Southwest Airlines

Introduction

By October 2002, Southwest Airlines had apparently weathered the initial crisis to the airline industry that resulted from the September 11, 2001 ("9/11") terrorist attacks. Most of the large national carriers had experienced huge losses in demand, profitability and market share, while in contrast Southwest's low-fare operations had thrived, even in the face of declining earnings. Yet, only a year after the attacks, Southwest and the industry in general faced still unknown future changes to its operating environment. There was already a new dynamic of security becoming a priority consideration, and new governmental directives and taxes meant to ensure and maintain that security. This new security dynamic had already impinged on Southwest's key operating strategy of customer-friendly service, due to boarding delays and resulting lower on-time arrival performance levels. Consequently, because of decreased demand due to lingering customer fears, depressed macroeconomic conditions, new federal taxes, and the perception of declining service, Southwest began to experience what other carriers already had: reduced revenue, increased costs and declining profitability.

Therefore, post-9/11 and amid the general industry malaise, Southwest's management is challenged with strategic decisions regarding the rate and manner of future growth. Also, the changes to the operating environment, such as increased security requirements, taxation, restrictive governmental regulations, and unpredictable responses on the part of competitors, created challenges to Southwest's operating strategy of offering a differentiated low-cost, customer-friendly service. Consequently, the central issue facing Southwest's management is: How should Southwest's future growth strategy be defined and achieved, given a crippled airline industry? In addition, what changes to the airline's operating strategy should be implemented, and in what ways, to achieve this growth, given the present and future challenges to the structural environment of the airline industry?

Internal Analysis

Southwest's Strengths

Southwest's main strategy is providing a differentiated product to airline industry customers. It does this by offering a low-cost, high-convenience, customer-friendly service to its main focus group, the business traveler. Southwest's business model has proven to be highly successful in providing the company a distinct competitive advantage over its competitors. Southwest's business model is based on several key activities that form the basis for its long-term and operational strategies.

Southwest has a long-standing policy of conservative growth. This policy limits annual growth in aircraft capacity to between 10% and 15%, and annual station growth to two or three cities, in spite of expansion opportunities. The financial side of the policy is a low debt-to-equity ratio that reduces costs and increases market value. As a result the company has maintained a strong balance sheet, as evidenced by thirty consecutive years of profitability.

Southwest has a strong organization, built on charismatic leadership, a small yet experienced executive management team infused with Southwest values and culture, and excellent employee relationships. Management was informal, and decision-making was on a cross-functional basis, adding to the efficiency of operations. Southwest has a defined set of core values, including profitability, low cost, family, fun, hard work, legendary service, simplicity, and altruism. These values permeate all levels of the organization, and led to good relationships with employees. For example, the company established an informal Culture Committee (CC) staffed with peer-nominated employees from all levels of the organization. The CC organized and ran several employee appreciation and promotional events all designed to foster good relations and the "Southwest SPIRIT". The company also partnered with unions, providing excellent pay and benefits in return for flexible work rules (e.g., the "... and whatever else might be needed to perform the service" contract clause). The emphasis on "family" led to an employment practice "to hire for attitude", ensuring a homogeneous work group with empathetic and pleasing personalities; although the company was wise and flexible enough to hire from an outside talent pool for specialized jobs such as information technology (IT). This led to innovativeness in Southwest's IT operations which resulted in the development of its website, Southwest.com, which was used as a ticket-distribution system. Such innovations resulted in increased sales and lower distribution costs.

In general, Southwest's greatest strength lies in its operating strategy. Southwest has been able to achieve differentiation by positioning itself as the only short-haul, low-fare, high-frequency, point-to-point carrier in the industry. The company has staked out a unique and valuable strategic position based on a tailored set of activities providing convenience and low-cost. Southwest's core competence comes from the way its activities fit and reinforce one another. These activities include:

Pricing Structure - Central to Southwest's strategy was keeping operating costs low enough to enable the establishment of fares below the cost of driving a vehicle over the same route. This made it difficult for imitators such as the larger airlines, which could not compete on the basis of cost.

Route Structure - The route network of Southwest consists of point-to-point flights connecting cities (stations). This was in contrast to the hub-and-spoke route system employed by most other carriers, a system which was considered less convenient to travelers, caused delays due to the "domino effect" of late flights, and was more costly and less efficient for staffing. Southwest's point-to-point system enabled the airline to achieve high levels of on-time service. In addition, scheduling involved frequent departures, enabling late or "last second" customers to catch a later flight. High-frequency service demanded that turnaround times be minimized as much as possible. Consequently Southwest service did not include connections with other airlines. Point-to-point connections thus allowed Southwest to increase plane utilization.

Fleet Uniformity - Southwest's fleet consisted entirely of Boeing model 737 aircraft. This created advantages such as reduced costs for training and maintenance personnel, greater flexibility of crew allocation to flights, increased efficiency and economies of scale.

Choice of Airports -Southwest's selection