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Assignment is about the generic strategies of South west Airlines characterized by three strategic themes

Home, - Strategy Formulation for Southwest

Current strategies of Southwest

The Porter’s generic strategies suggest that the Southwest Airlines adopts the low-cost provider strategy for achievement of lower overall costs as compared to the competitors (Thompson, p. 99, 2018). The company’s strategy has been characterized by three strategic themes. First, “Charge fares that were very priced competitive and, in some cases, appealingly lower than what rival airlines were charging” (Thompson & Gamble, p. 322, 2016). Second, “Create and sustain a low-cost operating structure” (Thompson & Gamble, p. 322, 2016). Third, “Make it fun to fly on Southwest and provide customers with a top-notch travel experience.” (Thompson & Gamble, p. 322, 2016). 

So far as the complementary strategic options are concerned, Southwest Airlines used acquisition strategies to strengthen competitiveness.  The integration of Air-Trans airlines into Southwest’s operations was completed by the end of 2014. One of the greatest achievements was the establishment of the company in cities not currently served by Southwest, thereby generating a competitive advantage over rivals. 

In order to keep its low-price/low-cost strategy, Southwest was the first airline to execute a different operational strategy within its industry.  Southwest’s point-to-point scheduling of flights allows them to operate more efficiently by cutting down the time aircrafts are at the gate. This allows for better staffing for its terminal operations throughout the day at a steady rate in comparison to hub-and-spoke operators.

Outcomes of the current strategies

As an outcome of these strategies, the total sales for UAI and LUV are growing consistently from 2011 to 2017. However, a closer look at the figures reveals that LUV sales are indeed experiencing steady growth, roughly from $15M to $20M over the period. UAL sales are quite inconsistent over the same period.

Stock prices are calculations that are used to describe in numbers the ownership certificates of a company. Stocks can fluctuate over time and this can be directly related to the supply and demand of the company. 

UAL and LUV’s stock prices are positively correlated over this period. However, upon closer analysis, UAL stock is considerably more volatile than LUV, with much more pronounced spikes and drops from 2011 to 2014 and beyond. In this comparison, LUV’s stock prices show consistent growth and capable of generating long term earnings. In this case, a stock from LUV would be more appealing for investors.

The net profit of Southwest Airlineshas been consistently increasing ending in 2017 as more profitable than United Airlines (UAL). However, UAL did have a more profitable year in a few instances, mainly in 2015. As per research, UAL was able to have this huge increase in profits by “improving their operational performance”, which included a significant reduction in aircraft fuel from $11.6MM in 2014 to $7.5MM in 2015 as per their Income Statement (United Airlines, 2016). (DANIELA DE NICOLO)

Analysing the ratios, it is found that in terms of ROA, which is a ratio that shows how efficiently the company has been using its assets to generate earnings, LUV has been outperforming UAL every year, except 2015, and as of 2017 was generating $14.41 for every dollar used to purchase assets in comparison to only $5.17 for UAL. (LEANN NEVELS)

Both companies experienced either a huge spike in net income or total assets in 2015 as the ratio doubles for LUV and UAL almost six-fold (LEANN NEVELS).

In terms of ROE, which measures the company’s profitability and shows how much profit its generated with the money that shareholders have invested, it is observed that due to the positive return it appears that LUV has done a consistently good job using the funds received by shareholders efficiently. UAL in comparison must have had a financial issue in 2012 with a negative return of 63% (LEANN NEVELS).

The profit margins show how much of the sales of the company has turned into profits in terms of percentage. LUV has been increasing their profit margin over the years, in 2011 their profit margin was 1.2% and in 2017 was 18.2%. However, UAL’s profit margin has been up-and-down over the years, their best performance was on 2015 with a 22.4% of margin profit and their worst year was in 2012 where they were negative in their profit margin (-2.2%). ANGELA LEON

Five most important strengths and the five most important weaknesses in Southwest’s internal environment. 

Strengths

Southwest Airlines Culture - It is certainly one of the most important strengths of the company.  Southwest is fully committed to employee welfare, job security,and social conditions.  We chose this strength over the others because we considered that their strong organizational culture has become a significant competitive advantage on the market, which will be difficult for its competitors to imitate. 

Customer Experience - Southwest Airlines has been known as a friendly airline, as they make it fun to fly on Southwest and provide customers with the best travel experience.  This strength was chosen over the others. The company, which is in its 47th year of service, has differentiated itself from other competitors because of its outstanding customer service delivered by more than 53,000 employees.

Flight Scheduling – The flight scheduling was selected as a unique strength as it allows Southwest to operate more efficiently than their rivals giving them a competitive advantage, increasing their throughput yield without necessitating the addition of new aircraft and gates. It provides a more significant source of operational excellence and power than other strengths that were similar such as their fleet base and strong domestic network. 

Procurement practices are aligned with its mission and vision - Southwest Airlines' procurement practices are fair and impartial while maintaining the focus on high ethical standards and being commensurate with its triple bottom line of Performance, People,and Planet. This strength was chosen because even though it is only a “Strength”, it shows the company’s great commitment to corporate responsibility. This was chosen instead of the other Strengths listed in Appendix 5 because a lot of the strengths are tailored to customer satisfaction. However, by having this strong vetting process for suppliers, LUV ensures overall customer satisfaction and builds trust amongst the communities it serves. 

Management style -  The elegant managerial style is an important version of strength which was chosen because even though it is only a “Strength,” it shows the different ways to assure employment satisfaction while showing a direct effect on productivity. This creates a culture where managers are constantly informed of what is going on and can make decisions in a timely manner, therefore, become more efficient. This was chosen instead of the other Strengths listed in Appendix 5 because having hands-on management is truly important in order to make the best information and on-time decisions. Without this constant presence from management, some of the other strengths mentioned in Appendix 5 would not have been exploited. 

Weaknesses

Lack of More International Destinations - After the merger with AirTran in 2014 Southwest was able to use the company's existing international capabilities to start incorporating more international flights without altering their price structure by much. They currently have over 11 international destinations in the Caribbean and Mexico (Thompson & Gamble, p. 332, 2016). They are looking to add more locations in the future but currently, if customers are looking to go overseas to Europe, Asia, Africa, etc they would have to utilize a different/bigger airline. This weakness was chosen out of all listed weaknesses in Appendix 5 because this limits the services that the airline can provide. Therefore, it limits its growth. Also, this was chosen because significant resources would need to be allocated in order to be able to remediate this weakness. Hence, it would be a costly adaptation, in terms of monetary and time resources. 

System Problems-Southwest has been presenting in the past some problems with their connections on board and their customer services platform. On the beginning of the year, they had a big problem when they did an upgrade on their system and their reservations systems got in trouble (The Dallas Morning News, 2018). In addition, last year during the cyber Monday their website was down for a house preventing a passenger from buy tickets (Shine, 2017). This is something that the company must be always prepared to have a good vendor that can fix this problem as soon as possible.

Customer can only get flight tickets through Southwest website- Southwest has direct sales (Southwest,2018), this means that customers can get only flight tickets from their website and not from other websites such as cheaptickets.com, this is a weakness since they do not reach the same amount of people who prefer to buy their tickets in these types of websites

Strategic Merger with AirTran- Even though Southwest merger with Airtran has several benefits, it also means that its operational costs will increase. The airline will now need to provide additional training for crew members, mechanics,and pilots on how to operate the newest addition to the fleet, Boeing 717. These two aircrafts have some similarities however they work differently, this will require more time and money for them to properly function. 

No first class/assigned Seating- This weakness was picked over the others because even though it deters some customers looking for a more upscale experience, Southwest has always been a low-cost provider. The cost savings from not having a first-class section/fancy lounge allows them to operate at such low fares. 

Five most important opportunities and five most important threats in Southwest’s external environment. 

Opportunities

New Tax Cuts to Help Airlines with Growing Costs - Airlines have more resources to direct towards obtaining more cost-effective planes. They can give back to employees which helps with productivity and public image

The main substitutes do not seem to pose a risk as they differ significantly from the aviation industry - Airlines provides a more convenient mode of transportation than the substitutes, specifically for long-range travel (Kasi, 2017). This is a very important opportunity as airlines can use this differentiator to their advantage. 

The airline market is expected to increase in the next years - “The International Air Transport Association (IATA) expects 7.8 billion passengers to travel in 2036, a near doubling of the 4 billion air travelers expected to fly this year” (IATA, 2017). This is a significant opportunity as this demand will drive the supply in the industry. 

Consumer loyalty - “In the context of Southwest Airlines, it has been identified that the passengers are very loyal towards this brand” (Skilton&Bernardes, 2015). This becomes an opportunity as it will drive demand in a highly competitive market as is the aviation industry. 

Acquisition of technology and skills - In the viewpoint of Min & Min (2015), it can be stated that this industry invests a lot in research and development in order to bring out the most innovative technology either to reduce the fuel costs or to bring out the most innovative models. This is a crucial opportunity as airlines that can adapt to technological innovation can supply better quality products and services to the buyers.

Threats

Operating costs of the airline industry are likely to increase in the upcoming years due to rise in fuel prices, labor cost as well as compliance to regulation fees - Owing to wage disputes leading to higher compensation and a shortage of pilots increasing hiring needs, labor costs are eating a big chunk of the operating budget.

Shortage of pilots to meet growing demand - New aircraft entering the global fleet, retiring pilots and more scrutinous requirements (such as 1,500 flight hours in the U.S.) cause a higher demand on experience pilots (Garcia, 2018). This is a very important threat as the industry needs specialized labor to be able to offer its service. 

Airline customers are well informed - Buyers are well informed about the product offerings of the diverse airline industriesbecause they have easy electronic access and can compare conditions and prices and select those that best suits them. Millennials demand better services. Customers want a seamless shopping experience, with personal offers.

Customer has low costs in switching to competing brands - The WSJ article indicates about a threat because buyers have easier access to better offers.

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