Southwest Airlines

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Southwest Airlines

  1. 1. Fall 08 November 08 Southwest Airlines Cristian O.C. Pistol - Cohort 7 – Tiffin University, Ohio EMBA Program @ Bucharest University Professor Dr. Laura Mays
  2. 2. Southwest Airlines By Cristian O. C. PISTOL, Cohort 7 2 Company Overwiew Southwest Airlinesis a passenger airline that provides scheduled air transportation in the US. The Company is a domestic US airline that provides point-to-point service which enables the company to provide its markets with frequent, conveniently timed flights and low fares. The routes served by Southwest are predominately short routes with high frequencies. It complements this service with more medium to long routes, including transcontinental service. The company’s average aircraft trip stage length in 2007 was 629 miles with an average duration of approximately 1.8 hours. According to the most recent data available from the US Department of Transportation (DOT), Southwest is the largest air carrier in the US, as measured by the number of originating passengers boarded and the number of scheduled domestic departures. The company operates through three business divisions, including passenger flights, freight and other. As of December 31, 2007, Southwest operated 520 Boeing 737 aircraft and served 411 nonstop city pairs. In addition, the company serves many satellite and downtown airports, including Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore-Washington International, Burbank, Manchester, Oakland, San Jose, Providence, Ft. Lauderdale/Hollywood and Long Island Islip airports. These airports are typically less congested than the hub airports of other legacy airlines. Approximately 78% of the company's customers fly non-stop. As of December 31, 2007, Southwest operated six reservation centers located in Chicago, Albuquerque, Houston, Phoenix, Oklahoma City and San Antonio. The company offers the option of ticket-less traveling through its website, www.southwest.com. For the year ended December 31, 2007, more than 95% of Southwest’s customers chose the ticket-less travel option and approximately and nearly 74% of the company’s passenger revenues came through its website. Southwest’s freight services include transportation of cargo and mail. S.W.O.T. Analysis Strengths Weaknesses - Firm operating strategy - Revenues are generated by the passenger division - Impeccable fleet - Lower load - Steady increase of revenues - Declining sales in the freight division Opportunities Threats - Growth in the air freight sector - Highly competitive industry - Expansion of the US airlines industry - Increase of fuel prices - Timely alliances - Economic downturn I. Strengths
  3. 3. 1. Firm operating strategy The company focuses on point-to-point service unlike the major US airlines. This permits direct flights which avoid delays and reduce the time of the trip. Southwest is able to provide its markets with frequent on time flights and low fares. 2. Impeccable fleet With over 500 aircraft, Southwest has one of the youngest fleets in the nation. Southwest has a strong fleet base to complement its strong route network. The company uses only Boeing aircraft which reduces its manipulation and maintenance cost. 3. Steady increase of revenues The passenger revenues witnessed a steady growth in the past years. This is because the company increased its capacity by adding new aircrafts to its fleet. II. Weaknesses 1. Revenues are generated by the passenger division Passenger revenues accounted for 95.9% of the Southwest's total revenue in 2007. If the other divisions are not reinforced, the company exposes itself to the risk of performing in an environment influenced by external factors such as possible increases in fuel price. 2. Lower load Due to its frequent flights, the company has a lower occupancy rate when comparing to its peers. This could imply loss of profit. 3. Declining sales in the freight division The declining net sales and low performance of freight division may eventually affect the company’s operating performance. III. Opportunities 1. Growth in the airfreight sector The US airfreight sector has witnessed strong growth in recent years and the trend is likely to continue in the future. The US airfreight sector generated total revenues of $41.3 billion in 2006. Further, it is estimated to reach a value of $61.6 billion by the end of 2011, an increase of 49.2% since 2006. By 2011, the US air freight sector consumption volume is expected to reach 61 billion ton, representing a CAGR of 6.1% between 2006 and 2011.The growing markets in the US represent an opportunity for Southwest to capitalize and increase its revenues and profits from this region. 2. Expansion of the US airlines industry The US airlines industry witnessed a strong growth in recent past. The US airlines industry is also forecasted to reach a volume of 1.1 billion passengers in 2011 from 860.1 million passengers in 2006. This representing a CAGR (2006-11) of 5.7%.The positive market outlook provides an opportunity for the company to further strengthen its network and gain competitive advantage over its peers. 3. Timely alliances
  4. 4. Southwest Airlines By Cristian O. C. PISTOL, Cohort 7 4 In May 2007, the company expanded its GDS (Global Distribution System) and corporate travel account efforts through a ten-year content distribution agreement with Travelport’s Galileo. Galileo is one of the leading providers of global distribution services. Through the agreement, Southwest intends that all of its published fares and inventory (except the company’s web fares) would eventually be available to Galileo-connected travel agencies in North America. This agreement allows the company to reach new customers, who would have an opportunity to buy, book and manage Southwest through the efficiency of the Galileo GDS channel. In June 2008, Southwest’s frequent flyer program, Rapid Rewards, added Avis Rent A Car as its new preferred partner. Avis Rent A Car System (Avis) is one of the world's leading car rental brands, providing business and leisure customers with a wide range of services. Rapid Rewards members would save up to 25% on Avis rentals and would earn Rapid Rewards credit when renting from Avis. After a month, the company added Thrifty Car Rental as a new preferred partner to the airline's frequent flyer program, Rapid Rewards. IV. Threats 1. Highly competitive industry Some of the major US airlines have established extensive marketing and codesharing alliances, including Northwest Airlines, Continental Airlines, Delta Air Lines; American Airlines, Alaska Airlines, United Airlines and US Airways. In contrast, Southwest ended its codeshare relationship with ATA Airlines in April 2008, as ATA announced its plans to immediately discontinue all scheduled passenger service. Southwest is also subject to competition from surface transportation in its shorthaul markets. This competition could be more significant during economic downturns. 2. Increase of fuel prices In recent past, the prices of jet fuel have increased sharply, hurting the bottom lines of most airlines. During 2007, aircraft fuel accounted for 28% of Southwest’s operating expenses. Southwest expects to consume approximately 1.5 billion gallons of jet fuel in 2008. Based on this usage, a change in jet fuel prices of just one cent per gallon would impact the company’s fuel and oil expense by approximately $15 million per year. 3. Economic downturn According to the IMF world economy outlook, the real GDP growth of the US is expected to slowdown in 2008. As southwest is present only on the us market, an economic crisis is bound to impact its operations.

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