Southwest Airlines Porter\'s Five Forces

Southwest Airlines

Porter's five forces can help to understand the competitive and operating environment facing Southwest Airlines. The five forces are buyer power, supplier power, threat of new entrants, threat of substitutes and intensity of rivalry (Porter, 1980).

The bargaining power of buyers is high. Buyers are price setters for the most part, owing to intense competition. A high level of information, which has resulted from Internet websites that compare airfares, has increased the bargaining power of buyers. In addition, the relatively deregulated U.S. market has encouraged price competition, which has resulted in lower prices and more consumer expectation of low prices (FRBSF, 2002). Most buyers lack brand identity and are highly price sensitive. There is also the threat of substitutes on short routes.

The bargaining power of suppliers is moderate to high. The two main inputs are labor and jet fuel. Airlines have moderate pricing power over labor given the relative buyer concentration and the switching costs for labor. That said, airlines that are unionized face a higher degree of supplier power than do airlines that are not unionized (Grant, 2005). Southwest is highly unionized but retains enough power over the cost of labor to remain profitable. Airlines have very little control over the price of jet fuel. Most airlines engage in extensive, active hedging strategies to ensure fuel cost certainty (McCormick, 2010). Beyond this, airlines are generally able to control costs. For older airlines -- the legacy carriers -- significant pension benefits may have a strong negative impact on the cost structure, though this is not the case at Southwest.

The threat of new entrants should be low in the airline industry, given the high capital requirements, the proprietary learning curve and need for strong brand identity. Yet new competitors have consistently entered the industry, often beginning with only a couple of leased planes and one or two routes. This is the way that Southwest gained entry into the market in the 1970s. New threats to recently emerge include JetBlue and Spirit.

The threat of substitutes is low to moderate, depending on the route. For short haul routes, customers have the option of driving or even taking the train. There are often low switching costs associated with driving. As the hassles associated with flying have increased, switching has increased as well. While flights on longer routes are faster, there is often a price-performance tradeoff. The longer the flight, the lower the threat of substitutes.

The intensity of rivalry is high in the airline industry. There is little to differentiate airlines. Each airline has high fixed costs. Exit costs are high, as each airline has high fixed costs and only operates in the airline industry. In addition, the industry is subject to intermittent overcapacity. In addition, the service is highly perishable -- an empty seat cannot be resold later. This spurs intense competition to fill airplanes. With low switching costs and a low diversity of rivals, there is a high degree of rivalry.