Posted: May 25th, 2022
Southwest Airlines has been an innovator in the airline industry. The company has steadily implemented one of the most interesting operational strategies since the company was founded. As a result, Southwest Airlines has earned countless awards rated against factors such as employee satisfaction, customer satisfaction, and profitability. Furthermore, Southwest was able to claim these awards while being able to also claim some of the lowest operating costs in the industry. Despite the company’s long track record of success, it will face brand new set of challenges and risks in the coming years since the airline industry seems to be evolving. The evolution of the airline industry will be driven by rising fuel costs, slow demand, and many environmental issues. Therefore Southwest will have to be able to further refine its strategy to meet the challenges in the new continually evolving external environment.
External/Internal Industry Analysis
Threat of New Entrants — Low
The global recession has created an environment in which there is little market share available for any new competitor to try to tap into. Furthermore, since the market size has stagnated, the industry is generally accepting a reduced margin on their services. Furthermore, there are many layers of industry regulations that must be considered before new competitor is to enter the marketplace. However, competition can also enter through acquisition or leave through liquidation which also provides some volatility to the industry and opportunities for a new landscape.
Supplier Power — High
There are basically two suppliers in the aircraft industry; Boeing and Airbus (Mustoe, 2010). Not only is the number of suppliers exceptionally low, but these suppliers actually coordinate their operations to some extent. For example, the two main companies also share many of the same suppliers and have worked together to pressure some of their own suppliers for their strategic advantage.
Buyer Power — High
In the airline industry, only a small portion of consumers have any significant loyalty to any one airline brand. In most cases consumers view different airline services as relatively equal and as substitute products. If there is ever a level playing field in terms of price and availability then consumers may have a preference of one brand over the other however this is usually a subsidiary decision. Therefore the buyer power in this industry is relatively high.
Threat of Substitute Products – Low
While travelers may consider different airlines as close substitutes, there really isn’t a good alternative to air travel. In some case consumers can decide to drive themselves, take a bus, or in some cases a train. However, for longer trips or trips in which convenience is important there really isn’t much of a substitute for air travel.
Competition — High
There are several other players in the market that make for a rather high level of competition. There are a range of different operational models and strategies for consumers to choose from that generally operate in the same locations that Southwest flys.
Above all other factors, the greatest strength that Southwest has developed is its organizational culture. The company’s organizational culture can be summarized concisely by its mission statement “dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit” (Southwest, 2012). This culture, in conjunction with their comparatively simplistic operating model, gives their employees a significant amount freedom in which to make individual decisions. Southwest demands that their employees are responsible representatives of the company at all times. The company respects its employees and allows them to freely express their ideas, suggestions and concerns. The results of this strategy could not be any more admired. Southwest has earned the lowest employee turnover rate in the industry as well as the highest levels of customer satisfaction while keeping operating costs at a bare minimum.
One weakness that was identified was the lack of an effective customer loyalty program. After trying many variations in different systems, many of the loyal customers were confused and at least slightly irritated in the changes (Richardson, 2011). Furthermore, the brand perception of Southwest is responsible for a large portion of the loyal client bases and award winning customer satisfaction levels. Southwest previous model as “radically egalitarian” because it valued each flight as equal and after eight flights a frequent flyer would earn one free flight (Richardson, 2011). However, Southwest change this strategy to be based upon a dollar amount spent in order to skew the system to attract more business flyers. However, this move has been less than well accepted by many of Southwest’s core customer base.
Rising fuel prices are a major threat for the airline industry as a whole. Although there are no substitute products, the total size of the market and the total number of flyers may dwindle. Many companies will chose to use online meetings as opposed to flying to meet in person. Vacation travelers may drive to a closer location than spend more to take a more elaborate vacation. Therefore the external environment is expected to become more volatile as the industry may shrink. Furthermore, it is most likely only a matter of time before the industry must also contend with environmental regulations. Although the last international deal in Durban did not set a legally binding agreement until the year 2020, the industry is beginning to feel environmental pressures. Some consumers are also applying pressure through restricted demand in regards to environmental concerns (Herskovitz, 2011).
Figure 1 – Industry Trends (CAPA, 2011)
Although Southwest has become the most admired company in the world, it will face a new set of challenges in an evolving industry. Since Southwest has a low cost leadership strategy and consumers are becoming more price sensitive, many of the changes could actually benefit the company; at least in regards to market share. It is entirely reasonable to expect that in this environment it could be the case that Southwest’s sales decrease due to industry conditions, while at the same time their market share continues to increase due to superior performance. Therefore, Southwest must capture market share at a greater rate than the industry’s decline.
CAPA. (2011, September 21). IATA upgrades 2011 airline industry profit forecast but warns of weaker 2012. Retrieved from CAPA Centre for Aviation: http://www.centreforaviation.com/analysis/iata-upgrades-2011-airline-industry-profit-forecast-but-warns-of-weaker-2012-59153
Herskovitz, J. (2011, December 12). Analysis: Durban deal may do little to cool heating planet. Retrieved December 12, 2011, from Reuters: http://www.reuters.com/article/2011/12/12/us-climate-diplomacy-idUSTRE7BB0X820111212
Mustoe, H. (2010, July 22). Airbus, Boeing May Force Supplier Mergers to Reduce Costs. Retrieved August 10, 2012, from Bloomberg: http://www.bloomberg.com/news/2010-07-21/airbus-boeing-cost-squeeze-may-spark-merger-boom-among-aircraft-suppliers.html
Richardson, A. (2011, October 10). Southwest Airlines Is Playing with Brand Fire. Retrieved from Havard Business Review: http://blogs.hbr.org/cs/2011/10/southwest_airlines_is_playing.html
Southwest. (2012). The mission of Southwest Airlines. Retrieved from Southwest: http://www.southwest.com/html/about-southwest/index.html
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