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The Strategic Analysis Of Southwest Airlines

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Introduction

Southwest Airlines is a Low Cost Carrier (LCC) operator. On comparison its fares are 30% lower than its competitors. To maintain its low cost leadership Southwest adopted various strategies. Because majority of the airline’s flights take only less than an hour it does not offer meals but only snacks and soft drinks. Nevertheless, customers are allowed to carry meals onboard. There is only one class of ticket and passengers can pick any available seats. Since Southwest Airlines provides point-to-point flights the need for connection flights are eliminated. This eliminates delays and hub connections that require more employees. The airline operated only one type of aircraft, the Boeing 737 thereby reducing maintenance costs, inventory costs and costs of training employees. The airline maintained employee/passenger ratio of 1:1,999 in 2012, the best in the industry. For cutting down operational costs Southwest used modern technology. In 1996, the airline introduced online booking and established a web site for online selling of tickets which reduced booking costs from 10 dollars to one dollar per passenger. In 2013, the company started a project to enhance its customer service by the use of data analysis. The project used cloud services for the analysis of actual recorded conversations between passengers and personnel. This enabled the airline to identify problems and to improve the quality of services.

Southwest Airlines could develop new and effective strategies to increase its competitiveness in the airline industry. Since the airline does not offer first class tickets, majority of the high end customers use rival airlines for first class travel. The upper class passengers and business travelers should be attracted by offering first class tickets or seats. The airline’s no-meals policy has also contributed to loss of customers to rival airlines. It is desirable that Southwest Airlines introduce light meals in addition to the drinks it offers in order to attract more customers. Other companies have begun to adopt its low cost strategy making the competition fierce for Southwest. Southwest Airlines being a low cost carrier, it cannot afford to lower prices further. An important option which will enable Southwest Airlines to remain ahead of competition is differentiation strategy.

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In order to retain its position in the highly competitive airline industry and to generate a positive image in the public Southwest Airlines should strive to maintain an upscale image among consumers by adequate advertising campaigns in the mass media in addition to in-flight campaigns like magazines, business cards, etc.

SWOT Analysis of Southwest Airlines

Strengths

  • Southwest Airlines is one of the best low cost carriers in the industry.
  • Based on the number of passengers it carries in a year it is among the largest airlines in the U.S..
  • The airline has an excellent brand presence.
  • Owing to its point-to-point operations leading to low turnaround time the airline has maintained high capacity usage.
  • The airline has high productivity among employees with the lowest turnover rate in the U.S airline industry.
  • The airline has returned profits for over 42 years continuously.
  • Years of profitability has brought strong financial position to the company.

Weaknesses

  • Its operations are concentrated largely in the domestic market (North America).
  • Over dependence on one model of aircraft – the Boeing 737.
  • The airline does not provide meals.
  • High profile passengers prefer rival airlines as Southwest airline does not offer first class seats.
  • The airline’s overheads very high as it has the highest number of full-time employees.
  • Majority are unionized employees.
  • The airline operates the lowest number of morning flights.

Opportunities

  • The airline is poised to expand into the international market with ease.
  • The airline has the potential to expand by partnering with other international airlines.
  • Its expanded operations to Canada and Mexico will be helped by the acquisition of AirTran holdings.
  • High growth potential because of increase in domestic travel within the U.S.
  • Opportunity to employ mobile technology that enables customers to book their flights through mobile devices.

Threats

  • There is stiff competition from Allegiant Travel, JetBlue, Public Airways, among others in the low cost market which was once a preserve for Southwest Airlines.
  • Fuel price fluctuations have adversely affected the finance.
  • Increased government regulations has lead to additional costs.
  • Terrorism paved way ti High security costs.

In 2014, Southwest Airlines had fair control of domestic market with 15.8% of the total share, coming second only to Delta Airline with 16.3%. Even overcoming the threat of bankruptcy Southwest Airlines has profitably operated over the last 42 years. The airline industry is projected to have an average 5.7% growth rate over the coming years which is great for the overall industry’s growth. In terms of airline’s growth, the projection was 6% in 2015 This places Southwest Airline’s domestic segment in the ‘rich’ segment. The slow and steady growth of the company have reached the maturation stage in the domestic market. It is expected that the international flight segment will achieve a 1% growth. Southwest Airlines control less than 1% of the international market and is not expected to make much impact on international business segment. The major reason is because the airline introduced international flights only in 2014, it is relatively new in the international market. Two types of services are currently offered by Southwest Airlines: domestic flights and the recently introduced international flights.

In order to entice more customers, the airline should also aim at developing new products or services. Offering first class seats can be one of them which will increase customers who often use rival airlines. It is important in the day-to-day running of the business that current organizational structure is re-evaluated which will help organizations in allocation of tasks, supervision, coordination of various activities and directing employees towards achievement of set goals. The organizational structure helps outline the organization’s hierarchies by drawing lines of authority and establishing lines of communication. The success of any organization is directly influenced by organizational structure (Southwest Airlines is operated under a functional organization structure model.) The structuring in an organization depends on the type of job or specific roles of individuals within the organization and is known as a functional organizational structure. The presence of departments or units that are charged with delivering specific tasks or accomplishing a particular goal is the most outstanding feature of functional organizations. An organization may have various department like marketing department, sales department, human resource department, research department and so forth, all of which are charged with accomplishing specified goals. The onus of functional organization structure is to enable employees and the various departments identify clear objectives or purpose for their existence. The purpose of functional structure is to enable employees to gain thorough knowledge in their respective fields or departments. The functional structure’s perspective enables an organization to produce standardized services and to increases efficiency in operations especially in case where there are limited products.

Chairman of the board who sits at the helm of the functional structure in Southwest Airlines, is also the president and the chief executive officer. There are four departments immediately below the president – administration department, operations department, legal department and a commercial department – each under a vice president. Each of these vice presidents oversee the operations of other departments below them such as marketing department, customer services department, planning department and procurement department among others. In such a structural setup, poor communication resulting from any of the departments may lead to conflicts and eventually customer frustration. Southwest Airlines prescribes that employees observe high standardization of their operations and are encouraged to try out different things to ensure satisfaction among employees under functional structure. This type of organization structure also guarantees that employees are directly involved in decision making in their respective departments. This is the current functional structure of Southwest Airlines.

Recommendation to Change Structure

Compared to the current functional structure which has certain inherent limitations a matrix structure would be best alternative for Southwest Airlines. The matrix structure is a combination of functional structure and divisional structure where the organization frequently appoints teams to carry out specific tasks. Based on their qualifications and irrespective of the department they work employees are appointed to form teams. Since it enhances sharing of information between team members when working on specific tasks, Matrix structure would be more appropriate. The limitations which surround a functional organization such as divisions which may arise between various departments due to conflicts or disagreements in a functional organization are overcome by a matrix structure. A matrix structure is most appropriate to organizations covering a wide geographical area such as Southwest Airlines. An attractive feature of matrix structure is that it eliminates vertical communication and instead encourages horizontal communication within an organization. Since horizontal communication is quicker to vertical communication matrix structure facilitates a quicker flow of information in the organization. Domestic flights in North America were the predominant area of operations of Southwest Airlines. This mode of operations was criticized as slow in adapting new trends and processes. Another criticism is that the airline does not offer flights to some of most attractive destinations that Americans prefer citing the example of not having scheduled flights to the Caribbean Islands, Mexico, Cancun and Baltimore. Consequently, the airline has lost business to rival airlines that schedule flights to these attractive leisure destinations.

Technology

Pointing out the non-updation of its reservation software it has been argued that Southwest Airlines has lagged behind over the recent years especially in updating. Another defect of the reservation system which the company have relied on for long is that it could not support international reservations or code sharing which enables exchange of reservations with other carriers in international flights. The airline’s customers were denied the benefit of Code sharing which emerged as a major problem when the company started operating international flights in 2012. In order for the company to expand into the international market, it must conduct huge investments in new reservation software that will enable code sharing and international reservations.

Alternative Strategies for Southwest Airlines

  • Introduction of ancillary sources of revenue – ancillary sources of revenue could be an additional source of revenue for Southwest Airlines. At the moment, ticket sales is the only major source of revenue for the airline. Ancillary revenue, also known as merchandising, can not only generate extra revenue for Southwest Airlines but also to diversify its revenue sources. For example, the airline can introduce a variety of items that passengers can purchase at will, such as meals, accommodation services, car hire services, and special seat allocation, among others. The attractive benefit in introducing such ancillary services is that majority of them can be offered by third parties, giving the airline management time to concentrate on other issues. Introduction of these services may be expensive to the airline.
  • Provision of quality services – Contrary to new trends in the airline industry, Southwest Airlines have over the recent past reduced the seat pitch of most its airlines. Majority of airlines currently offer an extended legroom that allows passengers to seat more comfortably. Though this can attract more customers in the long run each airline with more legroom can only carry few passengers which will affect its profits.
  • International operations – Southwest Airlines cannot achieve further growth by operating in the domestic market only as it is already in the maturity stage. Thus, the only viable alternative for further growth is investment in international market which will expose the airline to international competition and will require a huge capital outlay. If done, it will create great opportunities for growth.

References

  1. Centre for Aviation (2014). Southwest Airlines projects 6% capacity growth in CY2015 as long- haul from Dallas ramps up. Retrieved from http://centreforaviation.com/analysis/southwest-airlines-projects-6- capacity-growth-in-cy2015-as-long-haul-from-dallas-ramps-up-197468 Hall, K. (2012).
  2. Making the Matrix Work: How Matrix Managers Engage People and Cut through Complexity. London: Nicholas Brealey Publishing. Hill, C., Jones, G. and Schilling, M. (2014).
  3. Strategic Management: Theory: An Integrated Approach. Cengage Learning. Kumar, M. (2004).
  4. Operations Management at Southwest Airlines. ICFAI Knowledge Center. Retrieved from http://www.gibs.co.za/SiteResources/documents/NewDocuments2013/Beverley/operations%20management%20at%20southwest%20airlines.pdf Lewis, P. S. (2007).
  5. Management: Challenges for tomorrow’s leaders. Mason, OH: Thomson/South-Western. Ma, Q. (2001).
  6. Investment horizon and the structure of organizations: Essays in the theory of the firm. Organized monolayers and assemblies: Structure, processes, and function. Amsterdam: Elsevier. Mouawad, J. (2010, November 20).
  7. Pushing 40, Southwest is still playing the rebel. The New York Times. Retrieved from http://www.nytimes.com/2010/11/21/business/21south.html?_r=0
  8. Shaw, S. (2007). Airline Marketing and Management. New York, NY: Ashgate Publishing, Ltd. Shay, J. P. (1999).
  9. Dynamic competitive strategy: Towards a multi-perspective conceptual framework. Long Range Planning, 32(6): pp, 559-572.

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