Trang Phan

Strategic Marketing
Southwest Case Study
Situation Analysis

In 1971, Southwest entered the complicated airline industry in Dallas, Texas and ever
since, the company has been exceeding expectations with unprecedented strategies developed by
Herb Kelleher. The company’s strategies mainly focus on customer satisfaction: get the
customer where they want to go, with low fares and have fun doing it. Their low-cost strategies
were accomplished by reducing a large majority of the operating costs, which is now being
copied by other low-cost airline carriers. While there are many strengths that make Southwest a
leading domestic airline, there is room for improvement and expansion to maximize potential
against competitors.

SWOT Analysis

There is no denying that the greatest strength Southwest Airlines has is its financial
stability, Kelleher’s leadership, branding and corporate culture. As known in the U.S. airline
industry, Southwest consistently earns profits despite different problems in the industry that
other companies are facing, such as the loss in profits after the 9/11 attacks. Having a low
amount of cost in their operation is one of the contributing factors to Southwest’s greatest
strength. Using the Boeing 737 model, which is one of the most fuel-efficient planes allows the
company to cut down costs of training, maintenance, and inventory. Southwest also approaches a
no-frills service, such as no meals served on board or no first-class seats offered to its customer,
which also contributes to the low operating costs. By cutting down the operating costs,
Southwest can offer low price tickets to its customers, which appeals to a broader group of
customers. The company also extends its market to fifty-four cities in twenty-nine states and
provides nonstop flights from its major connecting points. Moreover, Southwest has one of the
shortest turnaround time for arrivals and departures, which saves a lot of time for the company,
as well as the customers. Aside from offering low prices and short turnaround times, another
strength that Southwest has is its loyal and productive workforce as the company has negotiable
flexible work rules for the flight attendants, pilots, and other company employees. These help
the company keep the employee productivity at a high level.

Despite many strengths, one of Southwest greatest weakness is that the company overly
depends on Boeing, especially with the 737 models. This gives Boeing a high bargaining power
as suppliers over Southwest, which directly affects the company's business in situations of any
recall and price increases or disagreement with Boeing. Moreover, Southwest does not provide
any assigned seating, which might make the customers wait for a long time prior to boarding if
they want to have a decent seat. Also, most of Southwest employees belong to a union, which
many studies suggest that unionized companies earn profits between 10 to 15 percent lower than
those comparable non-union firms. In Addition to these weaknesses, Southwest had numerous
changes in top management throughout the years. With the inconsistency in company’s vision
from the top management, the company shifted toward the mainstream that conflicted with
Southwest’s original niche: low-fare carrier as over a short period from 2005 to 2012, the
company has raised fares nine times.

In the airline industry, there are a few opportunities available for Southwest. International
flights and longer domestic flights are a growing market. The global tourism industry is
expected to grow at a CAGR of over 4% with 5% in the US in the next 5 years. Southwest’s
ability to expand into these markets, or partner with a company that is already in these markets,
would improve the company’s market capitalization. Moreover, with the development of
technology nowadays, the company also has an opportunity to begin research and develop
different aircraft technology, procedures, and services.

Threats to Southwest included the intense competition from its rivals, the effects of the
economy, government regulation, and terrorism. The fuel price increases and terrorism could
reduce air travel. The company’s competitive advantages such as the high frequency, low fare,
point to point flights, etc. are being copied by many other low-cost carriers such as Spirit,
Frontier, JetBlue or Allegiant Airlines. This creates a threat to the company as it forces the
company to reduce its expansion, which leads to decreases in Southwest’s market cap. Southwest
needs to watch out for the competitors of its main aircraft supplier, Boeing. Any competitions in
the aircraft industry, including supplier’s pricing competition, can affect the company’s supply
chain and business. Moreover, the airline industry is also taxed heavily, which increases
compliance costs of the company and consequently affects the profitability of the company.

Problem Statement

The challenges that Southwest Airlines is facing are the changes in leadership, cost
increases in fuel, oil, and wages, the rise of other rivals in the airline industry, and the
consumer’s needs in the niche market that Southwest created is fading.

Development of Strategic Alternatives and Evaluation

There is a question that Southwest has to consider to solve the problem that the company
is facing: should the company’s top management redefine what is the niche market for Southwest
at the moment? Is Southwest better served by expanding within the U.S. market or by expanding
in markets with better economies?

With the large domestic footprint, the expansion within the U.S. market might be easier
for Southwest as they do not have to purchase a different aircraft model to meet the international
safety regulations. However, as said in the SWOT analysis, the company has to be careful with
competitors of its suppliers entering the aircraft market, including Airbus and Bombardier.
Otherwise, the company might face an increase in the production costs according to Boeing’s
pricing competition. The company also needs to consider its pricing strategy as Southwest is
famous for its low-cost fare. The questions that the company needs to answer are how much
profit will they make if they keep their price low and how can they do that.

As discussed in the SWOT analysis, the international flights are a growing market.
Instead of just focusing on growing within the U.S. market, the company may strike gold in
economies with greater stability, especially with few international airlines offering a low-cost
structure. Investing in international flights would be an opportunity to enter the extended range
market, and Southwest would be able to move more passengers at once. The company might be
able to generate more revenue. However, tapping into the international market is not easy for
Southwest as the company does not have a lot of experience in this market. The company has to
invest into a different aircraft model to meet the safety regulation and, with a different aircraft
model, the company needs to obtain more training and more employee to make an impact for
their new markets.

Strategic Recommendation

At this point, Southwest needs to find a solid management team that could develop a
flexible business strategy for the company. International expansion is not the best alternative for
Southwest right now. With the slow rate of expansion within the domestic market, in the short
term, Southwest is better off remain focusing on providing services the U.S. The company needs
to be a frontrunner in its niche market, which is providing low fare, high frequency, and point to
point destination. Even though there are a lot of competitors in the industry, Southwest is well
known for their niche market, which already gives them an advantage. However, in the long run,
Southwest should still consider expanding its services to international markets, such as South
America or Canada.

The top management of Southwest should know that they need to keep the costs low, but
they also have to account for inflation. With the dollar dropping in value along with other effects
from the economy, it may be necessary to raise the fares, yet Southwest should keep it
reasonable so that the customer will not be surprised with huge rate increases. Addition to
keeping low fare, Southwest should also continue using the one model fleet strategy, which is
more cost-effective in the short term as its flight mechanics have a great understanding of the
aircraft and can keep repaired equipment streamlined. Though, the company needs to keep up
with services for the aircraft to meet the safety requirements. In a longer term, Southwest should
also seek out for better aircraft model to satisfy the consumer’s needs such as more legroom, free
Wifi, seatback DirectTV, etc.

Another acquisition will also allow Southwest to expand their route networks and to
serve major airports. Back in 2011, when Southwest bought AirTran Airways, the company was
able to expand its market to 103 cities in 41 states. This makes Southwest the largest domestic
airline with growth in profit from $178 million in 2011 to $421 million in 2012 and $754 million
in 2013. If the company can acquire another low fare carrier, such as Spirit or Frontier Airlines,
the company will be able to generate more profit as well as continue staying on top of the line for
domestic airlines. As stated above, the company needs to remain focused on the domestic
market, yet, in the long term, Southwest should consider tap into the international market. Since
the acquisition of AirTran, Southwest can expand to Central America and northern parts of South
America where there is a growing demand for air travel. Obviously, with the small amount of
experience in the international market, it is better for Southwest to acquire an international low
fare air carrier: WestJet Airlines, the second largest Canadian airline. The reasons why
Southwest should consider buying WestJet are because WestJet has been using a cost leadership
strategy just like Southwest and it can provide air travel services to destinations in Canada,
Mexico, the Caribbean and Central America. Moreover, the average fleet age of Southwest is
11.8 years, while for WestJet is 9.3 years, and with this acquisition, WestJet’s fleet will be able
to help reduce the average fleet age for Southwest.

Industry Update

Southwest, United, Delta and American Airlines are the top-ranked airlines based on 2016
domestic market share. Southwest has consistently retained the largest share of airline traffic,
with 19.1% of the market share and Delta comes after with 18.3%. In 2016, Southwest carried
more total domestic passengers than any other U.S. airlines, while American Airlines carried
more international passengers. In general, the number of airlines passengers has increased 3.8%
in 2016.

Even though the airline industry does not have any significant updates, yet in the future, it is
believed that a new type of technology called Boom Supersonic will be able to deliver a new
generation of airliners. Boom Supersonic is a 50-seat aircraft that can fly 2.6 times faster than
any other airline while still has the same operating cost. With this new development, carriers
will be able to save money and cut flight time in half, which will give airline companies a huge
competitive advantage.
 Cite

Trefis Team. (2014, December 11). What Has AirTran Done for Southwest Airlines? Retrieved
December 01, 2017.

Why Union Are Bad For Companies, Employees And Customers. (N.D.). Retrieved December
01, 2017.

Boyd, M. (2017, July 10). A New Disruptive Economic Model Is Emerging in The Airline
Industry. Retrieved December 01, 2017.