Southwest Airlines' response to maintenance challenges and reputation management

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 with either. Because it is the largest American carrier, there may be of some concern regarding antitrust, but that will probably never be an issue since the FAA regulates the ability of airlines to operate and will likely keep any monopolies from occurring. The economic environment has been difficult for about four or five years, but passengers are returning as the economy shows signs of a turn around. The social environment has become more complicated as flight remains an optimal mode of transportation, but due to social media customers have more control now than they ever have. Technology increases at a very rapid rate for both computer electronics, flight systems and planes. The company has update its planes recently and continues to be an innovator as far as systems and data are concerned. The environment is of major concern to all consumers, so Southwest needs to make sure that fuel consumption, building, flight plans and every other operation take that aspect into account. Southwest already has environmental initiatives in place which will help them to minimize their effect on the global green space.

Competitive Industry Analysis

The U.S. airline industry consists of approximately seven national carriers and several smaller ones that serve specific regions of the country. This analysis speaks to how Southwest compares to others in the industry. The industry economics are encapsulated in how much cost a particular airline incurs per passenger mile. As of the first quarter 2010 (last numbers available from the case study) Southwest's costs were lower than any airline other than Jet Blue. Unfortunately, all airlines have lost passengers, first after 9/11/2001 and then after the financial crisis began in 2008. Which means that all airlines have lost revenue. However, Southwest has lost far less than the other airlines and has actually jumped far ahead in number of domestic passengers carried. As a matter of fact, Southwest carries more passengers, according to the data in the case study, than any other airline even though they did not at the time have international flights. The main reason that Southwest was able to maintain the passenger and economic lead as compared to other airlines is because it has remained low frills and allowed other airlines to have expensive first class sections and "fancy frequent flyer clubs at terminals" which has helped maintain lower costs per flight.

Probably the most used analysis for the competitive factors that affect a company Porter's Five Forces model. The competitors in the industry have to be very competitive with one another because they are trying to get as many finicky people as possible to fly with them. There are different strata within the industry and Southwest is basically a budget national carrier competing against only Jet Blue nationally for that market, but more people are flying Southwest and leaving other airlines because of the incentives Southwest offers such as the "bags fly free" campaign. As for new entrants, there is always the potential that new regional carriers will take away some of the business generally designated to Southwest, but that is actually a small portion of Southwest's business since most passengers who fly Southwest travel out of their home region. Jet Blue is a significant competitor, but they have not yet been able to gain the rider-ship that Southwest commands. The suppliers are always going to make deals with the company that gives them the most business at the best price for them. Southwest, as the largest U.S.-based airline, can provide more business to suppliers such as those tht sell jet fuel so they generally are able to make better deals than other airlines. An example is that of hedging a majority of their fuel costs which is risky, but has allowed Southwest to save vs. The other carriers overall. The transportation that Southwest provides can only be rivaled by the rail industry, and that is not real competition. The reason is that the travel takes longer, and, even though it is subsidized by the government, cost a lot more for the same length of travel. It is basically a niche that some people enjoy and will always utilize. As mentioned before, the primary source of competition is the people who fly Southwest and can opt for a competitor. Air passengers have all the leverage in the industry and have shown it in the past by moving their dollars around. Right now, the greatest percentage of passengers are opting for the service that Southwest provides, but the people are finicky as mentioned before.

Overall, Southwest Airlines is very profitable and will remain so because of the advantage that they have gained with regard to the tactics used to secure passengers from competing airlines. The margins in the airline industry are small, but Southwest stretches its budget by efficiently using employees (whom they pay more on a per employee basis than any other similar carrier), hedging their fuel costs at a higher rate of total fuel use than any of their competitors, dealing with union issues before they occur, and maintaining an overall record of safety and customer satisfaction that cannot be rivaled by competitors.

Internal Analysis of the Firm

This section describes how Southwest handles itself and its own business. The competence of the firm's management and how everyday business is conducted.

Competitive Advantage

Southwest has always pushed the advantage that they are a bare bones airline that is geared more for saving the customer money than anything else. Because they do not offer the frills of other airlines and have remained a national flier until recently, they have been able to maintain low airfares and stay relatively profitable while other carriers are going out of business. This is the strength of the company and something that the other carriers, with the exception of Jet Blue which was set up the same way as Southwest, have not been able to match.

Financial Analysis

Recently, Southwest Airlines has been in the red for the first time in company history. Even as other airlines were folding, Southwest was able to maintain a profit because of its no frills approach. However, the financial crisis finally produced the first non-profitable years Southwest had ever seen. Despite that, the company has tried to grow revenue by doing the opposite of what every other carrier does, namely no bag fees and even more low cost flights, which has increased the number of people per flight even while numbers of flight needed decreased. This action has allowed the airline to regain some of its lost revenue. The company remains financially sound because it has maintained its reputation with the public.

SWOT Analysis

A SWOT analysis look at the strengths, weaknesses, opportunities and threats to a company. The primary strength of Southwest Airlines is that it has remained true to its low cost roots. A weakness that has been recently noticed due to the inspection failures of many older planes in the Southwest fleet, is the fact that Southwest has not maintained its fleet as it should. The opportunity for Southwest is to publicize the upgrades it is making to its fleet and to its maintenance procedures to regain the confidence of its customers. The threat is that the competition will take this opportunity to further degrade Southwest in the customer's eyes.

Identification of strategic Issues

The key issues for the company are the problems that it has had since the announcement was made that it had not maintained its faultless maintenance record, and the financial downturn has exacerbated this financial issue. Maintenance issues are very worrying to people who are trusting an airlines equipment as they fly. Because of passenger discomfort with the news that has emerged, Southwest has lost significant revenue over the past year. The main issue is that maintenance people were either nit well-trained or that they did not follow the prescribed maintenance schedule. Another issue is with the loss of revenues due to the financial downturn.

The key issue is the fact that FAA guidelines for maintenance on the older planes in the fleet was not followed. The fact that the airline was fined for the oversight is not the biggest issue. The larger concern is the loss of revenue incurred by the airline because people have lost confidence in Southwest Airlines. Previous to this problem, the airline had built a reputation that has made it the top U.S.-based carrier. However, this loss of reputation has a direct effect on where people will spend their travel money. Customers are more concerned with reaching their destination safely than saving a few dollars on the flight.

Strategic Alternatives & Recommended Action

There are several courses of action that the airline can take, but the need for an immediate solution is critical. The first possibility is to retire old airplanes and replace them with newer models. This action would show the public that Southwest Airlines takes the safety of its passengers very seriously, and that they realize that the maintenance issue were so serious that they needed to do complete upgrades to the fleet. Whereas this would demonstrate and extreme level of concern, this option could be detrimental if the public believes that Southwest should have made this change prior to the degradation of its fleet. It is also a very expensive alternative which could take years to pay back. Another possibility, is to implement new, tougher maintenance schedules which would ensure that this issue never happened again. The people who were responsible could be reprimanded and the new maintenance schedules could show timelines that were far in advance of the FAA timeline guidelines for preventative maintenance protocols.

The best option is the second one. First of all it is an immediate fix that does not cost the company a great deal of money. The change to maintenance schedules and double checking that the maintenance was done will help the public gain its confidence back. It is also possible to develop the new schedules with the people in place in the department already, so there is no need to outsource the issue. All planes that are deemed too old can be scrapped and new ones ordered. Also, the company can look at upgrading its fleet a little more quickly than it had originally planned.

Reference

Thompson, A.A., Strickland, A.J., & Gamble, J.E. (2011). Crafting and executing strategy: Concepts and cases. New York: McGraw-Hill/Irwin.