Southwest Airlines in 2010

Southwest Airlines in 2010

Introduction

The southwest airline company is a significant US airline that provides short haul, point to point, , low fare and high frequency services (Thompson, Strickland & Gamble, 2004). It was incorporated in Texas and started operations in 1971 serving three Texas cities: Dallas, Houston and San Antonio. To date, it is operating in over 59 American cities. According to Koenig (2005), the company has the least cost in operating it operates with low flight fares. For the year 2003, the company had revenues that totaled to $5,937 million which was an increase of 7.5% on the 2002 revenues which reached a tune of $5,741 million. The airline company business is divided into three significant areas: Passengers, Freight and other. These distinct areas have respectively accounted for higher revenues of 2003.

Southwest Airlines have employed many strategies and policies over the time they have been operating so that they can manage the competition in the airline industry (Thompson, Strickland & Gamble, 2004). The department of Transportation began tracking customer satisfaction statistics in 1987, and Southwest Airlines have had the lowest amount of passenger complaints. Most airline companies have tried to copy the model that Southwest have used and the culture that it has adopted. Many organizations and corporations have emulated this strategy, and Southwest is a model in the industry. The company utilized a number of campaigns to make it popular such as including skimpily dressed flight hostesses, free alcoholic beverages in course of flights and a love campaign using the mantra, aimed at attracting more passengers (Blanco, Lehman & Shimoda, 2005). They moved from an airport that was intercontinental and was a loss in the making to another airport which was abandoned. The airport had closer vicinity to downtown destinations which increased passenger traffic. In order to fill empty seats, the company slashed its regular flight fare in half and ran an advert attacking a competitor claiming that they were attempting to force them to close down (Ragland and Zimmerman, 1990). They also gave ice buckets or alcohol for those flying under the original fare price.

Southwest Airlines came face to face with their first hurdle when they faced a legal battle for four years for the incorporation of the airline. They went through the battle and won against local officials over their refusal to relocate from Dallas Love field to the newly acquired Dallas Fort Worth regional airport. According to Thompson, Strickland and Gamble, (2004), Southwest Airlines emerged victorious in a united states government investigation against Braniff and Texan International conspiracy to put southwest airlines out of business.

The company’s performance has been outstanding for the years that have passed since it adopted good customer relation strategies. The rate of income has the company consistently ranked in the first position in the market share in about 80 to 90 percent of the top 100 routes (O’reilly & Pfeffer, 1995). In the year 2000, the airline’s market share was 9.4% despite being in an industry that has vulnerability to economic cycles and swings in bottom line performance. Southwest has raked in profits every year since its inception in 1971. It posted a profit increase of 1.0% in 2000, from what it had posted in 1999, which was 5%.

The consolidated operating expenses for the year 2002 increased by $181 million compared to the 5.5% increase capacity. Changes in the operating expenses for the airlines are driven by changes in available seat miles. This points out the fact that South west’s position in the industry is competitive. The market has achieved high market shares, strong strategies and effective management. The information is always communicated to customers and employees through the internet, advertisements, annual reports and annual employee auctions. A high quality of customer dedication is the company’s mission and they deliver the best terms possible (Ragland, James & Zimmerman, 1990)

2002 (cents) 2001 (cents) Change (cents) Change (%)

Salaries, wages, benefits 2.89 2.84 0.5 1.8

Fuel, oil 1.18 (.07) (5.9)

Maintenance .57 .61 (.04) (6.6)

Agency commissions .08 .16 (.08) (50.0)

Aircraft rentals .27 .29 (.02) (6.9)

Landing fees .50 .48 .02 4.2

Depreciation .52 .49 .03 6.1

Other 1.47 1.49 (0.20) (1.3)

TOTAL 7.41 7.54 (1.3) (1.7)

Table 1.1: South west’s current performance.

Competitive advantage of Southwest Airlines

The employees of the company pay lower salaries than their competitors and work for more hours (0’reilly and Pfeffer, 1995). However, the company offers collective rewards that involve profit sharing and stock ownership. Flight attendants and pilots are paid by the trip. The flight attendants are the second highest paid in the industry. The senior most employees earn higher salaries than their juniors. In the entire Dallas, the salary of the Chief executive officer of Southwest airlines is one of the lowest. The company offers employees a discounted stock purchase program in which 85-90% of employees have stock in the company. (Blanco, Shimoda and Lehman, 2005).

Company’s Utilization Strategies

In terms of utilization, the company ensures that each plane flies extra flights per day and thus saving on the extra maintenance costs that would occur. This also saves on training costs that would have been met when trained manpower to man the planes. The utilization of cost effective revenue streams has been critical to the success of the company. In 1995, Southwest Airlines was among the first companies in this trade to have a website. In the years that followed, 70% or more of the revenues were collected from online bookings,

Due to their outside the box thinking and their proactive risk management, Southwest gained a reputation that included hedging of fuel to curb fluctuation of fuel price. Thus, the company has managed to operate at a low cost compared to their competitors (Ragland, James and Zimmerman, 1990). The multi tasking of crews has been instrumental in ensuring that turn around time is short. There are instances of pilots cleaning the plane wing on the ground while assisted by the on air crew. An aircraft has an average of 94 employees, compared to their competitors who have 130 employees. On average, Southwest airlines serve about 2500 passengers per year while their competitors serve about 1000 passengers.

The company still dominates in the field of triple crown awards due to the fact that they deliver the best in terms of time performances. They also have the least number of lost luggage and least customer complaints. The level of their fates is constant and simple (Koenig, 2005). There are no interline connections, and there have been the introduction of code share in recent times.

Building an organization capable of better strategy execution

There are various components that are employed in the strategy execution process. Southwest company has incorporated the principal components In ensuring that they have built a company that executes strategies in the industry (0’reilly and Pfeffer, 1995). There have been the organization of staff with the ability of both managers and employees capable of executing strategies. This has been done through the assurance of employees that they are free to do what they see relevant and beneficial to the company without following the channels of formal communication.

Southwest airlines have tied rewards and incentives to the achievement of strategic and financial targets. This is aimed at motivating employees so that they can deliver effectively what is expected of them. The company has ventured into organizing value chain activities and business processes and establishing lines of authority and relationships.

There is also the allocation of sufficient budgetary and other resources to the strategy execution effort. This comes in handy when building the organization so that there will be no barriers in executing strategies. There have been also the principle of institutional policies and procedures that facilitate strategy execution. The company has also adopted practices and business processes that drive continuous improvement in strategy execution activities.

Managing internal operations at southwest airlines

Southwest has experienced 30 straight years of profitability have been the best in customer relations and was named in 2003 as the most admired company in the united states. This growth and profitability have been credited to the swiftness and effectiveness of operational management in the company (Blanco, Lehman & Shimoda, 2005). All of the company’s operations have been managed as per the demands of the situation and the view of how they are going to affect the company. For instance, when other airlines shifted to DFW Airpot in 1974, the management decided to tally a little longer in the place that they were situated , and this came as an instrumental operational decision that ensured a monopoly at the place. According to economists, the business model of the southwest company revolves around providing reliable and safe as well as short distance air service at the lowest fare possible. The company believed that leadership should not dilute the quality of service that they offered. Analysts who have tracked southwest closely are of the opinion that southwest approaches are similar to that of market leaders in the fields and companies that are at the top of their trade.

Southwest airlines pursued a blanketing strategy that was similar to that of Wal-mart, a famous and successful us retailer (0’reilly and Pfeffer, 1995). In case the company decided to operate flights to a particular city, its scheduled flights from the new city with another two or four destinations that it was previously operating. The company never commenced on flights between two cities until they got planes and a workforce that were necessary to operate six flights per day. Southwest has developed competencies in turning around aircraft quickly, borrowing the strategy at Toyota whereby they made cars in cost effective batches.

The company planned to connect with daily new nonstop service between Spokane and Las Vegas from January 2004. It also planned to start new services from Philadelphia from May 2004 with daily non stop services to Chicago midway, Las Vegas.

Corporate culture and leadership

At the southwest, leadership is looked at as a process that can be carried out at all organizational levels (Ragland, James and Zimmerman, 1990). . This organization takes leadership at the front line as a key player to its success. No, any other airline has supervisors per Frontline employee then southwest airline. This approach is contradictory to the thinking of many contemporary management thinkers who view supervisors as perpetrators of bureaucracy who only get in the way and blocks the free flow of good leadership. Here, they are taken to play a very important role in strengthening coordination through training, counseling and actual participation in the Frontline work. They will not only look into the performance of employees and disciplinary measures but will also focus on problem solving and motivation. They view their subordinates as clients from within the organization.

According to the airline’s CEO, Herb Kelleher, there is no need to spoil the good work with undeserved seriousness. The CEO has influenced the attitude of the workers of the firm such that they enjoy what they do as a hobby not necessarily as an obligation (Blanco, Lehman & Shimoda, 2005). He has managed to get unions to identify personally with his company. He leads from the front and communicates directly with the workers. He reminds them that he is betting on their minds, their spirits and their hearts continue the success of the company. The human resource of the company has adopted the name of the people’s department and always stresses compassion and common sense as two of their core values. The workers have been permitted to break rules if the need arises.

The company’s spirit is creative and not too loose, and it is also strong on values of teamwork and positive minded. The spirit is also non-conformist, a little outrageous and extroverted. There are many lessons that can be drawn from the corporate culture and leadership at southwest airlines. This is because the company has developed in great proportions and are role models to other companies that operate in the same field and in a similar capacity. Underestimation should not exist on the leverage that corporate culture and human resource can provide for strategic advantage and change. Employees are the face of the company and should be brought in heart and mind and say and practice what the company says in regard to their values (0’reilly and Pfeffer, 1995).

To put the energies of individuals and the company is a good and beneficial step in the thriving and profitability of the firm. It helps in figuring out the way to obtain improvement and avoid wastage in fear of competition that come from rivals. The other lesson is that an intracompany family spirit and atmosphere of trust and meaningful interpersonal connections go a long way in enhancing motivation and satisfaction in the job. This is directly related to the bottom line. Growing too fast can hurt the family feel of the company; thus it should be avoided in all situations.

Opportunities and threats

The direct competitors of Southwest airlines are seven main low cost carriers who operate domestically (Blanco, Lehman & Shimoda, 2005). The carriers have adopted strategies and policies that resemble those of the Southwest, thus making the services that are offered by southwest common. However, South west’s domestic unit revenues are strong, and the company ranks third of the operating revenue per available seat mile among the seven low-cost carriers. In relation to the profit margins, the low coat carriers perform strongly as a group in the sector of domestic operating expenses per available seat mile.

The greatest opportunity of the company is related directly to its greatest strength which is to continue to develop its low cost position in the airline industry. However, in order to stay ahead of the competitors, the company must lay emphasis on maintaining low cost flying and the brand association that has served it well to date. In 2002, no fare exceeded $399. In August, the same year, the company reduced the amount lowering last minute fares while at the same time maintaining the full schedule of of frequent flights.

Southwest is capable to expand geographically as the market it holds has substantially expanded. It could begin to target large city markets with their strong brand name. This is because there have been an increase in cities and networks to which it is linked.

The company’s threats include cost of operations (Ragland and Zimmerman, 1990). For instance, issues such as labor rise caused a damaging round of negotiations with the flight attendant’s union. They should also be wary of other competitive factors such as reduced frequency of flights as it could lower the number of passengers choosing them.

Conclusion

Southwest Airlines offers a good example of how to get an employee buy into the growth of a business. The secret behind South west’s success has been asset utilization and low variable costs. These factors have been reinforced with a strong culture of the company to align values, strategy and structure. This way, Southwest has sustained a competitive advantage by unleashing potential in their labor force.

Recommendations for Southwest Airlines

In order to remain competitive and stand competition from other players in the industry, there are some steps that the company should take. They include the following recommendations:

a) Improvement of employee-management relations so that they can avoid disruptions in contract negotiations. This will ensure that the company does not stop functioning due to issues like workers’ strikes.

b)There should be the introduction of structured learning programs that are continuous over time so that there can be retention of employees for longer time spans.

c) The company should adopt services and also specialist who are capable of catering for the passenger population basing it on their demographics so that they can increase their share in the market.

d) Pursuing any market opportunity that comes close to them at any time would be an added advantage to the company’s functionality and profit margins.

e) The company should come up with campaigns that are aimed at attracting more customers. For example, the situation where a customer buys one ticket and get another one free of charge.

f) In relation to technology, the company should pursue the opportunity that have been offered by internet marketing in aggressiveness so that they can be able to reach a wider customer base.

g) The hedging of prices that are related to fuel should continue, as well as increasing the turn around times per day.

Southwest Airlines are destined to remain at the top of its market area of concentration if at all it continues operating with the efficiency that it has demonstrated to date. The services that have been offered that have been of high quality will ensure that their profitability is constant and that the company faces no major financial crisis.

References

Carlos Blanco; J. Lehman and N. Shimoda (2005). “Airlines Hedging Strategies:

The Shareholder Value Perspective.

Koenig, David (October 21, 2005). “Airlines That Hedged Against Fuel Costs Reap Benefits”.

The Washington Post. Retrieved May 23, 2010.

O’reilly, C., &Pfeffer, C. (1995). Southwest Airlines: Using Human Resources for

Competitive Advantage. Stanford, CA: Graduate School of Business, Stanford University.

Ragland, James and Martin Zimmermen (1990). Airline changing jets tax

Status Southwest’s maneuver will cut local revenues. The Dallas Morning News. April 12 1990. Retrieved on May 3, 2013.

Thompson A, Strickland A.J., Gamble J. (2004). Crafting and Executing Strategy:

The Quest for Competitive Advantage, (14th. Ed.). ISBN 0-07-288444-4. McGraw Hill.