Southwest Airlines business model and operations

¶ … start an analysis of Southwest Airlines and its success story is the company's mission statement. According to the company's website, the company's mission is "dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit"

If we take a brief look at this mission statement, we may find that, differently from many of today's companies, Southwest's mission is not profit maximization, but achieving customer satisfaction through the quality of the services provided. Additionally, the mission statement refers to the joint collaboration and mixture of Company Service and Company Spirit, in the sense that one cannot truly operate and exist without the other. A friendly and efficient working environment is, in Southwest's opinion, a key towards achieving the highest level of customer satisfaction.

The generic strategy for Southwest relies on several important pillars, some of them deriving from the mission statement. The first refers to achieving the highest level of customer satisfaction. This goes from providing high quality services to granting refunds to passengers after the attacks on September 11 and to reaching an efficiency level that allows the company to practice some of the lowest tariffs in the industry.

The second pillar is the "Company Spirit." An efficient working environment is the basic key towards achieving the highest level of performance. Some of the measures that the management has taken in this sense are quite explanatory, for example, including cash grants from the federal government into the company's profit-sharing formula for employees

. Such measures boost up loyalty and morale.

The third pillar for the company's generic strategy lies in "tempering opportunism

. Everything has to be done rationally, including taking over market shares from other companies.

Even if the company is excellently placed in the airlines industry, the external environment brings forth several threats for the future. First of all, new low-cost carriers, such as JetBlue and AirTran Holdings are powerful cost-competitors. Signals are clear that these companies are aiming for higher shares of the market and Southwest is a clear target for these rivals.

Second of all, the airline industry is still recovering from the terrorist attacks on September 11. Further more, terrorist threats are still actual and are translated into business by more security filters, which may affect the quality of Southwest's quality services. We have already seen, for example, that the company has been affected by airport security, with weak traffic increases (only 2%) and low performance on the on-time performance. Weak economy is another worrying factor of the external environment.

On the other hand, we should consider some of the opportunities that the market clearly presents. The company has extended its presence in several airports, including the important Chicago and Baltimore hubs. The fact that it only accounts for 10% of domestic traffic is a sign that this particular sector of business can be well exploited into the future. Additionally, the company has been benefiting from subsidies awarded to companies in the industry after the attacks on September 11.

In terms of the internal environment, the company has excellent scores in several areas. I would start by mentioning the company's strong and qualified human resource. Starting with the upper management and going down the employee ladder, we will find commitment and loyalty for the company and its mission. The way upper management saw fit to handle several labor problems that arise in any company (including here union issues) is a clear sign that the commitment towards the human resource asset is still intact at Southwest.

Additionally, the company's financial situation is quite healthy, especially if we evaluate the environment in which it operated in the last few years. Large cash reserves and a low debt-to-capital ratio mean that Southwest will be nowhere near a financial crisis in the long run. This is extremely important, because it lays grounds for optimal business in the future. Its growth figures, even if still low, are among the fewest positive ones in the industry.

Further more, the company's customer are loyal and provide the base for future growth, deriving directly from some of the facilities that Southwest offers, including flights directly from one city to another. The fact that Southwest has an economically viable model is an essential tool in long-term competition with other companies.

Among its weak points, we should mention the somewhat non-diversified fleet of airplanes. Indeed, as we have seen from the article, Southwest flies just one type of plane, the Boeing 737, which may bring forth several issues related to overall capacity and availability. Another possible weakness for the future refers to one of the characteristics of the way Southwest does business: gradually, slowly, taking one step at a time. The moderate to weak growth rates in 2002 show this. I am not sure that a global economy in which competition (and we have already mentioned this aspect) is getting tougher and tougher is still a place where you can afford to be gradual. However, Southwest's success story seems to contradict me.

The company's grand strategy refers to achieving a higher share of the market and being prepared to speculate any significant market opportunity that may come along in the future. There are several things these two issues imply. The higher share of the market (especially the internal market) can be achieved both by cost-competitiveness and by quality services. In both cases, the new companies, such as JetBlue, are serious competitors. Speculating the market opportunities that may appear needs to rely first on a strong internal potential and a base from within the company. I have already mentioned as company strengths the human resource, including the management team, and the healthy financial situation.

A gradual and sustainable growth seems to be the most important long-term objective for the company. I have previously enumerated some of the reliable foundations on which such an objective relies. A gradual and sustainable growth will also provide the appropriate means by which the company can support the new competition that has made its way on the market. A sustainable growth is also in close connection with the healthy financial situation. Debt-to-capital and debt-to-assets ratios that are too high only show that the growth actually relies on borrowed funds, funds which need to be later paid back.

In the short run, we can enumerate several short-term objectives for Southwest. First of all, an objective would be to create a pleasant working environment, an environment that is the key for Southwest's productivity and efficiency.

A second short-term objective is regaining the momentum after the economic recession and the attacks on the Twin Towers, in an industry that has performed on the brink of bankruptcy ever seen. For the moment, Southwest seems well placed in achieving this goal, however, there are issues to consider, including modifications that may appear on the market, in terms of the main players and their strategies. Southwest needs to keep a close eye on the new firms that are becoming ever more and more competitive.