Introduction
The objective of every airline company is to decrease costs and increase passenger revenue based on per available seat mile. Southwest Airlines is the leading airline in low operating costs. The airline features maximum airplane utilization, among other efficiencies. This could explain the secret behind the company’s sustained growth over the years. The seat assignments at Southwest are driven by a more egalitarian approach to handling customers (Goldberg & Weiss, 2018). The customers are assigned seats on a first-come-first-served basis. The airline adopted such a strategy in order to reduce costly delays and complexities. However, the company is facing stiff competition from other airlines, particularly those targeting price sensitive customers. Several airlines have adopted Southwest’s passenger fair model, where low costs for passengers are key. Basically, Southwest Airline’s value proposition is based on their low fares and outstanding customer experience. However, the advent of new generation of low cost carriers such as Frontier, JetBlue, Alaska, and Spirit airlines, along with legacy carriers such as American, Delta, and United airlines have exerted significant competitive pressures on Southwest Airline’s low cost model, and may negatively affect the model’s ability to continue yielding results.
Competitive Position
Operational excellence is one of the fundamental business strategies. While developing a business strategy, organizations need to realize that focus is very critical. Operational excellence is characterized by the provision of reliable products and services to customers at competitive prices and delivered conveniently. Southwest has endeavored to strip out operational costs wherever possible in order to keep the costs as low as possible. Lowering costs is a very important move as it allows organizations to charge competitive prices for the goods and services. This could involve eliminating some production processes, optimizing business processes, and reducing transaction costs in the business.
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Southwest Airlines has managed to promote operational excellence through the elimination of meals, seat assignments, and interline baggage transfers. Such moves have not only helped in eliminating inconveniences, but also in reducing the cost of doing business. Additionally, the company flies short haul only, eliminating the traditional hub and spoke system (Martin, 2017). This made the company’s destinations smaller, with low passenger fares. Southwest Airline also focuses on secondary airports with that generally have less congestion. This way, the airline is able to save time and money. This is in contrast to one of its major competitors, Alaska Airline, which operates under the traditional hub and spoke system. Based on the inconveniencies of the hub and spoke system, Alaska Airline’s operational costs are higher compared to Southwest Airline. Interestingly, Southwest’s fleet consists of one model of aircraft. Basically, operating a single type of airplane results in many cost-saving benefits, such as less spare parts inventories, simplified training of repair and maintenance staff, fast and efficient maintenance routines, and simplified scheduling of aircrafts for flights.
The improvement of the operational processes at Southwest allowed for the delivery of attractive prices to a segment of customers who would have otherwise been unable to fly. This means that the low cost strategy has significantly helped to increase the company’s market reach. By improving its operations, Southwest has been able to create a special type of consumer who does not require the comforts that are usually demanded by some more affluent fliers ( Homsombat et al., 2014 ). The company also managed to cut entertainment costs significantly by utilizing its own in-flight entertainment crew composed of gregarious and fun loving attendants who recognize that the flying economy is not actually fun. Major competitors such as JetBlue and Frontier have invested in entertainment gadget for customers, adding to the overall cost of doing business. Such competitors will have to charge higher prices to Southwest’s advantage. However, it is worth noting that operational efficiency is different from operational effectiveness. Efficient operations do not necessarily have to be effective. Effectiveness goes beyond cost cutting. A business process can be efficient but fail to impress customers. As such, operational efficiency is not a sure way of winning customers. Given the various customer tastes and expectations, price is not the only factor that consumers look for in making a decision on which airline to fly with. Therefore, organizations should focus on designing operations at every touch point in such a way that they can still deliver quality and competitive prices.
Financial Analysis
Net Income (in millions)
The net income of Southwest Airlines increased by 55.44 percent from $2,244,000,000 to $3,488,00,000, between 2016 and 2017. This indicates that the company is growing in terms of generating profits. However, its closest competitor, JetBlue, grew its net income by 51.12 percent, meaning that it is facing stiff competition. If JetBlue sustains such a growth rate, it may catch up with Southwest. As such, Southwest has to consider improving its marketing strategies to ensure that it stays ahead of competition.
Operating Income (In millions)
Southwest’s operating income decreased by 6.51 percent down from $3,760,000,000 to $3,515,000,000. Although its competitors recorded more decline in operating income, Southwest could have done better. The decrease is attributed to increase in oil prices. The company can increase its operating income by unbundling its product, to cater for the needs of the various customer segments in the market. Failure to adopt the appropriate marketing strategies may render Southwest Airlines unable to keep up with the competition in the industry.
Operating Expenses (in millions)
As shown in table 3, Southwest Airlines has done a good job in minimizing operating costs. This is attributed to the company’s focus on enhancing operational efficiency. Compared to its closest competitor, JetBlue, Southwest Airlines had the lowest percentage increase in operating expenses. While JetBlue saw an increase in operating expenses by 13.06%, Southwest recorded a mere 4.75% increase in operating expenses. Compared to its competitor, Southwest Airlines has been effective in maintaining lower operational costs.
Earnings per Share (EPS)
Southwest’s performance in the market is promising. Compared to its competitors, the company has managed to increase its earnings per share from $3.58 in 2016 to $5.80 in 2017. This represents a 62.01% increase, implying that the company is doing well in the market. This is attributed to the company’s strong brand, excellent customer service, and operational excellence. The company should take advantage of its favorable brand to stay ahead of competition.
SWOT Analysis
In order to effectively establish Southwest Airline’s current position in the market, it is important to analyze its strengths, weakness, threats and opportunities, considering its major competitors. The strengths refer to the company’s selling points. The strengths show how each functional part of a company is best suited to meet the goals and objectives of the business. The weaknesses denote any resource or process that a company lacks, which limits its ability to attain its full potential in a particular market. The threats and opportunities are external in nature. Threats refer to factors that negatively impact the going concern of a business. Opportunities refer to resources and factors that a business can utilize to stay ahead of competition.
Strengths
Hiring the right people
The entire business model for Southwest is generally important. It is perhaps the most valuable competitive advantage the company has. The company has for a very long time focused on hiring the right people who will contribute positively in the attainment of core business objectives. Southwest is generally a people oriented business. The airline operates with employees who are not only friendly, but also approachable and team members. Based on the company’s business model, Southwest hires its employees based on its brand messaging ( Miles & Mangold, 2005 ). The company focuses on hiring people who have the passion for helping customers. The main goal of such a strategy is to ensure that the customers are handled in the most friendly and professional of ways. The company has a stringent set of hiring policies and practices, aimed at ensuring the right mix of team members. As such, Southwest Airline’s focus on customer experience is entirely business-oriented. The employees’ attitude and helpfulness contributes significantly to the customer experience that the company prides in ( Budd et al., 2014 ). This implies that the employees are actively involved in the company’s day to day running, with the company’s vision and mission imprinted on the minds of the employees. As such, the employees are in a better position to own the company’s objectives and strategies. Employees who feel that they are valued can fully support the decisions made by the executives as they are involved in the decision making process.
This is not the case with some of its competitors, particularly the American Airlines. For instance, only 41 percent of American Airlines employees believed that the company’s management makes the appropriate decisions that take care of customers, with only 32 percent believing that the company’s leaders listed to and sought to understand the frontline team member experience (Leff, 2017). This implies that the management and the employees are in conflict with regards to how company customers should be treated. Lack of employee trust in an organization may significantly undermine the performance of an organization, particularly in a competitive industry like the US airline industry. The management and the employees should always speak in one voice when it comes to communication the organization’s vision and mission.
Frontier, one of Southwest’s competitors does not have a well-structured employee recruitment process like that of Southwest. This indicates that Southwest is ahead of competition in terms of hiring the right people for the job. Having the right people participate in the achievement of organizational goals and objectives results in significant success in a competitive market, where relationships are crucial in attracting and maintaining customers.
Attractive rewards and pricing
The company features one of the best rewards programs in the airline industry, offering points for purchasing flights that customers can use to purchase future flights. Such a reward pricing is effective in attracting new and maintain current customers in the market. The customer will always be motivated to always fly with Southwest Airlines because he or she is certain that the points earned all through will be used to purchase a flight ticket in the future. The offer attracts customers, particularly those keen on minimizing transport costs. Basically, all rational customers desire for free tickets, as well as low ticket prices. The company has partnered with Chase Bank to offer its clients a Southwest credit card that helps in accumulating points, but also in enhancing convenience. As such, keeping the customer happy is generally one of Southwest’s competitive advantages.
Thus, Southwest Airlines offers one of the lowest-priced solutions for air travel compared to Delta Airlines and American Airlines. In order to offer low prices, Southwest has built its business model around low operation costs. The company also has aircrafts that have no amenities such as in-flight movies. This helps to reduce overall cost of doing business. Additionally, Southwest Airlines services smaller airports that do not cost much.
Effective marketing strategies
The company has adopted various policies and procedures that help making flying with the airline enjoyable. Southwest Airline’s cancellation policy adds to the convenience of its services. The airline’s customers are able to cancel their flights up to 30 minutes prior to the flight’s departure. The funds from the cancellation can be used by the customer for a future flight. This way, the customers feel that their needs and concerns are adequately addressed by the company. As such, the customers remain satisfied with the company’s services. This is contrary to how the company’s competitors handle cases of flight cancellation among their customers. For instance, major competitors like JetBlue and Alaska charge $75 and $25 respectively as penalties for cancellation. The cancellation penalty is an inconvenience for the customers as they are always after reducing flight costs. This implies that Southwest Airlines enjoys a competitive advantage over its competitors in terms of cancellation penalties.
Weaknesses
Single product type
Southwest Airlines has rejected the product unbundling strategy that nearly all of its United States’ competitors have adopted. Having a variety of product offerings allows consumers to tailor their experiences based on their individual tastes and preferences. It is important to realize that ancillary revenue presents the greatest opportunity to grow revenue, over the medium and long term. JetBlue has been able to earn more revenue from ancillary services. As such, JetBlue has significantly grown its ancillary revenue by creating products that customers’ value rather than making them feel dimed. Southwest Airlines would have created some added value for its customers.
Opportunities
Product differentiation
Southwest airlines can unbundle its products in order to offer each particular segment a unique product. By offering a single product across segments may hamper the company’s potential for growth. By offering an extended legroom, Southwest Airlines can attract more customers who are willing to pay more for extra legroom. By offering different products, the company can generate high margin revenue. The company can decide to offer full service, hybrid, and ultra-low-cost tickets to customers.
Threats
Competition
The new generation low-cost-airlines and legacy carriers present a significant competitive pressure on Southwest Airlines. Much of its traditional markets have been encroached. Major competitors like JetBlue, Frontier, Alaska, Delta and American airlines offer differentiated products that may bait away the company’s customers. The company is no longer the only airline offering low cost flight tickets, following the entry of the likes of JetBlue and Frontier.
Available Alternatives
There are several alternative courses of action available to Southwest Airlines. The company can attract new customers and maintain current ones by ensuring that its offerings are in tandem with the needs, tastes and preferences of the consumers in the market.
Product Differentiation
Southwest Airlines can consider offering a variety of products to customers. This is because there are different segments of customers in the market, and price is not the only feature in a product that the customers are concerned about. Developing differentiated products may increase the company’s chances of success. Southwest’s close competitor JetBlue has performed well in terms of operating income. This can be attributed to its differentiated products, which attract consumers from various segments in the market.
Aggressive Marketing
Effective marketing involved appropriate branding and communication of a unified message to the consumers through various channels. By increasing online advertising, Southwest can reach new consumers who can be interested in its low-cost flight tickets. JetBlue has maintained highly spirited online campaigns aimed at attracting more customers. Southwest can counter the challenge by scaling up its marketing activities.
Expanding its Operations to International Markets
Southwest Airlines can consider expanding its market reach instead of focusing on the domestic market. Opportunities exist beyond American borders and the company can seize them. Overdependence on the domestic market may expose the company to competitive risks. This can help the company increase its market share, as well as operating income.
Recommendation
Product differentiation is the most appropriate course of action the company should consider undertaking. The company has a great brand that can be taken advantage of. Therefore, developing new products based on the various customer segments can increase the company’s chances for success in the industry.
Implementation
The company may consider developing three products: full service, hybrid, and ultra-low-cost flight tickets. Full service products will be marketed to high end customers who are not concerned about the price but rather the comfort of the flight. The hybrid product will be marketed to middle class customers and business individuals. The ultra-low-cost tickets will then be marketed to low end customers. Basically, the company will not have to invest a lot in marketing ultra-low-cost tickets as most of the existing customers fit in the segment.
APPENDIX
Table 1: Net income earnings for Southwest, JetBlue, and Alaska
| AIRLINE | 2017 | 2016 | % Increase/decrease |
| Southwest | 3,488 | 2,244 | 55.44 |
| JetBlue | 1147 | 759 | 51.12 |
Table 2: Operating income for Southwest, JetBlue, and Alaska
| AIRLINE | 2017 | 2016 | % Increase/Decrease |
| Southwest | 3,515 | 3,760 | (6.51) |
| JetBlue | 1000 | 1312 | (23.78) |
Table 3: operating expenses for Southwest, JetBlue, and Alaska
| AIRLINE | 2017 | 2016 | % increase/decrease |
| Southwest | 17,756 | 16,665 | 4.75 |
| JetBlue | 6,015 | 5,320 | 13.06 |
Table 4: EPS values for Southwest, JetBlue, and Alaska
| AIRLINE | 2017 | 2016 | % Increase/Decrease |
| Southwest | 5.80 | 3.58 | 62.01 |
| JetBlue | 3.49 | 2.32 | 50.43 |
References
Goldberg, R., Weiss E. (January 11, 2018). Why Southwest Airlines’ Competitive advantage might be saying ‘no’. The Washington Post ,
Leff, G. (November 20, 2017). American Airlines just surveyed all its employees- and things are pretty bad. View from The Wing .
Martin., H. (August 19, 2017). Southwest Airlines still has the power to lower fares of competitors, study says. The Los Angeles Times , http://www.latimes.com/business/la-fi-travel-briefcase-southwest-20170819-story.html
Miles, S. J., & Mangold, W. G. (2005). Positioning Southwest Airlines through employee branding. Business horizons , 48 (6), 535-545.
Homsombat, W., Lei, Z., & Fu, X. (2014). Competitive effects of the airlines-within-airlines strategy–Pricing and route entry patterns. Transportation Research Part E: Logistics and Transportation Review , 63 , 1-16.
Budd, L., Francis, G., Humphreys, I., & Ison, S. (2014). Grounded: Characterising the market exit of European low cost airlines. Journal of Air Transport Management , 34 , 78-85.
