External and internal environmental analysis

Southwest Airlines External & Internal Analysis

The intent of this analysis is to complete an external environmental scan of Southwest Airlines in addition to analyzing the internal strengths and weaknesses of the company as well. Southwest's competitive position and opportunities for growth are also included in this analysis.

Southwest Airlines External Environmental Scan

Airline regulations and the continually fluctuating, increasing price of fuel are two of the most significant external factors influencing Southwest Airlines' business model today (Lu, Chen, 2010). Southwest has fortunately over the last three decades created one of the most innovative and insightful approaches to managing fuel hedging, or the purchase of fuel contracts in the entire airline industry (Carter, Rogers, Simkins, 2006). This internal strength, which will be analyzed in greater depth later in this paper, has been able to translate an external threat into an opportunity for differentiation.

Because of getting the cost of fuel under control, Southwest has been able to translate external factors in the industry to its advantage. These include greater flexibility with code sharing on smaller regional Mexican and Canadian airlines, a strategy that has worked well with WestJet for example (Lu, Chen, 2010). WestJet has a comparable business model to Southwest, and the code sharing has significantly driven revenue for the smaller carrier in addition to capturing customers that would have not otherwise considered Southwest Airlines.

A secondary threat that Southwest has to contend with that emerged from the analysis is the continuing migration of competitors who have long relied on the hub-and-spoke model, transition to the point-to-point configuration that Southwest also relies on (Kumar, Johnson, Lai, 2009). Southwest acquiring AirTran late in 2010 will help to potentially alleviate this in the Southeastern U.S. markets where Delta and other carriers had previously made it very difficult for Southwest to expand.

Southwest Airlines' Internal Strengths

Southwest began as a small regional carrier serving Texas cities first, then expanding out to other Southwestern U.S. cities, the company began adding in more routes and planes. Early on the decision was made to create a very high level of standardization on all aspects of operations, from logistics, maintenance, services and flight operations. As the value proposition of the company was originally based on is providing flights at a price cheaper than driving, the need for standardizing every aspect of the business was critical to attain cost reductions over time (Carter, Rogers, Simkins, 2006). The company however did not want to sacrifice service to get this level of operations efficiency. Based on an analysis of their operations records, it was found that Southwest today has the lowest mean-time-to-repair (MTTR) in the industry, which has been estimated to be at least 55% lower than its competitors (Kumar, Johnson, Lai, 2009). This translates into hundreds of millions of dollars saved per year.

As was mentioned in the introduction, a second major strength the company has is in its use of analytics and financial analysis to hedge the price of fuel, sometimes risking as much as 80% of a future price of fuel purchasing based on speculation or hedging (Carter, Rogers, Simkins, 2006). Southwest is the most aggressive in the use of this strategy, with its competitors only hedging at most 25% of the total cost of their fuel. Southwest credited this strategy with keeping them profitable on a quarterly basis through the recession (Kumar, Johnson, Lai, 2009). This savings on fuel has also given Southwest more funds to invest in programs to reduce turn-around time of their jets between flights .

Southwest Airline's Internal Weaknesses

As with any company the size of Southwest, they have several weaknesses, with the most significant being their heavy dependence only on passenger traffic as their primary source of revenue. Despite efforts to move into logistics and supply chain services, the company is still struggling to gain significant success in more profitable business services markets (Kumar, Johnson, Lai, 2009).

Despite having an employee base that has the lowest turnover and highest levels of morale, Southwest also has one of the most rapidly declining sales-per-employee revenue levels for U.S.-based airlines (Kumar, Johnson, Lai, 2009). One of the factors that contribute to this is the fact that Southwest has more ground crew members than other airlines, an investment the company makes to attain the rapid MTTR figures mentioned earlier. This weakness however is also tied to the fact that the company has been struggling to break out of being a passenger-only airline.

Opportunities for Growth

Southwest needs to take the exceptional skills they have in logistics and apply them to the areas of business freight and transportation services. The logistics strengths of Southwest could more than outclass the regional freight forwarders and providers according to industry experts (Carter, Rogers, Simkins, 2006). The company could also create a more effective approach to selling supply chain management services as well based on this strength (Carter, Rogers, Simkins, 2006). Creating a supply chain practice as UPS has done would also help the company to alleviate the declining revenue per seat issue and also position them to move into more lucrative business-to-business markets as well.