SOUTHWEST AIRLINES

Charlie Pedersen

An Introduction to the SAM analysis

• The purpose of this analysis is to evaluate the standing ofSouthwest Airlines– To compare Southwest to the commercial aviation

Industry– To evaluate the organization internally and

externally– To evaluate strategic alternatives and make

recommendations upon those alternatives

External Analysis

A Look at the Airline Industry

An Introduction to the Industry• Commercial Aviation in the United States is

broken down into 3 categories– International Carriers• Lufthansa, Air France, Japan Air Lines

– “Legacy” Carriers • American, Delta, United

– Regional or Low Cost Carriers• Southwest, Air Tran, Midwest

The Shakeout• The Industry has exited its largest growth stage since

deregulation and is entering a period of “Shakeout”

– This is supported with the operational loss of ATA, Aloha, SkyWay, SkyBus, and the bankruptcy of Frontier

– This is a direct result of high fuel prices and reductions in consumer spending

No Frills• Southwest has had tremendous success due

to its “no frills” approach

– It has been able to undermine the “Legacy” carriers and has allowed other low cost carriers to enter the market

– This has created another level of competition in the Regional segment• This is a segment where cost and frequency of service

are of greater importance than amenities

The Competition• Competitors in the Regional Segment– Alaska• Focus area- West Coast

– Midwest• Focus area- Midwest, Upper Midwest, South Central

– AirTran• Focus area- Eastern Seaboard & South

– JetBlue• Focus area- Northeast

The Government’s Role• Continuing Threat of Regulation

– Contrary to popular belief, regulation has not had the effect on commercial aviation as it once did

– With many low cost carriers closing and legacy airlines consolidating, regulation might become a factor in the next Presidential Administration

Mergers and Acquisitions• Consolidation Concerns

– With the Legacy carriers consolidating to improve route coverage, the regional carriers must be aware to changes in the business climate.

– At this point, most mergers have not worked as well as hoped. • US Airways and America West still have not been able to

successfully merge every aspect of their operations since 2005.

The Not So Friendly Skies• Labor Issues

– With most airlines having union workforces,it becomes imperative to work closely with their representation to meet their needs.• The problems arising with Unions are in the areas of

labor and healthcare.– Consolidation threatens seniority status in the newly created

entity.– With fuel prices rising, more of the flight cost is going to that

in lieu of going into the employee healthcare fund.

Internal Analysis

A Look at Southwest Airlines

An Introduction to Southwest

• Southwest is the Largest Airlinein the U.S. in terms of Passengers carried

• Serves 64 destinations in 32 states• Headquartered in Dallas, Texas• Established in 1967 as an Intrastate carrier

Penny Pinchers• Southwest has benefited greatly from their

low cost business model

– The model is built around Hedging the Fuel Futures market to keep cost down

– The “No Frills” approach is taken to heart• No assigned seating• Minimal refreshment options

Frequency• Southwest has a greater frequency of flights

to its destinations– This is due in large part to not having a “Hub-and-

Spoke” system– Southwest prefers a point-to-point method• This method creates greater presence in more cities• This method also reduces the footprint in the airline’s

flight operations

Fleet• Southwest maintains a fleet of strictly Boeing

737 aircraft

– This keeps repair equipment streamlined– Flight mechanics know a greater deal about the

aircraft and keep them in the air

The Press• Southwest is widely known for its “down to earth”

method of Public Relations– The “No Frills” method is also at play here– Their PR division is also very cautious of social trends

• Southwest is not perfect in its Press efforts– Southwest has had several instances of flight dismissal– This has resulted in poor press and lawsuits against the

company

Growth• Southwest has expanded in the most cost-

efficient method– They tend to use second tier airports in the largest

U.S. cities• Midway-Chicago (instead of O’Hare)• Love Field- Dallas (instead of Dallas-Fort Worth)

– There have also been threats of moving operations to save money• Moving From Seattle-Tacoma International to nearby

Boeing Field

Growth

• Southwest serves many cities, but does not have service to some large cities, particularly in the south– No service to Atlanta, Charlotte, Memphis, and

others

• Due to rising passenger costs, Southwest has slowed its rate of growth

The Future

What should Southwest do next?

The Alternatives• Domestic Growth

– Is Southwest better served by expanding in the U.S. market?

– Can Southwest afford to expand its fleet?

– Can Southwest force out one of the “Legacy” carriers if it continues to grow domestically?

• International Entry

– Is Southwest better served by expanding in markets with better economies?

– Can Southwest obtain larger Aircraft and maintain them?

– Can Southwest compete with the larger international carriers?

Positive Domestic Growth

• With Southwest having a large domestic footprint, expansion might be easier at home

• If Southwest expands domestically, they would not have to purchase a different model of aircraft

• If Southwest’s pricing model holds true through the economic downturn, they would be in an excellent position to overtake the “Legacy” carriers

Negative Domestic Growth• Southwest could be hurt dramatically by the

economic downturn due to its low-cost structure

• The Boeing 737 continues to have competitors enter the market, including Airbus and Bombardier

• If the “Legacy” carriers continue to consolidate, they might turn their capital muscle on Southwest and other low-cost carriers

Positive International Entry• Southwest may strike gold in economies with

greater stability, especially with few international airlines offering a low-cost structure

• This would be an opportunity to enter the Extended Range airplane market, and move more passengers at once

• Southwest would have to adhere to international ideals on how to attract new customers

Negative International Entry• Southwest may not be able to obtain approval

due to no experience in international markets

• With different planes entering the fleet, more training and people must be obtained to keep them in service

• Southwest may not be able to keep enough staff to make the changes necessary to impact new markets

Recommendations• International expansion is not the best

alternative at this point• Southwest has slowed its rate of expansion

and needs to remain focused on the domestic market

• Southwest is the largest operator of the Boeing 737 with 529 in service– It would be to their advantage to continue use of

the Boeing airliner

Recommendations• Due to its one model fleet, it is more cost effective to

maintain that stance in the short term

• If International expansion becomes a more viable opportunity, keep it local– Canada, Mexico, and the Caribbean

• Costs must remain low, but account for inflation– With the dollar dropping in value, it may become

necessary to raise rates, but keep it reasonable– Do not scare off customers with huge rate increases

Conclusion• Southwest Airlines has been the leader in low-

cost airfare• The “Southwest Effect” has benefited

commercial aviation exponentially• Southwest must remain lean as it grows• Southwest must continue to be the people’s

airline of choice