TOPIC Refer to instructions ACADEMIC LEVEL Undergrad. (yrs 3-4) DISCIPLINE Business Studies DOCUMENT TYPE Assignment SPACING DOUBLE CITATION STYLE MLA

1. Running head: SOUTHWEST AIRLINES 1
Southwest Airlines Value-Enhancement
Students Name
University Affiliation

2. SOUTHWEST AIRLINES 2
Executive Summary
Southwest Airlines is a low-cost airline that operates within the United States. It was founded in
1967. The airline is renowned as the largest domestic operator since it transports an average of
106 million passengers annually. As well, the carrier operates in the small freight division. In
2011, the airline acquired AirTran airlines this way, maintaining a 39th subsequent profitable
year. A model used to justify Southwest's profitability index displays from a point-point route
that the airline operates efficiently such that in 2012, the airline made an annual revenue of $15
billion. While the airline continues to transform through acquisitions, the management must
embrace a low-cost structure as it has previously propelled their ventures. The Southwest route
continues to expand with new and enormous destinations; this necessitates that the company
focuses not only on customer service deliverables but also on other metrics that may deteriorate.
From the highlighted transformations as a result of various market forces concerning
competition, it is not feasible for the company to rely on its low-cost strategy to leverage its
competitiveness. This report highlights strategies such as market penetration and development as
well as product development. The rationale for this focus is that through these adoptions, the
airline may maintain its long-term profitability metrics.

3. SOUTHWEST AIRLINES 3
Critical Analysis of the Current Strategy
A low-cost strategy leveraged Southwest Airlines at large in the previous decade. This
strategy is highly attributed to raising the airline standards towards attaining a competitive edge
within the domestic markets. Thompson (2007) notes that "an organization must be the cost
leader and unchallenged in this position to implement the low-cost leadership strategy" (201).
Thusly, the strategy objectifies at maintaining a low-cost structure wherefore, the airline charges
low-fares to its clients. Today, the airline ranks amongst other operators in the US with low unit
costs.
What's more, utilization of Boeing 737 aircraft models contributes to Southwest Airlines'
low-cost structure as this model is regarded as being very effective as per the point-point route
structure. The airline constitutes a commendable workforce that is highly productive, and
because the carrier embraces utilization of simplified aircraft, their operational costs concerning
training, flight maintenance, and operations are minimized. As well, the airports through which
the airline operates are optimally located and hardly congested; this way, asset utilization is
increased to leverage efficiency.
Southwest Airlines is considered as a production-oriented firm because of its low-cost
structure. According to Thompson, such firms are concerned with minimizing production costs
through massive production to achieve maximum profits (202). To reiterate, Southwest Airlines
operates a large fleet of aircraft; however, despite implementing this strategy, the courier no
longer fits the term 'low-cost carrier.' Smith (2011) notes that low pricing strategies alone may
not amount to sustainable advantage (par, 1) despite the airline-luring clients with its low-cost

4. SOUTHWEST AIRLINES 4
structure. This strategy bases upon the identification of a particular group of customers, placing
them in a specific criterion as per their consumption needs that are always below average. The
Southwest airline targets domestic tourists who, in most cases, mind the airfares, and the courier
offers incentives at a lower rate compared to their competitors. Undoubtedly, a firm utilizing this
model needs to integrate their superior leadership to benefit from it, as Thompson (2007) states
"one of the ways through which this aim is attained is by eliminating aspects that customers may
regard unimportant while offering products."
Financial Consideration
Southwest Airlines is dedicated to providing the highest quality customer service with
warmth, company spirit, individual pride, and friendliness (Kelly, 2020). Through financial
ratios, one may estimate the financial condition and efficiency of a company, liquidity ratios are
commonly utilized based on existent assets and current liabilities ratios, and they indicate an
organizations’ ability to settle their short-term bills. One may determine whether measurement
results are positive or negative. More than one ratio is a prerequisite because anything less than
one means that the company has more liabilities than the resources. Southwest's current ratio
shows they barely met their current financial abilities. They are under the range that it should be
in as they should be between 1.5 and 3. However, Southwest's liquidity balance is better than its
rival, Alaska. Alaska's current ratio is .06x (Staff, 2020). What that entails is that Southwest is
more stable than Alaska in covering its current liabilities using cash and cash equivalents.
Southwest Airlines needs to reflect on its performance ratios. To boost the ratio, training in

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management skills is recommended. The company is stable in liquidity position. Liquidity ratios
may provide investment opportunities in other sectors.
Risk of Forming a Strategic Alliance
A strategic alliance is a two-company agreement to pursue a mutually beneficial project
while each remains independent (Kenton 2020). A business may enter a strategic partnership to
grow into a new market, boost its product line, or obtain an advantage over a competitor. The
agreement enables two organizations to collaborate towards a common purpose, which would
profit both. A strategic alliance can carry its own risk. Although the contract is usually
transparent for both parties, there may be differences in which the companies conduct business.
Gaps can cause conflict. In the long-run strategic alliance, one party may become dependent on
the other. Disruption of the coalition can endanger the health of the company (Kenton, 2020).
Previous research shows the stock market expects cooperative action results. A value-weighted
portfolio approach is used here to demonstrate that the overall market impact of alliance
disclosures is limited, reflecting the fact that the substantial returns tend to be concentrated in the
smaller partner (Burton, 2006). The performance ratios are a measure that most certainly would
disclose immediate details for assessing the efficacy of the partnership. Efficiency ratios v
measure how efficiently a company uses its assets and liabilities to produce revenue and increase
profits. Key productivity ratios include in-inventory asset turnover, stock turnover, and day sales.
Value-enhancement
For Southwest Airlines to acquire the capital necessary to support an aggressive value
enhancement strategy is if there were not much capital currently, then there would be an increase

6. SOUTHWEST AIRLINES 6
in the debt capital and by issuing new debt. From there, that capital would originate from
primarily two sources: equity (common stock or preference shares) or debt. For investment,
Southwest Airlines will receive a dividend, which is optional, but shareholding will be reduced.
Now for the mortgage, they will compulsory have to pay interest in the final payment of
principal, and their assets may be pledged. Realistic interest rates the firm might incur as per the
current market scenario, if Southwest Airlines debt is not much and they have sufficient assets,
and then they will get a mortgage, but not at a much higher cost. Now, if borrowed, what would
be impacted towards this is the debt to equity, total debt/capital, and interest coverage ratio.
Fuel Consumption Metrics
While the global airline industry has significantly developed over the recent past, a
significant issue of increasing concern is the cost of jet fuel, what Wensveen (2012) regards as a
"significant determinant in airfares" (p. 320). This costing continually varies as a result of
external factors. Wensveen attests that the consumption of fuel "varies considerably from route to
route depending on the stage lengths, aircraft weight, and wind conditions" (p. 320). In 2014,
Southwest Airline fuel consumption hit $3.16 per gallon; this is an increasing margin of $1.80
per gallon since 2007. Such expenditures have the propensity of affecting up to 35% of the
company's total spending, an increase from 29% in 2014 (Bachmana, 2014, par 3). At that point,
the firm is no more enjoying the attributes of a low-cost strategy besides being in constant rivalry
with other airlines such as Delta, American, and JetBlue. In addition, the elusive nature of the
profitable industry is influencing the organization today because of increasing operational costs.
This contradicts the firm's 25% previous total market share. Various exogenous factors influence

7. SOUTHWEST AIRLINES 7
Southwest Airline in terms of maximizing its profits, besides the aforementioned factors,
consumer expectations are on the rise, and this is a significant element. Consumer dissatisfaction
is an issue of increasing concern for all airline carriers. Percy (2018) argues that a production-
oriented company needs to focus on production inefficiencies that may affect the quality of the
final product (p. 233).
Decision Matrix
Criteria
Problem
Cost of
Operation
5
Effects on
other
systems
2
Speed to
Solve
1
Ease to Solve
2
Low-Cost
Strategy
3 X 5 = 15 2 X 2 = 4 3 X 1= 3 3 X 2 = 6 28
Customer
Satisfaction
2 X 5 = 10 2 X 2 =4 2 X 1 = 2 1 X 2= 2 18
Increasing
Competition
2 X 5 = 10 1 X 2 = 2 2 X 1 = 2 1 X 2 = 2 16
Quality of
Product
1 X 5 = 5 2 X 2 = 4 2 X 1= 2 1 X 2 =2 13

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Recommended Alternatives and Risks Involved
Despite the difficulties that the firm faces because of progress in industry patterns, for
example, high fuel cost, change in client desires, and a decrease in the degree of benefit,
Southwest Airlines has a chance to accomplish market leadership. The firm can achieve this
objective by altering its vital methodologies. Hill and Jones (2014) opine that an organization
should use its particular qualities to capture market share of the overall industry in an industry
described by declining execution (p. 220).
Product Development
Kumar (2016) characterizes a product to incorporate the guarantee that an organization
makes to the objective market in return for their cash (p. 10). The guarantee includes various
perspectives, for example, passionate hints, qualities, and status requests, among different
advantages. Kumar states that a product-oriented organization accepts that a prevalent product
pulls in an extensively considerable number of clients, henceforth improving the probability of
boosting benefits (p. 10). Therefore, to enhance its intensity, the organization ought to consider
enhancing the nature of the product that it offers its clients, viz. air transport. This move will
assume an essential job in guaranteeing that clients build up a stable relationship with the firm.
Presently, most clients are attracted to Southwest Airlines due to their low pricing.
Nevertheless, changes in industry elements, for example, increment in the cost of fuel, are
difficulties for the organization to support its low pricing methodology. This circumstance is very
much delineated by the organization's choice to alter its costs. Despite the adequacy of the

9. SOUTHWEST AIRLINES 9
product advancement technique for improving the organization's intensity, the methodology is
not liberated from difficulties. One of the remarkable challenges involves an expansion in the
cost structure. This viewpoint implies that the method may bring about the organization taking
part in awful value wars (Hill and Jones, 2014, p. 214).
Market Development
The second key elective that Southwest Airlines ought to consider involves positioning
itself as a market-oriented element. Hill and Jones (2014) insist that a market-situated factor is
mainly worried about creating and using market knowledge (p. 212). This affirmation implies
that Southwest Airlines will be worried about understanding the clients' needs. One of the
favorable circumstances that Southwest Airlines can pick up by receiving the market-oriented
methodology involves an improvement in the probability of the firm changing itself into a client-
centric entity.
This affirmation emerges from the view that the firm influences available insight
assembled from the statistical surveying that the firm attempts. Furthermore, the market
orientation strategy will empower the airline to build up a robust business culture that
acknowledges the clients' conduct, subsequently improving its probability to convey better an
incentive than its objective clients.
Market Penetration
Considering the immersed idea of the carrier business in the US, Southwest Airlines
ought to think about coordinating the concept of market infiltration. On the off chance that the
organization neglects to enter new markets and just centers its activity in the residential market,

10. SOUTHWEST AIRLINES 10
Southwest Airlines will not expand its productivity because of the exceptional rivalry. Under this
methodology, the airline ought to consider extending its arrangement of air transportation
administrations into new markets. One of the courses through which the carrier can actualize the
market infiltration technique involves internationalization. In its internationalization technique,
the aircraft ought to stay away from business sectors that are nearing maturity level. Despite
what might be expected, the firm ought to distinguish airline markets that are portrayed by a high
pace of development. Hill and Jones (2014), confirm that market infiltration depends on putting
resources into broad marketing correspondence to guarantee that the item being brought into the
new market is successfully separated (p. 213).
Regardless of the advantages related to highlight infiltration, execution of the system is
time-intensive (Geppert, 2008, p. 35). This viewpoint implies that Southwest Airlines will devour
a generous measure of time in making its air transport administrations known in the new market.
Besides, the firm faces the danger of item impersonation in the new market. This perspective
may happen if the rivals in the new market entered begins offering air travel services similar to
the firm.

11. SOUTHWEST AIRLINES 11
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www.bloomberg.com/news/articles/2014-09-11/southwest-airlines-no-longer-the-low-
cost-leader
Basu, C. (2019, March 6). Four Basic Types of Financial Ratios Used to Measure a Company's
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Geppert, N. (2008). Success factors for market penetration in CIS countries: Using the
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Kelly, G. (2020). About Southwest - Southwest Airlines. Retrieved 13 April 2020, from https://
www.southwest.com/html/about-southwest/index.html
Kenton, W. (2020, January 29). The Risks and Rewards of a Strategic Alliance. Retrieved from
https://www.investopedia.com/terms/s/strategicalliance.asp
Kumar, D. (2016). Enterprise growth strategy: vision, planning and execution. CRC Press.

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Percy, L. (2018). Strategic integrated marketing communications. Routledge.
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