Southwest Airlines

NATIONAL AMERICAN UNIVERSITY

STRATEGIC MANAGEMENT

SUMMER 2005

SOUTHWEST AIRLINES CASE STUDY

INDUSTRY & COMPETITIVE ANALYSIS

Driving Forces

1. Entry/exit of major firms: The airline industry has many entry barriers so the dangers associated incoming airlines are low. Lately, however, there have been many airlines exiting which causes fierce competition to gain their customers.

2. Changes in cost and efficiency: Cost of fuel, increasing inflation, increasing interest rates, maintenance costs, safe flights, and timely arrival and departures all play a major role in the airline industry

3. The internet: The internet enables flyers to go online and do more comparative shopping for good prices, flight schedules, and flight destinations. It is also more user friendly for businesses.

4. Strong regulatory/political/governmental/societal influences: Because of the incidents of 911, the government has cracked down on flight as well as preflight security. It has forced airlines to train their pilots, flight attendants, and ground crews. This has forced airlines to raise their prices and pay more attention as to who they hire. Another major act of terrorism could cripple the Airline industy.

COMPETITIVE ANALYSIS

Southwest Airline's 5 Forces of Competition

Bargaining Power of Suppliers

Full-service airlines have a high level of fixed and operating costs in order to establish and maintain air services: labor, fuel, airplanes, engines, spares and parts, IT services and networks, airport equipment, airport handling services, sales distribution, catering, training, insurance, and other costs.

The company saved a great deal of money by owning only one type of aircraft, the Boeing 737. It acquired some of its new aircraft at favorable prices because it also served as the launch company for the aircraft. It also saves money on parts, training, and maintenance. They do not serve meals as did most other airlines, they only serve beverages and snack foods which can be purchased anywhere.

Bargaining power of buyers

Southwest Airlines has a great deal of leverage when it comes to dealing with the buyers. It flies to 60 cities in 31 states with 3000 flights leaving daily. Southwest topped the monthly domestic originating passenger rankings for the first time in May 2003. Southwest is also the largest carrier based on scheduled domestic departures. Southwest is the United States' most successful low-fare, high frequency, point-to-point carrier.

Barriers to Entry

The entry barriers for new airlines are lower in a deregulated market, and so the U.S. has seen hundreds of airlines start up (sometimes for only a brief operating period). This has produced far greater competition than before deregulation in most markets, and average fares tend to drop 20% or more, spurring new sources of demand. The added competition, together with pricing freedom, means that new entrants often take market share with highly reduced rates that, to a limited degree, full service airlines must match. This is a major constraint on profitability for established carriers, which tend to have a higher cost base.

Interfirm Rivalry/Threat of new entrants

The reputation of Southwest Airlines does not really have any blemishes that spoil it. Their main competition includes AMR Corp (American Airlines and American Eagle), Delta Airlines, JetBlue Airways Corp. The entrance of AirTran Holdings. This airline is trying to grab a bigger chunk of the market. If customers do not like the fares that Southwest is charging, then they will go fly with JetBlue. Southwest needs to keep finding ways to retain their customers and must supply their planes with more amenities.

Threat of Substitute products

For some time, major U.S. carriers have been dealing with the combined impact of inflexible costs, an increasingly price-sensitive customer base, and a sputtering economy. And, in the aftermath of September 11, Americans have been choosing in large numbers simply not to fly. Now, the conflict in Iraq is taking an additional large toll on airline revenues. The depth and duration of the current depression in air travel remains to be seen, but the Iraq invasion's initial impact on major U.S. airlines has been dramatic, with international travel down in the range of 20% -- 100% on some routes, where cancellations are actually outpacing new reservations. Traffic declines on domestic routes have been more pronounced than during the 1991 Gulf War.

For an industry already losing more than $1 million every hour, the effects have been grave. The nation's second largest airline, United Airlines, remains in Chapter 11 bankruptcy, with some analysts warning that it faces a longer-term possibility of outright liquidation. Meanwhile, the largest U.S. carrier, American Airlines, remains at risk of bankruptcy, despite a last minute, month-end reprieve. The seventh largest, USAirways, very recently emerged from bankruptcy after cutting both services and jobs by a third, and some observers question whether even that will be enough in the event of an extended war in Iraq.

The bottom line is that another major incident of domestic terrorism, particularly an aviation-related event, could force all major U.S. airlines (except Southwest) to insolvency.

COMPETITOR ANALYSIS

Strategic Approaches/Predicted Moves of Key Competitors

1. You will probably see more merges such as the one with America West and US Airways. This is a smart thing to do. Combine your resources and cut back on your personnel.

2. You could also see price wars. The prices would drop low enough for long enough to hurt business then would rise again. Also airlines would copy some of Southwest's business practices. They would cut back on "frills" to cut back on costs.

AMR Corp (American Airlines and American Eagle), Delta Airlines, JetBlue Airways Corp are all companies that need to be watched. They are potentially in a position to utilize the strategies listed above.

KEY SUCCESS FACTORS

FAVORABLE IMAGE OR REPUTATION WITH BUYERS. The reputation of Southwest Airlines does not