Southwest Airlines Co. SWOT Analysis
What is SWOT Analysis? (Wikipedia)
SWOT analysis (alternately SLOT analysis) is a strategic planning method used to evaluate the Strengths, Weaknesses/Limitations, Opportunities, and Threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objective.
Setting the objective should be done after the SWOT analysis has been performed. This would allow achievable goals or objectives to be set for the organization.
- Strengths: characteristics of the business, or project team that give it an advantage over others
- Weaknesses (or Limitations): are characteristics that place the team at a disadvantage relative to others
- Opportunities: external chances to improve performance (e.g. make greater profits) in the environment
- Threats: external elements in the environment that could cause trouble for the business or project
Southwest Airlines Corporation Description
Southwest Airlines Co. (Southwest) is a passenger airline that provides scheduled air transportation in the United States. As of December 31, 2010, the Company had 548 Boeing 737 aircraft serving 69 cities in 35 states throughout the United States. The Company provides point-to-point, rather than hub-and-spoke, service. It is headquartered in Dallas, Texas and employs 34,726 people.
(Disclosure SEC Database September, 2011)
SWOT Analysis of Southwest Airlines
Firm operating strategy
Southwest focuses mainly on point-to-point service, rather than the hub-and-spoke service provided by major US airlines. Point-to-point service allows for direct nonstop routing by minimizing connections, delays and total trip time. As a result, approximately 76% of Southwest’s customers fly nonstop. As of December 2009, the company’s average aircraft trip stage length was 639 miles with an average duration of approximately 1.8 hours. This service also enables the company to provide its markets with frequent, conveniently timed flights and low fares. The company offers services such as: Dallas Love Field to Houston Hobby 27 weekday round-trip; Phoenix to Las Vegas, 15 weekday round-trip, and Los Angeles International to Oakland, 16 weekday round-trip. It also complements high-frequency short-haul routes with long-haul nonstop service between markets including Los Angeles and Nashville, Las Vegas and Orlando, and San Diego and Baltimore.
In addition, the company serves downtown airports, which include Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore-Washington International, Burbank, Manchester, Oakland, San Jose, Providence, Ft. Lauderdale/Hollywood, and Long Island Islip airports. These airports are less congested than other airlines’ hub airports. This operating strategy allowed Southwest to achieve high asset utilization and reliable on-time performance. It also helped the company to increase its revenues and to tap profitable markets.
Strong fleet operations
The company has a strong fleet base to complement its strong route network. In FY2009, Southwest provided service to 68 cities in 35 states throughout the US. Also, Southwest served 437 nonstop city pairs. During the year, the company operated a fleet of 537 Boeing 737 aircraft, of which 88 and 9 were under operating and capital leases, respectively. The remaining 440 aircraft were owned.
The company also had four owned Boeing 737 aircraft in long-term storage in FY2009. During the year, the company added 13 Boeing 737-700s aircraft to its fleet and it removed 13 older 737-300s from active service. It removed unproductive and less popular flights and reallocated capacity to fund other market growth opportunities, such as Minneapolis-St. Paul, New York LaGuardia, Boston Logan, and Milwaukee, all of which were new destinations for the company in FY2009.
In addition, as of December 2009, the company had firm orders for a total of 91 737-700 aircraft for the years 2010 through 2016. It also had options for 59 737-700 aircraft from 2011 through 2017, with an additional 54 purchase rights for 737-700 aircraft through 2018. The company is able to simplify scheduling, maintenance, flight operations, and training activities by operating only one type of aircraft, the Boeing 737. The strong fleet operation of Southwest helps the company attain a competitive advantage over its peers.
Dominant market position in North America
Southwest is the largest domestic carrier by total passengers, carrying over 101.3 million passengers in 2009. In FY2009, Southwest recorded revenue passenger miles and available seat miles of 74,456.7 million and 98,001.5 million, respectively. The load factor was 76.0% during the year. According to the US Department of Transportation (DOT), as of June 30, 2009, the company was the largest air carrier in the US, as measured by the number of originating passengers boarded. In FY2009, the company ranked second in North America in terms of number of passenger carried, first being Delta Air Lines. Dominant market position provides a competitive advantage to the company over its peers in North America.
Southwest Airlines’ Employees philosophy includes eleven primary attitudes:
- Employees arc number one. The way you treat your employees is the way they will treat your customers.
- Think small to grow big.
- Manage in the good times for the had times.
- Irreverence is okay.
- It’s okay to be yourself.
- Have fun at work.
- Take the competition seriously, but not yourself.
- It’s difficult to change someone attitude, so hire for attitude and train for skill.
- Think of the company as a service organization that happens to be in the airline business.
- Do whatever it takes.
- Always practice the Golden Rule, internally and externally.
Best low fare carrier
In December 2010, Southwest Airlines was named “Best Low Cost Airline in North America” by Business Traveler magazine.
Southwest Airlines is the nation’s leading, and largest, low-fare airline. Our unrestricted, generally available fares are typically much lower than the unrestricted fares of other airlines. Our unrestricted fares are fully refundable, have no advance purchase requirements, and enable you to make changes to your travel plans.
We also offer a number of deeply discounted restricted fares ideal for leisure travelers. Plus, we make special fares available to seniors (65 years of age or older), military personnel, infants and toddlers under the age of two years, older children (traveling with adults), and groups of ten or more
(Customer Service Commitment revised 8/31 – Southwest Airlines)
Largest airlines in the world in terms of highest number of passengers per year
Southwest is the United States’ most successful low fare, high-frequency, point-to-point carrier. Southwest operates more than 3,300 flights a day coast to coast, and is the largest U.S. carrier based on domestic passengers boarded as of March 31,2011, as measured by the U.S. Department of Transportation
(Southwest fact sheet)
40+ years in the industry and has achieved economies of scale
Southwest airline has celebrated their 40th Anniver sary on June 18, 2011. It’s amazing to look back and see how much we have grown since our start in 1971. They went from serving three Texas cities–Dallas, Houston, and San Antonio–to now serving 72 cities in 37 states nationwide.
Recognized as a great value and excellent services
Southwest Airlines Received the 2011 Quest for Quality Award for Excellence in Air Cargo from Logistics Management magazine; ranked first in on-time performance, value, and customer service.
Flexible working hours even though 82% of employees are unionized
82% of Southwest airlines employees are unionized, labor relationships have been extremely positive, particularly by industry standards.
Strong brand image
Southwest’s low-fare brand image, enhanced by an aggressive ad campaign touting that it doesn’t charge customers to check their bags, helped drive the shift in market share
Highest daily domestic departures than any other commercial U.S. airline
Southwest currently has flies to 72 cities in 37 states and more than 3,300 flights a day.
In November 2010, Southwest Airlines was named “Favorite Domestic Airline” and recognized as having the “Friendliest Flight Attendants and Crew” in a poll by Smarter Travel readers.
Southwest has significant contractual obligations and commitments primarily with regard to future purchases of aircraft, payment of debt, and lease arrangements. In FY2014, the company’ s total contractual obligations are estimated to be $2,510 million, as compared to $1,208 million in FY2010. Furthermore, the company witnessed a decline in its credit rating. In FY2009, Standard & Poor’ s and Fitch both downgraded Southwest’ s credit rating from BBB+ to BBB based on lower demand, especially among business travelers, and continued volatility in fuel prices. Moody’ s also downgraded the company’ s rating from Baa1 to Baa3 and also lowered the ratings of the company’ s PTCs and EETCs.
Southwest’s high level of contractual obligations and lowering credit rating could impact its ability to obtain additional financing to support its expansion plans. In addition, it will also lead to the diversion of its cash flows from operations and expansion plans to service the fixed obligations.
Declining profits and margins
The company has witnessed declining profits and margins since FY2007. The operating profits of the company have decreased at a compounded annual rate of change (CARC) (2007-09) of 42%, from $791 million in FY2007 to $262 million in FY2009. The decline in operating results is due to the significant increase of fuel and oil expenses, from $2,690 million in FY2009 to $3,044 million in FY2009. The operating margin of the company decreased from 8% in FY2007 to 2.5% in FY2009.
The net profit of the company also followed a similar pattern. The net profit of Southwest declined at a CARC of 61%, from $645 million in FY2007 to $99 million in FY2009.The net profit margin of the company also declined from 6.5% in FY2007 to 0.9% in FY2009. Therefore, declining profits and margins indicates that the company has not been able to manage its cost structure efficiently, which can adversely impact its long-term financial position.
Heavy dependence on passenger revenues
The company is heavily dependent on passenger revenues. In FY2009, the company derived only 1.1% of its revenues from freight operations, compared to 95.6% and 3.3% from passenger transport and other operations, respectively. Southwest has not yet leveraged its strong domestic network towards increasing its cargo revenues, which may lend more stability to its revenues. Furthermore, according to IATA, the worldwide cargo demand up by 28.1% in March 2010 compared to the same month last year. Also IATA predicts the growth of air cargo between 6%-7% in 2010 and 2011.
Therefore, a low level of cargo/freight operations exposes the company’s dependence on passenger revenues, which increases its risks of operating in an environment characterized by volatile fuel costs and very low profit margins.
Heavy dependence on a single producer (Boeing)
Southwest Airlines is currently the largest single purchaser of Boeing 737s. Southwest Airlines’ single aircraft strategy may make it dependent on Boeing.
Conservative growth strategy
Southwest airlines have always believed in conservative growth tactics but this may bounce back provided that its rival competitors choose for faster growth strategies. Thus it is incumbent that southwest carefully chalks out a strategy, which will help it, meet any eventuality in near future. The best way out could be to develop a strategy that is a mixture of both conservative and fast growth strategies.
Limited to 57+ cities domestically
Southwest should focus on entering the remaining top 50 cities in which they have no service, increasing presence in existing markets and eventually looking for intra-continental destinations.
Operates its own booking service
Which make Southwest airlines less divers than the other airlines
Does not offer segmented seating options (business flights, first class, etc)
Southwest does not offer first class seats on any of their airplanes. This may have potentially caused Southwest to lose first class customers to rival airlines
Space to carry freight and cargo is limited
Southwest airlines carry a small amount of freight and cargo because of the regulation of how much their plans are allowed to carry. And because they use only on kind of airplanes it is hared it increase it.
There are no formal union-management structures or processes
There are no formal union-management structures or processes for consultation and representation beyond negotiations and grievance procedures. However, management keeps the union representatives informed of new developments. One example is when the company decided to implement a flexible benefit plan; it met with union leaders and indicated the plan would be an add-on to the existing contractual provisions and therefore did not require negotiations. Union leaders also initiate dialogue, as they did when raising questions over how the company was implementing the Family and Medical Leave Act. Several union leaders questioned the procedures, and briefings were held to clarify how the company was complying with the Act. Other issues around which informal consultations have occurred include workers’ compensation administration policies.
(U.S. Department of Labor)
Recovery of US airline industry
The US regional airline industry has witnessed fluctuating growth rates in 2008 and in 2009. The industry was affected by the global economic downturn. The industry is expected to recover in 2010, posting strong growth thereafter. According to Federal Aviation Administration (FAA), passenger traffic will pick up in 2010, with domestic boardings growing 2.3% a year to reach 690.2 million by 2025. International boardings on the big carriers and smaller regionals will grow 4.3% a year from 2010 through 2025. The FAA forecasts that total enplanements will hit 1.1 billion in 2025, up from 757.4 million in 2008. It also expects that the general-aviation fleet will grow 1% a year, from 234,015 in 2008 to 275,230 aircraft in 2025.
Southwest offers scheduled passenger transportation services in the US. Therefore, the company is well positioned to benefit from recovery of US airline industry and it would help the company to generate additional revenues.
Acquisition of AirTran Holdings
Southwest pursues acquisitions that supplement its existing businesses. For instance, in September 2010, the company entered into a definitive agreement to acquire all of the outstanding common stock of AirTran Holdings for a combination of cash and Southwest’s common stock. AirTran Holdings is the parent company of AirTran Airways, one of the largest low cost scheduled airlines in the US.
As of February 2010, the company operated 138 aircrafts. Further, the acquisition would create more employment opportunities for its combined employee group, and it will also place the company in a strong position to respond to any economic and competitive challenges in its industry. The acquisition would also provide the company to extend its network and diversify into new markets, including significant opportunities to and from Atlanta, the busiest airport in the US, and strengthen its presence in key markets, such as New York LaGuardia, Boston Logan, and Baltimore/Washington.
The acquisition will significantly expand Southwest’s low-fare service in many more domestic markets.
Recovery of the US tourism industry
The US tourism industry faced a challenging year due to the downturn but the future looks bright. The results of recent months suggest that recovery is underway and at a stronger pace than initially expected. UNWTO predicts growth of between 3% and 4% in 2010. In 2009, the US had 54.9 million arrivals and 23.8 million of those were from overseas. The number of arrivals is forecast to increase to 55.8 million and reach 66.3 million by the end of 2010. The growth in the US tourism industry will enhance airline business. Southwest is well positioned to benefit from increasing global tourism industry. This in turn would help the company to generate additional revenues.
Southwest is expanding its operations to Mexico with the launch international service. In October 2010, the company announced the commencement international flights to five Mexico Cities in partnership with Volaris, an airline company based in Mexico. The service connects Southwest customers from 20 Southwest cities to five Volaris Mexican destinations (Cancun, Guadalajara, Morelia, Toluca/Mexico City, and Zacatecas). The new service will connect through Los Angeles International Airport, Oakland International Airport, and San Jose International Airport and will create up to 85 additional flight itineraries. This will enable Southwest to expand its business and add to its topline.
Longer flights are being introduced
As fuel efficiency and aerodynamics help make longer and longer flights possible to be introduce at lower fairs expect to see more customer demand.
Improved customer satisfaction and value
Southwest Airlines currently operates six Customer Support and Services Centers in Albuquerque, Chicago, Houston, Phoenix, Oklahoma City, and San Antonio. Southwest airlines has got a lot of reconnection because of the extraordinary services that they provide to their customers like:
- Southwest Airlines has consistently received the lowest ratio of complaints per passengers boarded of all major U.S. carriers that have been reporting statistics to the Department of Transportation (DOT) since September 1987, which is when the DOT began tracking Customer Satisfaction statistics and publishing its Air Travel Consumer Report.
- Named the Stevie Award Winner fro the Company of the Year-Transportation by the International Business Awards for outstanding performance and customer service.
- Received the 2011 Quest for Quality Award for Excellence in Air Cargo from Logistics Management magazine; ranked first in on-time performance, value, and customer service.
- On June 21, 2011, the American Customer Satisfaction Index named Southwest to the top spot on its Transportation Index for Customer Satisfaction.
- In May 2011, Southwest Airlines was ranked as one of the top ten companies in MSN Money’s 2011 Customer Service Hall of Fame.
- In May 2011, Consumer Reports ranked Southwest Airlines as the Top Airline in Customer Service.
- In March 2011, Keynote Competitive Research ranked southwest.com first in its 2011 Customer Experience survey for travel web sites.
- In February 2011, Southwest Airlines was featured in J.D. Powers list of 2011 Customer Service Champions.
- In November 2010, the Zagat Airline Survey ranked Southwest Airlines #1 in the following categories: Top Website; Best Customer On-Time Estimate; Best Luggage Policy; Best Value; and Best Checkin Experience for Domestic Airlines.
Traveler traffic is expected to grow by 3.5% through 2019
The US domestic market will maintain the dominant share of the total North American market at about 95% of the total RTKs. The US domestic market is forecast to grow at an annual average rate of 3.5% over the 10-year period from 2009 to 2019 and at an annual average rate of 2.9% over the 20-year period from 2009 to 2029.
(BOEING WORLD AIR CARGO FORECAST 2010-2011)
United States of America is the largest single market in the world
The United States is the largest single market in the world, accounting for 33 per cent of scheduled RPMs (41 per cent of total scheduled passengers) in 1996. The most significant change in the history of the industry came in 1976 when the Civil Aeronautics Board (CAB) asked Congress to dismantle the economic regulatory system and allow the airlines to operate under market forces. This changed the face of commercial aviation in the United States. Congress passed the Airline Deregulation Act in 1978, easing the entry of new companies into the business and giving them freedom to set their own fares and fly whatever domestic routes they chose.
Deregulation of the industry was followed quickly by new entrants, lower fares and the opening of new routes and services to scores of cities. The growth in air traffic brought on by deregulation’s first two years ended in 1981 when the country’s professional air traffic controllers went on strike. Traffic surged again after 1981, adding 20 million new passengers a year in the post strike period, reaching a record 466 million passengers in 1990.
In 1989 events began which severely damaged the economic foundations of the industry. The Gulf crisis and economic recession caused the airlines to lose billions of dollars. The industry experienced the first drop in passenger numbers in a decade, and by the end of the three-year period 1989-1992 had lost about US$10 billion – more than had been made since its inception. Great airline names like Pan American and Eastern disappeared, while others, such as TWA and Continental Airlines, sought shelter from bankruptcy by going into Chapter 11.
Today the domestic industry in the US is a low cost, low fare environment. Most of the major airlines have undergone cost restructuring, with United Airlines obtaining employee concessions in exchange for equity ownership. Some airlines sought the protection of Chapter 11 bankruptcy to restructure and reduce costs and then emerged as strong low-cost competitors. The majority have entered into cross-border alliances to improve profitability through synergy benefits.
In 1993 President Clinton appointed the National Commission to ensure a strong competitive industry. Its recommendations seek to establish aviation as an efficient, technologically superior industry with financial strength and access to global markets.
(Stanford University‘s Department of Aeronautics and Astronautics)
The US airline industry is highly competitive. Southwest competes on the basis of price, customer service, costs, frequency and convenience of scheduling, frequent flier benefits, efficiency and productivity. The company competes with other airlines on all of its routes. Its major competitors are AirTran, American Airlines, AMR, Continental Airlines, JetBlue Airways, MAIR, Northwest Airlines and UAL. Some of these airlines have larger fleet and wider name recognition in certain markets than Southwest. In addition, some of the major US airlines have established extensive marketing and code-sharing alliances. The company is also subject to competition from surface transportation in its short-haul markets. This competition could be more significant during economic downturns.
Increased competition may have material adverse effect on the company’s results of operations, financial condition and liquidity.
Price volatility in petroleum markets
The demand for petroleum and related products has historically been cyclical and sensitive to the availability and prices of oil and related feedstock. Historically, international prices of crude oil and refined products have fluctuated widely due to many factors that are beyond the control of companies like MAS. Fuel prices and availability are subject to wide price fluctuations based on geopolitical issues and supply and demand, which can neither be controlled nor accurately predicted. According to IATA, jet fuel price as of August 2010 was $92.4 per barrel, an increase of 12.6% over August 2009 jet fuel price. It is forecasted that the average jet fuel price in 2010 would be $88.3 per barrel.
Fuel has been one of the largest operating expenses for the last several years. In FY2009, Southwest incurred $3,044 as fuel and oil expense, representing about 30.2% of the total operating expenses. The volatility of global and regional oil prices exposes the company to extreme fluctuations in earnings, which is likely to have an adverse consequence on its growth initiatives. Any inability to obtain jet fuel at competitive prices would materially have an impact on the Southwest’s results of operation and financial condition.
High unemployment and inflation keeps travelers from flying
Supply and demand price elasticity of airline carriers may vary depending on the nature of the industry.
The macroeconomic factors affecting the airline industry include unemployment, the economic growth in the United States, and inflation. With low economic growth, consumers are finding luxury items more difficult to purchase and airline tickets for vacations fall into that category. Unemployment contributes to a lack of vacation travelers since individuals who are not employed do not have extra money for vacation or airline tickets. Inflation also causes operating costs of the airlines to be higher cutting into profits.
Unemployment is affecting the airline industry. Although unemployment in the United States is relatively low, the airline industries unemployment has been more volatile. As unemployment has risen, the airlines have laid off a much higher percentage of their people. As unemployment has fallen, they have hired back a large number. Layoffs among major airlines are not uncommon. Southwest is unique in its history of refusing to layoff any employees. (Bureau of Economic, 2008)
As unemployment has remained relatively steady from 2003 to 2007, the Gross Domestic Product for the United States has increased. The Air Transportation Industry contributes an average of 0.4 percent to the GDP. However, has GDP has increased, the Air. (Bureau of Labor, 2008)
Inflation from May 2007 to May 2008 has been 4.2% (Crawford, 2008). However, almost half of the inflation is caused by rising food and oil prices. According to Reuters, “… core prices are up a tamer 2.3 percent over the past 12 months, the same as in April.” (Felsenthal, 2008). Fuel expenses in the airline industry have previously ranged from10 to 15 percent of an airlines operating costs; however, with rising oil prices, fuel costs are between 35 and 50 percent. (Air, 2008). Unable to raise ticket prices twenty percent without drastically lowering demand, the airlines must take a cut in profits causing a flat growth curve even as the number of passengers goes up.
Joint ventures can negatively affect brand image
There’s just too much risk. A great many brands just aren’t mature enough to survive negative publicity or a drop in consumer sentiment unscathed. Sure, there are contracts and clauses, agents and intermediaries. Things lawyers can do to help protect a brand’s interests (on paper). But so much just can’t be controlled, and the sorting out happens behind the skirt, anyway. At the end of the day, each brand has its own corporate board and interests to maintain.
Many co-branded products and services struggle with authenticity and effective alignment. Try as the brands might, the wrong chord gets struck or there’s no discernable added value with the partnership. The consumer can end up feeling gamed or “sold to.”
Failure to meet shareholders expectations
Failure to meet shareholder expectations can cause the market value of the company’s stock to decline, making it more expensive for the company to raise money or acquire other companies using its stock. This pressure to meet short-term goals can tempt management to forgo necessary long-term planning when it includes present-day sacrifices that will be reflected in the company’s quarterly reports.
Increasing impact of the governmental regulations to the industry operations
Although, Most of theses regulations was there to increase the safety of the customers, It cost a lot of money and makes customers little bite tens and inconvertible. Which might make there experience unpleasant and more expensive.
Overall, Southwest has strengths in its firm operating strategy, strong fleet operation and dominant market position in North America. Their brand image was well noted by the domestic market, and now by the acquisition of Airtran Holdings, Southwest has a good opportunity to expend its market internationally, which has seen to be one of its main weakness in the past. Its conservation growth strategy can be seen as the double side edge, which has delayed its globalization, but meanwhile prevent it from involved the unfamiliar competitive market. Mixture of both conservative and fast growth strategies could be the best way of its future development.