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Strategic Issue
Southwest Airlines has never deviated from its niche: short-haul, high
frequency, low-fare service, all delivered with award-winning customer
service.1
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.
SWOT Analysis
An evaluation of the internal strengths and weaknesses, and the external opportunities
and threats--based on the case study and additional references--is as follows:
Strengths
• Southwest maintains operating expenses per available seat mile at 15-20% below
average.
• The company has no baggage handling, no meals, no central reservations, and no
assigned seats.
• Because all of its planes are Boeing 737s, maintenance, turnaround, and training
costs are contained.
• The company has embraced technology that will reduce costs (e.g., ticketless
travel).
• Culture begins with strong leadership. CEO Herb Kelleher is known for his
relaxed management style.
• Southwest was voted one of the "100 Best Companies to Work For in America"
by Fortune magazine.
• Southwest implemented programs to retain employees, including the first profit
sharing plan in the industry and a 401k plan that matches contributions dollar for
dollar.
• Although 84% of the workforce is unionized, they share responsibilities (e.g.,
pilots handling baggage) and have flexible work schedules.
• Southwest shares information with all levels of employees so that they understand
the company’s goals.
• It was even profitable in the years 1990-1992 when no other major airline had net
income.
• Southwest has the highest credit rating from Standard & Poor's in the airline
industry.
• The company has grown sales by 12.1% and 18.6% in 2006 and 2005,
respectively.
• Net income has grown 13.53% and 53.26% in 2006 and 2005, respectively.
• The company has excess debt capacity, evidenced by its long-term debt to equity
ratio of 0.31, to take advantage of opportunities.
5. The company's growth has been steady and planned. Southwest enters new
markets only when they can achieve frequent flights.
6. The company's marketing focuses on its low prices and fun culture.
Weaknesses
Opportunities
• More than 100 new cities have encouraged Southwest to fly to them.
• The new Boeing 737-700 has the ability to fly longer distances non-stop, which
may change the definition of "short haul".
• Enplanements for regional carriers are expected to increase 200% from 1996 to
2008.
• The consumer continues to seek convenience and time savings. Flying, rather than
driving, will meet that need if the price is right and the airline is reliable.
• The aging of the US population results in more interest in leisure travel.
1. Southwest's ability to hold the line on costs will impact its cost leadership
position.
• 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.
• The second largest cost component is fuel (11.2%), which could be negatively
impacted by economic or political events.
3. Improved telecommunications may lower demand for air travel, or may lower
demand for "discount" airlines.
Recommended Strategy
Southwest Airlines strategy has been successfully implemented, and the above SWOT
analysis does not indicate that a major shift in strategy should be made at this time. They
should continue utilizing a cost leadership strategy to underprice competitors and gain
market share. This strategy has not only resulted in increased market share, but has also
increased overall demand for air travel. Southwest should continue its market
development strategy, focusing domestically. There are numerous untapped markets in
the U.S., many of which are actively seeking Southwest's presence. Additionally,
competitors are now focusing on foreign markets, and deregulation there could result in
price wars and increased competition.
Southwest should continue to embrace new technologies such as ticketless travel and PC
reservations. New technology also includes a commitment to new aircraft, which will
result in a young, safe fleet of jets with longer range. All of these new technologies will
permit Southwest to contain costs, to expand to more markets, and to maintain its image
as a safe and reliable carrier.
And finally, Southwest should continue to foster its remarkable culture. The company's
fun-loving attitude and dedication to its employees have contributed both tangible and
intangible benefits. It is a true competitive advantage.
Update
• Net income for 2006 was $587.4 million, an increase of 16.40% over 2005.
• Net profit margin was 10.41% vs. 2005's 8.33% and an industry average of
7.35%.
• Return on assets is estimated at 9.77% vs. 2005's 7.48% and an industry average
of 7.45%.
The continued growth in sales and net income reflect the ongoing steady growth into new
markets. The company now serves 62 cities in 26 states. The company has added flights
to and from Islip, New York. From this base, they have been able to test non-stop flights
from New York to Los Angeles due to the new Boeing 737-700's abilities. The company
has also continued to pursue technology such as ticketless travel, available on its Web
site. In summary, Southwest has maintained its successful course.
References
David, Fred R., Strategic Management: Concepts & Cases (7th edition). Upper Saddle
River, NJ: Prentice Hall, Inc., 1999.
Endnotes
1
"'Irreverent' Air CEO Speaks". CNNfn Online, [online] http://www.cnnfn.com.