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Strategic Issue

Southwest Airlines has never deviated from its niche: short-haul, high frequency, low-fare service, all delivered with award-winning customer service.1

-- Herbert D. Kelleher, Chairman, President, and CEO

Southwest's current strategy is to position itself as a cost leader with a focus strategy. The company's management and employees aim to cost-effectively and reliably fly large number of customers on short, non-stop flights, and to have fun doing it. They are devoted to making flying available to everyone. The company has been successful in implementing this strategy, having experienced strong growth and profitability. Southwest is now the 5th largest carrier in the U.S. in total customers. It has operated profitably for 24 consecutive years in an industry with a volatile earnings history. The main strategic issue facing Southwest at this time is to evaluate this strategy and determine its future course of action.

SWOT Analysis

An evaluation of the internal strengths and weaknesses, and the external opportunities and threats--based on the case study and additional references--is as follows:

Strengths

1. Southwest has successfully adopted a cost leadership strategy.

* Southwest maintains operating expenses per available seat mile at 15-20% below average.

* The company has no baggage handling, no meals, no central reservations, and no assigned seats.

* Because all of its planes are Boeing 737s, maintenance, turnaround, and training costs are contained.

* The company has embraced technology that will reduce costs (e.g., ticketless travel).

1. The company has a reputation for great customer service.

* Southwest won the Department of Transportation's Triple Crown 5 years consecutively for ontime service, baggage handling, and least number of customer complaints.

* The company has topped the National Airline Quality Rating three years consecutively.

1. The company has a strong, fun-loving, employee-oriented culture. The company's mission statement focuses on these aspects of the business. The result is a loyal employee base that is willing to work hard to achieve the company's goals.

* Culture begins with strong leadership. CEO Herb Kelleher is known for his relaxed management style.

* Southwest was voted one of the "100 Best Companies to Work For in America" by Fortune magazine.

* Southwest implemented programs to retain employees, including the first profit sharing plan in the industry and a 401k plan that matches contributions dollar for dollar.

* Although 84% of the workforce is unionized, they share responsibilities (e.g., pilots handling baggage) and have flexible work schedules.

* Southwest shares information with all levels of employees so that they understand the company's goals.

1.

2. The company is in a strong financial position. (Refer to Exhibit 1)

* Southwest has consistently generated a profit for 24 consecutive years.

* It was even profitable in the years 1990-1992 when no other major airline had net income.

* Southwest has the highest credit rating from Standard & Poor's in the airline industry.

* The company has grown sales by 12.1% and 18.6% in 1997 and 1996, respectively.

* Net income has grown 13.53% and 53.26% in 1997 and 1996, respectively.

* The company has excess debt capacity, evidenced by its long-term debt to equity ratio of 0.31, to take advantage of opportunities.

1. The company's growth has been steady and planned. Southwest enters new markets only when they can achieve frequent flights.

2. The company's marketing focuses on its low prices and fun culture.

Weaknesses

1. The company's mission statement is weak. Although there appears to be clear communication of the company's goals, the mission statement doesn't even mention what industry Southwest is in.

2. Southwest's competitors are offering shuttle services that compete directly with the company. They are also operating, investing in, and forming alliances with regional carriers.

3. As the result of its steady, planned growth strategy, Southwest flies to only 51 cities. There are numerous untapped domestic markets.

Opportunities

1. There are opportunities for expansion to new markets.

* More than 100 cities have encouraged Southwest to fly to them.

* The new Boeing 737-700 has the ability to fly longer distances non-stop, which may change the definition of "short haul".

* Enplanements for regional carriers are expected to increase 200% from 1996 to 2008.

1. Demographic trends appear favorable to an airline focusing on price and reliability.

* The consumer continues to seek convenience and time savings. Flying, rather than driving, will meet that need if the price is right and the airline is reliable.

* The aging of the US population results in more interest in leisure travel.

1. The competition is looking to international, rather than domestic markets, for growth opportunities.

* International enplanements are projected to be up 2X from 1996 to 2008.

* Decreased government control in Europe and Asia has led to increased competition in these markets.

1. Improved computer technology will allow more ticketless transactions and reservations made by PC.

2. There are barriers to entry for other competitors in the airline industry.

* A large