Southwest airline is one of the major airlines operating these days. Starting from the scratch Rollin King and Herb Kelleher joined hands to build an airline company which would be a totally different from then airlines. They started the company with one simple thing in mind which was to get the customers to their desired places on time and at the lowest possible fare. They had one vision in mind i.e. To provide customers with suitable and affordable ticket prices with satisfactory air travel. On February 20, 1968 King and Kelleher created the infamous Southwest Airlines. The Texas Aeronautical Commission gave them the permission to fly between three cities in 1968. From 1968 the company has never stopped expanding and is expected to grow further more in the recent years. It dominated the market of airlines when it was created due to the strategy of lower costs opted by them. This lowering of fares has been a vital factor in the success of Southwest Airlines. With the help of great achievements devotion and expansion the company has been able to grab the Triple Crown. It is the first ever airline which was able to grab the honor. Not even in the department of travel has it achieved but it has also excelled in the department of finances.
Southwest Airlines always believed in the frequent flying program to give more concern to the number of trips taken. The firm at first focused on a single state to avoid competition by other companies. This paved a way for the company to expand. By the mid 1990s the air traffic level had increased by huge numbers and thus this promoted other airlines to participate. The firms existing vision statement is to provide the customers with fairly less fares and thus give an opportunity to all common people to travel by air. The main aim of the Southwest airlines is to maximize its returns and to increase the profit by a large margin. Southwest airlines believe in the security of each and every employee working in their firm and thus they provide the employee with a safe environment to work. The overall objective of the airlines is to provide people with safe and sound journey with fairly less fares so that the ordinary people can afford traveling by air.
Southwest airlines have been quite successful in implementing its policies, rules and strategies. Southwest airlines don’t believe in expanding at an increasing rate in order to avoid any future mishaps. It has always considered its cost containment policy as a major factor for its success. The employees in Southwest airlines are treated as customers and are provided with perks and benefits. It believes in devotion to its employees. It has believed in expanding only when an opportunity arises. For e.g. Southwest airlines would not prefer to run less than 12 flights a day in a particular city. Southwest believes in getting its passengers on the destination on time or before time. It has always wanted to fly a huge number of passengers on a high frequency. It believes in reducing the time in reaching a destination. ‘It has always avoided hub and spoke operations thus fly their customers directly from city to city.’ It has from the beginning avoided large crowded airports so that the time loss is reduced. After the imposition of ticket tax 1997 the company introduced non-stop trips around the world so that the tax imposed could be decreased. Southwest airlines always believed in reducing travel time so that the consumers reach at their desired destination safe and quick. In order to enhance the policy of reducing travel time the Southwest Airlines uses plastic cards as boarding passes and doesn’t assign any specific seat to the customer. This therefore reduces the time in which a customer boards the plane. It decreases the total turnaround time on the ground. All these policies improve travel timing for the company and for the customers. The Southwest airlines have adhered itself to one kind of jet i.e. Boeing 737. Thus all the employees learn and get experience in handling the specific type. This helps in handling a situation of emergency. The costs on which the airline operates are fairly less than their rivals. The overall strategy of the Southwest Airlines is aimed for specific purposes like maximizing profitability.
A mission statement can look easy but it should be in touch with the base of the organization with a specific statement of function. Words should be selected for sense and clearness – not technical language. A mission statement is a logical vantage point from which to look down the road. (Thomas Strickland, p.4, 28)
Southwest Airlines has given power to its employees with a Mission Statement that references “a dedication to the highest quality of customer service delivered with a sense of warmth, friendliness, individual pride and company spirit.” Whereas other airlines endured financially after the fanatic attacks of September 11, 2001, one could praise the Mission Statement of Southwest Airlines to assist continue their workers alert.
Vision statement is a report that focuses on future of how the association should give the impression and how it will effectively accomplish its goals.
It describes a practical, reliable, and striking future for the organization.
A vision allows leaders to inspire, attract, align, and energize their followers – to empower them by encouraging them to become a part of a common enterprise dedicated to achieving the vision” Gil Hickman, “Leading
Organizations”
Southwest Airlines’ vision is to develop the places both domestic and overseas by being the major and most advantageous airline company to attain both short and long-haul carrier proficiently and with little cost. It also has to be an airline service that consists of the most creative employees to assure the most excellent flight achievable for each and every traveler.
Southwest Airlines is a corporation that is meant for each and every person who needs to acquire from point a to point B. By flying. Their aim and idea is to fly safe and sound, with high rate of recurrence, less-expensive flights that would be able to get travelers to their specified point on time and more nearer to their places. They fly in 58 towns and 30 countries and are the world’s biggest short-haul transporter and they make certain that it is run powerfully and in an inexpensive manner. Their tools are up-to-date for example our check-ins procedure is quick. Motivating to develop and rise in a rebellious manner is key, and being economically established by maintaining quality far above the ground and charge low. Their brilliance is organizing cost by our hasty twenty-minute gate turnaround, a continuous flight through our airplanes, and an extra creative employee which maintain above our opponent. They keep our workers similar to clients, family unit and encourage and pay compensation to them for performing the work very nicely. We persist to be in the Fortune Magazine’s most well-liked corporations (2nd in 2002) 100 most excellent corporations to work for. Since 1972 we have grades first in cash Magazines featured in “The 30 Best Stocks.” In their group of peoples they create hand-outs to charitable trust to organizations and people in time of necessity.
The present vision and mission statement is quite beneficial for the company but in order to further improve the statement I think that they should provide customers with more enhanced and better ways to travel with comfort.
With the success of the company many opportunities arise for the company to grow in size and to maximize the profits. Southwest airlines only operates in the inter-city air travel. To increase its profits it can expand into overseas and also expand their service to other cities of the U.S.A. Many of the airlines which stood in the competition of Southwest but got bankrupted provided a way for the Southwest to hire already experienced and trained employees. E-commercing proves to be a vital factor in keeping the airlines standards. Southwest airlines were the first airline to launch its services on the internet. 50% of the bookings Southwest airlines get are from the online bookings. This internet marketing reduces the cost of the agent in between who charges his commission. Thus e-commerce is an important external opportunity for the firm to enhance its profitability.
Southwest airline was one of the airline companies which managed the blow of the incident of 9/11. Since then the airline industry has been affected and many new competitors in the field have emerged and have given competition to Southwest airlines. Many of the new entrants have adopted the same policy as that of Southwest. The policy includes low fares and short haul routes. Southwest airlines are on a detriment as the company doesn’t prefer bigger airports, so the other competitors who have emerged have access to a variety of cities and bigger airports. Jet Blue is an emerging competitor and threat to the Southwest airlines due to its adoption of the same policies. Many other companies are merging to provide tough competition to Southwest airlines. And many have got successful too in earning the market share. The emerging competition by new companies is a growing threat for the company and it should be tackled properly to avoid any future disturbances.
In order to further describe the competition Southwest Airlines is facing a Competitive Profile Matrix is designed. The following Competitive Profile Matrix tells about the tough competitors which are in a good position to have an edge over Southwest Airlines. It tells about the strengths and weaknesses of other competitors in contrast with Southwest Airlines.
Factors Weight Southwest Airlines United Airlines Delta Airlines Ratings Score
Ratings
Score 1. Low fares.15 4.60 3.50 4.60 2. Customer Service.15 2.30 4.60 3.50 3. Employee Relations.15 4.60 3.50 3.50 4. Rate of Expansion.10 2.20. 4.50 4.50 5. Marketing.15 4.60 4.50 4.50 6. Finance Structure.15 4.40 4.40 4.40 7. Management Policies.15 4.60 4.60 2.20
EXTERNAL FACTOR EVALUATION MATRIX
The external factors such as environmental, economic, social, cultural, demographic, political, legal technological etc. have a great influence on the company’s performance. Thus to provide a better view of all these factors External Evaluation Matrix is designed. A rating of 4 here means the company is very good at reacting to all the external factors. Following are the external factors which contribute to the performance of Southwest airlines.
Weighted
Major External Factors Weight Rating Score Opportunities 1. The point to point market remains a growth market.10 3.30 2. Adding of more Long haul routes.10 3.30 3. Expanding internationally into other territories.10 1.10 4. Expanding east U.S. short haul routes.10 4.40 5. Established Economy.10 4.40 Threats 1. Great fuelling costs.15 2.30 2. Economic downturn.15 3.45 3. Policies of Competitors.5-4.20 4. Corporate cost saving measures.10 3.30 5. Merging of Airlines sharing agreements scheduling and marketing agreements.5-2.10 Total 1.0-2.85
The key strength Southwest contains to propose is that it is possibly the most economically firm corporation in the United States airline market as earlier confirmed. For thirty one consecutive decades it has created a profit; not falling into the red even following the consequences of the September 11th attacks in 2001. This permits southwest the liberty to amend policy and make judgments that a more greatly weighted corporation, such as Delta may not be able to reproduce.
Whereas financial constancy is a key factor to Southwest’s accomplishment, there are numerous different competencies that have led to this place. To start with, Southwest has an tremendously optimistic status due to its better corporate veracity. Southwest was familiar for the ninth straight year in 2005 as one of America’s Most well-liked Companies by Forbes and has detained the characteristic of being between Business Ethic’s list of the top 100 Best Corporate Citizens for the last five years. (Annual Report 2005).
This benevolence permits Southwest to magnetize and sustain a solid group of workers – further than a quarter of a million job hunters applied for less than 3,000 posts previous year letting Southwest to keep high standards when filling positions. These faithful workers assist to counterbalance the risk Southwest faces by listing itself as a “low cost” airline. By containing employees that take pleasure in their positions and present themselves in a sociable, professional way, it adds excellence and worth by inserting an affirmative element in to a traveler’s Southwest experience. Additionally, motivated Southwest workers were able to make use of their improved productivity and innovation to make the company’s operating expense down by 1.5%. 82% Southwest’s work strength is unionized and this may serve to keep staff satisfied, settled terms involving.”.. hiring and retention rates, and costs for health care are items with potentially significant impact on the Company’s operating results” (Annual Report 2005). This potential weakness could guide to decreased revenue as Southwest’s labor demanding organization continues to expand.
An additional strength contributing to Southwest’s economic accomplishment is their ready approval of new technology. Services for example ticket-less check-in, which lets travelers to board their flight not just more speedily but furthermore with no distressing about losing a paper boarding pass, and the Southwest desktop icon, a marketing policy that makes use of a computer program that alerts users to “short-term internet specials” (2005 Annual Report) have permitted Southwest to more professionally supervise their business. Southwest also utilizes a specialized scheduling system that permits 80% of their customers to fly non-stop and confines time used up at gates to twenty-five minutes or less. However again, this also presents a flaw as any system breakdown, specifically in the computerized check in terminals could lead to a loss of information, goodwill, and in the end, revenue. Also in the part of effectiveness, Southwest has hedged 73% of its fuel expenditure at $36 per barrel at a point when the price is costing most other airlines over $60 (Arndt). In 2005 without help, this prevarication policy condensed Southwest’s fuel and oil expenses by over $900 million which allotted them more financial freedom as discussed above. The chance of this hedge reversing itself to turn out to be a liability to Southwest is highly doubtful as fuel costs are only estimated to increase for the projected future.
Regrettably, one of Southwest’s supreme strengths is also one of its main weaknesses. The low cost of Southwest’s tickets is the foundation stone of the company’s strategy and describes the nature of Southwest. This discounted ticket rate unluckily has led to the eradication of a first class and a decrease in overall facilities (refreshments, in flight movies, etc.). As a result of lack of these apparently needless services, some in the marketplace may distinguish Southwest as the airline of the second class resident although Southwest’s very good safety record and well-mannered staff. While ill-fated, Southwest is accessible with the chance to reinvent its image comparative to other airlines – a procedure it has already commenced by switching its traditional plane colors for a more reorganized system. Another area that presents both a weak point and chance for development is Southwest’s geographic service. Southwest make tracks from 62 cities covering only two-thirds of the United States. No service is supplied to Canada or Mexico in spite of their closeness to existing Southwest routes. Though, Southwest’s present policies plan for and make available the resources to allow for growth. In 2005, the company added thirty-three leased Boeing 737’s to service two additional cities, increasing their overall capacity by 11%.
Superficially, Southwest faces equal problems to the rest of the airline industry but from an imprecisely less precarious position. Government system, such as the Wright Amendment that at present limits commercial flights out of Dallas Love Field (Southwest’s primary hub), can put a strict limitation on Southwest’s development potential and it’s capability to function in certain markets. Adjustments to prior regulation, such as those prepared in reaction to terrorism, can also force a revise in current airline trends.
With the danger of terrorism still moderately high, post-September 11, 2001 security will carry on to cause a raise in costs. Resting on this, passengers are as a final point becoming relaxed again with air travel, and any attack.”.. even if not made directly on the airline industry” (Annual Report 2005) would confidently have a negative impact upon airline revenues as citizens once again became terrified to get to the skies. Any loss of assurance in the protection of air travel would direct to a transfer to the use of other forms of transportation, leaving Southwest struggling to fill its seats. Optimistically, Southwest has used its strengths to last out the situation earlier and as long as the company keeps its existing policies, should be able to carry on any unexpected terrorist attack.
All associations have strengths and weaknesses in the practical areas of dealing. No enterprise is evenly strong or weak in all regions. Organizations should struggle to exploit upon the internal strengths and prevail over weaknesses
INTERNAL FACTOR EVALUATION (IFE) MATRIX
The Internal Factor Evaluation (IFE) Matrix go over the main points and calculates the main strengths and weaknesses in the functional areas of a business, and also grants a way of recognizing and estimating the relationships among those areas. Scores can range from 1.0 to 4 with 2.5 being the average. Scores below 2.5 point out that a corporation is weak internally.
Serial number
Key External Factors
Weight
Rating
Score
Strengths
Recognized as one of the world’s safest airlines
Best customer satisfaction ranking of any major U.S. airline for the eighth year in a row
U.S. only major short-haul, low-fare, high frequency, point-to-point carrier
Lowest debt among U.S. carriers
Lowest cost airline in its market
Twenty-four years of operating at a profit
Low price fares, no frills
Weaknesses
Commitment to only Boeing 737 aircraft
Avoids formal strategic planning and management
Unionized labor force
Few long-haul flights
No centralized reservation system
No international flights
Low customer service budget
Weighted
Strengths-weaknesses-opportunities-threats (SWOT) Matrix
The strengths-weaknesses-opportunities-threats (SWOT) Matrix is a tool that assists manager to build up four types of strategies. The four sorts are Strength-Opportunity (SO) Strategies, Weakness-Opportunity (WO) Strategies, Strength-Threat (ST) Strategies, and Weakness-Threat (WT) Strategies.
STRATEGIC POSITION and ACTION EVALUATION (SPACE) MATRIX
This four-quadrant structure indicates whether aggressive, conservative, defensive or competitive, strategies are most suitable for a specified organization. The alignment or the SPACE Matrix characterize two internal dimensions and two external dimensions. Theses factors are the most significant determinants of an organization’s overall strategic position.
FINANCIAL STRENGTH
Ratings
Return on Investment
Leverage
Liquidity
Working Capital
Cash flow
COMPETITIVE STRENGTH
Customer loyalty
Market Share
Customer Service
Low Fares
Best on-time ratings
ENVIRONMENTAL STABILITY
Inflation Rate
Fuel Prices
Demand Variability
Competitors Prices
Competitive Pressure
Price elasticity of demand
INDUSTRY STRENGTH
Growth Potential
Profit Potential
Financial Stability
Ease of entry into market
CONCLUSION
X-axis: -2.0 + 2.5 = 0.5
Y-axis: -2.5 + 4.0 = 1.5
It is in the interests of Southwest to follow competitive strategies.
GRAND STRATEGY MATRIX
The Grand Strategy Matrix is an admired tool for creating alternative strategies. This matrix is founded on two evaluative criterion, competitive position and market development. Suitable strategies for an organization to think about are listed in each quadrant or order of attractiveness. Following are the four quadrants which are in the interests of the airline industry.
Quadrant 2 Quadrant I
1. Market progress 1. Market development
2. Market penetration 2. Market penetration
3. Progress of products 3. Product development
4. Horizontal integration 4. Forward integration
5. Divestiture 5. Backward integration
6. Liquidation 6. Horizontal integration
7. Concentric diversification
Southwest Airlines is positioned in this quadrant
Quadrant III Quadrant IV
1. Retrenchment 1. Concentric diversification
2. Concentric diversification 2. Horizontal diversification
3. Horizontal diversification 3. Conglomerate diversification
4. Conglomerate diversification 4. Joint ventures
5. Divestiture
6. Liquidation
STRATEGIC ALTERNATIVES
Service
EXPAND LONG-HAUL
Mexico
CRITICAL SUCCESS FACTORS
Weight
AS
TAS
Opportunities
1. The point-to-point market remains a growth market
2. Adding more long-haul routes.
3. International expansion into Canada, Mexico, or the Caribbean
4. Expanding Eastern U.S. short-haul routes
5. Stable U.S. economy
Threats
1. Competitive fare wars and customer incentives
Economic recessions
High fuel costs
4. Corporate cost-saving measures
5. Airline Alliances Xcode sharing agreements, scheduling and marketing agreements
Strengths
1. Recognized as one of the world’s safest airlines
2. Best customer satisfaction ranking of any major U.S. airline for the eighth year in a row
3. U.S. only major short-haul, low-fare, high frequency, point-to-point carrier
4. Lowest debt among U.S. carriers
5. Lowest cost airline in its market
6. Twenty-four years of operating at a profit
7. Low price fares, no frills
Weaknesses
1. Commitment to only Boeing 737 aircraft
2. Avoids formal strategic planning and management
3. Unionized labor force
4. Few long-haul flights
5. No centralized reservation system
6. No international flights
7. Low customer service budget
First and foremost, Southwest Airline has industrialized a great low cost model for the previous thirty years that suits today’s economy the most excellent. It has developed from a small company with only three aircraft to one of today’s most important airliners that take a trip between 58 cities carrying more than 60 million clients every year. As everybody can observe, Southwest Airline has been a large success. Now, it is provided a chance to develop even bigger at this tremendously hard and critical occasion for the airline industry. After the occurrence of September 11, Southwest Airline is one of the small airliners that stayed beneficial; other airline companies are lowering millions of dollars due to the insurance increase, the security cost and the deficiency of customers.
A suggest Southwest airline to acquire this opportunity to expand to better and bigger regions. It is the point for Southwest airline to make use of its low price tickets to take its challengers out of business and take over their market. I suppose, giving up a few of the profit to cut the ticket price even lesser and improve hardware can open Southwest Airline to a much bigger market that will carry more revenue in future. Implementations of cost reduction technology such as internet is desirable to lower the process cost to give customers improved agreements.
A advise that Southwest could accomplish growth with in the company’s current business by executing a concentrated growth strategy where the airline will generate a business and family class section on its airliners. Selecting a market penetration strategy will permit Southwest to raise the market share of its existing products in their current markets. By doing this, the corporation will not only magnetize, but they will persuade and accommodate to more business class travelers as well as groups and families.
A picked this market penetration approach in preference to offering exclusive business class flights because of the actuality that it is more cost-effective. By providing room on existing airplanes for groups, families, and business people, Southwest can accumulate money and carry on to manage its flights on the company’s existing airplanes. This way Southwest can make use of this approach to its already established business.
A propose that Southwest could make growth within the company by putting into practice a comprehensive growth plan. The market development strategy that I advise for Southwest Airlines will assist the company get in touch with new markets whose requirements are not being satisfied by the airline’s current product contributions.
Establishing a low price airline existence in Canada, will permit for Southwest to increase some international acknowledgment with fewer competition. It would be easier for the airline to found itself in Canada than in Latin American and Western Europe where there is more contest and require more hard work and devotion. Having an existence in Canada will not merely give Southwest the prospective to achieve new clients, but it will also assist support the company in turning out to be a piece of Canada’s business world. Canada is a country identified for business and customer travel. Implementing the market penetration strategy along with the market development strategy, Southwest will be capable to set up itself as an inexpensive way to take a trip within Canada. This is to declare that Southwest should function a separate airline service within Canada and still control its United States operation.
A advise that Southwest Airlines could also attain development through an integrative growth strategy. By means of this type of strategy the airline will be able to obtain businesses that are connected to company’s current business. My proposal is for Southwest to team up with travel vacation companies in order for the airline to become an element of touring packages. By offering group priority seating along with establishing Southwest as the primary carrier for the tour group; Contiki Tours, the airline will be able to reap the benefits of the touring agency without having to become a direct part of the travel agency. Southwest has been doing a very profitable job of being a low fare selling airline without having to share a large part of these profits with travel agencies. In order to become a mover for tours, the airline will have to effort along with travel agencies who have these promotional tours. Doing so will facilitate Southwest Airlines to get bigger into the market of touring travel, create partnerships with travel agencies, and support their new group seating planning. Working with these trip groups will help out Southwest add more spotlight to a new market segment.
The evaluation plan points on how the accomplishment of our suggested strategies can be evaluated and whether or not the policies could create the most wanted outcomes. The evaluation will in addition provide information on whether or not the investment of these strategies was worth it founded on the amendments in profits.
The first and foremost of these strategies is to incorporate a policy to increase the seating on Southwest aircrafts by generating business and family classes. By generating a business class section of the airplane, Southwest would increase the passengers who typically value a higher intensity of ease and facilities at comparatively low prices. By making a family class section of the airplane, Southwest will be capable to increase its demand to groups who worth the facility to sit together during the period of flights. These “families” would typically fly with opponents for the ease of being able to preserve package seats ahead of time. For that reason, this strategic plan would consecutively expand revenues, as room for seats which may normally go un-purchased if the flight does not fill up would now be not tied up to sit passengers paying more for the seat. It also facilitate to expand sales into a fairly new market while maintaining the market which is satisfied with the price they are already being paid in coach for the low price they are paying. Southwest will calculate the results of putting into practice such a policy by analyzing break even points. Southwest will set a periodical profit objective on its business and family classes of approximately $2 million, and then evaluate the general quarterly income with those of previous quarters as soon as business and family sections were not offered. This will clearly paint an exact image of whether or not these new policies are functioning, and to what extent.
Being familiar with the achievable opportunity cost of not spreading their product and services to far-off markets, Southwest has decided to put into practice a forceful market penetration policy into the Canadian airline business. The Canadian airline industry, which proposes little to no competition and few obstacles to access, is one which has vast potential.
Provided the small town airports in Canada and the complete shortage of competition, Southwest can maintain its low operating costs and the practice of transferring that low cost to customers, being the low-priced supplier in two different countries. Presently, the airline market in Canada is conquered by Air Canada, who has the benefit of a 70% market share (1). The remaining market share is distributed between much minor non-profitable airlines. For that reason, my aim is to go through the Canadian market by taking a benefit of 12% market share during the earliest year of business. This would place Southwest in the top three bracket in conditions of airline market commanders.
The 12% market share idea for year one of business would be the standard with which we would compute the accomplishment of Southwest’s Canada campaign. Southwest makes $1.6 billion in profits in the United States of America (2); Air Canada is anticipated to make $253 million (1). This means with the purpose to gain a 12% market share, Southwest would only have to earn 10% in Canada what they do in the U.S. Given the encouraging exchange rate and well-organized operations Southwest has, this aim is extremely manageable.
At the end of the first financial year, consequences will be examined to find out accurately how much market share Southwest was efficient in seizing, and how to carry on with future procedures.
The efficiency of our tour promotions should be estimated in combination with Contiki Tours by examining the total number of tickets sold from beginning to end of the year through the usual travel agencies Southwest contracts with. We will then contrast the percentage of these profits to the total profit and match up to see accurately how profitable these new procedures are. Southwest will further set a revenue objective of gaining 6% more profit than in earlier years of operations without the agency tour choices.
The objectives of the firm should include an expansion every year. The firm should review its plan to lower the fares and increase quality of their planes so that the customers don’t face any kind of difficulties. The policies of marketing should be reviewed and more advertising should be done to tell the people about their websites and about their services. The company should look forward to expand each and every year so that they can compete with larger airlines.
Southwest was built-in in Texas in 1967 and started Customer Service on June 18, 1971, with 3 Boeing 737 aircraft serving 3 Texas cities – Dallas, Houston, and San Antonio. At year-end 2004, Southwest functioned 417 Boeing 737 aircraft and gave service to 60 airports in 59 towns in 31 countries all the way through the United States of America. Southwest Airlines topped the monthly domestic passenger traffic rankings published by DOT for the first time in May 2003 (www.southwest.com).Founded on the monthly data for October 2004 presented in their corporation website, Southwest Airlines is the biggest carrier in the United States of America founded on creating domestic passengers boarded and planned domestic departures. One of Southwest’s key competitive strengths is its low operating costs. Southwest has the lowest cost, attuned for stage length, on a per mile basis, of all the main airlines. Between the factors that support to its low cost arrangement are a particular airplane type, a well-organized, high-utilization, point-to-point direction configuration, and hardworking pioneering and extremely creative staff.
Profitability ratios are used in an effort to evaluate management’s ability to monitor and control expenses and to earn a profit on resources committed to the business (Ledford, 2004). The ratios assess Southwest Airlines’ strengths and weaknesses, operating results and growth potential. These ratios are used to measure how efficiently the assets are being used to generate net income and sales (Stauffer, 2004). The ratios allow the comparison of the profitability of Southwest Airlines to that of similar airlines within the industry. Profitability is the measure of profit in relation to sales, assets, and other industry indicators of efficiency (Berry 2004). Southwest Airlines Return on Equity (ROE) gives the impression of being very good
The gross margin of Southwest Airlines has stayed stable in the three-year period discussed above. Southwest Airlines has a moderately high gross margin rate, first and foremost for the reason of low-operating costs. Low operating costs is one of Southwest Airlines’ claims to be known, as conversed in their 2003 Annual Report, “By keeping low costs low, we keep our fares low. This, in turn, gives customers the freedom to fly.” Alternatively, Jet Blue’s Profit margin is still well thought-out to be the greatest in the business.
Southwest Airlines EBITDA of Revenue has been growing for the previous three years. The corporation produced in excess of 1 billion revenue from ticket sales online (www.computerworld.com) for the previous three years. This is only part of the corporation’s revenue creating operations.
Southwest Airlines has outperformed most of the U.S. most important airlines in terms of decreasing its cost paid per gallon of fuel for the reason that the company has hedge its fuel necessity. Conversely, Jet Blue’s working margin has radically altered for the previous three years. The company management presumes that if fuel costs remains at the similar level for the whole year, it would suppose to inform a minor operating margin that it’s preceding guidance.
The airline industry is energy, labor and capital intensive but Southwest operating costs are fixed and operations depend on weather conditions and federal oversight (Long, 2004). The company is organized to look all the problems by making a strong cash bank account, low ranks of thanks, and prepared to access to extra financing. The company is the only U.S. airline whose credit is graded “A” standards and Fitch. Southwest is proud to say as stated in their 2004 Annual Report, that they have the highest balance sheet among its competitors and they have sufficient liquidity access to capital. At the end of 2004, Southwest has $1.8 billion cash on hand and $682 million in cash deposits at Boeing for future aircraft deliveries (www.southwest.com).Due to their powerful financial situation, the company has been capable to reply quickly to growth chances whether it is good or bad. It also supplies strength to track every market opportunities that come along. They began to open their service at Philadelphia airport and plan to maintain opening airports like Pittsburgh in May 2005. In an extremely competitive airline industry where incomes were razor thin and competition is severe, Southwest airlines handled to do well by doing things in a different way. Southwest’s main purpose is to offer reasonably priced air travel to the American people and give them the liberty to fly. In opposition to the whole airline industry, Southwest continued revenue whereas it kept its low price. This makes them, as a company, unique in two unusual ways. First, is keeping an eye on the short-haul traveler and second, using a point-to-point technique of flight connections.
At present, Southwest sustained to be the airline with the minimum cost in the market. The company’s idea to utilize one type of aircraft saves their time and resources in preparing its workers. To cut costs, travelers have the selections of choosing their own seat upon boarding. This passenger boarding technique permits the company to save on boarding pass printing. For that reason, low entrance fees are an enormous competitive benefit when merged with high-quality service and a devoted staff. Southwest Airlines workers are very faithful to the company which makes them have a perfectly different culture. The company created a culture around prioritizing the staff over the clients. The management strengthens the ideology of a fun work environment by advertising the “Work at a place where pants is optional” (Gordon, 2004). By making the over 31,000 workers feel as they are a vital part of a huge family, employees struggle to give the best customer service and turn out to be more loyal to the corporation.
Southwest Airlines price cutting policies were some of their weaknesses because they did not offer First Class seats on their aircrafts as judged against their competitors. The company’s philosophy is to make available low-cost fare to its employees; they might have lost their first class customers to opposing airlines. The biggest weakness of Southwest is their fleet which is a Boeing 737-200 which has been substituted with 300,500 and 700 series. Southwest’s 737s have an average age of 9 years old and the age of the plane create a high maintenance costs (Libby, 2004). The alternate of the 200 series gives Southwest the chance to decrease costs by increasing fuel effectiveness and slashing maintenance.
The point-to-point policy imposed by Southwest had not yet hit all of the likely market areas. There is a huge demand of Southwest services. There are a lot of cities that are demanding Southwest to enter their market area because it is proven that the demand for low-cost travel boost local economies (Horrigan, 2004). Southwest is the first airline to establish a home page on the internet (Kanto, 2004). The opportunity to service customers over the internet will be a big cost cutting tool for the future for the airline industry. The cost of booking on Southwest website is cheaper than booking a flight from a travel agent. Technology offered many new options to the company. The Boeing 737-700 model airplane is the most sophisticated on its class because they are quieter, fuel proficient, and easier to maintain.
COMPANY ANALYSIS
Today, Southwest Airlines is one of the most progressive U.S. airlines designed to revenue passenger miles (RPM). To maintain its future supremacy in the low-fare, short-haul markets, Southwest plans to grow its list of destination cities, increase its services to those cities already being served, and raise the number of accessible aircraft. According to the Associated Press (Dec. 5, 2005) interview with Gary Kelly, Southwest’s Chief Executive stated that Mr. Kelly made a series of bets that the price of jet fuel would rise, a hunch that has saved Southwest Airlines millions- possibly the difference between a profit and loss in some quarters. Mr. Kelly said that “air fares aren’t going to rise, so carriers will have to learn to live with lower costs.”
Southwest top priority is to keep their employees happy even if their main concern is to keep costs, including salaries under control and hopes that will lead to better customer service, higher ticket sales and grateful shareholders. Southwest’s cost per mile is much lower than older airlines-about 20% below American Airlines, the largest U.S. carrier-but rose in the first six months of this year while everyone else was cutting costs (Deakin, 2004). Since controlling costs is unavoidable, Southwest will cut costs by increasing efficiency. The company is using technology such as internet and airport kiosks to replace ticket agents and call center operators. They also made changes in purchasing and payroll practices to shave a few more dollars. Therefore, Southwest continues to show signs of positive earnings growth. Future plans of the airline include the continuation of cost-controlling efforts, expanding the fleet of Boeing aircraft and increasing its list of destination cities.
This analysis was very supportive in understanding Southwest’s behavior in terms of network policy. Most significantly, this analysis can help out in predicting Southwest future performance in the top U.S. markets. In order to maintain their status as the low-cost industry leader, they require to proactively looking at their ever-changing market place to strategically plan for tomorrow. The company requires focusing their effort on market penetration and growth in order to exploit their unique market niche. With the pace of people’s lifestyles ever increasing, consumers want convenience. Southwest has positioned itself to offer consumers the convenience they are looking for through their satellite locations and at the lowest cost. Therefore, I recommend that Southwest sustain their conservative growth pattern and expand operations at additional satellite locations. They also require to focus on product expansion that will lower their overall operating costs while adding considerable dollars to their bottom line. In order to keep with their competitors, Southwest needs to invest and develop other technological advantages.
Bibliography
Gittell, Jody Hoffer. The Southwest Airlines Way Using the Power of Relationships to Achieve High Performance. New York: McGraw-Hill, 2003.
More City Pairs Await Southwest – Kelleher Says Opportunities Remain Using Airline’s Formula.” Aviation Week & Space Technology. 143. 6 (1995): 40.
A www.marketingmix.com.au / www.mcdonalds.com / www.bbc.co.uk
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