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Capstone Research-Southwest Airlines

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This was a research project that our Business Strategy class completed in 2007. This is an evaluation of Southwest Airlines and its position in the market. We evaluated growth and future prospects with a heavily consolidating industry.

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Capstone Research-Southwest Airlines

  1. 1. SOUTHWEST AIRLINES Charlie Pedersen
  2. 2. An Introduction to the SAM analysis <ul><li>The purpose of this analysis is </li></ul><ul><li>to evaluate the standing of </li></ul><ul><li>Southwest Airlines </li></ul><ul><ul><li>To compare Southwest to the commercial aviation Industry </li></ul></ul><ul><ul><li>To evaluate the organization internally and externally </li></ul></ul><ul><ul><li>To evaluate strategic alternatives and make recommendations upon those alternatives </li></ul></ul>
  3. 3. External Analysis A Look at the Airline Industry
  4. 4. An Introduction to the Industry <ul><li>Commercial Aviation in the United States is broken down into 3 categories </li></ul><ul><ul><li>International Carriers </li></ul></ul><ul><ul><ul><li>Lufthansa, Air France, Japan Air Lines </li></ul></ul></ul><ul><ul><li>“Legacy” Carriers </li></ul></ul><ul><ul><ul><li>American, Delta, United </li></ul></ul></ul><ul><ul><li>Regional or Low Cost Carriers </li></ul></ul><ul><ul><ul><li>Southwest, Air Tran, Midwest </li></ul></ul></ul>
  5. 5. The Shakeout <ul><li>The Industry has exited its largest growth stage since deregulation and is entering a </li></ul><ul><li>period of “Shakeout” </li></ul><ul><ul><li>This is supported with the operational loss of ATA, Aloha, SkyWay, SkyBus, and the bankruptcy of Frontier </li></ul></ul><ul><ul><li>This is a direct result of high fuel prices and reductions in consumer spending </li></ul></ul>
  6. 6. No Frills <ul><li>Southwest has had tremendous success due to its “no frills” approach </li></ul><ul><ul><li>It has been able to undermine the “Legacy” carriers and has allowed other low cost carriers to enter the market </li></ul></ul><ul><ul><li>This has created another level of competition in the Regional segment </li></ul></ul><ul><ul><ul><li>This is a segment where cost and frequency of service are of greater importance than amenities </li></ul></ul></ul>
  7. 7. The Competition <ul><li>Competitors in the Regional Segment </li></ul><ul><ul><li>Alaska </li></ul></ul><ul><ul><ul><li>Focus area- West Coast </li></ul></ul></ul><ul><ul><li>Midwest </li></ul></ul><ul><ul><ul><li>Focus area- Midwest, Upper Midwest, South Central </li></ul></ul></ul><ul><ul><li>AirTran </li></ul></ul><ul><ul><ul><li>Focus area- Eastern Seaboard & South </li></ul></ul></ul><ul><ul><li>JetBlue </li></ul></ul><ul><ul><ul><li>Focus area- Northeast </li></ul></ul></ul>
  8. 8. The Government’s Role <ul><li>Continuing Threat of Regulation </li></ul><ul><ul><li>Contrary to popular belief, regulation has not had the effect on commercial aviation as it once did </li></ul></ul><ul><ul><li>With many low cost carriers closing and legacy airlines consolidating, regulation might become a factor in the next Presidential Administration </li></ul></ul>
  9. 9. Mergers and Acquisitions <ul><li>Consolidation Concerns </li></ul><ul><ul><li>With the Legacy carriers consolidating to improve route coverage, the regional carriers must be aware to changes in the business climate. </li></ul></ul><ul><ul><li>At this point, most mergers have not worked as well as hoped. </li></ul></ul><ul><ul><ul><li>US Airways and America West still have not been able to successfully merge every aspect of their operations since 2005. </li></ul></ul></ul>
  10. 10. The Not So Friendly Skies <ul><li>Labor Issues </li></ul><ul><ul><li>With most airlines having union workforces, </li></ul></ul><ul><ul><li>it becomes imperative to work closely with their representation to meet their needs. </li></ul></ul><ul><ul><ul><li>The problems arising with Unions are in the areas of labor and healthcare. </li></ul></ul></ul><ul><ul><ul><ul><li>Consolidation threatens seniority status in the newly created entity. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>With fuel prices rising, more of the flight cost is going to that in lieu of going into the employee healthcare fund. </li></ul></ul></ul></ul>
  11. 11. Internal Analysis A Look at Southwest Airlines
  12. 12. An Introduction to Southwest <ul><li>Southwest is the Largest Airline </li></ul><ul><li>in the U.S. in terms of Passengers </li></ul><ul><li>carried </li></ul><ul><li>Serves 64 destinations in 32 states </li></ul><ul><li>Headquartered in Dallas, Texas </li></ul><ul><li>Established in 1967 as an Intrastate carrier </li></ul>
  13. 13. Penny Pinchers <ul><li>Southwest has benefited greatly from their low cost business model </li></ul><ul><ul><li>The model is built around Hedging the Fuel Futures market to keep cost down </li></ul></ul><ul><ul><li>The “No Frills” approach is taken to heart </li></ul></ul><ul><ul><ul><li>No assigned seating </li></ul></ul></ul><ul><ul><ul><li>Minimal refreshment options </li></ul></ul></ul>
  14. 14. Frequency <ul><li>Southwest has a greater frequency of flights to its destinations </li></ul><ul><ul><li>This is due in large part to not having a “Hub-and-Spoke” system </li></ul></ul><ul><ul><li>Southwest prefers a point-to-point method </li></ul></ul><ul><ul><ul><li>This method creates greater presence in more cities </li></ul></ul></ul><ul><ul><ul><li>This method also reduces the footprint in the airline’s flight operations </li></ul></ul></ul>
  15. 15. Fleet <ul><li>Southwest maintains a fleet of strictly Boeing 737 aircraft </li></ul><ul><ul><li>This keeps repair equipment streamlined </li></ul></ul><ul><ul><li>Flight mechanics know a greater deal about the aircraft and keep them in the air </li></ul></ul>
  16. 16. The Press <ul><li>Southwest is widely known for its “down to earth” method of Public Relations </li></ul><ul><ul><li>The “No Frills” method is also at play here </li></ul></ul><ul><ul><li>Their PR division is also very cautious of social trends </li></ul></ul><ul><li>Southwest is not perfect in its Press efforts </li></ul><ul><ul><li>Southwest has had several instances of flight dismissal </li></ul></ul><ul><ul><li>This has resulted in poor press and lawsuits against the company </li></ul></ul>
  17. 17. Growth <ul><li>Southwest has expanded in the most cost-efficient method </li></ul><ul><ul><li>They tend to use second tier airports in the largest U.S. cities </li></ul></ul><ul><ul><ul><li>Midway-Chicago (instead of O’Hare) </li></ul></ul></ul><ul><ul><ul><li>Love Field- Dallas (instead of Dallas-Fort Worth) </li></ul></ul></ul><ul><ul><li>There have also been threats of moving operations to save money </li></ul></ul><ul><ul><ul><li>Moving From Seattle-Tacoma International to nearby Boeing Field </li></ul></ul></ul>
  18. 18. Growth <ul><li>Southwest serves many cities, </li></ul><ul><li>but does not have service to some large cities, particularly in the south </li></ul><ul><ul><li>No service to Atlanta, Charlotte, Memphis, and others </li></ul></ul><ul><li>Due to rising passenger costs, Southwest has slowed its rate of growth </li></ul>
  19. 19. The Future What should Southwest do next?
  20. 20. The Alternatives <ul><li>Domestic Growth </li></ul><ul><ul><li>Is Southwest better served by expanding in the U.S. market? </li></ul></ul><ul><ul><li>Can Southwest afford to expand its fleet? </li></ul></ul><ul><ul><li>Can Southwest force out one of the “Legacy” carriers if it continues to grow domestically? </li></ul></ul><ul><li>International Entry </li></ul><ul><ul><li>Is Southwest better served by expanding in markets with better economies? </li></ul></ul><ul><ul><li>Can Southwest obtain larger Aircraft and maintain them? </li></ul></ul><ul><ul><li>Can Southwest compete with the larger international carriers? </li></ul></ul>
  21. 21. Positive Domestic Growth <ul><li>With Southwest having a large </li></ul><ul><li>domestic footprint, expansion </li></ul><ul><li>might be easier at home </li></ul><ul><li>If Southwest expands domestically, they would not have to purchase a different model of aircraft </li></ul><ul><li>If Southwest’s pricing model holds true through the economic downturn, they would be in an excellent position to overtake the “Legacy” carriers </li></ul>
  22. 22. Negative Domestic Growth <ul><li>Southwest could be hurt dramatically by the economic downturn due to </li></ul><ul><li>its low-cost structure </li></ul><ul><li>The Boeing 737 continues to have competitors enter the market, including Airbus and Bombardier </li></ul><ul><li>If the “Legacy” carriers continue to consolidate, they might turn their capital muscle on Southwest and other low-cost carriers </li></ul>
  23. 23. Positive International Entry <ul><li>Southwest may strike gold in economies with greater stability, especially </li></ul><ul><li>with few international airlines offering a low-cost structure </li></ul><ul><li>This would be an opportunity to enter the Extended Range airplane market, and move more passengers at once </li></ul><ul><li>Southwest would have to adhere to international ideals on how to attract new customers </li></ul>
  24. 24. Negative International Entry <ul><li>Southwest may not be able to obtain approval due to no experience </li></ul><ul><li>in international markets </li></ul><ul><li>With different planes entering the fleet, more training and people must be obtained to keep them in service </li></ul><ul><li>Southwest may not be able to keep enough staff to make the changes necessary to impact new markets </li></ul>
  25. 25. Recommendations <ul><li>International expansion is not the best alternative at this point </li></ul><ul><li>Southwest has slowed its rate of expansion and needs to remain focused on the domestic market </li></ul><ul><li>Southwest is the largest operator of the Boeing 737 with 529 in service </li></ul><ul><ul><li>It would be to their advantage to continue use of the Boeing airliner </li></ul></ul>
  26. 26. Recommendations <ul><li>Due to its one model fleet, it is more cost effective to maintain that stance in </li></ul><ul><li>the short term </li></ul><ul><li>If International expansion becomes a more viable opportunity, keep it local </li></ul><ul><ul><li>Canada, Mexico, and the Caribbean </li></ul></ul><ul><li>Costs must remain low, but account for inflation </li></ul><ul><ul><li>With the dollar dropping in value, it may become necessary to raise rates, but keep it reasonable </li></ul></ul><ul><ul><li>Do not scare off customers with huge rate increases </li></ul></ul>
  27. 27. Conclusion <ul><li>Southwest Airlines has been the leader in low-cost airfare </li></ul><ul><li>The “Southwest Effect” has benefited commercial aviation exponentially </li></ul><ul><li>Southwest must remain lean as it grows </li></ul><ul><li>Southwest must continue to be the people’s airline of choice </li></ul>

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