Executive Summary
In the past decade, the airline sector has faced various challenges such as economic downturns, escalating fuel expenses, and environmental calamities. Despite these obstacles, Southwest Airlines has successfully remained resilient and consistently profitable for an impressive span of 38 years.
Southwest Airlines believes in the fair and equal treatment of their approximately 35,000 employees, recognizing their importance to the company's success. This focus has contributed to Southwest's position as one of the largest and most successful low-cost airlines in the United States. The airline stands out from its competitors by offering affordable fares combined with outstanding customer service. To achieve cost savings and meet customer expectations, Southwest employs a cost leadership strategy that includes using a single type of aircraft, utilizing point-to-point routes, implementing e-ticketing, operating from secondary airports, and maintaining highly productive em
...ployees. These strategies have resulted in record-breaking total operating revenues for Southwest Airlines at $12,104 million—a 17% increase compared to 2009.
Southwest Airlines has the lowest ratio of complaints per passengers boarded among major U.S. carriers. Their main goal is to provide the highest quality of customer service and keep their promise to valued customers. Despite the ongoing economic conditions, Southwest wants to ensure that the quality of customer service remains unchanged. To support this, Southwest aims to offer safe, affordable, reliable, timely, courteous, and efficient air transportation and baggage handling service on every flight without any surprises. Southwest maintains profitability while staying focused on their mission, vision, and goals.
Mission, Vision, Values, and Goals
- Southwest Airlines' mission is to provide the highest quality of Customer Service with warmth, friendliness, individual pride, and Company Spirit.
Southwest Airlines aims for a highly productive workforce in order to ensure the best flight experience for passengers. The company values enjoyable work and encourages a playful mindset while recognizing the importance of each individual's contribution. Additionally,Southwest Airlines sets goals for providing excellent customer service by being prepared to assist customers in any situation during their safe journey as a successful low-fare carrier.The airline industry has encountered difficulties like economic recession and fluctuating fuel prices. These factors can have a severe impact on the sustainability of established airlines. As a result, top management may opt to cut various operational expenses, including wages, material costs, customer satisfaction expenditures, and sales and marketing investments in order to maintain ongoing operations.
According to IATA's Annual Report in 2011, the industry is facing a significant threat due to unsustainable fuel prices and unpredictable economic conditions. The report emphasizes that oil prices have played a crucial role in determining the industry's profitability over the past decade, even when oil
was priced below $30 per barrel in 2001. Currently, fuel expenses make up 30% of the industry's costs. As mentioned in the same IATA report, jet fuel prices reached $130 per barrel in March 2011, resulting in fuel costs accounting for 33% of the industry's operating expenses.
According to the "Airline Industry Trend Update" (2010), new entrants face difficulties in competing in the US airline industry due to the fact that the top ten airlines possess more than 90% of the overall market share.
The airline industry has a dominant market share, leading to significant obstacles for new entrants. These obstacles encompass economies of scale, competition in establishing their own market presence, the development of brand loyalty, and providing appealing fares to customers (Hill, 2010, p. 44). ("Airline Industry Trend Update," 2010)
Threat of Substitute Products
In general, transportation alternatives like buses, cars, trains, and boats act as substitutes for the airline industry. In the United States specifically, automobiles serve as the primary substitute for air travel.
S. Despite the presence of a comprehensive interstate highway system, long distance travel by car does not pose a significant threat to the airline industry. "Airlines 2020: Substitution and commoditization" (2010) states that air travel has consistently had advantages in terms of speed and convenience compared to other modes of transportation for the past 75 years. Consequently, trains, cruises, buses, and cars have minimal impact on the airline industry due to their longer travel durations and relatively smaller price disparities for consumers.
Bargaining Power of Suppliers
Suppliers in the airline industry have significant power, particularly in three areas: jet fuel, airframes, and labor. Fluctuations in fuel costs greatly impact the aviation sector, as with any
economy. The price per barrel of oil has historically averaged around $20 but has steadily risen since 1999.
("Inflation Data: Historical Oil Prices Table," 2011) As the price of oil increases, the availability of fuel from fuel hedges decreases. For example, in 2005, Southwest had fuel hedges that covered 85% of their fuel usage. However, by 2009, this coverage had decreased to only 25% ("Southwest Research," 2006). The airline industry relies on Boeing and Airbus as their primary providers of commercial airframes. There are a total of 449 airline companies worldwide that use Boeing as their supplier, while Airbus is utilized by 405 airline companies ("Airbus customers & operators list," 2011).
Historically, both Boeing and Airbus had a monopoly on the supply of aircraft due to limited alternatives and strong negotiating power with airlines. Despite still being the dominant suppliers, the current economic instability and weakened position of the airline industry may force them to lower prices or negotiate with buyers. Additionally, unions also hold significant power in the industry as labor costs constitute a major portion of operating expenses. For instance, Southwest Airlines, which is 82% unionized, allocates 33% of its operating costs to labor ("Annual Report," 2010).
Just like airframe suppliers, airline labor unions also used to demand higher wages and benefits in the past. However, due to a sluggish economy, most airline companies were forced to reduce labor expenses and terminate pension plans in order to prevent bankruptcy. As a result, the weakened economic situation has reduced the bargaining power of unions and resulted in compromises on employee compensation.
Bargaining Power of Buyers
The aviation industry has experienced an economic downturn over the past decade, giving customers
significant power over the industry. Customers are highly attuned to airfare prices and have the ability to influence the industry through their purchasing decisions.
The airline industry developed low fare tickets to increase demand for air services. To provide these affordable fares, airlines began offering ticket services through online reservation systems. This allowed them to save up to 10% on commission fees for travel agents. Southwest Airlines was the first to offer online reservations, but they do not offer services through joint travel websites. Instead, they only offer online reservations through their own website, www.southwest.
Customers have buyer power over the airline industry due to several reasons. Firstly, there is no differentiation of the product, service, and brand loyalty among airline companies. As a result, customers are highly price-sensitive and tend to base their ticket purchases solely on price.
Moreover, the airline industry faces intense rivalry due to various factors. These include an unstable economic position, limited differentiation of the product, lack of brand loyalty, and price-sensitive customers. These threats contribute to the highly competitive nature of the industry.
Southwest Airline differentiates itself from competitors by operating point-to-point route service and not charging additional fees for first or second checked bags. The company believes that promotional points can help increase market share and revenue compared to other competitors. Additionally, Southwest continues to offer low cost and low fare brands to maintain its competitive advantage. By utilizing networking and process improvement, Southwest Airline is able to reduce costs. This strategy allowed Southwest Airline to be the only airline among the ten largest in 2004 to generate profit.
Southwest Airlines stands out in the industry with
its consistent annual profitability for 38 consecutive years ("Annual Report," 2010).
Distinctive Competencies
- Southwest Airlines possesses tangible resources, which can be categorized into financial, physical, and technological resources.
- Financial Resources: Despite an economic recession in aviation, Southwest Airlines has effectively managed to avoid bankruptcy, furloughs, pay cuts, and declining customer satisfaction for the past decade. In fact, in fiscal year 2010, Southwest Airlines achieved a record-breaking $12,104 million in total operating revenues, marking a 17% increase from 2009 ("Annual Report," 2010). Additionally, Southwest Airlines ranked third (106,227,521) and sixth (105 including AirTran Airways) among the largest airlines in North America in terms of passenger number and destinations respectively in 2010. Furthermore, Southwest generated a net income of $459 million in that year, ranking third among the largest airlines in North America ("List of largest airlines in North America," 2011). ("Southwest Airlines 2010 One Report," 2010)
- Physical Resources: Southwest Airlines operates a fleet of 550 Boeing 737 jets, with an average age of 11.
Southwest Airlines, operating for 4 years, has an extensive network of 3,400 daily flights to 72 cities across 37 states. The company holds its workforce of over 35,000 employees in high regard, treating them like family and acknowledging their remarkable contributions. It firmly believes that these employees are the key to its success. Additionally, Southwest Airlines is renowned for delivering exceptional customer service. Notably, the company utilizes a distinctive reservation operating system called southwest as part of its technological infrastructure.
Southwest.com is the second largest travel site and the exclusive destination
for customers to purchase and make their fare and reservation arrangements. Southwest has placed significant emphasis on enhancing their website to offer customers simple navigation, seamless functionality, and readily accessible information. In 2010, 79% of all airline bookings were processed through Southwest.com, and the website served as the platform for generating 84% of passenger revenues for the airline.
According to Southwest Airline's Annual Report from 2010, they first tested WIFI on four airplanes as a trial in 2009. Currently, they have over 60 airplanes equipped with WIFI, and their goal is to have all the airplanes WIFI capable by 2013.
In 2010, Southwest received 143,143 applicants, but only 2,188 were hired (“Southwest Airlines-Fact Sheet,” 2011). The company is renowned for being a leading low fare airline with exceptional customer service.
The Department of Transportation has reported that Southwest Airlines has the lowest complaint ratio per passenger among all major U.S. carriers (“Southwest Airlines Fact Sheet,” 2011). Furthermore, Southwest Airlines consistently wins awards and recognition for its outstanding customer service and customer satisfaction.
Capabilities
The organization prioritizes staffing by placing employees before customers, ensuring their satisfaction is a top priority.
Southwest Airlines places a great emphasis on the recruitment, screening, and hiring of employees as it
recognizes their significance in achieving success. The company is committed to providing a comprehensive range of well-structured training programs, covering areas such as communication skills, leadership, stress management, and career development. To ensure continuous improvement in employee knowledge and job performance, Southwest conducts thorough analysis of behavior, knowledge, and motivations. Additionally, Southwest offers leadership and communication training to lower-level management, with the aim of preparing them for higher-level roles. Notably, 90% of supervisory positions are filled internally within the organization.
Core competencies and competitive capabilities: Southwest Airlines differentiates itself from competitors by focusing on key differentiators such as low fare, no change fees, and bags fly free offers. To develop competencies and capabilities, Southwest only operates Boeing 737 aircraft and provides a reservation system exclusively through its official website. Additionally, the company highly prioritizes customer satisfaction, ensuring that passengers have a positive and enjoyable flying experience.
Matching the organization structure to strategy: Southwest Airlines empowers its employees by encouraging them to take initiatives and granting them decision-making authority.
Southwest expects managers to dedicate more than 30% of their time to checking facilities and listening to employees' concerns.
Competitive Advantage, Value Creation, and Profitability
The Value (Utility): Southwest Airlines remains at the top in customer satisfaction, 2011, according to the American Customer Satisfaction Index Survey, even though the airline industry's score dropped by 1.5%. Customers expressed dissatisfaction with other airlines' services despite paying higher fares and fees. Additionally, customers expect an improvement in service when airlines raise fares and fees due to fuel costs.
Despite other airlines increasing their fares by up to 10%, Southwest remains the only airline that offers low fares, no change fees, and no bag fees
(source: "Sky Talk," 2011). Over the past five years, Southwest has raised their air fares by as much as 39% due to factors such as fuel costs, expansion into larger cities, and longer flights ("Can't Call Southwest a Discount Airline These Days," 2011). However, Southwest managed to maintain its reputation as the king of low fares by simultaneously enhancing their level of service and customer satisfaction.
Southwest Airlines differentiates itself from other airlines by not charging fees for bags or penalties for ticket changes. This results in higher airline fares compared to other airlines, which offer lower fares but charge for bags ($30 per bag) and penalties ($150). As a result, the overall cost of air fares remains the same. According to the American Customer Satisfaction Index Survey, travelers consider it worthwhile to pay slightly higher air ticket prices instead of paying for bags, which are considered minor charges. Southwest Airlines proactively sought fuel derivative contracts in 1999 to safeguard against rising fuel costs. In fact, Southwest hedged more oil than its competitors in order to provide low fares to its customers.
Fuel and oil expenses continue to be Southwest Airlines' largest costs for the sixth consecutive year. However, the company and its management actively manage fuel derivative contracts to maintain a low cost structure. This allows Southwest to provide better service, lower prices, and increase its market share. The table below shows the cost (in millions), average cost per gallon, and operating expense for each year from 2005 to 2007.
| Year | Cost (Millions) | AVG. Cost / Gallon |
style="width: 25%;height: 24px;"> Operating Expense |
| 2005 | $1,470 | $1.13 | 21.4% |
| 2006 | $2,284 | $1.64 | 28.0% |
| 2007 | $2,690 | $1.80 | 29.7% in 2008 resulted in $3,713 at a rate of $2.44, with a total of 35.
1% |
| 2009 | $3,044 | $2. 12 | 30. 2% |
| 2010 | $3,620 | $2.51 | 32. |
