Southwest Expansion Abroad: Strategic Issues from Australia’s Macro-Environment and Industry

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Executive SummaryRecent changes in the Australian aviation industry have made it attractive for international players to enter the market. The aim of this discussion is to provide a critical analysis of the Australian domestic airline industry and Southwest Airline as it enters the new market, excavating strategic issues in Australia and providing solutions for Southwest as it enters and plans to thrive in the new market. To achieve this, the Porter’s Five Forces and the VRIO framework will be used extensively to explain the proposed strategy and give a brief of the challenges that must be overcome in Australia for successful entry as well as operations. The challenges are identified as the ongoing impacts of the COVID-19 pandemic and the resultant intense competition that has redefined the Australian aviation sector. The VRIO analysis identifies valuable resources and capabilities to include a reckoned brand and employees, rarity to include international presence, dominance of the aviation market, adaptability, and risk-taking characteristics, and quality product offering, global presence, financial capacity, corporate culture, customer experience, and competitive pricing to be key inimitable resources and capabilities. Resources and capabilities such as financial strength, technological advancement and integration, employee training, research and development, and corporate leadership complete Southwest’s organization capabilities. Further, the Porter’s five forces identify high buyer bargaining power, high supplier bargaining power, high threat of substitute products, and intense rivalry amongst current industry players as a challenge that will weaken Southwest in Australia. It is recommended that Southwest follows a strategic alliance approach, creating a separate entity with an established local player (most suitably Qantas), in order to overcome the challenges of a changing consumer base and the intense competition in the Australian Aviation scene.

Table of Contents

TOC o “1-3” h z u Executive Summary PAGEREF _Toc93746501 h 2Introduction PAGEREF _Toc93746502 h 4Porter’s Five Forces Analysis of the Australian Aviation Industry PAGEREF _Toc93746503 h 41. Bargaining Power of Buyers PAGEREF _Toc93746504 h 42. Bargaining Power of Suppliers PAGEREF _Toc93746505 h 53. Threat of Substitute PAGEREF _Toc93746506 h 54. Rivalry among Existing Firms PAGEREF _Toc93746507 h 55. Threat of New Entry PAGEREF _Toc93746508 h 5Southwest VRIO Framework Analysis PAGEREF _Toc93746509 h 5Valuable PAGEREF _Toc93746510 h 6Rarity PAGEREF _Toc93746511 h 6Inimitable PAGEREF _Toc93746512 h 7Organization PAGEREF _Toc93746513 h 7Strategic Issues in the Australian Airline Market and Industry PAGEREF _Toc93746514 h 71. COVID-19 Impacts on Consumer Behavior in the Australian Market PAGEREF _Toc93746515 h 72. Intense Competition in the Australian Aviation Market PAGEREF _Toc93746516 h 8Recommendations for Southwest in its Entry to the Australian Aviation Industry PAGEREF _Toc93746517 h 9Conclusion PAGEREF _Toc93746518 h 10References PAGEREF _Toc93746519 h 11

IntroductionIn the United States, Southwest Airlines is among the most successful low-cost airlines in the world. When it comes to distinguishing its products and services from those of its competitors, Southwest Airlines has been very effective (Cote, 2018), creating a customer base that is well segmented (Moir & Lohmann, 2018). With its global growth, the firm intends to repeat its success on the domestic market in the domestic Australian airline market. Low-cost carrier Southwest Airlines expects its highly motivated personnel, financial muscle, brand reputation, and management to create a sustainable competitive edge in Australia. Furthermore, Southwest Airlines’ better cost management would provide the airline with a competitive advantage in the Australian market. Southwest Airlines will need to adapt its business model if it is to be successful in its entrance into Australia. The purpose of this report is to provide a critical analysis of the Australian domestic airline industry and Southwest Airline as it enters the new market. The report will excavate strategic issues in Australia and provide solutions for Southwest as it enters and plans to thrive in the new market. To achieve this, the Porter’s Five Forces and the VRIO framework will be used extensively to explain the proposed strategy and give a brief of the challenges that must be overcome in Australia for successful entry as well as operations.

Porter’s Five Forces Analysis of the Australian Aviation IndustryPorter’s Five Forces research is one of the most well-known examples of a good approach and instrument for researching the external environment of any sector, and it is being used today. It’s important to remember that the airline industry in Australia has been buffeted by strong external headwinds such as a consistent pattern of decreased passenger traffic, rising operating expenses, extremely high fuel prices, and even higher landing and increased maintenance costs, among other things. In addition, intense competition from low-cost carriers has resulted in a pricing war that has been harmful to operations and profitability of companies in Australia including Jetstar and Qantas. Southwest will be operating in this new environment.

The following are the most important elements of Porter’s five forces. These factors are examined in relation to Southwest Airlines, which is the case study. The following are Porter’s five forces that have an influence on the airline industry, and especially Southwest’s financial performance:

1. Bargaining Power of BuyersAs a result of the diversity of options available to them, such as premium and other luxurious class air travel options, low-cost air travel, packaged travel options, and so on, buyers in the Australian airline industry have greater negotiation power than sellers. These services are given by a diverse range of service providers, hence enhancing the purchasing power of the buyer.

2. Bargaining Power of SuppliersThe fact that there are so many vendors offering equivalent services means that providers in the aviation industry have less bargaining power. Southwest’s dominance will be weakened and challenged as a result of the presence of other significant airlines in the market, such as Virgin Airlines, Jetstar, Qantas, and others.

3. Threat of SubstituteIn terms of the threat of replacement, it is lower in the airline industry since air travel provides a faster way of acquiring travel services over longer distances that would otherwise not be available through road or sea transportation. Because of this, the likelihood of replacement is lowered.

4. Rivalry among Existing FirmsIt is clear that business rivalry has played a significant role in the development of Australia’s aviation industry, particularly in light of the current situation, which shows that Southwest Airlines will compete directly with Virgin Australia, Qantas, and Jetstar in the domestic market, and that the competition is so fierce that almost all of the airlines are losing money.

5. Threat of New EntryThe possibility of new competitors entering the market is reduced since building an aviation company involves major infrastructure investment, which is difficult to do.

Southwest VRIO Framework AnalysisTaking a Resource-Based View is a strategic concept that looks at a company’s internal assets and weaknesses. As seen from this perspective, a firm is a collection of resources, and the collection of resources serves as the foundation for the organization’s strengths and weaknesses, in addition to its competitive advantage. When describing a corporation’s resources, the phrases intangible resources (such as cash) and physical resources (such as human capital) are sometimes used interchangeably (like innovation). Firms must also be adaptable in a market that is always evolving. Airline businesses with dynamic capabilities have a better chance of surviving in a turbulent and competitive market because they are able to respond to changes more rapidly and efficiently (Ginanneschi & Piu, 2018). Companies are increasingly basing their strategy on this technique, first identifying existing resources that can give them with a competitive advantage in their industry, and then exploiting and growing these resources to further reinforce their competitive advantage in their industry.

If Southwest intends to fulfill its long-term sustainability goals, it must do an in-depth review of its capacity and resource components while also devising a marketing strategy. These capabilities make up the company’s internal capacity, which is responsible for the vast bulk of the company’s operational and external commercial operations, including sales and marketing (Harvey & Turnbull, 2020). The constructed environment, cultural environment, financial environment, human environment, and natural environment all contribute to a company’s resources and capabilities. Following an examination of the company both internally and externally, Southwest’s strengths and weaknesses will be revealed in order to address the strategic problems and difficulties previously identified. Also covered will be the specific elements that have enabled Southwest to establish a competitive advantage over its competitors in the new Australian market (Fu et al., 2019). Among the threats Southwest faces include direct competition from established competitors like as Qantas and Jetstar, along with new market entrants and threats brought by its own expansion.

ValuableMoreover, the resource must be helpful to the organization. When it comes to creating a competitive advantage, not all resources are created equal. Being in possession of a resource that no one else possesses but which has no value is a waste of time. It is also important that the resource be rare and distinct, providing the organization an edge over competitors who will struggle to obtain it. Southwest’s valuable resources and capabilities include a reckoned brand, brand image, relationship with suppliers, capacity to raise capital, innovative products, and employees.

RarityTo be in possession of a resource that no one else has, but which has no worth, is a complete waste of time and effort. Moreover, it is critical that the resource be uncommon and different in order to provide the business a competitive advantage over competitors who will struggle to access it. Rare resources and capabilities at Southwest include international presence, dominance of the aviation market, adaptability, and risk-taking characteristics.

InimitableIt is necessary to combine important and distinguishing characteristics with incomparable traits in order to preserve a competitive advantage over the long term. Inimitable resources and capabilities for Southwest include quality product offering, global presence, financial capacity, corporate culture, customer experience, and competitive pricing.

Organization

After discovering that they cannot duplicate a resource they wish to get, many firms look for appropriate alternatives. If a resource is to provide a significant competitive advantage, it should be organized to reduce possibility of other players duplicating and using them. Southwest’s organization helps it to exploit opportunities and use its resources and capabilities such as financial strength, technological advancement and integration, employee training, research and development, and corporate leadership.

Strategic Issues in the Australian Airline Market and IndustrySafety, efficiency, capacity, and environmental concerns are among issues that Australian airspace management must grapple with on a regular basis. As Southwest plans to enter the Australian aviation market, it is important to consider some of the strategic issues and challenges that it is likely to face in the new market, both at the entry and the operations stage.

1. COVID-19 Impacts on Consumer Behavior in the Australian MarketDuring the last 10 years, Amankwah-Amoah (2020) notes that regional aviation in Australia has been characterized by unpredictability, with usually flat growth, dismal profitability, and financial hardship, particularly on smaller operators, among its hallmarks. In its own right, the aviation sector is a universe unto itself, employing a great number of people and contributing significantly to the global economy. After overcoming a number of challenges, Lohmann and Spasojevic (2018) highlight that the sector was poised for significant expansion until the pandemic struck, following which it saw a precipitous collapse. While COVID-19 has had a significant toll on the aviation sector’s bottom line, it is realistic to believe that the industry is on the mend and that it may very well return to the mainstream in a few short years (Sun, Wandelt, & Zhang, 2021). Australia’s domestic aviation industry, which was damaged by international and national border closures during the epidemic, is bracing for a pricing war as new entrants to the jet market compete with market leaders Qantas and Virgin Australia. As a result of airline price reductions intended to entice travelers back to the skies, Australians are currently enjoying some of the lowest domestic airfares seen in a decade (Lai et al., 2022). Thanks to the entry and use of new domestic and international strategies, players such as Qantas, Rex, and Virgin Australia are all adding new competition to major domestic and international routes.

In the airline sector, it’s difficult to overstate the magnitude of the COVID-19 epidemic’s influence on operations. According to predictions, the aviation industry would generate $328 billion in revenue in 2020, indicating a 40% increase over the previous year’s total. It’s the same as it was in the year 2000, when expressed in nominal terms (Lai et al., 2022). Despite the fact that the industry is expected to shrink in the foreseeable future, projections by Naweed and Kourousis (2020) do not expect traffic to reach the levels witnessed in 2019 until at least in 2024. Aside from the immediate financial consequences, the pandemic’s long-term impact on aviation is becoming increasingly apparent as time progresses. Because of digitization, there is little doubt that the standards for cleanliness and safety will be enhanced, and that the travel experience will continue to change as a result of this. The certificates of immunization and COVID-19 test results of travelers will be stored on their mobile devices when traveling. Others, on the other hand, have a greater impact on the overall picture. COVID-19 has irreversibly altered consumer behavior — as well as the airline industry — in stark contrast to the global financial crisis of 2008, which was purely economic in nature and resulted in lower purchasing power for the general public at the time (Sun, Wandelt, & Zhang, 2021). COVID-19 has had an irreversible impact on consumer behavior and the airline industry. Southwest must grapple with these challenges and issues as it enters an already highly competitive aviation industry in Australia.

2. Intense Competition in the Australian Aviation MarketIn comparison to the US market, Australia has lagged behind in terms of infrastructure and technology for the domestic aviation industry. Particularly, the government and the private sector is yet to fully embrace the low-cost carrier business model that supports local aviation market growth. Government and private sector investment in new infrastructure and technology will continue to be critical if the aviation system is to remain safe, efficient, and constantly improving. Southwest has an advantage of being a major success in a market that shares similarities with the Australian travel industry.

The addition of leisure destinations while maintaining the reconstruction of large global connecting networks will be a significant challenge for Southwest Airlines as the airline industry enters a period of network regrowth. This will be a significant challenge for Southwest as every other airline attempts to increase its value and generate competitive advantage. Cost is more important to leisure travelers than connectivity and convenience, according to a recent study. While the majority of network decisions are made primarily on passenger demand, with cargo being a secondary consideration, Southwest should rethink its approach because cargo-only flights have proven to be a vital source of revenue in the past several years. In Short, there is a need to change tact due to the intense competition and consumer behavior changes that have headlined the Australian aviation market.

Recommendations for Southwest in its Entry to the Australian Aviation IndustryDuring the COVID-19 pandemic, every airline was compelled to reduce its operating costs in order to remain competitive in the market. There is a significant difference between a one-time act motivated by volume and a long-term structural change in a company’s operations. After a period of stagnation and cost-cutting measures, the temptation will be to expand and raise prices rather than continue the onerous process of cost-cutting measures (Johnson, Scholes, & Whittington, 2008; Tanriverdi & Du, 2020). As long as the economy remains stagnant, the majority of airlines will compete for low-yield leisure trip customers.

Numerous airlines, particularly those that operate in domestic markets, have been able to cut unit costs by gradually increasing the size of their fleets over time (Harvey & Turnbull, 2020). This approach, on the other hand, has significant disadvantages. Making the appropriate trade-off between total trip cost and per seat cost in an uncertain demand climate will be crucial to achieving success in this scenario. More than ever, fleet flexibility, both in terms of aircraft types and numbers, as well as real-time scheduling, has become increasingly vital to airlines. On this, Southwest already has value, rarity, and organization of its resources and capabilities. Its employees, financial power, large stakeholder base, and management can be converted into sustainable competitive advantage in the Australian market through strategic alliance with other players such as Rex or Qantas in order to obtain significant advantage. It is recommended that Southwest follows a strategic alliance approach, creating a separate entity with an established local player (most suitably Qantas) in order to overcome the challenges of a changing consumer base and the intense competition in the Australian Aviation scene.

ConclusionThe aim of this discussion was to provide a critical analysis of the Australian domestic airline industry and Southwest Airline as it enters the new market, excavating strategic issues in Australia and providing solutions for Southwest as it enters and plans to thrive in the new market. From the Porter’s Five Forces and the VRIN used, it is proposed that Southwest pursues a strategic alliance with Qantas for successful entry as well as operations.

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