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Southwest Airlines Analysis

Established in 1971 by Herbert D. Kelleher and several business partners, Southwest Airlines has secured a strong position in the airlines industry over the last 35 years. Southwest and its wholly owned subsidiary, Air Tran, serve a combined 103 destinations in 41 U.S. states, the District of Columbia, the Commonwealth of Puerto Rico, and six near-international countries (Johnson, 2011). Both entities combined offer over 4000 daily flights. The Southwest Airlines corporate vision and self-concept is "America's low-cost, low-fare airline" (West-Grubbs, 2005). This is more than an espoused philosophy -- it's part of an operational model that is permeated throughout all business operations.

Short "peanut" flights are the airline's specialty. Southwest operates almost exclusively with only one type of plane in its fleet -- the Boeing 737 -- a quieter, more fuel efficient, and easier to maintain model which has helped reduce costs. Profit potential is the driving force behind all corporate decisions, not pricing wars or an overemphasis on market share (Hill and Jones, 2009). Many employees are cross-trained. The company has strategically avoided airports with high landing and gate fees. These practices and more all contribute to the company being able to successfully live up to its vision.

Introduction

This paper will highlight ways that Southwest Airlines' operations have supported its corporate objectives of providing excellent customer service and low-cost fares. The company's unique approach has allowed it to weather recent unfavorable economic conditions -- unlike much of its competition who are in deep debt or bankrupt. In the words of Herbert Kelleher, Chairman, President and CEO, "southwest Airlines has never deviated from its niche: short-haul, high frequency, low-fare service, all delivered with award-winning customer service" (West-Grubbs, 2005). There are also areas that if nurtured would position the company for even greater success. We will also take a look at those in more detail.

Company Analysis

Southwest has successfully adopted a cost leadership strategy, maintaining operating expenses per available seat mile at 15-20% below average. There are no major baggage handling fees, no meals, no central reservations, and no assigned seating (West-Grubbs, 2005). Standardization of the Boeing 737s has allowed for controlled maintenance costs, turnaround time and pilot and staff training. In addition, embracing innovative technologies such as e-ticketing has been an advantage. It is one of many offerings that has allowed Southwest to rank high in customer service and convenience, winning the company the Department of Transportation's Triple Crown over many consecutive years for on-time service, baggage handling, and low incidents of customer complaints (Gittell, 2005).

Southwest Airlines enjoys a strong financial position, consistently earning the highest Standard & Poor's credit rating in the airline industry (West-Grubbs, 2005). It was even profitable during the early 90s, when no other major airline was able to report net income. In 2011, total operating revenue was reported as $15.7 billion (Johnson, 2011). Over 104 million passengers contributed to Southwest's impressive $148 million in net revenue. Growth has been steady due to the strategy of only entering markets when frequent flights can be achieved cost-effectively. Corporate marketing stresses the company's unique selling points and brand identity (Enz, 2009).

Southwest was ranked number one among all major U.S. carriers several times on a customer service as well as safety, price, and overall performance (West-Grubbs, 2005). A large part of this success lies in its mission. Southwest Airlines stresses affordable air travel to those who would not normally fly. Thus, the short haul traveler has become the backbone of their success (Johnson, 2011). Southwest tapped into this niche market at the right time in the industry and has managed to generate a profit for decades while still keeping fares low. Maximizing utilization and minimizing ground time have been key elements to Southwest's profitability.

Southwest has also been very effective at putting the employee first, recognizing that a happy worker is a more productive one (Gittell, 2005). Low operating costs have contributed to lower customer fares which is an enormous competitive advantage, especially when combined with a high-quality and loyal workforce. A very unique culture exists at Southwest Airlines under the leadership of CEO Herb Kelleher, known for his calm management style. Southwest has been voted one of the "100 Best Companies to Work For in America" by Fortune magazine on more than one occasion (Johnson, 2011).

The company has implemented programs to retain employees, including establishing the first profit sharing plan in the airline industry and a 401k plan that matches contributions dollar for dollar (West-Grubbs, 2005). Although over 80% of the workforce is unionized, many responsibilities are shared (e.g., pilots sometimes handle baggage and flight attendants clean planes). Work schedules are flexible, due in part to the extensive cross training of employees. Senior management allows employees to have a voice in the organization and is transparent with business objectives, goals and information which contribute to the unity and cohesion of the work culture (Enz, 2009). "The most effective teams -- those successful for the long-term -- are activated as a deliberate strategy" (Pryor et al., 2009).

However, while Southwest Airlines has created a satisfying work atmosphere and carved out an envious position in the market, there are still opportunities for improvement. For instance, as times change, the mission, direction and values of organizations often evolve as well. The company's mission statement could speak to more current social issues such as sustainability, "green initiatives" and its approach to corporate responsibility. Such tactics would also enable the company to stave off competitors who are inching towards Southwest's niche by offering shuttle services and collaborating with regional carriers (West-Grubbs, 2005). Further, a more aggressive growth strategy could tap overlooked domestic and international markets -- currently Southwest is operating in fewer than 90 U.S. cities.

In addition, union pressures could force the company further and further away from its pricing strategy. Southwest pilot and flight attendant unions have higher than industry average salary and benefits packages. The largest cost component of business operations is labor -- roughly 37% (Johnson, 2011). This cost could be adversely impacted by union actions, which cover a huge percentage of Southwest's workforce.

Fuel is another risk factor. Currently, the company is able to operate without charging higher prices to offset higher energy costs, but shifting government regulations, political influences, and rising economic and price concerns threaten this position (West-Grubbs, 2005). Rising concerns over airplane safety and proposed government increases in facility tax rates may also one day result in higher overall costs and fewer profits.

Conclusion

It is clear that Southwest Airlines' vision and strategy has been successfully implemented -- thus, the nearly 35 years of profits. The company enjoys healthy market share, particularly now that the economy has demanded that consumers be conservative when shopping for air travel. Southwest should continue its business approach, leveraging Air Tran to expand internationally. There are also numerous untapped markets in the U.S. Any expansion into new cities should be at a moderate pace to ensure adequate coverage of new markets and controlled growth. The company recently added its first 737-800s to its fleet (Johnson, 2011). This younger air carrier will result in safer, longer-range flights which will allow for expanded opportunities.