Southwest Airlines has been one of the aviation industry's success stories; founded in 1967 the airline pioneered the low cost carrier model, and grew organically leveraging a first mover advantage (Morrison, 2001). The airline now operates approximately 3,600 flights every day, employees 45,009 staff and with the acquisition of AirTran in 2011 it became the largest domestic U.S. carrier (Southwest Airlines, 2014). The airline has grown, but in recent years the airline industry has seen significant constraints on growth due to the maturity of the industry in the U.S. along with the economic influences constraining growth (IATA, 2014). However, this does not mean there is not room for growth; to assess ways in which the firm may improve and understand the position of the company, examining the way it competes and how it is influenced by external forces will be beneficial.
Globalization and Technology
Globalization and technology have had a major impact on Southwest Airlines. The globalization effect may be argued as fairly subtle, as until recently the company operated only within the U.S. However, globalization has impacted on the global travel culture, making airline travel more popular and increasingly seen as a normal model of travel, rather than remaining an uncommon mode, which was the case 30-40 years ago (Belobaba, Odoni, & Barnhart, 2009). The globalization of the industry has also allowed for increased knowledge sharing and the development of safer technology and practices with results of air crashes being shared and the development of international aviation standards (Belobaba et al., 2009).
Technology has, and continues, to have a significant impact on the airline. As Southwest has adopted the low cost carrier strategy, one of the underlying approaches has been to ensure that operating costs are controlled and value is created in the underlying systems (Gittell, 2005). A major changed has occurred with the use of the internet, the booking system was gradually moved over to the internet, which proved to be a cost effective medium, and was able to tie in the dynamic pricing computer programs that determine seat pricing by forecasting the demand for each flight (Gittell, 2005). The automated system allowed for the passenger to be empowered and to reduce the costs associated with the call centers. The process was successful by 2000 more than 25% of all revenues were generated online; today it is more than 80% (Southwest Airlines, 2014). The internet has also increased efficiency with the online check in, reducing costs and increasing ease for passengers (Southwest Airlines, 2014; Gittell, 2005). Marketing has also benefited from technology, with the use of the 'Ding' program, a small application that potential passengers could install, so they would be notified with a pop up screen when special fares were released (Southwest, 2014). Technology also plays an important role in the operations, it has recently been reported that the cockpit software in Southwest aircraft is being upgraded, which will create smoother landings for passengers and increase fuel efficiency (McCartney, 2014). The change taken 3 years to prepare and required the retraining of pilots and (McCartney, 2014). However, technology can also be seen as a constraint, especially as the firm outgrows it or the technology becomes dated; costly upgrades may be required to facilitate the growth; this was seen with the booking system, which was unable to cope with international bookings. With the acquisition of AirTran and the decision to expand with international flights, the former Amadeus system was insufficient, and the firm has had to invest in an upgrade (Maxon, 2014; Carey, 2014). Technology has been a major enabler, and continues to be a boon, with ingoing requirements for investment.
Two general approaches have emerged within the field of strategic planning, indicating different ways of examining a firm and assessing how they maybe able to gain superior returns (Thompson, 2007). The two approaches are the industrial organization (I/O) model and the resources-based view (RBV) (Thompson, 2007).
Application of the I/O Model
The I/O model operates under the assumption that to gain superior profits a firm needs to examine the industry influences, looking to forces outside the organization, and leverage that information to identify suitable strategic choices (Lieberman & Asaba, 2006). Applying this model to Southwest Airlines it is necessary to look at the characteristics in the industry that are external to the organization.
There are numerous industry wide pressures; the economic recovery is seeing an increase join the demand for airline travel, but the rate is constrained; the rate of increase for the entire industry in August 2014 compared to the previous year was 5.9%, but this was not equally spread across all markets, the U.S. domestic market only grew by 4.5% revenue per kilometer travelled (RPK) compared to international flights where the growth was 6.7% RPK (IATA, 2014). Latin America has the fastest growth rate of 8.2% RPK, followed by Africa with 7.5% RPK and Europe with a growth rate was 6.8% RPK (IATA, 2014).
The current concerns regarding Ebola appear likely to have an impact on the aviation industry, with a potential decrease in demand for flights into and out of Africa, as well as increased associated costs and security in order to undertake relevant measures to prevent the spread of the contagion. However, this is not expected to impact other flight destinations. The political uncertainty in Eastern Europe, and the Middle East, is also heading a potential impact on demand, as well as operations. Fewer passengers are likely to travel to areas where there is political unrest, and airlines are increasingly diverting their aircraft away from aviation routes which fly over conflict areas, an issue which has come to the fore following the downing of the Malaysia airlines flight over the Ukraine in July 2014 (Walker, Salem, & Luhn, 2014).
Extrapolating from these environmental factors, maybe argued that the potential strategy for increasing revenues and creating superior profits will be to increase international flights, due to the constrained growth which is taking place within the domestic market. Strategy may be to look towards expanding the existing international strategy to incorporate Latin America, this avoids problematic areas of the world where there are political unrest and health concerns, and also target scenario where there is currently the highest level of growth per passenger kilometer. Notably, this is also an area where there is expected to be long-term increase in demand, especially as many Latin American countries develop economically (IATA, 2014).
Application of the RBV Model
The resource-based approach towards strategy assumes that superior returns may be gained by examining the firm, and leveraging characteristics that are internal to the organization, rather than the external assumption with the I/O model (Thompson, 2007). The RBV model examines the organization in the holistic sense, with the firm seen as more than only its final output. The RBV may be considered by looking at the tangible and the intangible assets belonging to the firm.
Southwest Airlines has a significant amount of tangible assets; the largest asset group is the aircraft, with the firm owning and operating a fleet of 680 Boeing aircraft. Prior to the acquisition of AirTran the entire fleet was made up of Boeing 737's, giving the firms a high level of flexibility in terms of substitution if an aircraft was delayed or developed a fault, as well as the economies of scope and scale with maintenance, and also reduces the amount of money tied up a spare parts different types of aircraft (Gittell, 2005). Today there are also 66 Boeing 717's and more & 37's are on order. Although some of the aircraft are older, they are being modernized and retrofitted to keep them up-to-date. The aircraft are maintained in-house, which also reduces the potential reliance on a third-party maintenance contract, an issue which many other airlines face (Southwest Airlines, 2014; Gittell, 2005).
The technological assets are also major part of Southwest Airlines, and help to support its value strategy, retaining a leadership position within the low-cost carrier market. However, this is not particularly unique; many other airlines utilize a similar strategy. A significant point of differentiation within the airline is the relationship with the employees, and the corporate culture (Gittell, 2005). The organization has a very positive relationship with employees, which has resulted in a highly cooperative culture, which is even resulted in pilots helping flight attendants and luggage handlers when there has been a shortage of staff (Gittell, 2005). This is highly unusual within the aviation industry, may be argued as a source of competitive advantage in terms of differentiation, as well as supporting cost-effective support operations (Belobaba et al., 2009; Gittell, 2005). The value of employees is also seen within the way that the organization tries to ensure that price not only functional bill, but also enjoyable supported with the way flight attendants interact with the passengers (Southwest Airlines, 2014).…