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Southwest airlines strategy analysis
Southwest airlines strategy analysis
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Opportunities and Threats facing the U.S Airline Industry
The health of the overall U.S airline industry is still tenuous in-spite of the passenger traffic volumes returning to pre-9/11 levels. A survey estimated that from 2001 through 2003, the US airline industry reported to have lost $23.2 billion dollars, compounded by an additional $1.6 billion in the first quarter of 2004. This $24.8 billion shortfall exceeds the total profits earned over the entire six-year period 1995-2000
Drastic changes in the Economic, Political/legal and technological segment of airline’s external environment contributed to some of the major looses seen by the industry. The key factors that heavily contributed to the loses include
• Economic slow down in the country
• Massive decline in business travel
• SARS epidemic
• Increase in competition
• Availability of substitutes for air travel
• soaring fuel prices
• Weak dollar
In response to the industry’s financial crisis, Congress made available several forms of relief that amounted to over $20billion. This relief includes the payment of upto $5billion in pretax cash assistance to reimburse air careers for losses incurred as a direct result of the 4-day government shut-down of air traffic after 9/11. However, relief measures were not enough to bring the airline industry out of hot water.
Most of the airlines have accumulated vast amounts of debt which brought them on the verge of bankruptcy. The list includes Atlas/Polar Cargo, Midway, National, Sun Country, TWA, United and US Airways. American and Delta airlines narrowly avoided bankruptcy but have warned about such possibility. ”An average carrier is now well over 90% leveraged (net debt to equity ratio) compared to 60-70 percent historically. This means most airlines are now completely leveraged and unable to obtain capital. This has added to significant debt service costs and will make the industry even more vulnerable to any future economic downturns.
With industry debt well over $100 billion, much of it due in the next 24 month. 11 of 12 airlines are rated “junk bonds” by S&P. Only Southwest remains at an “investment grade.
Almost all airlines are faced with the same challenges and threats in the external environment like rising fuel cost, weak travel demand etc. Some airlines like Southwest, JetBlue and AirTran whi...
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...work and take necessary action to adapt and sustain its competitive posture.
Southwest employs integrated low-cost and differentiated strategy which enables the firm to
• Adapt quickly to environment changes
• Learns and implement new skills and technology quickly
• Effectively utilize its core competency while competing against rivals.
To sustain a competitive advantage and to seek above average returns, Southwest implements this strategy to produce relatively differentiated service at lower cost compared to its rivals.
Yes this strategy is appropriate to offset the forces in the industry.
Southwest should grow internationally as the demand for air-line travel has substantially declined domestically in the last couple of years and will continue to decline further in some segments like business or corporate travel. The major reason I feel is the growth in communication technology enabling people to work remotely without the need to be present in the office. Voice and data over IP, Live meeting and communication services have substantially reduced the need for corporate executive and divisional managers to travel thus lowering the demand further.
Along with the low stock index numbers of September 17th, the airline industry and travel stocks were also rocked. One of several airlines announcing layoffs, US Airways said that they would be terminating 11,000 jobs. These heavy losses were contributed to airlines “being grounded last week [week of September 11th], plus passengers have been apprehensive to fly, in the wake of the hijackings” (Stock Markets Reopen 1).
Another internal challenge for Southwest Airlines is the conflicting management style and business operation with AirTran. On top of that, the external challenges such as the increase of competitions and gas prices are some of issues f...
When the attacks of September 11th occurred, the federal government had to completely close down some airports in the US. This created a negative effect on the industry as it was a shock to their entire organization. Planes in the US and around the world were canceled due to this attack as well. Planes were not flying anywhere, as the plan was to prevent any other attack. Each plane that was cancelled had to be paid by the airline company directly. According to the International Air Transport Association there was a drastic change in the amount of flights between the date before and after the event. Around 37,600 less flights flew the day after the attack had occurred. The number of flights dramatically decreased in those three days; in addition every...
The Airline Industry is a fascinating market. It has been one of the few industries to reach astounding milestones. For example, over 200 airlines have gone out of business since deregulation occurred in 1978. Currently, more than 50% of the airlines in the industry are operating under Chapter 11 regulations. Since 9/11, four of the six large carriers have filed for and are currently under bankruptcy court protection. Since 9/11 the industry has lost over $30 billion dollars, and this loss continues to increase. Despite the fact that the airline industry is in a state of despair, JetBlue has become the golden example, a glimpse of what the industry could be.
Southwest Airlines strategy of focusing on short haul passenger and providing rates as low as one third of their competitors, they have seen tremendous growth in the last decade. Market share for top city pairs on Southwest's schedule has reached 80% to 85%. Maintaining the largest fleet of 737's in the world and utilizing point-to-point versus the hub-and-spoke method of connection philosophy allowed Southwest to provide their service to more people at a lower cost. By putting the employee first, Southwest has found the key to success in the airline business. A happy worker is a more productive one as well as a better service provider. Southwest will continue to reserve their growth in the future by entering select markets only after careful market research.
After September 11th, 2001, the airline industry experienced a significant drop in travel. The reasons for the airline industry downfalls also included a weak U.S and global economy, a tremendous increase in fuel costs, fears of terrorist's attacks, and a decrease in both business and vacation travel.
According to the International Air Transport Association, 2001 was only the second year in the history of civil aviation in which international traffic declined. Overall, it is believed that the IATA membership of airlines collectively lost more than US$12 billion during this time (Dixon, 2002).
It is evident that the greatest strength that Southwest Airlines has is its financial stability. As known in the US airline industry, Southwest is one of those airlines who are consistently earning profits despite the problems the industry is facing. With such stability, the corporation is able to make decisions and adjust policies, which other heavily burdened airlines may not be able to imitate.
The results of airline deregulation speak for themselves. Since the government got out of the airline business, not only has there been a drop in prices and an increase in routes, there has also been a remarkable increase in airline service and safety. Airline deregulation should be seen as the crowning jewel of a federal de-regulatory emphasis. Prices are down: Airline ticket prices have fallen 40% since 1978. Flights are up: The number of annual departures is up from 5 million in 1978 to 8.2 million in 1997. Flights are safer: Before deregulation, there was one fatal accident per 830,000 flights, now the rate is one per 1.4 million flights. So what's the problem?
In the airline industry, Southwest Airlines is considered a true innovator. By shaking up the rules of flying and improving upon inefficient industry norms, Southwest has quickly grown by leaps and bounds. From the very start, Southwest Airlines' goals were to make a profit, achieve job security for every employee, and make flying affordable for more people (Southwest,2007). Southwest has not strayed from these goals. It does not buy huge aircrafts, fly international routes or try to go head to head with the major carriers; and thanks to a great planning, Southwest airlines has become the most successful airline company in the U.S., if not the world.
The low cost and no frills strategy is make travel affordable at low cost. The company only operates one type of aircraft which is Boeing 737 to help maintenance cost low. Southwest was the first airline to use E-ticketing in this way customer can reserve spot and buy ticket on their web and allow less expense in printing tickets. Medium measured airports which allowed them to produce better time performance and less fuel costs so plane do not have to wait in the line at the runway. The core value of the company of “LUV and fun” makes the company great place to work that gives customer with a great experience.
Airline and travel industry profitability has been strapped by a series of events starting with a recession in business travel after the dotcom bust, followed by 9/11, the SARS epidemic, the Iraq wars, rising aviation turbine fuel prices, and the challenge from low-cost carriers. (Narayan Pandit, 2005) The fallout from rising fuel prices has been so extreme that any efficiency gains that airlines attempted to make could not make up for structural problems where labor costs remained high and low cost competition had continued to drive down yields or average fares at leading hub airports. In the last decade, US airlines alone had a yearly average of net losses of $9.1 billion (Coombs, 2011).
The company’s cost leadership strategy of keeping their fares low to ensure frequent and convenient travel along with its playful, fun poking advertising, exciting promotional ways, and various vibrant ways of operation enabled the company to expand exuded its effect on both customer and competitors, thus lowering the prices in the new market. This is the ‘Southwest
Although many companies are in business to make a profit, Southwest claims that their primary goal is not profit maximization. However, they have been consistently profitable by making air travel affordable to those who previously could not afford it (Freiberg, 1996).Southwest says the customer comes second, showing their devotion to employees. By taking care of their employees, the company encourages employees to take care of the customers. Employees are...
The airline industry is very susceptible to changes in the political environment as it has a great bearing on the travel habits of its customers. An unstable political environment causes uncertainty in the minds of the air travellers, regarding travelling to a particular country.