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SOUTHWEST AIRLINES ANALYSIS Southwest Airlines Analysis Part 1: External Environment Analysis Key Economic and Industry variables

From 1980 to 2009, the airline industry has had mixed profit and loss results. During this period the total net losses amounts to $43.2 billion. From 2000, the industry also experienced a drastic decline in domestic flights by 88 million annually. However, Southwest airline has had a steady passengers growth of about 28 million annually. In 2008, passengers

declined by 3.4% and 5.3% in 2009. Big players include Southwest Airlines, American Airlines, Delta Air lines, JetBlue Airways. Smaller competitors include Continental, Northwest, United and U.S Airways. Porters 5 Force Analysis The industry is experiencing a decline in demand. Homogeneity of products ensures easy switching costs. American, Continental, Delta, Southwest, United and US airlines dominate the industry. Mergers between various competitors such as Delta and Northwest, United and Continental have increased competition. New entrants into the industry face various challenges such as high initial and running costs, high capital, and Government/FAA restrictions. Customers in the industry are very sensitive in terms of price and time. Customers also have many options for the domestic routes with many airlines providing similar services. Finally, the industry has many substitutes to air transport such as trains, cars and buses. Positioning Map Looking at the positioning map, Southwest Airlines leads the industry. It has the highest numbers of customers followed American, Delta, United, US, Continental, Northwest and finally JetBlue. Southwest has the lowest operating costs in comparison with other airlines.

SOUTHWEST AIRLINES ANALYSIS

However, a deeper analysis of JetBlue reveals that the company performs better than Southwest on low costs despite that the company has fewer customer than southwest now. Key Industry Driving Forces Public concern plays a key role in the airline industry. Since the aftermath of 20/11, people are extremely weary of airlines due to fear of terrorism. This causes a decline in passengers. Global economic crisis also greatly affects airline industry. Fuels prices have drastically increased thereby, greatly increasing operating costs of airlines. Because of the harsh economic times, many people cannot afford the expensive air travels; hence opt for other cheaper means like cars, trains or buses. In addition, government regulations also affect the industry. These include Airline Deregulation Act of 1978, Wright Amendment of 1979, 1997, 2005 and 2006. Weighted KSF for Industry Analysis of weighted KSF for Southwest, American and JetBlue Airways reveal the following results. First, Southwest leads the industry on flights on time (2 out of 10 compared to 1 and 0.8 for American and JetBlue respectively). Secondly, Southwest also leads on customer service (2.5 out of 10 compared to 1 and 1.75 for the two competitors respectively). Thirdly, Southwest leads on advertising in the industry (1.5 out of 10 compared to 1.35 for the competitors). Fourth, Southwest further leads on employee relations and retention (at 1 out of 10 compared to 0.8 and 0.7). JetBlue, however, operates on lower costs than southwest and American airways making them the most cost efficient airline in the industry. Industry Value Chain Analysis Various players in the industry affect service delivery of Southwest Airways. Just like any other airline, Southwest requires corporation of various players and stakeholders so as to

SOUTHWEST AIRLINES ANALYSIS provide quality service to their customers. Boeing is the biggest supplier of planes in the industry. Their advertisements and safety campaigns for their planes greatly affect passengers faith in these planes. Food products and fuel prices also greatly affect the industry. Fluctuating food and fuel prices leads to decrease in profits and increase in cost burden on the airlines. International and domestic airlines also affect delivery of service. The industry serves families, business people, and individuals through various flight packages. Sub conclusion

Southwest Airline is the leading airline in this industry as seen above. The airline enjoys many advantages over their competitors in the industry. First, when other airlines seem to experience decline in passengers, the airline has had a steady increase in their passengers. Secondly, statistical data shows the company enjoys a high positioning in the market. Thirdly, it leads on time flights, customer service, advertising, and workers relation/retention. All the above qualities give southwest an edge over their competitors. Despite the above benefits, southwest also faces stiff competition especially due to mergers involving various small airlines. The company also faces a challenge of cost efficiency as JetBlue Company is more efficient than them. Part 2: Companys Resource and Competitive Position Company Strategy (Corporate and Functional) The company currently has three business strategies to ensure success. First, they aim to reduce cost of flight, increase the number of flights and increase their customer service. This will ensure they improve quality of service while reducing costs of services. From 2009 the companys advertising cost increased by 20%. The increase in advertising costs aims at raising awareness in the company services and increasing repeat customers. Thirdly, the company wants

SOUTHWEST AIRLINES ANALYSIS

to market themselves as a fun loving company. This will give them a competitive edge over their competitors. The company also has three strategies to improve their functions. First they intend to reduce costs by using only Boeing 737 planes and introduction of ticket less flights. Introduction of only one type of a plane will reduce maintenance costs. While elimination of tickets, will reduce costs of printing tickets and staff costs of tickets sellers. Secondly, they substitute price for volume by buying in bulk. Thirdly, they treat their employees well who in turn treat customers well. Mission and Vision Focus on environment (Planet), customers (People) and services (Performance). First they endeavor to ensure a safe environment by reducing their carbon emissions and efficiency use of power and energy. Secondly, the company focuses on improving and enhancing their relationship with people. This ensures that their services and functions do not at any way infringe on any bodies human rights. Further, the company plans to enhance their performance in all their activities. Finally, the company has a vision to enhance and improve their customer service to the highest levels in the industry. Financial Analysis Financial Analysis 009 Operating Profit Margin Net Profit Margin % Dividends on Common EPS 0.018 $ 0.13 0.24 $ 0.018 $ 0.84 .53% 1 .6% $ 0.018 $ 0.63 2 .07% 1 .54% $ 0.018 $ 2 008 4 .02% 6 .49% $ 2 007 8 0.2% 5 2 006 1 Southwest has been profitable for years with 2 Analysis

SOUTHWEST AIRLINES ANALYSIS

operating expenses below average in the industry. However, there is cause for alarm as operating and net profits margins have been on decline posting 3.95% and 4.94% between 2008 and 2009. The decrease in operating profit margins clearly suggests lack of efficiency in operating costs expenditure. The company needs to evaluate their operation costs so that they can remain profitable and relevant in the industry. In addition there is a sharp decrease in net profit margins in 2008 and 2009. The sharp decrease points to a problem in the companys strategies or functions which is hindering the company from being profitable. SWOT Analysis Southwest is strong on employee retention, customer service, and their HR service which ensures they hire and retain the best employees in the industry. Other strengths include their ability to control fuel loss and workers creativity and innovativeness. Southwest can utilize their strengths to maximize opportunities available in the market such as baggage transfer services and introduction of first class seats and services. Most their competitors offer this services which will appeal to elite customers and also provide additional revenue to the company. Guaranteed passengers safety is the main weakness of the company. In airline industry, reputation and repeat customers are the key factors and southwest have to ensure their safety record does not come under scrutiny again. Report of a delay in inspection of their planes caused a substantial decline in profits and loss in business. Threats facing Southwest Airways include stiff competition from JetBlue who are able to operate at lower costs than Southwest. Apart from cost efficiency, JetBlue also threatens Southwest through its continued gain in market share. Southwest also face a big handle as they prepare to merge with Air Tran. Both companies are very big and the merge process is very difficult with many challenges. Finally, the company

SOUTHWEST AIRLINES ANALYSIS

faces a volatiles industry faced with many challenges especially with the current global financial crisis. Issues that the Company should address in the suggested strategy First the proposed strategy should address the companys functioning of their human resource department. Issues of concern in the human resource department include quality of training and development of programs. Level of training and safety programs are very crucial in enhancing safety in operations and quality of control inspection. Second, it should address management of strategies. The company must change their strategies to address the raising concern of JetBlue, their main competitor. Finally, the company should address the cultural and organizational differences of merging with Air Tran Airways. Strategy Content Introduction This strategy proposal aims at addressing the weaknesses and challenges facing Southwest Airline. As the company analysis shows the company faces some serious challenges such as stiff competition, decrease in profits, high operation costs and safety of operations. To address the above issues and others, the company must the following areas. Such areas include hiring and retention of employees, leadership, organization culture, innovative and creative practices, resource allocation, and rewards for implementation. Analysis