in domestic only, no international flights.
9. INTERNAL FACTOR EVALUATION (IFE) MATRIX
By the performance an internal audit above, the IFE matrix is presented as below:
Weights Rating Weighted
Key External Factors (KEF)
0.0 to 1.0 1 to 4 Score
Strengths
1. Southwest has successfully adopted a cost leadership
0.07 3 0.21
strategy
2. Southwest has a reputation for great customer service 0.07 3 0.21
3. Employee loyalty 0.07 4 0.28
4. Thirty-seven consecutive years of profitability – 1972 till
0.04 4 0.16
2009 (31 consecutive years of profitability by 2003)
5. Eighty-five percent hedge position on fuel. 0.07 4 0.28
6. RPM’s for 42.2 billion 0.04 3 0.12
7. Excellent public image. 0.07 4 0.28
8. Strong management team. 0.07 4 0.28
9. Thirteen billion in market value. 0.04 3 0.12
10. In 2009 Southwest has three hundred and eighty-
0.04 3 0.12
eight new jets (30 new jets in 2003)
11. Average age of jets is least than 10 years ~ 8.4
0.04 4 0.16
years
12.Fourth largest domestic airline. 0.03 4 0.12
13.Growth rate higher than industry. 0.07 3 0.21
14.54 % of revenues from online booking via SW Website
0.02 3 0.06
(25% in 2003, 50% in 2004).
15.Seventy-five percent of flights are E-tickets. 0.03 4 0.12
Weaknesses
1. The company's mission statement is weak 0.02 1 0.02

CHUOP Theot Therith: Southwest Airlines (2009) 8


Strategic Management
2. Depend on single producer 0.01 1 0.01
3. SW has highest percentage of full-time employees
0.03 2 0.06
leading to increased overhead.
4. Southwest only flies one plane, the Boeing 737. 0.01 1 0.01
5. They will not fly outside the continental United States,
0.04 2 0.08
63 cities and 32 states.
6. Difficult to convince customers SW offers benefits other
0.01 2 0.02
airlines do not.
7. Flying only 737s could lead to negative press if
0.01 1 0.01
problems with that plane arise.
8. Does not accommodate for severely handicapped. 0.01 1 0.01
9. Large cities (Atlanta, Charlotte, etc) are without SW
0.05 1 0.05
service.
10. No business section on plane, do not provide a first
0.01 1 0.01
class for passengers, do not provide assigned seating.
11. Southwest does not offer any type of in-flight meals. 0.01 2 0.02
12. Southwest offers in domestic only, no international
0.02 1 0.02
flights.
TOTAL 1.00 3.05

10. THE TOWS ANALYSIS


Here, the TOWS matrix – an effective way of combining internal strengths with external
opportunities and threats, and internal weaknesses with external opportunities and threats.
(Base on the external audit at point 5 and internal audit at point 8)

External Opportunities (O) External Threats (T)


1. O1 1. T1
2. O2 2. T2
3. O3 3. T3
…………. ………….
12. O12 10. T10
Internal Strength (S) SO Strategy (maxi-maxi ) ST Strategy (maxi-mini)
1. S1 1. Use the reputation for great 1. Expand the rapid rewards
2. S2 customer service to penetrate program to offer one reward
3. S3 & attract customers from point for every three

…………. other 100 new cities (S2-O1) purchases made on the


Southwest website at least
15. S15 2. Through market value, offer
one month in advance.
flight service in the cities
2. Upgrade our fleet by adding
currently without SW (S9-O3)
CHUOP Theot Therith: Southwest Airlines (2009) 9
Strategic Management
3. Base on increasing of revenue 12 of the similar Boeing 717 jets
from online, continue to satisfy in order to accommodate to
customer via internet the travelers desiring the

(S14S15 – O6O7O9) luxury of a business class.


WO Strategy (mini-maxi) WT Strategy (mini-mini)
1. Hire more part time worker 1. Add new cities not flown to
Internal Weaknesses (W) (W3-O12) by Southwest such as Atlanta,
1. W1 2. With airline companies Charlotte, Chicago, and New
2. W2 selling planes SW can York
3. W3 purchase models similar to 2. Shorten the flight life span
…………. the 737, which could lead to of the B737’s in order
12. W12 better press if a problem with maintain planes that are
the 737 arises (W7-O10) consistently up to date with
technology

11. THE SPACE MATRIX


Internal Strategic Position External Strategic Position
Financial Strength (FS) Rating Environmental Stability (ES) Rating
ROI 3 Technological changes -2
ROA 3 Risk involved in business -3
Leverage 2 Rate of inflation -3
Net income 3 Competitive pressure -5
Inventor Turnover 2 Price of elasticity of demand -2
FS average 2.6 ES average -3.0

Competitive Advantage (CA) Rating Industry Strength (IS) Rating


Market Share -2 Profit potential 6
Product/service quality -1 Growth potential 5
Customer loyalty -1 Financial policy 4
Competition’s capacity utilization -2 Resource utilization 5
Technological know-how -1
CA average -1.4 IS average 5.0

Conclusion
Directional vector coordinates: X-axis -1.4 + 5.0 = 3.6
Y-axis 2.6 + (-3.0) = -1.4
Therefore, the Southwest Airline should pursue Competitive Strategy

CHUOP Theot Therith: Southwest Airlines (2009) 10


Strategic Management

FS

+6
Conservative Aggressive

CA IS
-6 +6

(3.6,-1.4)
Defensive Competitive

-6

ES

The directional vector locates in the competitive quadrant of the SPACE Matrix, indicating
competitive strategies. So Southwest should take backward, forward, and horizontal integration;
market penetration; market development; product development; and joint venture.

12. THE GRAND STRATEGY MATRIX


According to the Market Growth and Competitive Position of Southwest (via the case),
therefore Southwest is in the Quadrant I (please see the matrix below).
.

CHUOP Theot Therith: Southwest Airlines (2009) 11


Strategic Management

Rapid Market Growth

Quadrant I
Quadrant II 1. Market development
1. Market development 2. Market penetration
2. Market penetration 3. Product development
3. Product development 4. Forward integration
4. Horizontal integration 5. Backward integration
5. Divesture 6. Horizontal integration
6. Liquidation 7. Concentric diversification

Weak Strong
Competitive Competitive
Position Position
Quadrant III Quadrant IV
1. Retrenchment 1. Horizontal integration
2. Concentric diversification 2. Concentric diversification
3. Conglomerate 3. Conglomerate
diversification diversification
4. Horizontal integration 4. Joint ventures
5. Divesture
6. Liquidation

Slow Market Growth

13. THE INTERNAL-EXTERNAL (IE) MATRIX


Use the finding’s score of EFE (at point 7) and IFE matrix (at point 9), we get the IE matrix
based on the following two criteria:
1. The total weighted score from the EFE matrix: 2.03 – this score is plotted on the y-axis
2. The total weighted score from the IFE matrix: 3.05 – this score is plotted on the x-axis
Now we plot these values on axes in the IE matrix.

CHUOP Theot Therith: Southwest Airlines (2009) 12


Strategic Management

EFE total weighted score

Strong Average Weak


3.0 to 4.0 2.0 to 3.0 1.0 to 1.99

4.0
High
3.0 to 4.0
I II III
Here, Southwest
3.0 is in cell VI
(2.03,3.05)
Medium IV V VI
2.0 to 3.0

2.0

Low VII VIII IX


1.0 to 1.99

1.0
2.0 3.0 4.0 IFE total weighted score
As the matrix, Southwest is in cell VI that suggests the hold and maintains strategy. In this
case, Southwest’s tactical strategies should focus on market penetration and product
development.
14. MATRIX ANALYSIS AND TOWS SUMMARY
As the result of IE matrix (at point 13), SPACE matrix (at point 11), Grand Strategy Matrix
(at point 12) and TOWS analysis (at point 10), we find out the Alternative Strategies such the
table below:
Nº Alternative Strategies IE SPACE GRAND TOWS Count
01 Forward Integration √ √ √ 3
02 Backward Integration √ √ 2
03 Horizontal Integration √ √ 2
04 Market Penetration √ √ √ 3
05 Market Development √ √ 2
06 Product Development √ √ √ 3
07 Concentric Diversification √ √ 2
08 Conglomerate Diversification 0
09 Horizontal Diversification 0
10 Joint Venture √ 1
11 Retrenchment 0
12 Divestiture 0
13 Liquidation 0

CHUOP Theot Therith: Southwest Airlines (2009) 13


Strategic Management

15. THE QUANTITATIVE STRATEGIC PLANNING MATRIX (QSPM)


This QSPM compares two alternatives. Based on strategies in the stage 1: the input stage
(EFE, CPM, IFE) and stage 2: the matching stage (TOWS analysis, SPACE matrix, IE matrix, GSM),
company executives determined that Southwest needs to pursue an competitive strategy aimed
development of new product and further penetration of the market.
It means the possible strategies for Southwest Airlines are (1) market penetration strategy:
Expand into more cities that are currently without SW airline flights (such as Atlanta, New York)
and (2) product development strategy: Add 12 B17s to Fleet.

Expand into
more cities such Add 12 B17s to
Weight as Atlanta, New Fleet
Key External Factors (KEF)
0.0 to 1.0 York

AS TAS AS TAS

Opportunities
1. More than 100 new cities have encouraged
0.04 4 0.16 2 0.08
Southwest to offer flight service (2003)
2. There is an increased demand for
0.09 4 0.36 3 0.27
international travel
3. Increased demand for cities that are currently
(by 2009) without Southwest airline flights 0.09 4 0.36 3 0.27
such as New York, Atlanta
4. With an increase of nearly 3 million people in
the US there is an expansion of developing 0.01 3 0.03 2 0.02
cities across the United States
5. Increased amount of upper level business
travelers has led to greater demand for 0.01 2 0.02 4 0.04
better seats.
6. First airline on the web 0.02 - - - -
7. Booked online 13.6% more than American
0.03 - - - -
Airlines (in 2004)
8. Top-ranked web site in customer satisfaction
0.03 - - - -
among travel sites (by 2004)
9. Increase popularity of internet leads to an
expected rise of 22 percent from 2006 in 0.03 - - - -
flight booked online
10. There is a decline of 11 percent in airline 0.01 2 0.02 2 0.02

CHUOP Theot Therith: Southwest Airlines (2009) 14


Strategic Management
companies with funding leading to used
planes being able to be purchased
11. Each year, airline companies (such as Delta
and Northwest in 2006) are declaring
0.04 2 0.08 1 0.04
bankruptcy leaving more cities existing
allowing more airlines to fly to
12. Decline of 11 percent in airline companies with
funding leading to experienced workers being 0.03 1 0.03 1 0.03
laid off.
Threats
1. Specialization expertise of Jet Blue using one
plane model allows them to provide less 0.10 1 0.10 2 0.20
expensive mechanics to maintain planes.
2. Jet Blue is the only airline to carry satellite
0.05 1 0.05 2 0.10
televisions on planes.
3. The largest cost component (36.9% of
expenses) is labor. This cost could be impacted
0.03 - - - -
by union actions, which cover 84% of
Southwest's workforce.
4. The second largest cost component is fuel
(11.2%), which could be negatively impacted
0.10 - - - -
by economic or political events, high cost of
fuel leads to increase in ticket prices
5. New tax system, higher ticket taxes. 0.04 - - - -
6. Increase in airport security due to possible
0.09 1 0.09 1 0.09
terrorism, terrorists’ attacks
7. Many companies such as AirTran Airways are
0.04 1 0.04 3 0.12
offering a business class in their B717 jet.
8. Competing airlines offer satellite radio in their
passenger jets, newer and more
technologically advanced jets with luxury 0.04 1 0.04 2 0.08
items and some of competitors offer in-flight
meals adding luxury
9. Alternative forms of transportation, such as a 0.04 1 0.04 1 0.04
high-speed railway, could weaken demand
for air travel. Also, if the economy weakens,
people may choose to drive rather than fly
10. Southwest would be hurt if the public 0.04 - - - -

CHUOP Theot Therith: Southwest Airlines (2009) 15


Strategic Management
perception were that low price equates to
low quality. An incident like the ValuJet crash
could reinforce this perception.
Sub total of weight and TAS 1.00 1.42 1.40
Strengths
1. Southwest has successfully adopted a cost
0.07 - - - -
leadership strategy
2. Southwest has a reputation for great
0.07 2 0.14 1 0.07
customer service
3. Employee loyalty 0.07 - - - -
4. Thirty-seven consecutive years of profitability
– 1972 till 2009 (31 consecutive years of 0.04 - - - -
profitability by 2003)
5. Eighty-five percent hedge position on fuel. 0.07 - - - -
6. RPM’s for 42.2 billion 0.04 2 0.08 2 0.08
7. Excellent public image. 0.07 2 0.14 1 0.07
8. Strong management team. 0.07 1 0.07 1 0.07
9. Thirteen billion in market value. 0.04 4 0.16 2 0.08
10. In 2009 Southwest has three hundred and
0.04 2 0.08 3 0.12
eighty-eight new jets (30 new jets in 2003)
11. Average age of jets is least than 10 years ~
0.04 2 0.08 3 0.12
8.4 years
12.Fourth largest domestic airline. 0.03 2 0.06 1 0.03
13.Growth rate higher than industry. 0.07 2 0.14 1 0.07
14.54 % of revenues from online booking via SW
0.02 - - - -
Website (25% in 2003, 50% in 2004).
15.Seventy-five percent of flights are E-tickets. 0.03 - - - -
Weaknesses
1. The company's mission statement is
0.02 2 0.04 2 0.04
weak
2. Depend on single producer 0.01 1 0.01 2 0.02
3. SW has highest percentage of full-
time employees leading to increased 0.03 2 0.06 1 0.03
overhead.
4. Southwest only flies one plane, the
0.01 1 0.01 4 0.04
Boeing 737.
5. They will not fly outside the
continental United States, 63 cities and 32 0.04 3 0.12 1 0.04
states.
6. Difficult to convince customers SW
0.01 2 0.02 1 0.01
offers benefits other airlines do not.

CHUOP Theot Therith: Southwest Airlines (2009) 16


Strategic Management
7. Flying only 737s could lead to
negative press if problems with that plane 0.01 1 0.01 2 0.02
arise.
8. Does not accommodate for severely
0.01 - - - -
handicapped.
9. Large cities (Atlanta, Charlotte, etc)
0.05 4 0.20 1 0.05
are without SW service.
10. No business section on plane, do not
provide a first class for passengers, do not 0.01 - - - -
provide assigned seating.
11. Southwest does not offer any type of
0.01 - - - -
in-flight meals.
12. Southwest offers in domestic only, no
0.02 4 0.08 1 0.02
international flights.
Sub total of weight and TAS 1.00 1.5 0.98
SUM TOTAL ATTRACTIVENESS SCORE 2.92 > 2.38

Note: . AS = Attractiveness Score, TAS = Total Attractiveness Score


. Attractiveness Score: 1 = not attractive; 2 = somewhat attractive; 3 = reasonable attractive;
4 = highly attractive.

Doing calculation in the QPSM, we conclusion that market penetration strategy: Expand
into more cities that are currently without a SW airline flight (such as Atlanta, New York) is a
better option. This is given by the Sum Total Attractiveness Score figure. The market penetration
strategy yields higher score than the product development strategy: Add 12 B17s to Fleet. The
market penetration strategy has a score of 2.92 in the QSPM shown above whereas the Add 12
B17s to Fleet strategy has a smaller score of 2.38.

16. CONDUCTION AND PRESENTATION THE EBIT/EPS ANAYLYSIS


(Assume $500 million needed; in millions)
Amount needed $500 millions
Interest 5%
Tax rate 38%
Share price $7.2
Shares outstanding 770 millions

CHUOP Theot Therith: Southwest Airlines (2009) 17


Strategic Management

EPS/EBIT Analysis for the Southewest Airlines (in millions except)

Common Stock Combination Financing


Debt Financing
Financing (70% Stock – 30% Debt)
Recession Normal Boom Recession Normal Boom Normal Boom
Recession
EBIT 300 500 800 300 500 800 300 500 800
Interest 0 0 0 50 50 50 15 15 15
EBT 300 500 800 250 450 750 285 485 785
Taxes 114 190 304 95 171 285 108.3 184.3 298.3
EAT 186 310 496 155 279 465 176.7 300.7 486.7
#Share 839.51 839.5 839.5 770 770 770 818.65 818.65 818.65
EPS 0.22 0.37 0.59 0.20 0.36 0.60 0.22 0.37 0.59

EPS

0.7

0.6

0.5

0.4 Series1
Series2
0.3 Series3

0.2

0.1

0 EBIT
0 200 400 600 800 1000

Note: Series1 is Common Stock line


Series2 is Debt line
Series3 is Combination (70% Common Stock, 30% Debt)

1
839.5 = 770 + (500/7.2)

CHUOP Theot Therith: Southwest Airlines (2009) 18


Strategic Management

17. RECOMMENDATION TO SOUTHWEST AIRLINES


Based on QSPM, the best looking strategy would be the market penetration expanding
geographically market to mare cities that are currently with out Southwest Airline flight such as
Atlanta and New York. It is recommended Southwest penetrates its flights to more cities both in
domestic and internationally.

Last modified: July 28, 2010


Submitted Date: July 31, 2010

CHUOP Theot Therith: Southwest Airlines (2009) 19