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Environmental Analysis: Southwest Airlines Essay

INTRODUCTION

Southwest Airlines Co. began its operations in 1971 and has been serving the industry for the past 43 years now (Southwest Airlines, n.d.). It is the major domestic airline, and ranked number one in 2014 by the Bureau of Transportation Statistics (United States Department of Transportation, 2014). Back in 1971 the airline began its services in Texas in the cities of Houston, San Antonio, and Dallas. The company has been ranked as the nation’s largest low cost carrier (Mergent, 2012). It offers the lowest fares, and has the lowest cost structure in the industry.

Southwest Airlines Co. also acquired AirTran Holdings Inc. in 2011 and now owns AirTran Airways. The company has been ranked 9th among the 50 most admired companies in the world according to a survey by Fortune magazine (Fortune Magazine, 2013). Southwest uses the exchange symbol LUV on the New York Stock Exchange (NYSE).

This paper will summarize an environmental scan of Southwest Airlines to include an analysis of the most important external environmental factors in the remote, industry, and external operating environments, the most important strengths and weaknesses of the organization, an assessment of the company’s competitive position, and analyze the structure of the organization and how this affects organizational performance (University of Phoenix, 2013).

POLITICAL FACTORS

The Airline and Aviation industry underwent Governmental Regulations by the passage of the Civil Aeronautics Act of 1938 and the simultaneous creation of the Civil Aeronautics Board (CAB). This Act enabled the CAB to control the service fares, the entry of new airlines from the market and the exit of existing airlines from the same, and the assigning of air routes to different airlines. Then the Federal Aviation Act was passed in 1958 and led to the formation of the Federal Aviation Administration in August 1958. The rule making was shifted to the FAA and it had control of the air routes, the airline safety and air traffic controls.

The Airline Deregulation Act was passed in 1978 and falls in the category of Federal Law. It eliminated the governmental authority over determination of service fares and control of routes and new airlines entry into/exist from the airline industry. As a result of the act, the CAB was dissolved in 1984. The FAA was not eliminated and it remained in control of airline safety and air traffic control (United States Government Accountability Office, 2006). This Amendment came into force in 1979 and comes within the category of federal law.

It manages the air traffic at Dallas Airfield in Texas. Initially, this amendment posed such restrictions on nonstop flights that their routes got limited to Texas and its neighboring states only. However, the restrictions were taken off in 1997 and 2005. The Amendment was revoked in 2006 but some restrictions will expire in 2014. Soon after the passage of the Airline Deregulation Act of 1978, Southwest was about to begin interstate flights. But restrictions were imposed by the Congress and the airline was disqualified to ticket/operate flights beyond Texas and the states touching its borders.

ECONOMIC FACTORS

A number of economic constraints are also there in the environment that have their relative impacts on Southwest’s operations. These include:

Higher unemployment rates, which Southwest had been challenging by refusing to lay off employees even during surging unemployment.

Increase in operating costs.

Instable credit market and capital market.

Declining demand for air travel.

Economic Recession in the country (Southwest Airlines, et al., 2013).

SOCIAL FACTORS

Social factors influencing performance include an increase air pollution caused by the airline industry as a whole; gases are emitted in upper atmosphere causing an increase of around three percent of greenhouse emissions globally. Also, fuel efficiency has increased significantly from the past three decades. The airline industry has been divided into labor unions which include several types of unions such as the Flight Attendants’ Unions, the Machinists’ Unions, and the Pilots’ Unions. The majority of the employees are part of such unions which has led to an increase in labor costs for the entire airline industry. TECHNOLOGICAL FACTORS Fuel efficiency is increasing. Aircrafts that are more fuel efficient are being developed and the engines are being redesigned to cater to this change.

The Air Transportation System has been reformed by the introduction of the Next Generation Air Transportation System (NextGen). This system is supposed to be implemented in the country by 2025. The system revises air routes and updates it to satellite system management; the promotion of usage of GPS technology for navigation, route length shortening, time reduction, and fuel saving, etc.

The JPDO (Joint Planning and Development Office) has been setup to facilitate the development of NextGen. Apart from that, the tracking system has been updated and routes have been improved significantly. Airline forecasting and algorithms have allowed improvements in prices and costs for airlines in the industry. The average age of an aircraft in the industry is around 13 years. The market is expected to grow and revenues are likely to increase.

HOW SOUTHWEST SHOULD CONFRONT THESE THREATS

Southwest should take active measures to deal with all the above measured threats. To combat with political threats of regulation, the Shelby agreement does help by providing expansion in a few routes. However, they are still less and the routes and areas served need to be expanded. Some sort of agreement should be made for that. To deal with its economic threats, Southwest is already implementing fuel cost saving strategies. It has already reduced its fares for the passengers, which provides it with a competitive edge. Southwest has adopted a no-layoff policy with reference to its employees, in the face of high unemployment rates. Therefore it should work to control and ultimately minimize its operating costs. To deal with the social issues present in the industry, careful negotiations and dealings with the various kinds of unions should be done. Environmentally safe emissions of gas should be reviewed as well as alternate sources of energy.

Technology is increasing in the industry. Southwest needs to be able to afford the latest technology so that it could offer superior quality of service than its competitors.

SOUTHWEST’S STRENGTHS

Southwest Airlines has a number of strengths. It uses the inner city airports and focuses on point-to-point service, which reduces the connections and facilitates nonstop routing. That resultantly reduces the total flight time. This makes it easier for Southwest to charge low flight fares for its passengers. The airline also serves downtown airports including Houston Hobby, Chicago Midway, Dallas Love Field, Burbank, Oakland, San Jose, Manchester, Baltimore-Washington International, Hollywood, Long Island Islip and Providence airports. This way the airline can make good use of its assets and perform on time and be reliable. That ultimately shows up as an increase in market revenue (MarketLine, 2012). The company has also employed successful advertising methods. It has reduced its overall operating costs and has been profitable for 36 consecutive years. It is known in the airline industry as being the best low cost carrier.

SOUTHWEST’S WEAKNESSES

Contractual obligations associated with the purchase of future aircraft, debt payment, and leasing arrangements resulted in a lowering of the companies’ credit rating in 2009. This has affected the company’s ability to secure future financing (Tellex, 2012a).

With increased technology, fewer companies are dependent on face-to-face meetings resulting in a lower demand for business travel. Reappearing downturn in the economy have also reduce the amount of those who travel for leisure. The subsequent result in the overall decrease in travel is lower profit margins for the company (Tellex, et al., 2012b).

The company continues to rely heavily on revenue generated by passenger travel, earning only one percent of its revenue through the transportation of freight and cargo. Considering that passenger travel is heavily dependent on price, fluctuations in fuel and security costs can expose profits to volatility (Tellex, et al., 2012c).

The airline has always maintained a conservative growth strategy. It needs to develop a more aggressive, robust business plan in order to keep up with other industry leaders in the modern economy. The company is currently limited to approximately 68 cities domestically and relies heavily on one aircraft manufacture (Boeing) to produce its fleet (Tellex, et al., 2012d).

MAIN COMPETITOR

One of the major competitors to Southwest Airlines is Delta Airlines, which is headquartered in Atlanta, Georgia, U.S. It has a few significant weaknesses such as the legal issues it has recently faced (including 2009’s antitrust lawsuits) that have had their impact on the company’s brand image. Also, the company is heavily indebted. In Fiscal Year 2011, the company had a long term debt of $11,233 million, and in FY2010 it was $12,553. The interest expense was also very high. That is why it is more prone to recession and because of this financial depression it is also unable to acquire additional funds. That has become a threat to its liquidity. The company also faces increasing fuel costs, competitive threats, and extensive governmental regulation (MarketLine, et al., 2012).

While it is difficult to combat governmental regulation, Southwest Airlines can build upon Delta Airline’s weaknesses, because it has remained profitable and has also become fuel efficient in the recent past. Also, the company has been successfully able to reduce its overall cost structure and provide high customer service, which is why it is amongst the top ranked airlines in the industry. This automatically creates value for the stakeholders.

SOUTHWEST’S COMPETITIVE STRATEGY

The company follows a low-cost competitive strategy by offering low fares to its customers which happen because it has been able to reduce its operating costs. It focuses on inner city airports such as the Dallas Love Field. To minimize costs, Southwest doesn’t provide meals in flights. It also uses Boeing 737 aircrafts which are technologically more fuel efficient. This makes its ranking high in customer services as compared to other airlines in the industry.

RECOMMENDED MODIFICATIONS TO SOUTHWEST’S STRATEGY

Assuming that the United States economy is undergoing a downturn, Southwest Airlines will need to make a few amendments to its strategy. These include improving its cost efficient structure and maintaining its existing customer base as well as begin providing healthy meals on an economical basis without increasing the flight fares too much. It should focus on what it does best and also build upon its competitive edge of excellent customer service. That way it would be able to combat the effects of an economic downturn, partially or completely.

IMPACT OF GLOBAL COMPETITION ON SOUTHWEST’S STRATEGY

If viewed from a global perspective, the company needs to make several revisions to its competitive strategy. Although Southwest has a competitive edge in the local industry because of its low fares and low cost structure, to be able to face global competition, the company needs to begin serving more routes, as the number of routes it serves currently is making it seem like a competitive disadvantage for the company. Also, the company should utilize its profits for the provision of healthy quality meals. An overall improvement in the operations should also be considered.

ORGANIZATIONAL STRUCTURE AND PERFORMANCE

Perhaps the most important element of Southwest Airline’s success is the company’s decentralized organization structure. The airline places a limited emphasis on organizational structure allowing employees and management committees to make decisions. The company’s policies are developed by combining employee input and measuring all decisions against its own code of ethics.

The company continuously demonstrates its ability to develop relationships through the formation of cross-functional teams that share goals and knowledge and build a mutual respect for one another rather than blaming. “Focus on relationships is the fundamental driver of leadership, culture, strategy, and coordination at Southwest” (Gittell, 2003, p. 177). Southwest defines leadership as a process that can occur at any level of the organization but is most productive on the front lines.

Supervisors assume a position of servitude to their subordinates going beyond the traditional responsibilities of that role. Employees are viewed as internal customers who deserve nurturing and training. The company intentionally distorts the lines between work and personal lives to enhance family and community relationships. The end result of such an organizational structure is improved flight departure performance, faster turnaround times, greater staffing productivity, fewer lost bags, and fewer customer complaints (Gittell, 2003).

CONCLUSION

Since its inception in 1971, Southwest has continuously distinguished itself from other airlines in the industry. For 41 consecutive years, it is the only airline to sustain a profit. The company’s organizational structure reflects its commitment to customers and employees alike. The benefits of this commitment have established the company as the benchmark for the industry in terms of loyalty and customer/employee satisfaction. Rankings such as number one in air transportation (United States Government Accountability Office, et al., 2006), number nine in _Fortune’s Most Admired Companies_ (Fortune Magazine, et al., 2013), and number 12 on _Forbe’s Best Companies to Work For In 2013_ (Forbes, 2013) also provide testament to the success of the company’s business strategy.

In order to sustain this level of success in the long-term and remain competitive within an industry that already has limited flexibility created by an unusually large amount of fixed costs, federal and union regulation, manufacturer dependency, and economy. The company must give consideration to developing a more transformational model. Fortunately for Southwest, the company has no need to reinvent itself. However, this model should include an cost-effective approach to fleet expansion and additional freight and cargo transportation services to generate more revenue while retaining their proven formula for organizational structure and customer service.

References

Forbes. (2013). _The 25 Best Places to Work in 2013_. Retrieved June 8, 2014, from Forbes: http://www.forbes.com/pictures/efkk45eddil/no-12-southwest/

Fortune Magazine. (2013). _World’s Most Admired Companies_. Retrieved June 8, 2014, from Fortune: http://fortune.com/worlds-most-admired-companies/southwest-airlines-9/

Gittell, J. (2003). _The Southwest Airlines Way: Using Power of Relationships
to Achieve High Performance._ New York: McGraw-Hill. Retrieved June 8, 2014

MarketLine. (2012, December 21). _SWOT Analysis_. Retrieved June 8, 2014, from MarketLine: http://advantage.marketline.com/PageForbidden?returnUrl=%2FProduct%3Fpid%3D345D3B5B-CDC8-4F13-AD68-8D79064FB08A%26view%3DSWOTAnalysis

Mergent. (2012, Decemeber 14). _Company Detail: Southwest_. Retrieved June 8, 2014, from Mergent Investor Edge: http://www.mergentinvestoredge.com/companyDetail.php?compNumber=7750&companyName=Southwest%20Airlines%20Co&ticker=LUV&cik=0000092380&pagetype=detail&exchange=NYS&country=USA#

Southwest Airlines. (2013, December 31). _LUV Investor Relations_. Retrieved June 8, 2014, from 2013 Annual Report: http://southwest.investorroom.com/company-reports

Southwest Airlines. (n.d.). _Company Profile_. Retrieved June 8, 2014, from LUV Investor Relations: http://southwest.investorroom.com/

Tellex, T. (2012, March 20). _Southwest Airline SWOT Analysis_. Retrieved June 8, 2014, from Exploring the World of Business: http://www.tamaratellezmba.com/blog/2012/03/20/southwest-airlines-swot-analysis/

United States Department of Transportation. (2014, May 15). _Airline Traffic Data_. Retrieved June 8, 2014, from Bureau of Transportation Statistics: http://www.rita.dot.gov/bts/press_releases/bts024_14

United States Government Accountability Office, (. (2006). _Airline Deregulation._ United States Government Accountability Office. Retrieved June 8, 2014

University of Phoenix. (2013). _STR/581 Week 3 Individual Assignment: External and Internal Environmental Analysis_. Retrieved June 7, 2014, from


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