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Analysis of Southwest Airlines

Southwest Airlines is an American-based company that offers passenger services in 40 US states and 7 neighboring countries. It is continually improving its range of tourist destinations by venturing into new routes to increase revenue and market share. It also rewards its passengers for their use of its services. However, for the past few years, the company has faced external problems due to competition. Other players in the industry are also improving their services to rival those offered by Southwest Airlines. The case study intends to look at both the internal and external environment of the business to assess the areas of strength and those that need to be improved. SWOT analysis, Porter's five forces analysis, as well as financial analysis, are conducted to determine the issues that undermine the operations of the airline and make necessary recommendations. 

Porter’s Five Forces Analysis

Industry Rivalry

There is a serious competition among rivals in the aircraft industry in the US market. A terrible financial crisis has been occasioned by increasing rivalry among major players, adversely affecting companies that have weak frameworks. Air carriers such as Northeast Airlines, Delta Air Lines, as well as other US and continental companies, have once or twice gone bankrupt due to financial issues. Southwest Airlines survived since it adopted better policies. However, the company is under intense competition because rivals are copying its strategies, restricting their brands in a bid to revive their fortunes in the market (Baker, 2013). The only companies that can survive such a volatile environment are the ones that adopt low-cost strategies with no frills. The current top three competitors include JetBlue Airways, Frontier Airlines, and Virgin America. Southwest Airlines has a competitive advantage over them by providing reputable customer service, low fares, and a well-connected US route network.

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Bargaining Power of Consumers

The buyer bargaining power is high since they are significantly affected by price changes. Consumers have the authority to choose prices that favor them. What is critical to them is flexibility, and they prefer airlines that offer flexible services. Southwest Airlines benefits from buyer bargaining power due to its flexible services (Homsombat, Lei, & Fu, 2014). If clients are disappointed with the administration, they have the flexibility of decision to choose another air carrier.

Bargaining Power of Vendors

The supplier bargaining power is high, which does not favor airline companies. For instance, fuel prices either increase or decrease the cost of running an airplane company (Fageda, Jiménez, & Perdiguero, 2011). It potently creates scarcity, making expenditures to surge high against the wishes of Southwest Airlines. Unforeseen risks such as the crisis in the Middle East also affect the mining of oil. 

 
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Threat of Substitutes

Airlines provide faster services, which makes it quick for passengers to travel. Safety is another competitive advantage of Southwest Airlines since planes are more secure (W. Lu, Wang, Hung, & E. Lu, 2012). However, the company faces the threat of substitutes because of the market it serves. The fact that it primarily operates in the American market makes other means like trains viable substitutes. However, the threat is minimal since the company runs low-cost flights with prices that are slightly different compared to the price of train tickets.

Threat of New Entrants

There is a small risk of potential entrants based on the kind of economic environment and entry barriers in the airline industry. A company needs significant capital to start a business, as well as seek routes, channels of delivery, and terminals. The competition is intense, and a new air carrier might fail within six months due to unsustainable costs. For Southwest Airlines, the threat is insignificant; therefore, it should only be concerned about other threats.

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SWOT Analysis

SWOT analysis is performed to ascertain how the company's internal resources can complement and neutralize the external forces affecting the business. In conducting the SWOT analysis, strengths and weaknesses represent the internal resources while threats and opportunities represent the external forces.

Strengths

The main strength of Southwest Airlines is the affordable cost of airline services provided to its passengers. The company’s strengths have improved its reputation and enhanced brand value among existing customers (Homsombat et al., 2014). The airline's business model is unique, and the status it has set over the years keeps attracting and retaining clients. The company has created economies of scale in the airline industry through its cost reduction strategies even at the leadership level. The airline additionally boasts of higher percentages when it comes to customer satisfaction ratings. In particular, the American Customer Satisfaction Index recognized the company as the leading player in customer satisfaction (Bueno, 2012). The airline’s market share is significant, and it will utilize this strength in implementing its expansion strategies to external markets.

Weaknesses

The business model and the no-frills service had introduced administrative bottlenecks that pushed the company toward the financial crisis and unpreventable losses. Currently, the growth rate of the economy is slow (Fageda et al., 2011), and the fact that the company mostly operates within the US worsens the situation. In the recent past, the airline company could post profitable figures despite operating in an economy that was under recession. Another weakness is the company’s failure to institute strategies aimed at improving its products, as well as developing other products. In marketing, products must be designed to avoid backlash from customers, but the airline is lagging behind in this area.

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Opportunities

Globalization is on the rise, and so is the online business. According to Baker (2013), adopting better technologies to improve the customer experience while traveling might improve services in the airline industry. Southwest Airlines has an opportunity to deliver services and products purchased online to different destinations. It has a chance to make value offerings since the population in the east is majorly composed of aging persons, and such services are needed in abundance.

Threats

The economic state of the US is a threat since it is unpredictable. The country has suffered from the recession and, in case such periods are experienced again, air carriers will suffer. Terrorism is another issue on the rise that is now preventing people from traveling. Fuel prices and increasing costs of maintenance are a threat to profits. Finally, competition is also on the increase since other players in the market are taking measures to gain a competitive edge.

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Financial Analysis

The table below shows Southwest Airlines’ financial performance for the selected number of years. According to it, the company’s net income is continually increasing while operating expenses are decreasing annually.

Table 1

Southwest Airlines’ Financial Performance

Year

1971

1991

2007

2012

Total operating revenues (millions $)

2.33

4.736

7.369

17.100

Net income

-3.8

433

645

421

Total operating expenses (millions $)

-0.68

2.03

3.17

16.465

Source: Case 16: Southwest Airlines

Alternative Courses of Action

Based on the results of the external environment analysis and the intense competition that the company faces, new strategies need to be put in place to ensure that the airline moves in the right direction. Southwest Airlines must rethink and expand to India and China. It will see profits increase, and investor capital will earn some dividends. Changes in leadership and culture are also necessary. These are two new areas where strategies can be developed, implemented, and evaluated to check if the company meets the initial goals.

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Leadership

A company that is seeking growth in a different market must have a change in management. Southwest Airlines will now be operating in a diverse environment, and better leadership will be required, especially in managing a diverse workforce. Leaders should also adjust organizational culture to promote diversity that may result in creativity and innovation (Fageda et al., 2011). Managers in foreign offices should be given the freedom to take risks and make choices. Directing people may cause some failure, especially when one is aware of the environment in which they operate.

Culture

There are cultural differences between the US and the new investment destination. It might be a challenge to transfer the US or Southwest culture to the new environment into which the business is expanding. The change in culture is a better alternative as it promotes diversity, transfer of positive culture, and sharing of best practices.

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Recommendations

Culture change is the best alternative that can help Southwest Airlines to serve foreign markets effectively. The company should focus on creating a customer-centered culture. Innovative culture focuses on employees as knowledge workers and invests in them to enhance creativity. A cultural web is, therefore, required to instill a creative culture in employees.

Implementation

Based on the financial analysis of the company, it is true to argue that it can implement the recommendations by adopting strategic human resource management. Southwest Airlines is arguably doing well in the US market, but training employees to acquire knowledge and skills will place the airline at a better position in the international market. Training improves competencies and capabilities that help to enhance business culture. It further enhances learning that allows staff to identify problems and use their expertise to solve them quickly.

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Conclusion

Southwest Airlines’ internal and external environment has its areas of strength and those that need improvement. The business needs to adopt strategic changes in a manner that regulates both customers and employees to maintain a competitive edge in the airline industry. Strategic changes will undoubtedly propel the company to a better level.

 

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