Evaluation of Southwest Airlines Recent Actions Dealing with Risk and Uncertainty
The airline industry contends with many high level risks and uncertainties. Therefore, the companies have to create and maintain risk management strategies to deal with uncertainties that arise. Without having a risk plan, the airline company can suffer losses that arise from the uncertain situations. A risk can present a positive gain or negative loss to the company. Therefore, uncertain condition that may present a company with profits while others present the company with a loss.
To avoid the uncertainties that are associated with risks, Southwest Airlines has recently adopted various strategies within the last year. The airline company has embraced a ready stance to risks that allows it handle and manage risks as they arise. Readiness to handle a wide range of issues ensures that a company overcomes risks as they arise. Southwest Airlines makes an assumption that they are at a risk of unlikely events at all times (Talwakar, 2013). The outfit has thus placed necessary measures to handle any situation. For example, the firm is aware of the competitiveness of the market and has thus invested in business analytics to help in gathering useful information both internally and externally. It helps the airline better prepare for the future ( Fu, Jin, Liu, Oum & Yan, 2019) . Having a foresight of events helps in creation of a response plan that manages incidences effectively. Southwest Airlines involves all the employees in the planning processes to aid them in understanding the operations.
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Southwest Airlines has recently invested in a cultivation of its reputation to help it in overcoming extreme situations. The company has recently engaged in rebranding of its business to continue being relevant in the low cost market. For example, the company has invested in new seating arrangements that accommodate people with disabilities. The special seats have helped in improving the brand of the company as both a budget and sensitive carrier. The firm also has special services for people who are travelling when sick. Such measures have helped the company overcome most unlikely events.
The company has improved its risk department by employing more experts and investing in data analytics. The improved resources enable it respond swiftly to any uncertainties that arise in business. When dealing with risks, the risk department relies on the predictable elements of the situation to develop a resolution (Von Bergen, Bressler & Boatmun, 2018). The airline has thus been able to respond to events in a quick and adequate manner. The airline company has invested in a good public relations department that enables it respond to issues as they arise ( Fu et al., 2019) . Information is released to the public in good time to create clarifications and offer solutions. For example, late or delayed take offs are communicated at the airports and to clients at an appropriate time to help them adjust.
Advice for Improving Risk Management
Information technology has improved ability to gather large amounts of data and make analysis within a short time so that the data can be utilized in the process of making key decisions. Most companies are now leveraging on business analytics to gather descriptive, prescriptive and predictive information (Pedersen, Gwozdz & Hvass, 2018). Southwest Airlines needs to further invest in an analytics department by hiring more experts and staff that have both industry and analytics knowledge. Business analytics is preferred by most organizations because of its capability to collect and analyze data to produce useful information. Besides, the company further needs to invest in digital technologies as they help in faster identification of risks and resolving them. Therefore, the organization should ensure commit resources in modern technology for use in business systems. For example, Southwest Airlines is working on implementing a project known as OpsSuite ( Fu et al., 2019) . Notably, it is a web-based application used in handling different tasks that help in improving customer service. It will create an integration of services that helps in ensuring a seamless communication between the company and its clients. The organization’s employees will develop ability to monitor gate assignments and supervise loading of luggage. Further, it will also help in fostering accuracy of passenger information.
Another strategy that can help in improving management of risks at Southwest Airlines is conducting periodic training to improve skills, knowledge and experience of staff and crew members. Competent staff members are able to identify risks and report them to the management for action. Notably, they should also be trained in risk management identification and reporting to ensure that all uncertainties are identified early and attended to in good time. According to Wilson et al. (2018), training of staff aids in incidence reporting thus enabling instant response. The airline will thus be able to minimize losses that could otherwise have been incurred as a result of delayed response.
The airline company should also invest in creating a culture that supports risk management. The employees should be encouraged to be more proactive in their incidence reporting. Other cultures that can be adopted by the organization include being observant and ensuring that all employees understand their tasks and responsibilities in the organization. The management and other staff members should be ready to learn from previous events to avert potential risks. Averting potential uncertainties requires staff members to be observant. When all employees understand their roles in the organization, they become accountable for their actions.
Adverse Selection Problem that the Company is Facing and How to Minimize its Effects
Adverse selection and moral hazard are commonly used in the field of risk management. The concept explains a scenario where one person is disadvantaged. In the airline industry adverse selection situation occurs when there is asymmetric information between passengers and the airline company. Due to adverse selection, there can be instances when one group in the business gets access to more accurate information while the other misses on such information (Von Bergen, Bressler & Boatmun, 2018). In that case, the party that has less information is disadvantaged in the relationship in comparison to the other group. Such incidences result in instances of inefficiency. In addition, they can also compromise quality of service provided by the airline company.
Southwest airline faces some adverse selection problems that include unscheduled change of airline route without prior knowledge of the passengers. Such changes have an influence on passengers because it interferes with their plans. It influences their decisions when making a choice on which airline to use. Also, it also has an impact on their scheduling of future travels with the airline company. The airline company needs to place itself in the circumstances of its clients and try to understand their demands. The company should know that clients have different abilities.
Southwest Airline should strive to have knowledge of their customer behaviors through use of analysis tools to understand the patterns of purchasing behavior that can change from time to time both in the corporate and retail sector. Some of the changes that are commonly experienced in retail travel include: an increase in online booking compared to agent booking, a proliferation in the relevance of loyalty programs, advertisement through social media, and use of varying devices in booking processes. Efficient service provision is achieved when there is an understanding of customer behavior and aids in preventing loss of transactions.
Ways in which the Company is Dealing with Moral Hazard Problem
Moral hazard is used in states or conditions where there is a party that gets involved in a dangerous event with the knowledge that they are protected from the risk and the other party will be responsible for the cost. A moral hazard situation occurs when the two parties involved do not have complete information on each other (Von Bergen, Bressler & Boatmun, 2018). The moral hazard is founded on unbalanced or asymmetric information. In such situations, the party that takes risk in transactions has more information compared to the other party that is incurring resulting consequences. The party that has more information has an extra motivation to behave inappropriately to benefit from the transaction. Once the transaction has been conducted, the gains from the asymmetric information will be realized.
The best practices used to deal with the problem include provision of incentives. There exists potential gains created for monitoring when the agent is doing the right thing and are engaging in a risk affair. The principal is involved in the motivation of effort by offering outcome-contingent incentives. For example, he or she can offer bonuses to facilitate completion of specific tasks that benefit the company. Tournaments are also used to help in gathering of information that is economically valuable. Information on relative performance can be collected with little expense. The data informs relative effort of all agents. Winning a tournament is dependent on the amount of hard work shown by other agents. Therefore, a tournament is a game between the agents.
Another practice involves hierarchical monitoring where a supervisor is involved in provision of monitoring services at a cheap rate and in a more professional way than the principal. It thus creates a three-level hierarchy for monitoring the agent.
Principal Agent Problem and Tools Used to Align Incentives
There exists various instances where a principal delegates their authority to an agent that acts on their behalf. The delegation of authority is aimed at ensuring that various tasks in the organization are executed by people who have the right expertise (Pedersen, Gwozdz & Hvass, 2018). The delegation of tasks ensures that experts make key decisions thus minimizing the risks of making mistakes. The agent has an upper hand in making expert decisions. The informational advantage of the agent poses a threat to the principal. The principal cannot verify whether the agent has acted in the best interests of the organization. An agreement can also be drafted to define incentives in a way that assures the principal that the agent is acting within his/her responsibilities.
There are no unique solutions that can be provided to the problem that exists between the principal and agent in an organization. However, Coasean Contingency Theory can be utilized to provide different solutions for varying problems that exist in the firm. A study conducted by Thakor (2018) provides that coasean logic can be used in transactions that occur strictly within the firm, for example, when there is a hierarchical transaction that has been done between the employer and the employee. Employment contracts are used in the structuring of different intra-organizational transactions. In Southwest Airlines, there is a high level of cooperation among the employees of the firm.
There are various tools used in the alignment of incentives thus contributing to improved profitability. The techniques include limitation of measures that the institution compensates for, avoiding measures that can easily be gamed, ensuring existence of a control system, setting reasonable targets, using trigger mechanism to fund incentives, and considering the amount of bonus that affects the total compensation (Jirjahn, 2018).
Examination of Organizational Structure of the Company and Suggestions to Improve Profitability
Southwest Airlines has a good functional structure that helps in providing an operating system and culture. The decision-making in the company occurs at the highest levels of management. The decision making orientation is aimed at ensuring that the upper management has substantial authority. The upper echelon provides direction to the other employees in the junior-level positions. The tall structure in Southwest Airlines is however disadvantageous because it can contribute to poor communication among departments. Customers are also likely to be frustrated due to poor information processing among the departments.
An image of the organizational structure of Southwest Airlines
The organization structure can be improved through creation of a hierarchy that has a delegated decision making system. The hierarchical structure of the company places power at the top level of the management. Such a centered decision-making system prevents the incorporation of ideas or opinions from the middle level and junior employees. The structure can also be improved by enhancing collaborative teams that cut across departments.
References
Fu, X., Jin, H., Liu, S., Oum, T. H., & Yan, J. (2019). Exploring network effects of point-to-point networks: An investigation of the spatial patterns of Southwest Airlines’ network. Transport Policy , 76 , 36-45.
Jirjahn, U. (2018). The adoption and termination of profit sharing for employees: does management’s attitude play a role?. Applied Economics , 50 (2), 108-127.
Pedersen, E. R. G., Gwozdz, W., & Hvass, K. K. (2018). Exploring the relationship between business model innovation, corporate sustainability, and organisational values within the fashion industry. Journal of Business Ethics , 149 (2), 267-284.
Talwakar, P. (2013, March 5). Southwest Airlines boarding and game theory. Mind Your Decisions. Retrieved from https://mindyourdecisions.com/blog/2013/03/05/southwest-airlines-boarding-and-game-theory/
Thakor, A. V. (2018). The Economic Consequences of Regulatory Protection & Extraterritorial Reach. Available at SSRN 3176049 .
Von Bergen, C. W., Bressler, M. S., & Boatmun, T. (2018). Helping behaviors can negatively impact long-term well-being: How “skin in the game” more effectively helps others. Society and Business Review , 13 (1), 112-123.
Wilson, S., Dempsey, C., Farnham, F., Manze, T., & Taylor, A. (2018). Stalking risks to celebrities and public figures. BJPsych Advances , 24 (3), 152-160.
