The Way Forward for Southwest Airlines

SOUTHWEST AIRLINES

Benchmark – Executive Summary: Southwest Airlines

A SWOT analysis provides a useful means to assess where a business currently is, and the right strategy for capitalizing on available opportunities to improve its current position (Henry, 2021). Guided by this understanding, we conducted a SWOT analysis of Southwest Airlines to assess the company’s post-Covid19 financial health and identify viable strategic alternatives for recovery and growth. The SWOT analysis showed that the company excels in its single aircraft policy, which makes it possible to standardize staff training and reduce operational costs, as well as in its low-cost business model, which gives it an edge over the competition amidst depressed customer incomes. The company’s financials point to an improvement in both the Return on Assets (ROA) and Return on Equity (ROE) in 2021 relative to 2020, which indicates improved efficiency in as far as utilization of assets and profits earned for every dollar of shareholders’ investment. This indicates that the enterprise is successfully recovering from the negative effects of the pandemic. Nonetheless, the company may benefit from investing more in strategic airline partnerships and reducing its reliance upon a single supplier (Boeing) for aircraft and parts. Southwest Airlines has not integrated any airline partnerships into its business model in the past, which may hinder it from offering an array of destinations to its customers. At the same time, overreliance on Boeing as the single supplier gives the said supplier huge bargaining power over price, which could endanger the company’s efforts to maintain the low-cost business model.

There are two strategic alternatives that Southwest Airlines could pursue to create value moving forward: reaching out to new customers through route expansion and product development by offering better service quality. The first strategy involves reaching out to new customers in markets not served by the company before, while the second strategy has to do with growing the company’s existing market by enhancing the offerings available to existing customers. Both strategies would offer the airline an opportunity to improve its bottom line. However, route expansion could result in wastage of capital and resources, threatening the company’s sustainability if the new markets fail to pay off. Further, the strategy would present the challenge of complying with laws, regulations, and cultural issues associated with the new routes, which would further push up operating costs. At the same time, attempts to enhance service offerings for existing customers could be faced with supply chain risks as the company sources for various components to enhance service quality. There may also be limitations arising from laws and regulations that govern the mode of offering certain services, and resistance to change when employees are reluctant to embrace the changes meant to enhance service quality.

We employed a decision matrix to quantitatively compare the two strategic alternatives by cost implication, long-term viability, and alignment to the organization’s mission. The greatest weight was assigned to financial implications given that the airline industry is still grappling with the effects of the Covid19 pandemic. Southwest’s ROE and ROA both indicate an increased ability to generate profit post-Covid19, and the airline does not face any challenges in terms of settling its obligations since liquidity ratios are within acceptable limits. All the same, it may be important to refrain from aggressive, value-enhancement strategies at this time. This is particularly so given that financial experts foresee the likelihood of a global recession in 2023 that could affect people’s disposable incomes and purchasing power, leading to lower returns for most industries, including the airline industry.

For this reason, route expansion may be the more viable strategic alternative for Southwest Airlines at this time. The company could minimize the costs of entering identified new markets by forming strategic alliances with established companies in the said markets. The company’s liquidity and leverage ratios are within acceptable limits, implying that the airline can be able to commit, direct, and effectively assign resources in efforts to establish a strategic alliance. A strategic alliance would make it possible to pool resources and expertise, and to share risks, thereby minimizing the costs of operating the new routes, and ensuring the company still maintains its low-cost air travel model.

The question then is how to finance the expansion without hurting the company’s bottom line. The airline industry remains highly volatile from the effects of the Covid19 pandemic. Thus, investors may be unwilling to put in more equity to support expansion efforts at this time. At the same time, the recent move by the Fed to hike interest rates from 4 to 4.5% in an attempt to curb inflation makes it costlier to borrow from commercial lenders. Given the current situation, I would suggest defunding the value-enhancement program announced in December 2022, which seeks to plough in an investment of $3.5billion annually to improve passenger amenities, and directing the funds to route expansion. Among the measures announced include introducing power outlets and internet for every seat, increasing the size of overhead bins, increasing the number of movie offerings, and updating on-board drink options (Josephs, 2022). In my view, the enhancement program, which mainly targets business class travellers, would decrease the company’s ROA as more customers are likely to opt for the cheaper classes amidst shrinking incomes.

In conclusion, Southwest Airlines also stands to maximize chances of future success by integrating the Christian worldview tenet of servant leadership into its values. Servant leadership is motivated by the desire to serve rather than lead. It is about making employees, rather than profit, the main priority as Jesus commands in John 13:1-20. The underlying idea is that happy employees will translate into happy and loyal customers, who will, in turn, translate into happy shareholders. Southwest Airlines has exemplified servant leadership in the fact that it has never laid down a single employee in its 46-year existence despite facing turbulent times as if often the case in the airline industry (Johnson, 2017). Colleen Barrett, the company’s President emeritus, emphasized servant leadership in the idea of engaging employees whenever there is a problem and working “hard to tray make something optimistic come out of whatever the situation is, and to try to make people feel good whatever the dilemma is” (Johnson, 2017, n.pag). To follow in Barrett’s footsteps, Southwest Airlines could instil the idea of servant leadership by fostering workplace spirituality and rewarding or recognizing as servant-leader champions leaders who exemplify spirituality in their work. Studies have found a significant positive association between workplace spirituality and employee engagement across industries (Rehman et al., 2021). Thus, the airline could maximize its chances of future success by fostering spiritual values among the company’s leaders.