Southwest Airlines originally began operation in 1967, but as Air Southwest Co. In 1971 its name was changed to Southwest Air Co. The purpose behind its foundation was to provide passengers with a cheap means of air travel within Texas. Today they have a fleet of 550 Boeing 737s and 37000 employees. Although it's a relatively small, domestic airline, taking passengers to 73 American cities, but it provides remarkable customer satisfaction. Its $178 million Net income provides a good estimation of its profitability. The company has a high position in the Fortune 500 companies and the Department of Transportation's survey of customer satisfaction placed it at number one. Its complaints ratio per passenger is the lowest among all airlines operating in U.S.. Its popularity among customers as well as employees is legendary. The airline empowers employees with decision making rights for immediate resolution of problems. The airline boasts of: close interdepartmental connections - departments exchange gifts, a strong leader, open door policy for employees and strict accountability. The airline answers consumer letters regularly through personalized responses (Bunz, U.K & Maes, J. D, 1998).
Current Trends in the Airline Industry: The airline industry in U.S. has also suffered from effects of recession, however now the industry is facing a rapid increase in demand for air travel. To cope with this increase in flights and planes is needed. Secondly, airlines are forming links with firms providing related services, such as travel agencies, resorts and cab service. There is a new focus on environmentally responsible flying. Airlines in Europe are required to submit carbon dioxide emission reports and U.S. airlines are buying eco-friendly fuel. They are trying to come up with ways of reducing carbon dioxide emission. Increased travel incentives bring 15% more sales and create around 2.4 million jobs which makes them popular among airlines. Unions are being…… [Read More]
The deregulation of the United States domestic civil aviation industry in 1978 saw airlines begin to compete freely. However, the capital-intensive nature of the business, along with undifferentiated products and services, has led to 120 airline bankruptcies since then. In the light of this context, Southwest's ability to compete is particularly interesting as it has not only continued to expand, but has been the only one to earn a profit every year since 1973 (Freiberg, 1998, p. 4-5).
Today, Southwest is the fourth largest major airline in America, flying more than 64 million passengers a year to 58 cities (Southwest Airlines, 2002). Southwest attributes its success to its unique business model of rock bottom fares, low costs, and outrageous customer service that entails getting passengers and their baggage to their destinations on time and ensuring that they have some fun along the way (Peters, 1998, p. xiv). This business model is the basis of the airline positioning itself as a low fare airline that is fun to fly.
Southwest does not assign seats on its flights in line with its business model of keeping its costs and fares low. Not assigning seats gives the airline the advantage of helping cut boarding time to twenty minutes and reducing costs by reducing ground time. The principle, here, being that lower unit costs per flight and higher revenues are achieved by increasing the number of hours that an aircraft flies (Freiberg, p. 82-82). Thus, the aforesaid and several other cost cutting measures have enabled Southwest to successfully occupy the position of a low fare airline. The airline fulfilled its second positioning dimension of 'the airline that is fun to fly' through developing the concept of 'luv.' Everything the airline does is seen to revolve around this concept, including the low fares and flight schedules it offers: "LUV is our stock exchange symbol, selected to represent our home at Dallas Love Field, as well as the theme of our employee and customer relationships." (Southwest Investor Relations)
Southwest's concept of 'luv'…… [Read More]
Southwest Airlines Case Analysis
Southwest Airlines is a company that has grown from a small regional carrier in Texas and surrounding states to the largest U.S.-based airline. The primary strategy of the company is to be the low-cost, no frills option for people wanting to travel within the United States. Recently, Southwest acquired another carrier so they will soon begin international flights to the Caribbean and Mexico. This paper discusses the company, its competitive environment, how it relates to external forces, and how the company has built and maintained its reputation with a creative internal focus.
Until recently the company has maintained a spotless maintenance record, but there have been several incidents that have worked to temporarily tarnish the reputation of the airline. Due to some faulty aircraft inspections, Southwest has had to rethink it maintenance program. Since the issue was connected with maintenance, the primary recommendation of this paper is to implement new standards which will work to re-instill confidence in customers. Also, the airline should also look to upgrading its fleet of airplanes to phase out older models and acquire newer planes which do not have the stress issues of the older planes.
External Analysis of the Environment
Macro Environment Analysis
The principle method used to analyze the larger environment external to a company is encompassed in the acronym PESTEL. The six elements that are comprised in the acronym -- political, economic, social, technology, environment, legal -- are meant to give the company a view of the overriding forces that effect industry. As of right now, Southwest primarily flies within the United States, so is only concerned with U.S. government and laws. However, the company recently purchased a small airline that has routes that fly to the Caribbean so will soon have to deal with those nation's political and legal guidelines. The U.S. political system is stable, and legally there are no issues that Southwest airlines will have to deal…… [Read More]
Value chain and resource-based view of the firm
Southwest Airlines has a famously unique business model for an airline, one which has enabled it to sustain a profit even during times when the rest of the airline industry's fortunes were flagging. Southwest is a budget airline that offers relatively limited flights to a fixed number of destinations, in comparison to its competitors. However, it strives to offer superior service, thanks to its enthusiastic and well-trained staff. It offers value to customers based upon price as well as programs such as its Rapid Rewards loyalty program (Thompson & Gamble 2008: C-287). "Southwest was a shrewd practitioner of the concept of price elasticity, proving in one market after another that the revenue gains from increased ticket sales and the volume of passenger traffic would more than compensate for the revenue erosion associated with low fares" (C-287).
Southwest was also one of the first airlines to eschew the 'hub and spoke' system of flights. Instead of offering many connecting flights to prominent large airports, Southwest focused on offering shorter, direct and frequent flights. This reduced delays based upon connections. It also increased customer satisfaction by streamlining and improving customer service. Early on, Southwest focused on doing what it did very well, rather than trying to be all things to all people. It marketed itself as a low-fare, on-time airline (C-289).
In an era where service quality on flights is plummeting, Southwest still has a strong reputation for the enthusiasm of its considerate staff. It also exhibits a sense of humor as an airline, most notably in its artful 'love' campaign, a verbal play on words, regarding the location of the airline near Love Field. Southwest staff members were specifically selected for their personality, and being willing to sing and play games was a must (C-287). This strategy also increased customer satisfaction, by making the process of traveling much more 'fun,' even if there were delays. For certain consumers, such as those with an eye upon their pocketbooks, Southwest seemed to be an ideal airline. Also, for customers who travel on frequent, short trips, its Rapid Rewards loyalty program offered more value than standard frequent flyer programs, because the number of trips, versus the number of miles flown, conveyed rewards to the passenger.
Southwest was careful to avoid the overly…… [Read More]
Before 1978, the federal government regulated the U.S. airline industry. Airlines were given profitable routes but were also obligated to serve unprofitable routes in the public's interest. Increases in airline costs were routinely passed along to customers due to the lack of price competition.
In 1978, the airline deregulation act enabled airlines to set their own fares and enter or exit routes without government approval (Lam, 2003). The major airlines responded by dropping the unprofitable routes, in favor of the more profitable ones that were the long haul flights between big cities. Short haul flights still operated, but only as feeder flights to the major airports where the long haul flights departed from. In many cases, passengers had to fly short haul to a hub airport, then connect to another hub airport and take another flight to reach their final destination.
Deregulation allowed smaller regional airlines to expand quickly, being more flexible and carrying a lower level of debt than the major carriers. Their lower cost structure allowed the small regional airlines to position themselves as value airlines, competing with the big carriers on price. In the U.S., air travel rapidly became more popular, due to the size of the country and the lack of competition from alternative forms of long distance travel.
Southwest Airlines began as a small regional airline operating between Dallas, Houston and San Antonio. Deregulation enabled it to expand rapidly and in 1990, it hit the U.S.$1 million mark. Today, it remains a major carrier.
Southwest Airlines has reinvented traditional air travel by implementing super-low airfares and a wacky, irreverent style of doing business. This paper will present a historical overview of the company, discuss the reasons for the company success, identify financial strengths and provide a final conclusion.
I. Company History
In 1971, Rollin King, a San Antonio entrepreneur who owned and operated a small commuter air service, and Herb Kelleher, a lawyer, collaborated their ideas for a new type of airline (Southwest, 2003). Their plan was simple -- they believed…… [Read More]
Southwest Airlines: We Love Bags
Determine how Southwest Airlines' corporate culture differs from other airlines.
Southwest Airlines was founded on the premise that an airline needs to put its customers and their needs at the center of all operations, and further create a customer experience that is highly differentiated, memorable and sought-after by passengers. Southwest has surpassed even its own initial expectations in these areas. The culture of Southwest galvanizes the employees, customers, stakeholders, suppliers and partners into a cohesive value chain all aimed at keeping costs down and increasing lifetime customer value through loyalty (Krames, 2003). Due to its excellent control of costs and aggressive use of fuel hedging, all supported by a very customer-centric, positive culture, Southwest is the only U.S.-based airline to never file for bankruptcy protection, much less ask for a government handout (Rhoades, 2006). Southwest is one of the most unique service businesses in the world due to its ability to translate a core set of values exemplified by a whatever it takes attitude of service to the passenger, friendliness, individual pride, and Company Spirit (Strategic Direction, 2005). Southwest Airlines employees are empowered to take any action that is ethical and legal to ensure customers' satisfaction (Hardage, 2006).
The uniqueness and highly differentiated nature of the Southwest culture is also attributable to the thirteen core values that founder and CEO Herb Kelleher put into place with the company was founded (Freiberg, Freiberg, 1996). He wanted to create a culture of accountability, transparency and trust, in addition to allowing employees to be themselves as well. Mr. Kelleher also believed that when employees were fulfilled in their work, they would be willing to go the extra mile for customers as well (Krames, 2003). All of these assumptions turned out to be correct, and led to the definition of the thirteen values the company is based on. These thirteen values include seeking out low cost yet high value solutions to customers' challenges and problems; relentless pursuit of profitability; family; fun; hard work; individuality; ownership; legendary service; egalitarianism; common sense and good judgment in serving customers; simplicity; and altruism. These values are so critical to the success of the company that new employees are…… [Read More]
Air travel is still the preferred means of transport in the United States of America largely because it is faster. However, it has in the recent times experienced decreased growth from the peak in before the 1990s. The period between 1980 and 1990, there was a sharp increase in the number of people travelling by air. Today, major carriers have cut costs in the face of intense rivalry and low profit margins. Nonetheless, the economic downturn experienced in the U.S. has not made the situation any better for the aviation industry. Many airlines have greatly been affected by the increase in fuel prices and demand for high cost of labor. However, through product and service differentiation innovation strategy of low cost, reward and convenience, Southwest has successfully distinguished itself from market competitors in a bid to maintain profitability in this excessively aggressive industry.
Differentiation Innovation Strategy
Products and services can be differentiated in a number of ways for them to stand out as distinct. Southwest Airlines has two main differentiation innovation strategies in place, pricing and convenience. Southwest Airlines charges the most affordable fore in the market and is still able to make a profit. The low fare strategy, as made Southwest formidable in the airline industry and competitive in the transport sector as a whole as many opt to fly than drive. In addition, the airline has secured a prominent market position by defining a business model that adopts one type of aircraft; this has made operations and maintenance manageable. They are able to train their mechanics on the Boeing 737, they stock inventory for the same aircraft and the onboard and ground crew are familiar with it (Stevenson, 2012). In addition, SWA makes it possible for "bags to fly free" this limits time wastage before departure. The aircraft has short hauls, secondary airports and point-to-point (Acap, Feng, & Mattu,…… [Read More]
Southwest Airlines is one of the most successful low-cost airlines in the world. The company's focus on constant innovation, excellent labor relations, and sound financial management have ensured its success at a time when many companies have suffered from the economic downturn. In this way Southwest Airlines has created an example of business success for many. The company's success is also due to the consistency among its organization practices, which even imitating companies have found difficult to truly replicate. Indeed, the company has used its tangible, intangible, and other resources to ensure its security in the world.
Southwest's response to 9-11 has shown its attitude and commitment to the industry. It has set itself apart from its competitors by avoiding layoffs in an industry where most major airlines cut their workforces by 16%. Southwest, in turn, maintained its labor force and expanded the availability of its product to the flying public. In this way, the company maintained its reputation as a caring employer and service provider, maintaining a high level of importance in terms of both its internal and external human relations. This attitude was difficult to replicate in the face of the 9-11 crisis and the company's reputation received a major boost where others faltered (New York Times, 2011).
Southwest Airlines also has an impressive range of physical resources to maintain its reputation as low-cost service provider. During 2011, the company's fleet amounted to 698 Boeing 737-717 aircraft. During 2011, the company's aim was also to introduce the 737-800 craft into its fleet.
Additional costs were cut down by incorporating technology in its service process. Indeed, the company was the first of its kind to introduce ticketless travel. The company website is responsible for 46% of revenue for Southwest and receives the largest amount of clicks among websites of its kind.
The company has a significant amount of financial resources, which is the result of the company's sound cash management policies. In the financial year 2011, for example, the total cash generated was $985,000,000, which amounted to an operating income of $262,000,00. The company's credit value level is also "very good."
To achieve this, Southwest's business policy is to operate the same type of aircraft at a high frequency between smaller airports (New York Times, 2011). This, along with its "no-frills" policy, has allowed the company to reach…… [Read More]
The airline industry has been one that has consistently lost money during the last decade. Even before that, if an airline did not have a good business strategy, they were most likely doomed to failure. Many people do not remember Braniff, TWA or Pan American, but for a long time they were among the largest air carriers in the world. He present model, for airlines as well as other businesses, is to determine what they can do to streamline their costs, and the costs to their customers, while still remaining profitable. This may seem like what companies have always done, but that has not been the case. When the economy is doing well customers do not care as much about pricing and carriers offer more for the price of a ticket. Unfortunately this balance has been destroyed by the economic downturn, and many businesses have not been able to survive.
There are some that have either learned the lesson of survival, or they were able to continue a business model that was consistent with the equilibrium that has been established since the crisis. Southwest Airlines has always prided itself on the fact that it is a low-cost alternative to the big name international airlines. Southwest started as a regional carrier and has become successful nationally because they have maintained a pricing strategy that is consistent with the way customers now behave. Like businesses such as Wal-Mart and thrift stores, the low-cost alternative has become the industry reality. Southwest has been able to grow its business through this economic period because of savvy decisions that were made decades ago. With new initiatives (that are actually old ones repackaged) such as "bags fly free" and new ones such as hedging fuel costs, Southwest Airlines has been able to thrive at a time when other airlines are at the brink of bankruptcy. This paper details the culture and values that have made Southwest one of the more revered and copied companies in the United States.
Southwest Airlines is an air carrier that specifies low cost travel for all of its patrons. The carrier serves the continental United States with non-stop service to and from all of the airports it serves, and it guarantees…… [Read More]
Southwest Airlines has been an innovator in the airline industry. The company has steadily implemented one of the most interesting operational strategies since the company was founded. As a result, Southwest Airlines has earned countless awards rated against factors such as employee satisfaction, customer satisfaction, and profitability. Furthermore, Southwest was able to claim these awards while being able to also claim some of the lowest operating costs in the industry. Despite the company's long track record of success, it will face brand new set of challenges and risks in the coming years since the airline industry seems to be evolving. The evolution of the airline industry will be driven by rising fuel costs, slow demand, and many environmental issues. Therefore Southwest will have to be able to further refine its strategy to meet the challenges in the new continually evolving external environment.
External/Internal Industry Analysis
Threat of New Entrants -- Low
The global recession has created an environment in which there is little market share available for any new competitor to try to tap into. Furthermore, since the market size has stagnated, the industry is generally accepting a reduced margin on their services. Furthermore, there are many layers of industry regulations that must be considered before new competitor is to enter the marketplace. However, competition can also enter through acquisition or leave through liquidation which also provides some volatility to the industry and opportunities for a new landscape.
Supplier Power -- High
There are basically two suppliers in the aircraft industry; Boeing and Airbus (Mustoe, 2010). Not only is the number of suppliers exceptionally low, but these suppliers actually coordinate their operations to some extent. For example, the two main companies also share many of the same suppliers and have worked together to pressure some of their own suppliers for their strategic advantage.
Buyer Power -- High
In the airline industry, only a small portion of consumers have any significant loyalty to any one airline brand. In most cases consumers view different airline services as relatively equal and as substitute products. If there is ever a…… [Read More]
Margins have fluctuated and are down, indicating short run cost control failure. However, company performance in the long run is strongly attributable to the corporate culture. Southwest has had consistent performance since its inception, despite many swings in the fortunes of the industry overall. This indicates that management fostered a culture that over the long run will drive customer loyalty and will drive steady, incremental cost reductions. Success for Southwest is not measure in short-term results so much as long-term and on that measure the culture has contributed to a long run of success for Southwest.
One of the strategic decisions in the case is how to deal with the declining revenue environment. The airline industry has struggled in recent years leading to industry-wide cost reductions. To address this issue it is recommended that Southwest simply ride it out. The corporate culture has been a source of value for the company, and layoffs could compromise that culture. Therefore layoffs will cost more than doing nothing even as revenues drop. The second recommendation is to use the opportunity to find new routes. As other carriers reduce capacity, space may become available at airports that would allow Southwest to drop less profitable routes for ones that are more sustainable over the long-term.
The first leadership action to implement these decisions would be to take a public stand reassuring the employees that there will be no layoffs. While layoffs are bad, the fear of layoffs is almost as bad for morale within the organization, so a public stand could assuage that fear. The second leadership action would be to ask for the employee's assistance in cutting costs further. While the culture exists, this act would reinforce the culture, by imploring the employees to buckle down and go to battle for the company. Another leadership action would be to go on the offensive -- make an internal declaration such as a mission statement for the coming year that will rally the troops against a specific target. This could be overtaking a rival airline in market share or perhaps turning a profit. In either case, these tactics will work because the instill confidence in…… [Read More]
The secondary gross margin measure, Gross Margin after Depreciation, shows the costs of having a rapidly growing infrastructure to support new routes and the purchase of additional planes over the five-year period. The reduction Gross Margin after Depreciation would be flat or slightly down during a strong economic period as well. This measure of gross margin indicates that the capital investments that are often amortized over seven years as fixed assets are being depreciated on the Southwest Airlines balance sheets through the 2004 -- 2009 period. In summary, the Southwest Airlines financial statements reflect how effective the strategies of continually improving productivity through process improvement are which are tied very closely to the culture the company has worked so hard to create. The activity-based ratios shown in Table 1 including Inventory Turnover, reduction of Operating Cycles and stabilizing Days to Sell Inventory stabilized at 9 days is impressive. This says that despite the rapid growth the company has achieved, they are still as efficient as when they were significantly smaller in 2004.
Table 1: Southwest Airlines Ratio Analysis
Describe the characteristics of company's culture and how it affects company performance.
The thirteen core values of the companies mentioned earlier define a strong foundation on which trust is established and maintained between managers, employees, senior management and service partners throughout the airline's network. This trust acts as an accelerator of key business processes, as it enables much greater tolerance and resiliency to change on the part of its employees. It is noteworthy that Southwest Airlines is one of the few airlines that is not completely managed from unions at the mechanics level of operations, and the commitment to values is a major factor in contributing to keeping unions from overtaking this company (Krames, 2003). If there is a cornerstone to the culture that directly contributes to the company's ability to translate its values to profits, it is its egalitarian nature and openness, and the trust that pervades communications (Sadri, Lee, 2001). This cultural attribute above all others has led to fewer mistakes being made, fewer problems with operations, greater insight into how to improve the efficiency…… [Read More]
Southwest Airlines, Inc.
Southwest is an impressive company on many levels. Most notably, it's determination to do whatever it takes to get the job done stemming from its original battles to begin operations make the company flexible in meeting the demands of a highly dynamic industry. Secondly, the company fosters innovation and has been very creative in being a leader in transforming the industry. Some of the most important examples include its ability to facilitate rapid turns, early leadership in online ticket bookings and "outrageous" marketing campaigns.
Thirdly, the belief that the employee comes first and that customer satisfaction will follow has boded well for Southwest. It's "hire for attitude, train for skills" and People Department reinforce this airline's dedication to making the working environment as enjoyable as possible. This combined with an open door policy and lean management layers promotes a strong sense of ownership and team accomplishments. Southwest consistently appears on Fortune's list of most admired airlines because its can do attitude, innovation, motivated workforce have propelled the company to be profitable for nearly thirty years even though it competes in an industry that is vulnerable to economic cycles that typically have large effects on the bottom line of airlines.
Southwest is a company with few visible weaknesses, but does have room to explore opportunities related to price elasticity in the industry as well as online sales. Currently, the airline has recognized that there are time-sensitive and price-sensitive customers and has developed on-peak/off-peak pricing schedules to reflect this. However, this is just the tip of the iceberg in exploring what options customer are willing to pay for such as assigned seats and business class cabins, features that other airlines exploit to boot their margins for every seat-mile they fly. The case doesn't reveal the fact that Southwest doesn't partner with other online travel such as Travelocity and Microsoft's Expedia. The airlines states that it doesn't do so because it can't control the service a Southwest customer gets from the online agent nor can it guarantee the ease of buying a ticket online. But, other online sites have also figured…… [Read More]
Internal Analysis of the Southwest Airlines RBV Framework
Southwest Airlines (NYSE:LUV) has a market cap as of September 12, 2011 of $6.3B, the most profitable and valuable American-based airlines there is today. This is a direct result of the company's ability to consistently take a resource-based view (RBV) of its inherent strengths and develop and execute successful strategies on them over time. The RBV of the airline industry illustrates how challenging it is to attain higher levels of Return on Invested Capital (ROIC) on a services-based business that is under continual price competition (Kumar, Johnson, Lai, 2009). Southwest has been able to overcome these challenges by concentrating on fuel edging strategies, greater focus on standardization of aircraft and supplies to drive down operating costs, and a focus on delivering an exceptional customer experience on each flight (Michalisin, Karau, Tangpong, 2004). Using an RBV-based analysis of the company, this report provides background and recommendations for future strategies going forward.
Southwest Airlines has successfully differentiated itself for its many competitors by taking an RBV-based approach to quantifying the contributions of its culture and employees to profitability. The foundation and catalyst of this unique aspect of the Southwest Airlines culture is predicated on the thirteen cultures the founders put into place when launching the company (Freiberg, Freiberg, 1996). Based on these thirteen values, a culture of trust permeates the company today. Given the high level of trust within and between departments, there is also a high level of creativity and flexibility in completing tasks and responsibilities, all centered on the customer experience above all else (Rhoades, 2006). It is noteworthy that Southwest is the only airline to generate a positive Return on Investment (ROI), Return on Assets (ROA), and Return on Equity (ROE) during the last recession, far outdistancing its competitors on these critical financial metrics. The greater the level of trust and an egalitarian mindset in a company, the greater the level of information velocity and corporate performance
(Kochan,…… [Read More]
Southwest Airlines Business Model and Downsizing.
Southwest Airlines: Downsizing decisions
Southwest Airlines brands itself as a people-focused company. Interacting with its quirky, humorous staff has become part of the Southwest experience that customers expect when traveling on the airline. Southwest places a premium upon selecting the right people for each position at the company, with the belief that while workers can learn skills, they cannot learn to have the right attitude. When faced with the prospect of downsizing, Southwest must confront the possibility of letting go cherry-picked workers who have made a tremendous investment in the company, and in whom Southwest has made a tremendous investment in recruiting and training. "There is little airlines can do about the cost of fuel, landing fees or insurance. The big fish is controlling labor expenses, and experts say that companies must reduce costs or get better efficiency (i.e. more working hours) out of pilots"(DiCarlo 2004). However, air travel is a service-based industry and Southwest cannot afford to ignore the need to retain quality staff.
From a rational choice perspective, customers are highly price-sensitive when it comes to choosing airlines, particularly airlines that have primarily marketed themselves as 'budget' airlines like Southwest. Southwest has been able to keep costs down in the past by flying to a relatively limited range of destinations, an aggressive fuel hedging program, and limiting full meals and in-flight amenities. However, this strategy does not appear to be working any longer. Thus, according to the rational choice perspective, Southwest must cut costs in all areas including workers.
But this is where rational choice theory can occasionally meet with folly, failing to take into consideration the input of other organizational actors. The harmonious relationship between Southwest management and employees, which has limited the strikes and labor discord that have plagued the other airlines, has been another cornerstone of its success. Massive layoffs would threaten this. "87% of its employees belong to a union. Southwest has never had a strike, and now that the network carriers have whacked away at salaries and benefits, Southwest staffers are generally the highest paid in the industry. But since Southwest has about 30% fewer employees per aircraft than its network competitors, it has the lowest…… [Read More]
"Paying market prices for a third of its fuel needs could add as much as $600 million to its bill next year, according to an analysis by the federal Bureau of Transportation Statistics," almost twice "the $313 million profit that the airline made in 2004, and well above the $440 million analysts expect it to earn this year," meaning that Southwest's main competitive threat really comes from the end of its previous business strategy. However, "Southwest is planning for the day when things get even worse. The airline is already looking at 2010, when its fuel hedges completely disappear, leaving it with a fuel bill that would be $1.4 billion higher than in 2005 - an increase equal to 20% of its current revenue - if prices stay the same as they are today. Southwest's fuel costs now average $15 a passenger, according to a study by the federal statistics bureau that will be released this week. That compares with $9 a passenger in 2000." (Maynard, 2005)
However, Southwest is reluctant to raise fares, as it has branded itself as a budget airline, and it has no real perks to eliminate for passenger or staff. Some industry analysts suggest it has a little wiggle room with salaries, but will that lead to the labor disputes that blighted the major carriers?
Southwest seems wise to continue its branding as a low cost carrier. But in the face of JetBlue's potential use of its marketing strategies, and the end of its fuel protections, the airline may have to accept advertising on the side of its planes. JetBlue has done so on its 100-person carrier crafts from Boeing. For this industry pioneer to flourish, given the demise of the fuel-hedging component of its business strategy, and to capitalize upon the major carrier's current weaknesses, JetBlue may have to…… [Read More]
More specifically, since Southwest invests heavily in both training and the "attitude" of its employees, the fact that all economically motivated employee separations are voluntary buyouts allows the company to protect that investment.
A happy workforce is more productive, which further helps the company manage its costs. Compared to the industry average, Southwest serves more than twice as many customers per employee and gets by with 8% fewer employees per plane. Moreover, the company's all-hands-on-deck approach allows it to turn its planes substantially faster than the competition, getting these extremely expensive assets back into the air where they can generate revenue.
4. Given the strategic decisions in the case, recommend actions that management should take to sustain/strengthen the culture (or implement a change), based on the situation given.
In the face of recent safety-related setbacks to the company's previously unblemished brand, both employee and public confidence in the maintenance system must be rebuilt. More broadly, since culture is the centerpiece of the company's competitive proposition, the most natural resources available to overcome the situation are likely to be cultural in focus. Simultaneous, risks to the culture must be identified and addressed.
A secondary concern is the possibility that the public will identify Southwest as a "fun" or party-oriented low-cost airline with a willingness to cut corners on safety. Such perceptions must be actively challenged through a campaign that demonstrates that while the carrier avoids wasting money on frills, it still provides substantial value for the price of a ticket.
5. Given the strategic decisions in the case, identify three leadership actions that the company would need to be consider to implement the decisions. Explain why these are critical to implementing the strategic decision.
1. Broaden the labor force's mandate to report concerns and suggest operational improvements to matters of equipment. Implemented in a sensitive way, this would knit maintenance personnel more closely into the corporate "family" where they might otherwise be scapegoated for the company's problems. It would also transmute the failure of a single area of the business into a teachable moment for all, reinforcing the core engagement with customer service and pride in the brand.
2. Scale back the "fun" orientation of the brand to focus on reliability and value until it is clear that the company's reputation has been repaired.…… [Read More]
The capital asset pricing model (CAPM) is a method that is commonly used to determine the cost of equity for a company. The formula for CAPM is:
According to MSN Moneycentral (2012), the beta for Southwest Airlines is 1.13.
The risk free rate, based on the one-year Treasury yield, is 0.17% at present (U.S. Department of the Treasury, 2012). We are assuming a 7% market risk premium, as is customary.
This results in a CAPM calculation as follows:
Ra = Rf + ? (Rm-Rf)
Ra = 0.17 + (1.13) (7)
Ra = 0.17 + (7.91)
Ra = 8.08%
Therefore, according to CAPM, the cost of equity for Southwest Airlines is 8.08%.
This cost of equity is about what would be expected. Southwest is a relatively stable firm that seldom has massive swings in earnings, despite being an airline. If the historic average cost of capital for a firm in the S&P 500 is 10.2%, then Southwest falls below that. However, this is linked to the fact that the risk free rate is very low at present. The risk free risk is not historically near the zero bound. Because the risk free rate is so low right now, the cost of equity for most firms will be below their historical averages. For example, if we take 3% as the risk free rate -- a more reasonable number historically -- we can see that the cost of equity for Southwest is 3 + 7.91 =…… [Read More]
At YUM Brands, this internal environment is characterized by an organizational culture focused on the role of people in the attainment of the organizational goals and objectives. The Yum Brand managers then recognize their employees as the most valuable assets and strive to increase their on the job satisfaction.
"We believe that our customers' experience will never exceed that of our team members. For that reason, our Dynasty Model starts with our people. We know that people don't just play a role in our success -- they are the reason for our success. Our corporate values -- what we call our How We Win Together principles -- are built around a "People Capability First" philosophy and lay the groundwork for the way we team together every day" (Website of Yum Brands, 2012).
Despite the positive attitude embraced by the Yum Brand executives, fact remains that the brands are spread out across the entire world and the four companies (Taco Bell, Kentucky Fried Kitchen, Pizza Hut and Wing Street) operate through numerous franchises. Within the franchises, the focus falls on the preservation of the brand names, the satisfaction of the customers and the generation of profitable results. The emphasis on the personnel as such tends to decrease as the managers are local persons, with different styles, cultures and different implementations of human resource management and organizational culture. In other words, it is challenging for Yum Brands to universally implement its internal philosophies, mission and vision in the spread out structure of its stores.… [Read More]
..you've got to take time to listen to people's ideas. If you tell someone no, that's and act of power and, in my opinion, an abuse of power. I don't want to constrain people in their thinking" (71).
Today the biggest asset Southwest Airlines has is its employee loyalty. Always considered to be valued employees over profit and money and this is exemplified by the fact that the airline has never had a lay off of any kind - with the exception of laying off three employees early in the business but hired them back in a short amount of time. Southwest's company loyalty to their employees has made them stronger organization and has saved them a significant amount of money. Trust and security shown by Southwest employees is evidenced in how they do their job. There definitely exists a bond of loyalty that is hard to break, as the employees know they have a future in the good times as well as the bad times. In addition the management segment of the airline believes front line employees are the most important assets of the airline. In fact Kelleher management structure is often viewed as an upside down pyramid wherein the top of the pyramid is representative of the employee. Another significant aspect of employee loyalty within Southwest Airlines is the company's willingness to make the employee part owner of the airline itself, namely in providing employees a stock option plan. Today the employees now own 10% of the company's outstanding stock. All in all, the seemingly limitless employee loyalty is clearly evident in the airline's day-to-day operations of the airline as they go out of their way to make sure the airline stays on time to continually accommodate the traveling customer. There is no doubt that the success of Southwest Airlines is a reflection of the company's goals and management style.
Works… [Read More]