Southwest Airlines Case Study

SouthWest Airlines Case Study

Executive Summary Thousands of people travel by air; Southwest Airlines provides low-fare air transportation service among 58 cities in the United States. Although the industry suffered a major blow from the terrorist attack of September 11th, the company is still holding strong; while other airline companies are in debt. The information was majority gathered and analyzed from the internet; sources such as "News Week," and "Wall Street Journal." According to the acquired knowledge of Southwest, the company maintains steady sales. The major success to their continued success is due to their low-cost model and competitors are aware that they cannot match Southwest Airlines low prices therefore, by dropping the price even lower; Southwest Airlines can force a company to go bankrupt.

Introduction In 1971, Rollin King and Herb Kelleher started an airline service with one simple notion: "If you get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and make darn sure they have a good time doing it, people will fly your airline." They were right about that. Southwest Airline is now a major airline, in fact, the fourth largest airliner in the United States that is trading under the Symbol LUV on NYSE.

The mission of Southwest Airlines is dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride, and company spirit. It primarily provides short haul, high-frequency, point-to-point, low-fare air transportation service among 58 cities (59 airports) in the United States.

Here are some numbers that will give a brief idea how the company is operating: Net income: $241 million Total passengers carried: 63 million Total RPMs: 45.4 billion Passenger load factor: 65.9 percent Total operating revenue: $5.5 billion The airline industry has been hit hard by the terrorist attack of September 11th. There is a 13% insurance raise for the airlines and the government is enforcing fees regarding security problems. The operation cost increases dramatically and there are less people traveling by air. Most of the airliners are losing money expect a few. Southwest is one of those airlines which have remained profitable.

Organization of Southwest Airlines is described as an upside-down pyramid. The upper management is at the bottom and supports the front line employees (~35000), who are the experts. This is Herb Kelleher's unorthodox leadership style, in which management decisions are made by everyone in the organization, not just the head executives. The company is described to not have much emphasis on structure; instead employees are encouraged to think freely without constraints such as titles. Kelleher, for example, is said to know the names of virtually all his employees.

Southwest Airlines is characterized as a C-corporation with duration distinguished as a normal perpetual existence. The shareholders are not normally liable for debts of the corporation and they preserve an operation that is normally more structured, requiring more meetings and (in some states) more reporting requirements. Management is very centralized through the board of directors (elected by the shareholders) and the officers (elected by the directors). The corporation is taxable entity, although the income which would normally be taxed at the corporate level can normally be paid out in salaries (and in other deductible ways) so that there is in fact no tax at the corporate level. As far as transferability of interest, it is normally fully transferable and raising capital is in the choice of public companies.

Southwest Airlines values employees, initiating the first profit-sharing plan in the U.S. airline industry in 1974 and offered it ever since. "In 2000, Southwest offered its employees a record-setting $138M in profit sharing. This tax-deferred compensation represented an additional 14.1 percent of each employee's annual salary.

Methodology In order to explore Southwest Airline's corporate structure, the method in which we obtain our information is a critical component in our mission. Therefore, this analysis describes a methodology that utilizes Southwest Airline's official website to attain background history, company particulars and financial statistics. In addition, the library's electronic journals, business research databases (Wall Street Journal, Business Week) and accredited search engines on the Internet such as Yahoo! are also major resources for our investigation in conducting a fundamental SWOT analysis and acquiring information regarding the company's main competitors and customers.

Our research will not be limited to just Southwest Airline, our research involves Boeing 737 as well as a few of the opposing companies. Research on these additional topics will be specific, material that pertains or assists in elaborating our recommendations for the company of Southwest.

Results According to the attached figure covering the past four years of Southwest Airlines' financial progress, they have maintained steady net sales. In 1999, they had total net sales of $4,735 million which had risen to $5,585 million. Their slight drop in 2002 to $5,521 million was due to the September 11th incident. However, this is nothing compared to other major airline industries where they have lost so much more. Many have even gone bankrupt and been forced to close down. In fact, Southwest Airlines was the only major US air carrier to remain profitable since then; albeit Southwest Airlines were affected by the poor economic conditions. Few of their main competitors are Continental Airlines and American Airlines. Substitute products include the train (Amtrak) and bus (Greyhound) which cover long distances. While these alternates cannot offer the speed of travel, most of Southwest Airlines' customers are attracted to the low price.

Suppliers include those who provide service/products necessary for Southwest Airlines to their business function. For Southwest Airlines, suppliers include mechanics(and other maintenance people), providers of fuel, food(the snacks that are offered). The suppliers do not have much bargaining power.

Customers include both residential and commercial sectors. There is no bargaining power for customers, as there is no threat of backward integration; it is unlikely that customers of Southwest Airlines are going to build their own airplanes and fly themselves.

Rivalry among competitors sets the price-Southwest Airlines is a discount airliner. Rivalry is increasing, as the market decreases, and competitors downsize, the competitors become more or