Southwest Airlines (Circa 2010)

 
Overview

The greatest danger facing Southwest Airlines (“SWA”), the largest U.S. carrier with 35 straight years of profit, is complacency. The inertia and comfort of long success causes a ‘play it safe’ strategy to be the most appealing but also the most dangerous to the future of the company:

• A series of safe bets accumulates into a long term strategy of mere incrementalism

• Mere incrementalism is inconsistent with the bold, ambitious and innovative leaps which made SWA successful in the first place

• Current industry turmoil, consolidation, and overall customer disaffection create unexploited opportunities for new growth

• New entrants will have nothing to lose, will ‘play to win’, and are the greatest long-term threat to SWA

Summary of Key Issues

SWA costs per passenger revenue mile have risen 27% from 1995 to Q1 of 2008 while average domestic fares have risen only 15% for same period. Sooner or later profits will suffer from this trend. Fuel is greatest single cost:

(http://www.wikinvest.com/concept/Airline_Travel)

• Porter’s Five Forces Model: Few threats to SWA from suppliers (good relationship with Boeing), substitutes (bus/car/rail), existing carriers (SWA outperforms them) or customers (SWA ranked very high).

Greatest threat is risk of start-up carriers who clone SWA strategy and undercut its fares by concentrating on a single SWA market.

Recommendations

Relieve potential pressure on future profits by cutting costs and raising revenue:

• Creatively and actively search for new ways to cut costs. For 2008 – 2014 SWA plans to buy 108 new planes: 20% of current fleet. Use “collaborative partnership” with Boeing to identify new ways to cut fuel and operating costs

• Grow average domestic fare by expanding to new underserved markets using existing business model of direct flights to cheaper and smaller airports

• Expand to underserved international markets in Canada, Mexico and Caribbean using existing business model

• Stop exclusive reliance on fuel hedging to protect against future price surges. Identify alternative new physical supplies including synthetic jet fuel

Preempt new entrants by intensifying brand differentiation:

• Radically rethink coach passenger experience through seating and cabin redesign and innovative new technologies such as virtual reality

• Great design of key business processes, systems and physical layout has the power to triumph unexpectedly, to produce major improvements in the key metrics of success (cost, risk, efficiency, and yield), and to achieve the impossible.(http://www.fastcompany.com/magazine/95/open_edlet.html)

 
Active collaboration between management and employees should be expanded to include suppliers and passengers to identify design improvements

Don’t try to please everyone all the time. SWA’s passenger complaint rate may be too low and too costly. According to Harvard Business School management professor Michael Porter: “Companies that try to be all things to all customers…risk confusion.”

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