Southwest Airlines business model and operations

Southwest Airlines

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).

SWOT

Strengths

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 ambitious expansion of some of its rivals. It expanded into markets cautiously, and quickly cut unprofitable flights. As well as engaging customer service, it was careful to maintain and upgrade its fleets, and stay mindful of safety concerns. When Southwest did expand, it was in areas underserved by rivals (C-292). Its flight model allowed it to keep fuel costs low, and to avoid paying landing fees and terminal gate costs (C-293). It was the first airline to offer expedited, ticketless travel (C-292). Its democratic method of seating passengers in a numerical fashion further bolstered its reputation as an ethical airline that cared about consumers, as well as reduced the time it took to board.

Weaknesses

Southwest remains fundamentally a regional airline. For flyers who need to travel extensively all over the world, it may not be the airline 'for them.' Also, more and more airlines are cutting back on in-flight amenities. Southwest always offered a budget focus, but now more airlines are starting to look like Southwest, most notably its budget rival Jet Blue.

Southwest's greatest weakness at present is rooted in what was once its greatest strength-hedging on fuel prices. From 1998-2004, this practice resulted in Southwest saving 4 billion dollars, but "prices in late 2008 and 2009 resulted in reported losses of $408 million on the fuel hedging contracts that the company had in place during 2009" (C-294). Hedging is always a gamble, and Southwest cannot count that this gamble will pay off year after year

Opportunities

The downturn in the economy makes offering budget flights an ideal way to ingrate Southwest into the hearts and minds of consumers. Southwest has always been an airline that serves the needs of the 99%, rather than the one percent of flyers. Southwest traditionally offered no first class seating to passengers, and instead focuses on offering a high-quality experience to all flyers (C-294). The streamlined, budget approach to its airline which strives to offer maximum efficiency, even to the point of eliminating cloth seats with leather (easier to clean) and requiring flight attendants to clean the cabins after the flights makes it the ideal minimalist airline for the next millennium.

Threats

Jet Blue and other budget carriers continue to compete on price with Southwest. Southwest is losing some of its unique 'branding' as others try to copy its model. Southwest has always had a warm, insular, 'promote from within' policy, and while it does not offer the highest salaries, it always offers greater job security than its rivals. However, as the airline has begun to grow larger in scope, employees have begun to demand higher salaries (C-302). As Southwest has begun to expand, including its acquisition of low-cost rival AirTran, it has also experienced some of the challenges of larger carriers, such as allegations of safety problems (C-308).

Strategic changes

Southwest's main strategic challenge is the need to modify its corporate culture and high quality standards to suit the new demands of its expanding empire, and its general expansion.

Recommendations and strategy implementation

1. Southwest must stay true to its corporate culture which honors loyal employees, given that this is its main distinguishing feature, in contrast to its rivals.