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Southwest Airlines is examined in this case analysis, which highlights the company's critical financial situation. The study utilizes news articles, the company's website, and finance websites. The research emphasizes the importance of Southwest's robust relationships with its employees and customers, which they are determined not to compromise or damage. However, the company needs to generate $100 million without resorting to employee layoffs or customer dissatisfaction by increasing fare prices. Consequently, this analysis demonstrates how Southwest is exploring innovative ideas to strengthen its brand and ultimately achieve success.
Rollin King and Herbert D. Kellher founded Southwest Airline services in 1971. Southwest functions as a low-fare air transportation company, serving numerous states and catering to over 20 million customers annually (Yates, 2012). In 1991, when the airline industry faced severe financial decline due to economic instability, Southwest remained resilient while its competitors struggled with debt. The key factor behind their success then and now lies in their reputation for cost-effectiveness and their ability to maintain strong relationships with both employees and customers.
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By ensuring that each individual feels valued, Southwest has established itself as the leading industry player, with competitors unable to match their low prices for fear of bankruptcy.
Southwest Airlines, a successful company for over 38 years, believes that passengers will choose their airline if they are delivered to their desired destinations on time, at affordable fares, and have an enjoyable experience (Southwest Airlines History, n.d., para. 1). The company has achieved this by adopting a low-cost approach and eliminating checked baggage fees while providing excellent customer service.
Additionally, Southwest has implemented a profitable point-to-point strategy for route selection. As a result of these strategies, Southwest has been able to expand its operations and maintain profitability. Today, Southwest Airlines is recognized as one of the most successful airlines in the struggling airline industry.
In recent years, several airlines have experienced significant losses. Five out of the top ten airlines have gone bankrupt. Despite Southwest's previous growth, they are now encountering financial difficulties. An article from Star-Telegram on October 18, 2012 titled "Southwest Airlines plans to cut expenses without layoffs" (Ahles, 2012) emphasizes the airline's workplace culture and low fees but also mentions the necessity to reduce corporate overhead costs by $100 million (Ahles, 2012). The article provides a comprehensive analysis of Southwest's current situation and underscores the urgency to address their substantial problem in order to avoid bankruptcy.
The airline industry has been facing challenges such as increasing energy costs, expensive labor contracts, and decreased consumer demand in recent years. Southwest Airlines has encountered significant issues due to five main factors. These problems began with a major shift in business and consumer travel demand after the terrorist attacks on September 11th, 2001. The attacks greatly affected consumer confidence in flying, leading Southwest Airlines and other airlines to implement safety measures to regain trust. Additionally, there was a 5.4 percent decrease in business travel within the airline industry during late May and early June (Martin, 2012). This decline represented the largest monthly drop since April 2010 and indicated signs of an economic slowdown.
Many businesses are choosing to use Skype as a cost-saving alternative for their core business travel. Skype is a computer program that allows free video chatting, eliminating the need for expensive trips. This is especially advantageous for cash-strapped companies seeking alternative ways to conduct business meetings. In 2011, Southwest bought four Air Tran cities for $1.4 billion, which contributed significantly to their growth. However, this decision negatively impacted their finances as they spent over a billion dollars. They had expected an increase in consumer demand and subsequent revenue growth during the election time but their predictions were incorrect, leading to financial difficulties. In April, Charlotte, N.C., Flint, Michigan; Portland, Maine; and Rochester, N.Y. will transition to Southwest service.
The entire airline industry is concerned about the cost of fuel. In the third quarter of this year, Southwest paid $3.16 per gallon for jet fuel, which is $1 more than last year's price. They anticipate paying $3.45 per gallon in the fourth quarter of this year. Despite airlines transitioning to more fuel-efficient planes, fuel expenses still account for approximately 35% of their total operating costs (Martin, 2012). Airlines are cautious about quickly increasing airfares as fuel costs rise because they know passengers may seek alternative transportation options if flying becomes too expensive.
Although Southwest was initially one of the most fuel-efficient airlines, rising fuel costs prompted them to enhance their fleet's efficiency by purchasing new Boeing 737-700s instead of leasing them. This decision aimed at improving cash reserves and reducing debt compared to other airlines, ensuring Southwest's competitiveness. However, this move also led to increased operating costs as Southwest chose to update the interiors of these planes and plans to replace the seats in mid-2013.
Fuel costs and labor expenses are both major concerns for Southwest.
Labor costs have risen by over 10% at Southwest compared to the previous year, leading union workers to request more generous compensation packages. However, Southwest is committed to providing a stable work environment and equal opportunities for its employees because it highly values them and aims to maintain positive relationships. This dedication may help gain employee support in preserving the company's low cost advantage. In the travel industry, customer satisfaction is crucial for growth and profitability. Fortunately, Southwest has been recognized for its exceptional customer service, receiving top rankings from both the International Business Awards and Consumer Reports in 2011. Despite facing financial challenges, Southwest remains confident in retaining both customers and employees. Here are some suggestions for successfully implementing change.
Southwest Airlines is currently facing challenges that can be resolved through a set of recommendations. Despite strong competition within the airline industry, Southwest has the opportunity to become the top competitor by making a few changes. It is crucial for Southwest to reassess its strategic decisions and adopt new strategies in order to regain financial stability.
Despite these obstacles, Southwest remains committed to their mission of providing exceptional customer service with warmth, friendliness, pride, and company spirit. The company is determined to uphold this mission and strives to overcome the current situation in order to become a more profitable and resilient company.
Southwest Airlines' CEO, Kelly, acknowledged that the carrier is falling short of its strategic objectives for the year. To tackle this issue, they intend to slash corporate overhead costs by $100 million. While there are currently no plans for workforce reductions, Kelly mentioned the possibility of scaling back hiring and overall corporate employment. In 2009, Southwest resorted to offering buyouts to employees in order to downsize their workforce by 1400 individuals. To avert bankruptcy, they may need to extend additional buyout offers; however, they are exercising caution in preserving a positive relationship between the company and its employees.
Due to its strong employee relationships, Southwest Airlines has the advantage of being able to negotiate with unions and explain the necessity of low labor costs for the company's long-term stability. This approach has been taken by various airlines like United Airlines and US Airways who, when facing bankruptcy, have cancelled benefit pension plans and requested unions to accept pay reductions. Additionally, some airlines have utilized government regulations and the threat of financial cuts to successfully reduce costs. Although Southwest Airlines currently does not face the same financial challenges, it must remain firm with its unions and either decrease or maintain labor costs to avoid joining the list of bankrupt airlines.
Southwest Airlines plans to cut operating costs and explore new revenue sources in 2013. They intend to investigate initiatives such as charging for early check-ins, making changes to the Rapid Rewards program, and implementing other small fees similar to those of other airlines. However, it is uncertain if these initiatives will involve new passenger fees. While competitors earn millions of dollars through checked bag fees, Southwest Airlines is unwilling to consider adding them. The company fears compromising its reputation for being the best value, having the most accurate consumer on-time estimates, and having the best luggage policy among all domestic airlines. This reputation was recognized by the Zagat award in 2009 (Southwest Airlines News, 2009, para. 1). Instead of customers spending up to $120 on roundtrip baggage fees, Southwest Airlines encourages them to allocate that money towards their vacation expenses.
Southwest Airlines cannot control the cost of fuel, but they can enhance fuel efficiency by using newer and better equipped airplanes. By doing so, they can conserve fuel and offset the rising fuel costs. To improve fuel efficiency, Southwest has been installing Blended Winglets on their aircrafts since 2003. Additionally, they have been purchasing more 737-700s, which are known for their fuel-saving capabilities, making Southwest the largest buyer from Boeing. This has resulted in a 10.8 percent increase in passenger capacity and higher revenue. To further optimize efficiency, it is recommended that Southwest continue retrofitting older planes with Blended Winglets and invest in new aircraft models that are more fuel efficient in the long term.
For sustained expansion, Southwest should consider exploring foreign markets that are suitable and profitable. As the airline industry rebounds, there will be a rise in consumer demand. While Southwest has successfully expanded within the United States, they should also consider expanding their destinations to include Canada and Mexico. Venturing beyond U.S. borders will facilitate further growth and boost profits.
Southwest Airlines expresses confidence in its capacity to raise prices without losing customers. The company places importance on its commitments and is devoted to safety, trust, and building strong relationships with employees, customers, suppliers, and the environment (Southwest Airlines Mission, n.d., para. 3). Despite the occurrence of 200 airline bankruptcies since deregulation in 1978, Southwest remains optimistic about generating enough funds to meet obligations and regain a solid financial position. Gary Kelly has stated that they are currently exploring ideas to enhance their brand but it is too early to provide further details (Ahles, 2012).
Southwest Airlines Financial Crisis: Seeking Solutions. (2017, Jan 27). Retrieved from https://studymoose.com/southwest-airlines-case-analysis-essay
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