Success Strategy Employed by Southwest Airlines

Southwest Airlines began as an ambitious company by offering flights from Love Field Airport Dallas to Houston and San Antonio. It began modestly with just three planes and three Texan destinations and currently owns hundreds of planes and flies millions of people to many cities. Even though Southwest was operating in a sector of the economy that was known at that time for its bankruptcies and huge financial losses, the firm reported its 38th straight profitable year in 2010 (The Saylor Foundation, 2014).

The company started its operations in 1971 at Dallas Love Field airport after winning a 4-year court case against two local airlines, Texas International Airlines and Braniff, which are now defunct. The two firms argued before a Texas law court that there was insufficient demand to sustain three intrastate airlines. The legal and later bruising pricing battles between Southwest and the two other firms forced it to create a new operating model that eventually helped the firm survive and thrive. The firm introduced affordable fares and a lively advertising campaign that was based on the "Luv" theme; this helped it to develop a reputation for fun and cost-effectiveness (Johnson & Hall, 2009)

The firm has grown from three airplanes to become the largest domestic airline in the United States (U.S.) with 38 straight years of profitability. Since its inception, the firm has put more emphasis on customer satisfaction rather than on automation as the key to its business success. However, by 2002 its then chief financial officer and later CEO Garry Kelly acknowledged that automation would be crucial to meet the firm's strategic goals. Based on this realization, the company started developing a firm IT foundation. This automation infrastructure was started to aid in key processes in the firm such as the sector's first ever paperless ticketing and web application (Afshar, Saeb, Tadros, Mehra, & Gautam, 2010).

What caused Southwest airlines to succeed where other airlines have not? Historically, the company has differed from others in the industry in various significant ways. Many of the large U.S. airlines operate in a "hub and spoke" system. This means that, these large airlines route their passengers via a hub airport on their way to other cities and Southwest is no exception. The firm has, however, managed to become more efficient than its competitors. While many large airlines operate a variety of different airplane models, Southwest utilizes only one type of jet, the Boeing 737. This enables the airline to service its fleet easily and efficiently. The maintenance mechanics and flight engineers need only to learn how to fix on type of jet in contrast to their counterparts in other airlines who need the technical know-how to fix different types of airplanes. Also, unlike its rivals, the firm does not offer assigned seats in advance making it more efficient than its peers (The Saylor Foundation, 2014).

Southwest Airlines also had the lowest operating-cost models in the local airline industry. The firm also consistently had the lowest air fares on offer. Its customer service was also among the best in the airline industry. By the year 2001, the airline had more than 35,000 employees and recorded about $5.6 billion dollars in operating revenues from a 68.1% passenger load factor. Its trading abbreviation in the securities exchanges was LUV, which symbolized the airline's headquarters the Dallas Love Field Airport, in addition to its relationships with clients and staff (Govindarajan & Lang, 2002).

Internal Factor Evaluation (IFE) Matrix

An evaluation of the internal strengths and weaknesses-based on case study, in addition to several references (by 2009) gives the following information:

Strengths

1. Southwest Airlines has effectively implemented a cost leadership approach.

2. Southwest Airlines is known for its great customer service: the airline bagged the Department of Transportation's (DoT) Triple Crown for 5 years straight courtesy its on-time service, baggage handling and the lowest number of passenger complaints. The firm has also won the first place in the National Airline Quality Rating for 3 years in a row.

3. Staff loyalty: the airline has a loyal, lively and employee-centred culture. The firm's mission statement concentrates on these business aspects. The outcome is a loyal workforce that is willing to put in more effort to achieve the firm's objectives.

4. Thirty seven successive years of profitability (1972-2009).

5. The airline also has an 85% fuel hedge position.

6. Southwest Airlines have also accumulated over 42.2 billion Revenue Passenger Miles (RPMs)

7. An impeccable public image

8. A strong and professional management team

9. The firm boasts of a $13 billion market value

10. By 2009 the firm had 388 jets

11. The average age of its jets is 8.4 years

12. The company is the fourth largest U.S. airline

13. Southwest airlines also recorded consistently higher than industry growth rates

14. The company also has a strong IT infrastructure with 54% of its revenues generated via its online ticketing system through its website (50% in 2003)

15. 75% of its flights tickets are booked online (Therith, 2010).

Weaknesses

1. The firm has a weak mission statement. Even though there seems to be a clear message of the firm's goals, the mission statement does not even state what industry the firm's operations are in explicitly.

2. The firm relies on a single producer for all its jets. Using only one type of jet could attract a lot of negative press if problems with that airplane model arise.

3. A very high proportion of Southwest staffs are full-time employees resulting in very high overhead costs.

4. The firm operates only one type of jet- the Boeing 737.

5. Southwest does not fly to destinations outside continental United States-it services only 63 cities in 23 states within the U.S.

6. It is difficult to convince passengers that Southwest offers benefits that other airlines do not offer.

7. The firm does have special seats or facilities for the severely handicapped.

8. SW does not fly to significant large cities such as Atlanta and Charlotte.

9. The airline does not have a first or business class service for its customers-it does not offer assigned seats

10. The airline does not cater in-flight meals of any form (Therith, 2010).

Internal Factor Evaluation (IFE) Matrix

By evaluating the internal audit above, the IFE matrix is as follows:

"Key External Factors" or "KEF"

Weighted Between

0.0 to 1.0

Rating Between

1 to 4

Total

Score

Strengths

1. Southwest has effectively implemented a cost leadership approach

0.07

3

0.21

2. Southwest Airlines is known for its great customer service

0.07

3

0.21

3. Staff loyalty

0.07

4

0.28

4. 37 successive years of profitability

0.04

4

0.16

5. 85% fuel hedge position

0.07

4

0.28

6. 42.2 billion RPMs

0.04

3

0.12

7. Excellent public image

0.07

4

0.28

8. Strong and professional management team

0.07

4

0.28

9. $13 billion market value

0.04

3

0.12

10. By 2009 the firm had 388 jets

0.04

3

0.12

11. The average age of its jets is 8.4 years

0.04

4

0.16

12. 4th largest local airline

0.03

4

0.12

13. Southwest airlines also consistently record higher than industry growth rates

0.07

3

0.21

14. The company also has a strong IT infrastructure with 54% of its revenues generated via its online ticketing system through its website (50% in 2003)

0.02

3

0.06

15. 75% of its flights are online tickets (Therith, 2010).

0.03

4

0.12

Weaknesses

1. The firm has a weak mission statement.

0.02

1

0.02

2. The firm relies on a single producer for all its jets

0.01

1

0.01

3. A very high proportion of Southwest staffs are full-time employees resulting in very high overhead costs.

0.03

2

0.06

4. The firm only operates one type of jet the Boeing 737

0.01

1

0.01

5. Southwest does not fly to destinations outside continental United States-only services 63 cities in 23 states.

0.04

2

0.08

6. It is difficult to convince passengers that Southwest offers benefits that other airlines do not

0.01

2

0.02

7. Using only one type of jet could attract a lot of negative press if problems with that airplane model arise

0.01

1

0.01

8. The firm does have special seats or facilities for the severely handicapped

0.01

1

0.01

9. SW does not fly to other significant large cities such as Atlanta and Charlotte.

0.05

1

0.05

10. The airline does not have a first or business class service for its customers-it does not has assigned seats

0.01

1

0.01

11. The airline does not cater for any form of in-flight meals

0.01

2

0.02

12. The firm only flies to local destinations and no international flights

0.02

1

0.02

TOTAL

1.00

3.05

SWOT Analysis chart

Strengths

Weaknesses

Financial means

Southwest is a reputable brand

It has a strong domestic network

Exceptional business leadership

A deliberate effort at employing individuals who have a team spirit

Negligible revenue opportunities

Obsolete products

Falling revenues and profits

Heavy reliance on passenger revenues

Has many contractual obligations

Opportunities

Threats

Recovery of the domestic airline industry

Acquisition of AirTran Holdings

Revival of the U.S. tourism industry

Affordable airfares

Diversification to international flights

Stiff competition

Regulatory restrictions

Volatility in oil markets

Increasingly rising costs

Terrorist attacks

Strengths

1. Financial means

2. Southwest is a reputable brand

3. It has a strong domestic network (CAPA, 2014).

4. Exceptional business leadership

5. A deliberate effort at employing individuals who have a team spirit (Gittell, 2003).

Weaknesses

1. Negligible revenue opportunities

2. Obsolete products (CAPA, 2014).

3. Falling revenues and profits

4. Heavy reliance on passenger revenues

5. Southwest has too many contractual obligations (DataMonitor, 2010).

Reasons for Strength

Financial means

In the second quarter of 2014 the Southwest reported its 5th straight quarter of record breaking profits. Its dependable profitability as well as its strong balance sheet have won Southwest Airlines the enviable status of being the only U.S. airline to attain an investment grade status up until early 2014 when Alaska Air Group also achieved that status.

The firm managed to sustain profitability throughout the 2008-2009 economic recession, and it recorded a $754 million profit in CY2013 that was the highest since the end of the financial downturn.

Additionally, the firm has also maintained a robust balance sheet. It had a 37% leverage in 2Q2014 and had about $4 billion cash in hand. At the end of 1H2014 it had generated $1.6 billion in terms of free cash flow and as of 30th June 2014 it had cut its debts at capital lease obligations by $1.5 billion (CAPA, 2014).

Exceptional business leadership

Former Southwest Airlines CEO Herb Kelleher exemplified integrity within the firm by being transparent and honest about the state of affairs in the organization. Consequently, he was highly credible within the firm.

Even with credibility, exceptional business leaders have to find means to demonstrate explicitly that the firm is concerned about the well-being of all of its employees. The fact that Southwest has no mass lay-off records even with the turmoil in the airline industry demonstrates its credibility to the employees. It is public knowledge that both Kelleher and the chief operational officer Colleen Barrett are happy to be approached by the airline's staffs that need assistance in dealing with personal problems.

The firm's management is happy to break protocols in the organizational hierarchy to find successful ways to help their staff. In this manner, they show that they are constantly on a daily basis concerned about their employees' welfare rather than only at times of crises (Gittell, 2003).

It professes a strong domestic network

Southwest is presently profiting from the robust demand in the U.S. market, displayed in its 8% passenger unit revenue improvement in 2Q2014, the greatest profit in the industry, in the U.S.

Southwest is the second major airline in the U.S. market when gauged through seat usage according to data from OAG and CAPA for the week of 15-Sep-2014 to 21-Sep-2014. Its share is around 20%, only behind Delta's share that is approximately 22%. Via gaining hold of AirTran and taking hold of needed slot divestitures by the American and U.S. airways to enable those airlines to advance in unison, Southwest has built inroads in the major U.S. markets of New York La Guardia and Washington National.

Southwest possesses a significantly strong spot in eight of the best cities by arrivals for the week of 15-Sep-2014 to 21-Sep-2014: in Chicago it has an 88% seat share at Midway, in Atlanta it is the second largest having a 7% share while Delta holds an 805 share, in New York LaGuardia it is the fourth largest airline with a share of 8%, in Denver it is the second largest airline with a share of 26%, in Los Angeles it holds a 135 seat share in a very divided market, in Houston it has a 9% seat share at Hobby, in Las Vegas it holds a 435 seat share and in Washington it has about 9% share at Washington National and a 70% share at Baltimore/Washington International. The information above is founded on data from OAG and CAPA (CAPA, 2014).

Conscious attempt to employ individuals who are good in teamwork

Southwest does not emphasize on employing the best. Interestingly, instead, during employment preference is given to the individuals who will be capable of smoothly assimilating with the other affiliates of the team.

There is a conscious effort to initially find individuals with the suitable attitudes and then offer them the knowledge and experience that they will require to be productive and efficient.

Southwest's employment criterion precedence apply not only to the customer service personnel but also to pilots and mechanics, two categories of people that are normally employed exclusively for their technical expertise (Gittell, 2003).

Southwest possesses an iconic brand

It is one of the popular brands in the U.S., and it constantly works to develop its heritage via advertising in the social media and the high profile sporting events.

Southwest has been considered as best travel brand and it is the fifth brand by the Business Journals in the American Brand Excellence Awards.

It is unique by not following the crowd and giving up the revenue is uncertainly a net gain, though maybe not easily answerable (CAPA, 2014).

Reasons for Weakness

Minimal revenue opportunities

Southwest has not adopted product unbundling that almost all of its U.S. equivalents have embraced based on the premise that passengers be allowed to have variety and the freedom to enjoy different and altered experience. The variability is practiced by most of the airlines through full, ultra-low cost and hybrid service; subsidiary revenue allows for the greatest opening for improving the accruals considerably over the long and medium term.

The top-line revenues of the airline grew just 3.6% year-on-year in CY2013 after climaxing at 29% growth in CY 2011. Southwest has tried to pull some subsidiary levers in its own, normally in a more positive manner- putting up for sale chosen boarding locations at the gate, enhancing security around its most limiting fares and raising some other fee revenue. In 2013, the airline predicted that those changes would lead to roughly USD 175 million of increased revenue on per annum.

The airline transported approximately 133 million passengers in CY 2013, and its incomes outside passenger and freight operations dropped by 2.5% to USD 815 million. In comparison, JetBlue, a U.S. hybrid airline, carried approximately thirty million customers in CY2013; yet, it recorded subsidiary income of USD 670 million in CY2013, of which USD170 million was obtained from its 'Even More' offering (CAPA, 2014).

Declining profits and margins

The airline has faced reduced profits and margins from FY2007. The airline's operating profits have reduced at a compounded yearly rate of change (CARC) (2007-2009) of 42% to 4262 million in FY 2009 from $791 million from FY2007. The drop in the operating outcomes is because of the considerable rise in oil and fuel prices, from $2,690 million in FY2009 to $3,044 million in FY2009.

In FY2007, the airline's operating margin reduced from 8% to 2.55 in FY2009.

Dropping profits and margins signify that the airline has not been capable of effectively managing its cost structure, which can affect its long-term financial position negatively (DataMonitor, 2010).

Its product is outdated

An extensive legroom provision is currently the model for several airlines globally and provides a chance to increase subsidiary income.

Southwest has increased its aircraft and reduced its seat pitch, in the past years, which is another tendency clear in the U.S. market place.

Apart from providing on-board Wi-Fi, its product is perhaps worn out, and more essentially, it could be missing a chance to leverage its product to establish new income opportunities.