Environmental Analysis: Southwest Airlines

Southwest Airlines

Southwest Airlines is one of the most successful airlines in the United States. There has never been layoffs or strikes in the history of the company, although there were several times when layoffs could have been justified, including the months following the September 11, 2001 terrorist attacks. However, Southwest's Mission statement says “Above all, Employees will be provided the same concern, respect, and caring attitude within the organization that they are expected to share externally with every Southwest Customer.” (Southwest, 1988). The Airline has always believed that their corporate culture is one of the keys to their success. The culture recognizes that employees have emotional intelligence and that their attitudes and morale are key to the teamwork and creative environment.

Southwest Airlines is operating in an industry that is struggling to make profits. The slowing economic growth and raising fuel costs are lowering earnings while revenues remain the same. 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.

Figure 1: US Unemployment versus Transportation Industry Unemployment.

(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

Figure 2: Growth of Air Transportation Industry and the Gross Domestic Product.

(Bureau of Labor, 2008)

Transportation Industry has not done the same. Rising oil prices has had a profound impact in the aviation sector.

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.

As the airline industry heads into a new era of high oil prices and lower consumer spending, Southwest Airlines has the opportunity to expand. In June 2008, Southwest has planed to cut over 31 of its routes but add 40 others causing a net expansion. “The addition of nine flights overall comes as many of Southwest's competitors scale back their flight offerings as they retrench in the face of record-high fuel prices and a slumping economy.” (CNN Money, 2008) Southwest's ability to expand at a time when other major carriers are reducing their loads is caused by several factors. A critical factor during a time of high oil prices is Southwest's history of hedging future fuel costs. Southwest is not only able to gain from a lower oil price, they are also better able to budget costs for the upcoming year. (USA Today, 2008). Consumers are starting to cut back on luxury purchases. According to Reuters, “...just 25 percent of respondents rated their financial situation as better than a year ago, the lowest in 27 years.” (Reuters, 2008).

In the first year of operation, Southwest was experiencing cash flow problems. While other companies may have begun layoffs, the President of Southwest went to the ground service people and discussed the issue with them. Together, the company set a goal of decreasing the turnaround time for at the airport gate from 55 to 15 minutes increasing the revenue capability of the airplane. Having found a way to increase revenue without losing any people, the ground service crew felt like a valuable part of the team and the President of Southwest did lay anyone off. (Smith, 2004) In the second instance of potential layoffs, revenue passengers became scarcer in the wake of September 11, 2001. To help the company through the crisis, Southwest asked employees to take a pay cut instead of having to let people go. That action allowed the company to be one of the only airlines who were able to retain all their employees during that time. According to a corporate cultural study “Southwest's culture, which emphasizes employees as the airlines “first customers” and the passengers as its second, has been integral to Southwest's success.” (Smith, 2004). The practice of putting the needs of the company's

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