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Five forces, swot and internal analysis of southwest airlines and the airline industry

Southwest Airlines has achieved success through a low-cost leadership strategy while maintaining high customer service standards. An analysis of Southwest and the airline industry examines Southwest's internal strengths like its unique culture and cost-cutting approach. The airline industry forces model reveals threats from substitutes and supplier bargaining power. Opportunities exist for Southwest in international expansion, though changing consumer preferences pose challenges to its stripped-down model. Future industry profitability depends on balancing low fares with improving onboard experiences.

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Page 1 of 9 Five Forces, SWOT and Internal Analysis of Southwest Airlines and the Airline Industry Introduction Since itsinception,the commercialairline businesshasbeenahighlycompetitive andresilient industry.Fueledbyoligopolisticstrategies,the majorairlineshave definedthe industrywithtunnel vision,respondingtoone another’smarketmoveswitha“one up “attitude.While thislimitsanycost leadershipstrategies,itopensdoors foradifferentiator.Throughoutthisarticle we intendtooutline SouthwestAirlinesinternal competencies,examinethe industrythroughdefinitionandthe five forces model,andcreate a SWOT analysisof Southwest.Throughthesemetrics,we hope toprovide aholistic viewof SouthwestAirlinesandthe company’scompetitive position. Internal Competencies SouthwestAirlineshasseveraluniquequalitiesthathelpdistance itself fromthe competition,the mostprevalentbeingtheirexecutionof targeted customerservice.Southwestismarketedheavily towardsindividualsthatviewthe airlinesasnothingmore thantransportation:consumersthatseek quick,reliable servicewithoutthe hassle.Offering15minute turnaroundsandflightsthatdon’trequire a seatingchart, Southwestcreatedamarketforbusinessmenandwomenaswell asfrequent flyers. AnotherqualitythatsetsSouthwestAirlinesapartisitsunique emphasisonworkerculture workerattitude. Witha unique hiringstyle,Southwestmanagestoattain,train,andretainskilledand energizedworkersthatare the envyof the entire industry.These workersare the primarydriversof customerretentionandservice efficiency,whichultimatelydrive profitabilityforthe firm(Czaplewski, Ferguson,Milliman,2001).
Page 2 of 9 Southwesthasalsostreamlineditsbusinessmodel tovalue costefficiencyoverall else,seeking to minimize “luxury”costs.Forexample,SouthwestAirlinesonlyflies737 modelsof aircraft.Withonly one type of aircraft, pilotsquicklybecomeexpertswiththe airplane,reducingoverall trainingtime.An additional benefitof onlyone classof airplane isthe reductionof maintenance costs.Standardizedparts and reducedtrainingforthe maintenance crew resultsin animprovedbottomline.Anotherexample of reducingcostsisSouthwest’spatternof avoidingmajorhubs.Bylandinginsecondaryairportsthey avoiddelaysandreduce dockingfees. The mostnoticeable costcuttingstrategyutilizedbySouthwestis the eliminationof mostpremiumservices,suchasmeal service.The eliminationof meal service and other“premium”productshasallowedSouthwesttoreduce in-house costsandpasssavingsontotheir customers.Southwesthasmanagedtocreate a seriesof interworkingandinterconnectedstrategies that make itsbusinessmodel incrediblydifficulttoimitate (Gittell,2003). However,consumerwantschange andSouthwest’s“strippeddown”strategymayeventuallystop producingsustainableprofits.While Southwest Airlinestargetmarketconsistsof young,middle class, and those travellingshortdistances,manyconsumerssimplywantmore.Forexample,Southwest’s strategyislargelyunsustainable inaninternational capacity.Longinternationalflightairlinessuch as Emirate’soffersfull roomestoitsfirstclasspatrons.These luxuriespull customersawayfromSouthwest once the distance exceedsafewhours.FortunatelyforSouthwestAirlines,thesemarketsdonottendto overlap.However,once flighttechnologybeginstooffershorterflightsoverlongerdistancesandthe overall industrycostof a flightdecreasesthe mainsource of competitiveadvantage maybe the luxury offered,somethingSouthwesthasnoexperience with.
Page 3 of 9 Industry Analysis Major firmssuchas American,Delta,andUnitedhave beendefinedasthe “airline industry”.We contestthat SouthwestAirlinesdoesnotfitintothisdefinitiondue tohow dissimilarthe firmisin comparison.SouthwestAirlinesofferstransportationfrompointA topointB,little else.While other airlinesofferinflightentertainment,fullyrecliningchairs,andevenbeds,Southwestoffersnone of these luxuries.Withthatinmindwe chose todefine Southwestasa“transportationindustry”,merelyamode of transportationthatdeliverspeople andgoodsacrosssome distance.Offeringquantityoverquality tendsto alienate consumerswhosee the airlinesasameansto an end. Young,middle class,and frequentflyersrarelywanttopay extraforthe luxurieslistedabove,howeverSouthwesthasmanaged successfullytocapture thatexactmarket. Trends Oil Prices A trendthat has affectedpricingof airline servicesforyearshasbeenrisingoil prices.Between October2010 and October2014 the price of oil wassteadyat approximately$3.00 a gallon.However, entrance into2015 broughta massive dropinairline fuel prices.Thisdroptoapproximately$1.40 a galloncan onlyhelpsmallerairlinefirms,suchasSouthWest. ConsumerTechonology A trendthat mayhurt SouthWestisthe increasingadvancedconsumertechnologyonflights. OfferingpersonalTV’sandIpadshelpsmitigate the painof longflights,somethingSouthWestisslowly becominginvolvedin.
Page 4 of 9 CustomerService As statedabove,anothertrendinairlineshasbeentosatisfysecondarycustomerrequirements, that isto say anythingotherthanthe actual transportation.Southwesthasbeenable toutilizethe industrydistractionsasanopportunity.The mostnoticeabletrendinthe airline industrytodayisthatof increasingconsumerexpectations,oratleastthe majorairlinesinterpretationsassuch.Wantingmore for lesshasput majorstrainon an extremelyexpensive industryandhasservedonlytoincrease the elusivenessof sustainable profits.While mostairlineshave soughttosatisfyconsumerwantsbyoffering more at a highercost,Southwesthasachievedsuccessofferingless.Southwest’sculture encourages and nurturesimprovedcustomerinteractionaswell.Theyhave managedtoavoidthe industrytrendof one uppingtheircompetitors,savingmoneyinunnecessarilyofferingmore thanthe consumeractually wants.If the currenttrendcontinuesSouthwestwillcontinuetobe profitable andslowlyovertake competitorsasmore consumersleave tojoinSouthwestAirlines.While Southwesthassuccessfully managedthe expectationsof itscustomersbynotofferinganextravagance fromthe gate,that’snotto say that consumerswill neverwantanimprovedexperience,achallenge thatSouthwestAirlineswill likelyface inthe future (AviationTrends,2015). SWOT Analysis SouthwestAirlineshasalwaysbeenatthe forefrontof innovationofferingseniordiscountsand ticketlesstraveling,theyare strengthenedbyanincredible cultureandlow costservices.However,even as theycontinue tocapitalize onstrengths,SouthwestAirlineshasa numberof opportunitiesand challenges.ToproperlyassessSouthwestAirlines’place intheirindustry,one mustevaluate their strengths,weaknesses,opportunities,andthreats.
Page 5 of 9 Southwestcore competenciescreate anumberof relevantstrengths.Southwestwasawarded top travel brandby The BusinessJournalintheirAmericanBrandExcellence Awards(Murray).By supportingthe communityandprovidingequal opportunities,theycontinue tobuildastrongwork culture andreputation.Southwestmaintainsavalue-creatinghiringstrategythathasmade thema great place to workfor, a mentalitythathasstrengthenedtheirrelationshipwithunions.Theymeticulously workto maintaina unique culture bycarefullyreviewingeachapplicantandhiringthe bestfits. Employeesare exposedtoaunique brandof formal trainingandencouragedtoseeknew approachesto solvingproblems.Beside investinginbrand,culture,andtalent,Southwestputsalarge emphasison efficiency,theyhave anextremelyhighcapacityusage,meaningtheyhave veryfew emptyseats,agreat safetyrecord,andan industryleadingturnaroundtime (Broughton).Theyhave anextremelystrong domesticnetworkandare able tohedge aggressivelywhenthe fuel pricesare low tomaintainhigh profitability. Despite manystrengths,Southwest’sdependenceonBoeingisamajor weakpointinthe company.Theypurchase all theiraircraftsfromBoeingandin fact,theyonlyflyone classof aircraft,the 737. As a resulttheyhave a highdependence onBoeing737s.A recall or price increase onthese aircraftswouldcripple the entire business. There are a numberof industryopportunitiesforSouthwest.Southwesthasarobust domestic network,butare just beginningtoengage ininternational operations.Internationalflightsandlonger domesticflightsare agrowingmarket.Southwest’sabilitytoexpandintothesemarketsorpartnerwith a companyalreadyinthem,wouldimprove theirmarketcapitalization.Theyalsohave anopportunityto beginresearchanddevelopmentof aircrafttechnology,procedures,andservices.
Page 6 of 9 ThreatsfacingSouthwestinclude intense competition.The effectsof the economyand terrorism,andotherlowcost providerssuchasSpirit,Frontier,andAllegiantAirlineshave decreased Southwest'smarketcap.Theymustmaintaintheirbrandimage asa low-costproviderinthe mindsof consumers.Southwesthasbeenable toleverage theirstrengthsandopportunitiestoovercome their weaknessesandthreatswhile maintainingasuperiorconsumerexperience. Five Forces Model 1. Threatsof newentrants As statedbythe Economist("WhyAirlinesMake SuchMeagre Profits."TheEconomist) the threatof new entrantsis slimtonone.The capital and regulatoryrequirementsmake buildinganairline fromthe groundfloordifficult,tosaythe least.Anothermajordeterrentfornew entrantsisthe highly competitivenature of the industry.Airlinesfightforimprovedeconomiesof scale andrightstohub locations.Majorairporthubs are ownedandcontrolledbythe governmentorothermajor airlines. Fleetcostsare alsoa significantbarrier.Pricesrange from$11 millionto$320 millionfora plane unit.Fuel costsmake upas much as 50% of the expensesof majorairlines.The uncertainnatureof fuel andassetpricesmakesitdifficultfornew airlinestobudgetefficiently.Governmentregulationsalso create difficultiesfornewentrants.Taxes,fees,andregulationsare constantlyaltered(Southwest AirlinesInvestorRelations,Jan2015). The threat isfairlylow withpotential of positiveimpactonprofits. 2. Bargainingpowerof suppliers As statedbythe Economist,suppliershave considerablepowerinthe airlineindustrydue toa relative monopoly.The industryisdominatedbyBoeingandAirbus,billiondollarcompaniesthatseekto corner the market.Inreference toSouthwest,theyrelyheavilyontheirprimarysupplier,Boeing,a relationshipthatcouldimpactSouthwestnegativelyonprofits(SouthwestNewsroom, 2011).
Page 7 of 9 3. Bargainingpowerof buyers In an article writtenbyTeresaCederholm of YahooFinance (“BargainingPowerof the Airline Industry’sCustomersandSuppliers”),Cederholmstatesthatprice sensitivityandavailabilityof alternatives,suchasrail or car, givesbuyers’price consciouschoicesthatSouthwestmustrespondto.If flightpricesare toohigh,manybuyerswill utilize slowerandcheaperalternativesforlongdistance travel.The abilityforconsumerstoeasilyswitchgivesthemsignificantpowerinthe transportation industry,resultinginpotential negative profitability. 4. Threat of substitute products More time consuming,yetlesscostlyformsof transportationare widelyavailable fordomestic consumers,suchas cars, trains,andbus transportation. While othermajormodesof transportation offerthe same basicservice,the airline industryisable toperformitovermuchlongerdistancesandis cheaperpermile (Kasperkevic,2012). These advantagesgive the airline industrypoweroversubstitutes. Unlessthe cost of flyingwere tosignificantlyincrease,the effecttoprofitabilityislargelyneutral. 5. Rivalryamongcompetingfirms In 2014, the OECD competitioncommitteeanalyzedcompetitioninthe airlineindustry,finding that the fierce competitionandlackof viable mergershasledto“horizontal alliances”withinthe industry.These factorsaswell asincreasinghybridizationof businessstrategyinthe industryhave blurredthe linesbetweenshortfare andlongfare firms.Southwesthasconsideredacquisitionsastheir move againstrival competitors.Withthe purchase of AirTranandJetBlue theyhave managedto increase marketshare aswell asopenpossibilitiesinthe international market(Schlangensteinand Hughes,2015).
Page 8 of 9 Industry Predictions The onlyreasonthe current industryhassurvivedsolongisbecause of deriveddemand.Thatis to say that wantingtotravel to anotherlocationorwantgoods fromfar away,createsthe demandfor the airline industry.Noone wantsthe airlinesjustbecause theylike airlines,the demandisderivedfrom the consumerwantsand needsof otherproductsandservices.Astechnologyadvances,the industry cost of maintainingandcreatingthe actual aircraft will greatlyimprove the industry'sbottomline. Presumablyflightswill shortenandcostsperpassengerwill alsodecrease.All of thesethingscangreatly improve andsustainfuture profitabilityof the industry. Conclusion SouthwestAirlineshasmanagedtoleverageacost leadershipcompetitive strategywhile maintainingandexceedingthe industry’scustomerservice standards. While Southwestiscurrentlythe industryposterchildforexceptional service theydonotexcludethemselvesfromexternal threatsand internal growthpossibilities.Costleadershipfacesthreatbytechnological advancements,increasing qualityof service providedbydifferentiators.Tailoredcustomerservices,suchasin flightWiFi andreal time crewupdates,threatenthe positionof costleaders. The future of the airline industryisuncertain, and reliesonconsumersdecidingwhethertheypreferlow costora significantboostinflightquality.If customersopinionshifts,cost-leaderswill be forcedtoadapttheirstrategiestoincorporate these services.We believehowever,thatSouthwestAirlineshaspositionedthemselvesappropriatelyandwill continue torespondtochangesin the industry.Southwestwillcontinuetocompete inthe industry,and barringa paradigmshiftinconsumerwants,will continue tobe profitable.
Page 9 of 9 Sources "2015 AviationTrends." 2015 Aviation Trends.N.p.,n.d.Web.12 Oct. 2015. "SouthwestAirlinesReportsFourthQuarterAndRecordAnnual Profit;42ndConsecutiveYear Profitability."SouthwestInvestorRelations. N.p.,22Jan. 2015. Web.10 Oct.2015. "SouthwestAirlinesWill BecomeLaunchCustomerforthe New Boeing737 Max Aircraft - Southwest AirlinesNewsroom." www.swamedia.com.N.p.,13Dec.2011. Web.13 Oct. 2015. “SouthwestAirlinesSWOT:Financial StrengthisMainstay,butCostandCulture ChallengesLoom Large.” Centreforaviation.com.CAPA:Centre forAviation.Web.9Oct. 2015 Broughton,Robert.“SouthwestAirlinesSwotAnalysis.” Quality-assurance-solutions.com. Web.9Oct. 2015. Czaplewski,A.,Ferguson,J.,&Milliman,J.(2001). SouthwestAirlines:How internal marketingpilots success. Gittel,J.(2003). The SouthwestAirlinesWay. Kasperkevic,Jana."SouthwestAirlinesHasA SecretWeaponTo Make Everyone Love Flying." Business Insider. BusinessInsider,Inc,13 Mar. 2012. Web.10 Oct. 2015. Murray, Lance. “SouthwestamongAmericanBrandExcellenceAwardWinners.” Bizjournal.com. Web.9 Oct. 2015. Schlangenstein,Mary,andJohnHughes."WebCite QueryResult." SouthwestCEORisksKeep-it-Simple Strategy to Reignite Growth. N.p.,28 Sept.2010. Web.10 Oct.2015.