Southwest Airlines' competitive position in the consolidating airline industry

External Analysis of Southwest Airlines

External Analysis Southwest Airlines

Will Southwest Airline's strategic plan continue to bring success in the new airline industry landscape? This paper sought to answer this question by examining the external increasingly consolidated environment in which Southwest competes. The review was conducted through application of Porter's Five Forces, a PEAT analysis, and a SWOT analysis.

The report concludes that Southwest has gained ground and maintained stability, changing only as much as it needed in order to remain the friendly domestic budget airline it started out as, and to compete effectively but with fidelity to its vision and values.

This paper will present a brief analysis of the competitive landscape for Southwest Airlines based in order to assess the airline's future capabilities in an environment in which other airlines are increasingly co-opting Southwest's successful and innovative strategies. This deductive exploration of the landscape will continue at the micro level through application of Porter's five forces framework. The treatment will follow a tiered approach that examines the macro-environment, the micro-environment, and -- to some degree -- the internal environment. The external analysis at the macro level will be accomplished by analyzing the PEST filters at the micro-environment level. Finally, a SWOT analysis will be generated for Southwest Airlines against the background of the macro level and the micro level analyses. The unit of analysis for this paper is the company level for Southwest Airlines. The NAICS code is 4811, which includes all companies providing scheduled air transportation of passengers and cargo. The Charter and Other Nonscheduled Air Transportation category includes those companies providing nonscheduled transportation.

Strategic Analysis

Southwest Airlines competes with about 600 companies across the domestic airline industry ("Airline Industry," 2011). The major airlines include United Continental, American (which is owned by AMR) and Delta ("Airline Industry," 2011). In addition, there are a number of express delivery companies, such as UPS, FedEx, and DHL. The ten largest companies earn more than 75% of the revenue for the industry ("Airline Industry," 2011). About 70% of revenue comes from domestic flights and approximately 20% comes from international flights. Reservations, and the provision of training, servicing, and maintenance, account for the remaining revenue generated in the airlines industry ("Airline Industry," 2011).

Porter's Five Forces

The structure of an industry can have a profound effect on the level of profitability that can be sustained. Rivalry can best be understood within the context of an industry. Michael Porter developed a model for analyzing the influence of industry context on competition.

Supplier Power. There is virtually no vertical integration in the airlines industry. However, horizontal integration has been very evident. A number of mergers of large airlines have occurred over the past decade. Consolidation is expected to continue as airlines reach for stability and profitability ("Domestic Airlines," 2011). The supplier power force is high.

Buyer Power. Buyers in the airlines industry -- primarily airports -- tend to be weak. However, buyers are trying some new tactics to drive up their share of the revenue. Tampa International Airlines, for instance, is offering $2.5 million in airport fee waivers and advertising over a two-year period to any airline that begins daily flights to Europe with a wide-body 767 (Huettel, 2011). Even new domestic service and shorter international flights will qualify for smaller incentives.

Despite the increased dependence on the Internet, the freight and mail poundage increased by 3.6% from 2010 to 2011 ("Research and Innovative," 2011). Some minor increases in airfare in 2011 did little to dampen flyer behavior, as the number of enplaned passengers increased 2.4% by from 2010 to 2011 ("Research and Innovative," 2011). The percentage of scheduled service fell 3.9% from 2011 to 2011 ("Research and Innovative," 2011). Market shares for the major airlines are as follows: Delta at 16.6%, Southwest at 14.4%, American at 13.5%, United at 10.0%, U.S. Airways at 7.9%, Continental at 7.3%, JetBlue at 4.4%, Alaska at 3.4%, AirTran Corporation at 3.4%, SkyWest at 2.1%, and Other at 17% ("Research and Innovative," 2011). These market shares point to three distinct tiers in the industry, which could certainly be a factor in the wave of consolidation, with larger airlines acquiring somewhat smaller ones. The buyer power force is high.

Threat of New Entrants. Barriers to entry in the airline industry are great. Economies of scale can only be achieved by airlines achieving a fairly substantial size. Local and regional airlines are able to be competitive on a smaller scale than larger airlines and their entry costs are less. New entrants in this category have entered the market. Jet Blue, founded in 1999, is a successful example ("Domestic Airlines," 2011) . This category calls for separate analyses of the impact of the five forces on different tiers of airlines, which is determined primarily by the size of the company. For smaller, regional airlines, the threat of new entrants force is moderate. For larger airlines with strong international presence, the threat of new entrants force is low.

Threat of Substitutes. Switching among airlines is common. Higher end consumers tend to loyal and participate in mileage clubs. But a vast number of flyers are price sensitive, and the price-performance trade-offs are very clear. The threat of substitutes force -- within industry -- is high.

There are no viable long-range substitutes for air travel in the U.S. The train system, unlike that in Europe is inadequate for most cross county or interstate travel -- there simply are not enough rails and the costs are higher than budget air travel. The cost of fuel periodically makes long-distance traveling by automobile prohibitive. Traveling by boat is impractical as there are very few domestic water channels, although in some areas ferry travel is competitive with small airplane travel. The threat of substitutes force -- across the transportation industry -- is low.

SWOT Analysis

A SWOT analysis is used here to triangulate the information gathered and analyzed by the PEET analysis and the use of Porter's Five Forces ("SWOT Analysis," 2009; Zahorsky, 2009).

Strengths. Southwest airlines most prominent strength is employees. The recruiting and hiring process is stringent, the performance expectations are high -- and they are met. Employee loyalty and motivation to make the company successful are high. Pricing is another company strength, in that, despite its "cattle call" boarding processes, Southwest has found ways to keep customers happy and prices low. The enthusiasm of employees has a lot to do with those outcomes. The ability to turn a plane around in about half the time other airlines accomplish the task is a substantive strength; this allows Southwest to schedule more flights per day than their competitors.

Weaknesses. Southwest makes promises to employees that it keeps -- sometimes at significant fiscal cost. When the company promised to freeze pilot pay, it cost Southwest somewhere near $100 million dollars ("Wharton," 2003). As Southwest matures as a company, more of the fleet will need to be replaced. Inventory is expensive, but leasing arrangements may provide some relief and forestall Southwest having to invest in the inevitable technological upgrades to planes.

Opportunities. The Southwest effect -- lower average fares among competitors in airports where Southwest flies to compete with Southwest's low fares -- can help Southwest keep the competition at bay. Southwest knows how to keep costs down, and because they are prepared for the industry slumps -- on solid financial footing -- they can create fiscal smoothing. Southwest's debt-to-equity rate is lower than the rest of the airline industry at about 25%, unless leases are involved, which drives it up to 40% ("Wharton," 2003).

Threats. The airlines industry is highly taxed, with fees accounting for approximately one-third of every ticket. Regulation from the Federal Aviation Administration and the Transportation Safety Administration is responsive to incidences, and can tighten at any time which drives up costs. If Southwest does not add international fights to its schedules, it may become difficult to compete with airlines that are getting substantial discounts and free services for participating in these programs (Huettel, 2011). Continued political unrest and instability pose threats to the volume of enboarded passengers, which could undermine Southwest's ability to keep all their flights full.

Conclusion

Southwest Airlines can plan on staying the course to achieve continued success -- the carrier has been profitable for 38 straight years. It has weathered the industries ups and downs, and expanded to serve 70 cities in more than 35 states. The fleet has grown to about 550 planes and Southwest acquired AirTran Holdings -- the parent company of AirTran Airways -- for approximately $3.2 billion in 2011 (Hoovers, 2011). The formula of low fares, low operating costs, festival seating, and singing / joking flight attendants continues to work well for Southwest.