Southwest Airlines

Group 2 (Management/Marketing)


I.             Introduction

A.     Team Members and managerial functions

1.      Hartley Grimm (Management)

2.      Kristen Barson (Marketing)

3.      Nick Krynski (Management)

4.      Jesse Coad (Management)

5.      Danielle Devine (Marketing)

6.      Joyce Jackson (Management)

B.     Perspective of Group in Report – Our group is analyzing Southwest Airlines with a concentration on its strategy as it relates to the company’s competitiveness in relation to its rivals.

II.          Industry Description (Hartley Grimm)

A.     History of the Airline Industry – Since its inception the air transportation industry has been a dynamically changing industry.  From the leaps and bounds that technology has brought on, through the terrorist attacks in 2001, there are many challenges that the air transportation industry has faced. We will be looking at the post 9/11 world of the industry and how it has grown since that time.  From 1970 through 2001 air transportation grew and a fast rate. In 1970 the airlines were transporting nearly 172 million passengers, growing to 615 million in the year 2000. Unfortunately for the financially tight airlines, the recession and terrorist activities on September 11th immediately cut passenger levels back to their 1995 equivalents.  A move that all companies within the industry were not anticipating, setting many up for bankruptcy.

B.     Characteristics of the Airline Industry – The Airlines are grouped in many ways, including their size and what they transport. The most common classifications for airlines are the major passenger airlines, low-cost carriers, air freight, and regional or commuter carriers.  The major airlines are composed of 14 major airlines.  Three of which have a priority on cargo transportation. Six of these in this category are often referred to as the "Big 6"; however after the events of September 11th, there has been a shuffle and not such a high labeling for the top six airlines. The major airlines typically operate a traditional hub and spoke service.  These flights are the type many passengers are accustomed too. There are main "hubs" that are at few airports across there servicing area. Theses are larger airports that can accommodate much larger aircraft and traffic volumes. Off of these hubs are smaller routes with smaller planes that make up the spokes. To get from point A to point B usually revolves around a trip to a hub as a connection before reaching your final destination.  In contrast to operating of the Big 6 major airlines there are a dozen or so low cost and low fare carriers.  In contrast to the hub and spoke system, carriers such as Southwest utilize a direct flight route. The downfall many critics have claimed is their limited travel availability to specific cities. Despite these negative reports of the low far carriers they have thrived and continue to see new entrants in this highly competitive area of the air transportation sector. This is in part due to their target audience of leisure travelers who are focused on routes of under 500 miles.  Without the many intertwining flights and simplified schedules they are able to attract their target market with their lower fares.

C.     The Current State of the Airline Industry – The regional and commuter section is a rapidly changing sector in the air transport industry. There are just over 25 such carriers in the country.  Many of these are owned by independent companies, but have been contracted out by the major carriers and carry the names like "US Express." These companies focus on connecting from smaller airports to the major airlines hub locations, helping to expand travel availability for the larger airlines. The major change in this sector is stemming from the regional jet phenomenon. Due to passenger perception of the safety of turbo prop type aircraft, many companies such as Continental Express are on a high priority mission to convert to all smaller regional jets.  The air cargo or air freight segments make up a substantial portion of the industry as well. Cargo sections are those that hold scheduled flights for shipment of cargo.  Cargo can be carried on cargo portions of passenger aircraft as well as specifically designed aircraft that carry only cargo. These are not the destination delivery options, but this section only includes the air transit part. This sector is home to some of the most profitable companies in the air transport category.  Despite the extreme success the 1990's brought to the airline industry, many companies have entered into a downward spiral.  With high debt ratios riding the balance sheets of many companies, the downturn of passenger travel has many of even the major airlines scrambling for survival.  Restructuring has become the common practice in the post 9/11 era in the airline industry. Nearly all of the former Big 6 major airlines have filed for bankruptcy or looked for government assistance.  Dwindling profits are expected to rise among major airlines as the low cast carriers continue to lure the passengers from the struggling giants. Encompassed with the extreme costs facing major airlines it is a true fight for their life. Labor is the key to these companies as their costs are accounted for on average of 40% going to labor.  Despite the bleak look for the industry, there is hope on the horizon. The key is in proper strategic management of their assets, cash flow, labor, and scheduling. The industry is already seeing an increase in travel that is expected to continue. Unfortunately due to the many factors from terrorism to government regulations clouding the view, it is tough to make sound predictions for any specific airline. It is for sure to say that domestic travel by air is here to stay for the business and leisure travel. We may see new strategies and sectors emerge within the air transport industry due to the struggle for survival; however, they will serve the fundamental needs of the passengers and cargo that need to reach their destination.

III.       Company Description (Kristen Barson)

A.     Southwest Mission Statement – “The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.”

B.     Company Background

1.      The Early Years – In 1966, a plan was brought into Herb Kelleher’s law office by a man named Rollin King, an entrepreneur who owned a small commuter service in San Antonio.  The plan was to start a low cost airline that would take passengers between San Antonio, Dallas, and Houston. King had a simple business concept that was pretty straight forward.  This concept was simply to attract customers by flying convenient schedules, getting them to their destinations on time, presenting very low fares, and be sure to present the best customer service possible.  In 1967, papers were filed to incorporate the new airline.  January 1971, an aggressive, self confident airline veteran named Lamar Muse was brought in as CEO of Southwest Airlines.  On June 18, 1971, the airline started service.  The flights include 6 trips between Dallas and San Antonio, and 12 trips between Houston and Dallas. Southwest charged twenty dollars, which was well below rival fares.  Even though the prices of flights were a steal; the numbers of passengers on flights were fewer than 250 on all of the 18 flights.  One conclusion to attract more customers was to dress the flight hostesses in colorful hot pants and white knee-high boots, start giving passengers free alcoholic beverages during the day time flights, set up a “love” campaign where flights from Houston, Dallas and San Antonio were known as the Love Triangle. Another idea was to add an out of state service to add more flights to the Love Triangle, by purchasing a fourth Boeing 737.  Customer service and satisfaction was a top priority for Muse.  He made it a point to question the flight attendants about what customers were saying so that he could get a better idea of what more he needed to do in order to strive for complete customer satisfaction.  Muse also spent 25 to 30 hours every month, riding on the flights himself so he could personally interact with the customers and check out what was happening in the terminals. Muse came up with a pricing structure.  Weekday flights departing before 7pm were twenty-six dollars, and all other seats on the other flights were only thirteen dollars. 

2.      The Herb Kelleher Years – In 1972, traffic doubled immediately when Southwest decided to move its flights from Houston Intercontinental Airport to its new location at the Houston Hobby Airport.  March 1978, Muse ended up resigning from CEO; and, Herb Kelleher was soon appointed president, CEO and chairman of the board.  Kelleher wanted to keep up the low fare, short haul airline that everyone knew about; although, he did want to make one change.  This change consisted of adding additional cities outside of Texas.  Southwest became the dominant carrier in Baltimore/Washington, Las Vegas, Kansas City, and Chicago Midway.  It was also the leading carrier in California, Texas and Florida.  Even though there have been many obstacles thrown in the path of Southwest by competitors, Herb Kelleher’s fight to survive only grew stronger, which truly created Southwest’s culture and made them the airline they are today. 

3.      Southwest Today – Recently, Southwest airlines announced its 31st consecutive year of profitability and began offering online boarding passes via This online feature provides additional convenience to Customers by allowing them to proceed to their departure gate without stopping at the ticket counter, skycap, or self-service kiosk. On May 9, 2004 Southwest Airlines launched service to Philadelphia, its 60th airport. With the addition of its Philadelphia service, Southwest now operates 2,800 daily flights to 60 airports in 59 cities across the United States.

IV. Competitive Environment of the Airline Industry (Nick Krynski)

A.     Dominant Economic Traits

1.      Market size – Total revenue was $81.6 billion for the airline industry for 2003. 

2.      Scope of Competitive Rivalry – Seller rivalry is primarily national, but competition does occur regionally and internationally as well.

3.      Rivals – There exists about 12 major airlines in the United States.  There also exists a number of smaller national and regional airlines that compete on a smaller scale.

4.      Customers – Customers include mostly individual travelers and organizations.

5.      Vertical Integration – No real significant backward or forward integration

6.      Ease of Entry – Fairly strong barriers to entry exist in the form of capital requirements for investing in equipment and regulations.  Also, there exists some market saturation in certain markets that discourage entry.

7.      Technology and Innovation – Service technology is somewhat slow to technological change; use of new technology has changed distribution (e-tickets).

8.      Product Differentiation – The actual service of transporting passengers from one location to another is fairly standardized.  Differentiation exists in customer service and the locations in which an airline flies. 

9.      Scale of Economies – Moderate to High; On account of this, airlines are trying to lessen their planes’ ground times to get more RPM (Revenue Passenger Miles).  The less time a plane in idle on the ground and the more time its active in the air, generally results in more flights and more revenue from passengers.

10.  Capacity Utilization – Load factor was 74.2% (2003), showing that as an industry, about 3/4 of capacity is being used.

11.  Industry Profitability – Somewhat low; there is limited market capacity within each city’s airports.  Also, rising security costs and depressed fares (in an effort to attract customers after 9/11/01) are preventing profitability.  Added to this is the unpredictable nature of fluctuating oil prices.

B.     Competitive Forces

1.      Rivalry among Sellers – Moderate to Strong.  Airlines primarily compete on price and service; however, to a lesser extent they do compete on frequency of flights, frequent-flyer programs, reliability of flights, and other amenities.  In recent years, pressures have somewhat eased as established carriers have stayed within their existing geographical areas of dominance, concentrating more on returning to profitability than expansion.  However, there have been pressures from low-cost carriers (Southwest, JetBlue…) whom have been in a state of expansion.

2.      Potential New Entrants – Weak to Moderate.  Low traffic levels (since 9/11/01) and a lack of desirable gate access in airports has contributed to the industries barriers of entry.  Also, the capital-intensive, labor-intensive, and energy-intensive nature of the industry can cause difficulties for new entrants.

3.      Substitute Products – Moderate.  Passenger rail lines, bus services, and personal transportation (cars) are all substitutes that exist in relation to air travel.  They are generally lower cost and considered more convenient for shorter distance travel; however, air travel in the U.S. seems to be preferred for longer distances.

4.      Supplier Bargaining Power – Moderate to Strong.  For an airline company, aircrafts are costly and vital pieces of equipment.  With regard to commercial passenger aircraft manufacturers, there are really only two suppliers that exist:  Boeing and Airbus.  The limited nature of this industry gives these aircraft suppliers greater power in setting prices.  Air travel is also a fuel-intensive industry, thus making the airlines very sensitive to swings in fuel prices offered by fuel suppliers. 

5.      Buyer Bargaining Power – Weak.  Buyers of airline tickets include many individuals and organizations.  With such a large pool of separate customers, little power is exerted by the buyers as a cohesive group.

C.     Drivers of Industry Change

1.      The Rise of the Internet Economy – The internet and e-commerce has completely altered the airlines distribution (the booking and ticketing of passengers for air travel).  With the advent of e-tickets, travelers can book tickets on their flights through the airlines’ websites or a third-party website (Orbitz, Travelocity, Expedia…).  This has allowed airlines to bypass travel agent commissions, nearly eliminate wasteful paperwork, and reduce airline staffs. 

2.      Globalization – Growth potential in the global travel market has led to a drive for globalization in the air travel industry.  To facilitate international growth, U.S. airlines are lobbying for “open skies” treaties between the U.S. and other nations.  These treaties are bilateral agreements that essentially deregulate travel between the involved countries, thus opening up certain markets to competition.  The U.S. currently has signed more than 60 open skies treaties with nations around the globe.

3.      Low-cost Competition – The rise of the low-cost carriers has forced a change in the competitive environment of the air travel industry.  Southwest, JetBlue, and Airtran, among others, operate off of low-cost strategies that allow them to offer relatively low airfares.  These low fares put pressure upon the entire industry and are forcing rivals to lower their costs and decrease their fares in order to stay competitive.

D.    Key Factors for Competitive Success

1.      Locations that an airline services – The servicing of particular geographical markets are essential in the nature of the airline industry.  Airlines need to offer routes between markets that are desired and utilized by customers.

2.      Cost structure of an airline’s operations – The costs that are inherent in the operations of an airline are a real limit to how low airfares can be.  Costs include maintenance, fuel, labor, fees and lease payments for operating in airports, and various other costs (food, entertainment…).  Those airlines that are able to control costs can attract customers with lower fares and can improve overall profitability.

3.      An airlines’ workforce and its interaction with customers – The workforce of an airline can define the customers’ perceptions of the airlines’ image.  A Pleasant workforce can encourage repeat business.  A sullen workforce can drive customers away to rivals. 

4.      Reliability of Service – An airline with a reputation for reliable service has been shown to develop a positive image among customers, which can lead to more repeat business.  Reliability in the air travel industry is measured by several elements: reports of mishandled baggage, the on-time arrival of flights, involuntary boarding denials from overbooking flights, and passenger complaints.  Those airlines that are able to control these elements are said to provide better service to the customer, and thus offer more reliable service.

V.    Competitors (Jesse Coad)

A.  Low-Cost Rivals

1.      JetBlue Airways – Jet Blue is based out of Forest Hills, NY and currently had 4,704 employees.  Jet Blue Airways Corporation is a low-fare, low-cost passenger airline that serves point-to-point routes between 22 destinations in 11 states and Puerto Rico. The Company focuses on serving underserved markets and/or large metropolitan areas that have higher than average fares. They have a geographically diversified flight schedule that includes both short-haul and long haul routes. Jet Blue commenced service in February 2000 and established its primary base of operations at New York's John F. Kennedy International Airport. On August 28, 2001, it began service at its West Coast base of operations, Los Angeles' Long Beach Municipal Airport. In early 2004, Jet Blue launched service from Logan International Airport in Boston to 5 cities with a total of 11 daily departures. As of February 2004, Jet Blue operates 108 weekday flights between the Northeast and Florida, 66 weekday flights between the East Coast and western United States and 48 weekday short-haul flights.  Jet Blue had revenue of $1,070,000,000 in 2003 and had an unprecedented revenue growth of 57.20%.  They had a net income of $101,730,000 in 2003 and $0.94 earnings per share in 2003 as well.  Their financial stability and management effectiveness will show in the coming years that Jet Blue will become a major threat to Southwest Airlines and the entire airline industry.

2.      ATA Holdings, Inc. – ATA Holdings Corp. is based out of Indianapolis, IN and currently has 7,900 employees. ATA Holdings Corp. owns ATA Airlines, Inc. which is a passenger airline in the United States. They are a provider of low-cost scheduled airline services, commercial charter services, and passenger airline services to the U.S. military. At December 31, 2003, ATA and Chicago Express Airlines, Inc., a wholly owned subsidiary of ATA Holdings, were certified to operate a fleet of 82 aircraft. The Company operated 2 Lockheed L-1011-50 aircraft, 4 Lockheed L-1011-500 aircraft, 32 Boeing 737-800 aircraft, 15 Boeing 757-200 aircraft, 12 Boeing 757-300 aircraft, and 17 SAAB 340B aircraft.  ATA mainly operates out of Chicago and Indianapolis airports and flies mainly to major US cities and parts of Mexico and Puerto Rico.  In 2003 ATA had a net income of $15,792,000 which is an improvement over the last two years which both had negative net income.  ATA is starting to get their name into the mainstream light if the airline industry and we look for them to vastly improve over the next few years.

3.      Airtran Holdings, Inc. – Airtran Holdings INC. is based out of Orlando, FL and currently has 5300 employees. Airtran is a low fare airline in the US.  The Company operates scheduled airline service in short-haul markets principally in the eastern United States, primarily from its hub in Atlanta, Georgia.  Airtran operates 75 Boeing 717 (B717) aircraft making approximately 436 scheduled flights per day to 45 airports across the United States, serving more than 60 communities in 21 states and the District of Columbia. The Company's products include competitive fares, advanced seat assignment, business class, consumer driven automation such as online check-in, Bye-Pass airport self-service kiosks and A-Plus Rewards, which is a customer loyalty program.  In 2003 Airtran had a net income of $100,517,000 which is a vast improvement over the 2002 net income figure which was around $10,000,000.  Airtran is another up and coming low cost airline that is looking to be yet another competitive force in the near future.

B.     Legacy Carriers

1.      American Airlines – American (AMR) is based out of Fort Worth, TX and currently has 96,400 employees.  It provides jet service to approximately 150 destinations throughout North and South America, the Caribbean, Europe and the Pacific. AMR is also an air freight carrier, providing a range of freight and mail services to shippers. AMR Eagle Holding Corporation is a wholly owned subsidiary of AMR, which owns two regional airlines: American Eagle Airlines, Inc. and Executive Airlines, Inc. AMR also contracts with three independently owned regional airlines, which do business as the American Connection carriers. The American Eagle carriers and the American Connection carriers provide connecting service from eight of American's high-traffic cities to smaller markets throughout the United States, Canada and the Caribbean.  In 2003 AMR had $17,830,000,000 in revenue and an -8.80% revenue growth rate. AMR also had a net income of $-349,000,000 and a -2.206 earnings per share ratio in 2003.  AMR is also struggling financially and having management problems as well.  American Airlines holds a majority of the overall market share over its fellow competitors.

2.      United Airlines – United is based out of Elk Grove Township, IL and currently has 63,000 employees. United transports people, property and mail throughout the United States and around the world. It has 1,600 daily departures to over 110 destinations in 23 countries and 2 U. S. territories. United has a partnership with United Cargo which offers domestic and international shipping and they also helped form the Star Alliance in 1997 which is a global integrated airline network.   In 2003 United had a revenue growth of -11.50%, a net income of $-1,930,000,000, and an -18.223 earnings per share ratio. United Airlines is not in very good financial position and is mainly due to poor management and other security costs that came about after September 11, 2001 which forced them to layoff over 20,000 employees.  In 2004 United added a new low-fare carrier called “Ted” that serves select leisure markets in order to reach new customers.

3.      Delta Airlines – Delta is based out of Atlanta, GA and currently has 70,600 employees.  Delta Airlines provides air transportation for passengers and cargo throughout the United States and to various parts around the world.  As of March 2004, Delta Airlines and its wholly owned subsidiaries, Atlantic Southeast Airlines, Inc. and Comair, Inc. served 206 domestic cities in 47 states, the District of Columbia, Puerto Rico and the United States Virgin Islands, as well as 48 cities in 32 countries.  Delta unlike other airlines is managed as a single business unit. Delta has hub airports in Atlanta, Cincinnati, Dallas/Fort Worth and Salt Lake City.  Each of these hub operations includes Delta flights that gather and distribute traffic from markets in the geographic region surrounding the hub to other major cities and other Delta hubs.  Financially, Delta like its fellow competitors thus far, is also in financial dismay.  Delta had $13,440,000,000 in total revenue in 2003 and had a 0% revenue growth since 2002.  They had a net income of $-707,000,000 and had a -5.773% earnings per share in 2003 as well.  Delta, like its other competitors, is struggling with their management practices right now and had to lay off 13,000 employees since 9/11/01.  Recently, Delta Airlines CEO Gerald Grinstein announced a plan to restructure the company to keep them from possibly filing for chapter 11 bankruptcy.

4.      Continental Airlines – Continental Airlines is based out of Houston, TX and currently has 37,680 employees. Continental Airlines, Inc. is a United States air carrier engaged in the business of transporting passengers, cargo and mail. Together with Express Jet Airlines, Inc., from which Continental Airlines purchases seat capacity, and its wholly owned subsidiary, Continental Micronesia, Inc. (CMI), the Company serves 228 airports worldwide as of December 31, 2003. Continental Airlines flies to 127 domestic and 101 international destinations and offered additional connecting service through alliances with domestic and foreign carriers. They directly served 16 European cities, 7 South American cities, Tel Aviv, Hong Kong and Tokyo in 2003 as well. Continental also provides service to 31 cities in Mexico and Central America.  In 2003 Continental had $ 9,100,000,000 in revenues and a 5.60% revenue growth rate.  They also had a positive net income of $ 135,000,000 and a $1.71 earnings per share ratio.  Continental is a healthier financially than its other competitors mentioned thus far and that trend will most likely improve in the future.  However they have laid-off 12,000 workers since 2001.

VI.  Southwest Airlines SWOT (Danielle Devine)

B.     Strengths –   An understanding of a company’s internal resources (strengths and weaknesses) and external market opportunities and threats is extremely important to good strategy-making.  In the case of Southwest Airlines, as a new company, they had to evaluate the market.  They saw what there competitors were not offering and created a company that reached those unmet needs.  The first thing Southwest did was come up with a competitive approach as a low-cost leader in the airline industry.  With that main objective they were able to create the most successful airline company in the history of aviation.  That success generated from great strengths within the company that enhanced it competitiveness.  Southwest’s expertise was in providing consistent fun, enjoyable, unique customer service.  They achieved this by making jokes, playing games in the terminals, and offering free alcoholic beverages.  The airline put employees first, making them feel like valuable assets.  In turn, they did their job energetically, treated customers with respect, and make flying on Southwest airlines a unique experience.   People enjoyed the light atmosphere; it would help to reduce the anxiety of nervous flyers.  Southwest was known for its stewardess’s in knee high boots and colorful uniforms.  Along side the employees, Southwest’s distinctive competence was it’s shorter and cheaper travel time, which beat out all major competitors.  Southwest had the lowest cost/low-price/no-frills strategy that offered a single class of service at the lowest price, making air travel more affordable.  Now, they captured more of the market that otherwise would not be targeted.   Creating millions of new customers that would eventually turn into loyal customers.  Southwest was the first airline to introduce ticketless travel. Customers were able to order tickets online and simply use their drivers license at the airport to confirm their reservation.  This innovative technology led to no lines at the ticket counter and more on time flights.  In addition to the time cutting strategies, Southwest’s whole operating system was even the fastest.  They used a point-to-point system of scheduling that was more cost-efficient than the hub-and-spoke system used by rivals; resulting in higher utilization of aircraft and terminal facilities.  Plus, they had 10 minute rapid turns at the gate with all stewardesses pitching in to help clean the plane.  All the cohesive work between job titles led to a unifying company that aimed to please their customers with the cheapest, fastest, and most reliable aircraft in the industry.  That was Southwest goal from the very beginning.  They maintained that strategy and continued to grow as one of the most reputable airlines in the market.

¾       Low fares are competitive with travel by automobile

¾       Customer Service is described as enjoyable, fun, and unique

¾       Rapid turns at gates (10-20 minutes)

¾       Two-tier on-peak/off-peak pricing structure

¾       Reliability of on time service

¾       Lack of lines at the ticket counter

¾       First airline to introduce ticketless air travel

¾       Flexible strategic planning

¾       Point-to-point system of flight routes and scheduling has been shown to be more cost-efficient than the hub-and-spoke system used by rivals.  This has resulted in higher utilization of aircraft and terminal facilities.

¾       Employees first mentality has resulted in happier workers serving customers

¾       Attractive frequent flyer program.

C.     Weaknesses – Every successful company has something lacking, whether the problem is big or small, there is always room for improvement.  In the initial stages of company development, Southwest had to go to court several times, draining their budget and financial resources they were going to use for initial investments.  This led to a slow start against competition.  The other big disadvantage is the lack of customer service.  Due to the low cost of tickets, Southwest had to cut a lot of other costs associated with the airlines.  For starters, there is no assigned seating; check-in is on a first come first serve basis.  Customers either had to come really early to get specific seating or be unsatisfied with the seating they ended up with.  There is no first class seating so, business travelers that needed space to do work were left unsatisfied.  Unfortunately, there was no meal included on any Southwest flights, just peanuts.  People are not very friendly when they are traveling and hungry.  Due to the low fares, no personal convenience for the air traveler was included.  If a Southwest customer had a connecting flight, they had to personally get their own bags in the baggage claim; then, check the luggage back in to the next flight.  People are not going to want to travel Southwest for long trips due to the huge baggage inconvenience.  Along with unhappy customers came some unhappy employees.  Southwest pilots flew more hours a month than industry average and got paid less.  This led to disputes within the company and their own union.  In addition, there was staff shortages in certain locations (to hold down labor costs) and employees would have to do several jobs at once, leading to a stressful environment.  These weaknesses make Southwest competitively vulnerable in that the competition satisfies everyone of the needs air passengers are lacking with Southwest.  Most of the weaknesses can not be overcome by Southwest because of the cost restraints.  They choose to have those disadvantages, which will either make them or break them in the fight for competitive edge.

¾       Court battles left small initial investments

¾       Absence of assigned seating has lead to a “first come, first serve” procedure, which is a source of some frustration to customers.

¾       Flight attendants are required to perform extra duties (trash pickup, clean plane) in order to facilitate quick turnarounds.

¾       No first class section

¾       No meal service, just peanuts are offered.

¾       Baggage is not transferred to connecting flights, thus causing inconvenience for customers in a hurry.

¾       Southwest pilots flew more hours a month than the industry average and have been paid less

¾       Staff shortages exist in certain locations in an effort to hold down labor costs.

¾       Southwest’s dependence on union labor may offer resistance for future plans

D.    Opportunities – Now that we had a look inside the company, it is time to look outside at market opportunities to create a competitive edge, and strategy.  It is likely that a company would want to pursue every opportunity for growth, but there are certain choices a firm has to make that match their own resources to get the best competitive edge.  The market opportunities that are most relevant to Southwest are those that offer distinct channels for profitable growth, and most potential for advantage.  Southwest chose to land in smaller airports closer to big cities making it more convenient for the customer.  The travel time is greatly reduced in a smaller airport with fewer planes, and Southwest can get more air passenger from city to city.  After the airlines deregulated, they let Southwest fly outside Texas, which led to gradual expansion into domestic markets.  When they start to dominate a route and the competition backs out, Southwest picks up more flight routes and gains the market share at that airport.  Eventually Southwest should consider an alliance or joint venture with a European airline and created the some type low cost travel overseas.  There are many cities in Europe that are within hundreds of miles that Southwest can provide cheap, enjoy able, unique flying experience.  Now that they have dominate the short routes with the small planes, Southwest can get some bigger planes and make cross-country or international trips for a low cost.  They could always buy out the competition that went under to add additional planes.  If they wanted to target new customers, they could come up with a strategy to target families like, ‘each additional person get $10 off,’ encouraging several people to travel together for the discount.

E.     Threats – Even thought there is many industry opportunities for Southwest that tie into their strategy, threats are always a problem a business needs to face.  It is management’s job to identify the external threats to the company and evaluate what strategic actions can be taken to minimize their impact. One threat facing Southwest is the turnover of its CEO and upper management.  Not all people have the same skills and ethics as Herb Kelleher which causes a different leadership team every time management turns over.  This can be a make or break for a successful company.  People can always go to her modes of transportation like bus, train, car, and boat if they do not like the way things are running at Southwest.  Competitive threats amongst the airlines would be fare wars.  There are several big airlines that can acquire the same planes and try and duplicate what Southwest has been so successful at doing.  Eventually airlines are going to start competing with the low fares. There are a few airlines that already started with their own cheaper version like Jet Blue, and US3000. Granted they do not have the reputation that Southwest occupies but, they can gradually acquire more market share if Southwest lets them.  That is why it is so important to have a strategy for the upcoming problems.  A few threats coming from the environment that the industry has n o control over are suppliers.  There are only two main jet suppliers who control the cost of the market.  Options are limited for airlines that need to buy planes.  They have to purchase at whatever the supplier charges.  Also, the airline industry as a whole is vulnerable to economic cycles and big swings in bottom-line performance.  If the consumers do not have the money to spend due to an economic slow down, airlines take a major hit in filling reservations.  For example, 9/11 caused huge losses for the industry.  People were afraid to fly, airlines went into debt and even bankruptcy, and scheduled routes were limited.  Since there was a huge loss in business, airlines had to jack up the prices to try and stay afloat.  New government regulatory requirement causes an additional charge on tickets due to increased security.   Not to mention the stringent security measures a traveler has to go through at the airport, before even boarding the plane. 

¾       Fairly recent low-cost entrants (JetBlue) are gaining market share with similar strategies

¾       Airline industry as a whole is vulnerable to economic cycles and big swings in bottom-line performance

¾       Terrorist threats since 9/11/01 have driven away some customers

¾       Legacy competitors are developing their own low-cost commuter services

¾       New government security regulations cause frustration to customers, increase airfares, and discourage leisure travelers.

VII. Southwest’s Current Strategy (Joyce Jackson)

A.     Current Strategy Effectiveness – Southwest has successfully proven itself to be the best low-fare airliner in the industry.  Its strategy is simple, to provide the best possible service for its customers and employees.  The easiest way for a company to evaluate their current strategy is by putting together a Company Situation Analysis.  This analysis will reveal if the current strategy Southwest is using is effective.  It will also narrow down what changes need to be made in order to stay competitive.    

B.     Competitive Position Compared to Rivals – Southwest’s success is directly related to its perceptive understanding of the key success factors related to it.  As you can see below, Southwest dominates the customer service quality KSF, and as a result they have won the Triple Crown for lowest customer complaints, most on time arrivals, and highest quality baggage service several times in a row.

C.     Strategic Issues Southwest Faces

1.      How can the company continue to grow?

2.      How can the company stay competitive?

VIII.  Southwest’s Future Strategies

F.      Alternative Possible Strategies

1.      Expanding into international markets (Danielle Devine)

a.       Advantages of expansion

¾       International alliances are crucial to achieving profits on oversees flights.

¾       By facilitation smoother connections and stimulating traffic and alliance can dramatically lower its cost, cut fares, and increase flight frequency without requiring substantial investment in additional aircraft, facilities and route authority.

¾       For U.S. based airlines, international revenue passenger miles increased more than domestic travel.  The market is growing overseas and Southwest needs to bring their unique service to be an innovator and gain market share before their U.S. competitor’s do.

¾       Alliances utilize cost savings by sharing cargo and passenger terminal facilities and integrating frequent flyer programs.

¾       The government is pursuing an “open skies” treaty; it is a bilateral agreement that decreases economic regulation of airlines and allows alliances and partial ownership deals between international carriers.

b.      Disadvantages of expansion

¾       Right now in Europe and U.S. no foreign company can dominate the domestic flights in the other country.

¾       Initial market may be chaotic and lead to a decrease in ticket sales and increase in flights, possibly leading to initial steep losses.

¾       Can be hard to get landing slots and terminal space with all new foreign competition.

¾       Foreign markets are different than U.S., along with spending and travel patterns; if Southwest does not do an in-depth foreign analysis, they could begin on the wrong foot.

¾       Would most likely be forced into using a form of the Hub-and-Spoke system for international connections.

2.      Growing Southwest into Smaller Markets (Kristen Barson) - There are many advantages and disadvantages of staying a small, non-international airline such as Southwest.  Since Southwest is a short-haul carrier, the average trip length is 425 miles.  In order to keep up competition with ground transportation, keeping extremely low fares is the only way to go.  Smaller airlines have convenient flying schedules and they do not fly out of large airport hubs, so passengers can travel to their destinations on time.  While on board of smaller airlines, customer service from the flight attendants is always friendlier than larger airlines due to there being fewer people on board the smaller airline.  Another important factor in remaining a small airline is having smaller planes.  While using smaller planes, this cuts down the companies training, inventory costs, and maintenance on the planes.  Smaller planes are also more fuel efficient than larger jets.  The potential threat of new, low cost, entrants to the industry are always on the rise; such as, Delta Express, US Airways Metro Jet, and Shuttle by United.  These companies are mainly trying to compete with Southwest’s low prices, better turn around times, and customer service.  Limited destinations are also a big concern if a company is trying to remain small.  There are also limited days of the week, times and dates that the traveler can only choose from.  However, larger airlines have just about any flight the passenger is looking for, and it is a lot easier to get the flight the individual requested.

3.      Growing Southwest into a Larger Airline (Jesse Coad) – Southwest airlines would be to invest in bigger aircrafts for cross-country travel.  Currently Southwest uses only Boeing 737’s in all of its flights.  We believe that if Southwest invested in a few larger jets, they would be more cost efficient overall.  Bigger jets are made to hold more passengers and are built to withstand longer flights on a consistent basis better than the 737’s they are currently using. This would allow Southwest to gain even more of the market share for cross country travelers by adding more non-stop flights and reducing layovers to regional airports.  By offering cross-country, non-stop air travel at reasonable prices would make Southwest even more of a threat to the airline industry.  The main drawbacks to Southwest buying bigger jets would be not being able to make the price of the cross-country flights appealing to its customers.  This would result in cross-country flights that are not hauling the maximum number of passengers the jets are able to carry thus losing money for the airline.

4.      Growth through Acquisition (Nick Krynski) – Southwest could growth through a sensible acquisitions strategy.  The company could penetrate certain domestic markets where it is lacking a presence.  Possible geographic areas where this expansion could take place include the Great Plains (North Dakota, South Dakota, Minnesota, Iowa & Nebraska), the Rocky Mountain States (Colorado, Montana, & Wyoming), and the Deep Southeast (South Carolina & Georgia).  Southwest could benefit from the acquisition of a smaller regional airline because the company would quickly gain a presence in the markets serviced by the acquired company and it would hopefully absorb the airline’s customers.  However, the company must thoroughly research a targeted acquisition to make sure that it can assimilate to Southwest’s “friendly” culture, that it can adhere to the company’s strict cost discipline, and that it possesses certain market locations that would benefit Southwest’s bottom-line without distracting from its image.  An example of a possible target acquisition could be Access Air based out of Des Moines Iowa.  This company flies 737s, which match Southwest’s fleet, and they service an area where Southwest has no presence.  Southwest could do an in-depth analysis to determine if Access Air, or a similar airline, would be a sensible and beneficial acquisition opportunity.

G.    Recommendation – We believe that Southwest would best be served by pursuing a strategy that stresses international expansion.  Expansion into smaller markets or growing into a larger airline with larger jets could allow the company to penetrate certain customer segments and geographic markets; however, the company may have to sacrifice many elements of their strategy that have proven successful results, like its low-cost structure.  Growing the company through acquisitions could help the company penetrate certain neglected markets, but it could also negatively impact Southwest’s current “friendly” corporate culture and certain markets may be neglected because of low traffic possibilities.  In contrast to these strategies, there exists great growth potential in the global travel industry and there are strategic decisions that an airline could make to minimize the necessary investment and complications.  Southwest should initially pursue an alliance with low-cost carriers in markets such as Europe and Latin America.  Foreign low-cost carriers, such as Easy Jet in the United Kingdom, could benefit Southwest by offering smooth connections for overseas travel, a match in operational philosophies (cost structure, employee focus…), and a partner in confronting foreign regulations and politics.  Overtime, Southwest could begin directly investing into “open sky” counties, such as the Netherlands, and providing their trademark point-to-point system between international destinations.  If Southwest can effectively instill its friendly culture, its strict cost controls, and its reliable service overseas, it could become a major force around the world, just as it has already within the United States.