Knowledge Area Module (KAM) I



Southwest Airlines Analysis

MICHAEL BENNET

ANTHONY JOHNSON

RICHARD LUKENS

TERRY NAMKUNG

STL435 – Strategic Planning

March 30, 2014

Whitney Stevens

Southwestern College Professional Studies

Abstract

For a company to be successful in their industry they have to complete an analysis of the industry. Within this analysis, the company will look at their own company to see what the strengths and weaknesses of the company are. They will also look at what opportunities and threats that are in the industry that their company needs to address. With a thorough analysis, a company can then develop a sound strategic plan for the company. In this paper, the group conducted a case analysis on Southwest Airlines. The group will discuss the current mission and vision statement of the company and the suggested revamped statements of the group. They will also discuss the strengths, weaknesses, opportunities, and threats for Southwest Airlines. Finally, the group will provide suggested strategies that they believe the company should take to ensure future growth of the company.

Executive Summary

Southwest Airlines has secured a prominent and esteemed position in the United States Airline industry as a leader and market innovator. Never before within this industry have we seen a company so securely entrench and endear themselves into the American public as Southwest. Some examples of their accomplishments can be extracted directly from their 2014 Media Kit; #1 Low Cost Carrier in North America (2011), #1 Airline Brand (2011), #1 Domestic Carrier (2012), #1 Most Admired Airline (2011). In addition to the above, and arguably the most esteemed accolade; Listed at #7, Southwest is the only airline listed in the top 50 FORTUNE magazine most admired companies (2014 Media kit, 2014).

As indicated above, Southwest has, and continues, to project and justify itself as an industry leader and innovator. The following Case Study will outline and define Southwest’s Strategic business culture and current operability by examining everything in regards to their strategically crafted Vision and Mission Statements, Internal and External assessments, and discussion on their current Strategy Formulation and Implementations factors.

Within the vision and mission statements segment, the currently published statements will be explored and expounded on with regards to Southwest’s published intents and corporate direction. Specifically, attention and detail to the expanding mission of Southwest as it expands internally (Air Trans), and externally (International Route additions). The segment will conclude with a restructured and revised vision and mission statement that reflects the current Southwest corporate culture exceptionally, and encapsulates its strategic growth through long term relationships within a new motto.

The internal and external assessments will clearly and concisely expound on Southwest’s capabilities, opportunities, challenges and strategic initiatives of which they intend to move into the future. Specifically discussed are the current trends within the airline industry, market positions, market strategy, general firm value, initiatives to stay relevant to the customer, and a final overall assessment of each factor.

The Strategy formulation and implementation segment will clearly outline the analytical aspects of Southwest. This will include a look at their SWOT, SPACE, BCG, IFE/EFE, Grand Strategy, and QSPM matrices. We will also examine the applications that the EPS/EBIT analysis, projected income statement and balance sheet have in relation to the projected financial ratio.

Southwest has enjoyed year over year increased profits for 33 straight years running, and shows no indications of slowing down or breaking that streak. With a young fleet of planes, and the newly acquired asset of Air Trans, their inventory, routes, and personnel to expand service and breadth of coverage is more significant than any other competitor. Southwest has enjoyed paying down over $1 billion in long term debt, while offsetting the global fuel rate increases. Southwest’s coveted and verified methodology of direct route systems vice the industry norm “hub and spoke” has allowed it to reasonably and strategically add routes that are international in nature, and strategically positioned for growth.

Southwest truly holds a unique and coveted position within the United States Domestic Airlines market which has been directly reflected financially within its highly touted revenue streak, emulated corporate culture which embraces customer service fanatically, and the uncanny ability to capitalize on the average family and community.

Southwest Airlines Analysis

In today’s travel industry, there are many different means of the transportation used to conduct a person’s travels. The airline industry had over eight million departures in 2013 (RITA, n.d.). With the rising cost of fuel and the rising prices of tickets for travelers, this group decided to conduct their analysis on an airline company. The airline that this group chose to conduct an analysis was Southwest Airlines. Southwest is an interesting company because they are low cost carrier, but have had forty-one consecutive years of profitability in the airline industry (yahoo finance, 2014). In this analysis the group conducted both and internal and external assessment of the company. The reader will see that the group used several matrices that they used to develop a strategy for the company as well as an implementation plan for the strategies to be used by the company. Finally, the group will show the expected financial and nonfinancial objectives that they recommend for the company and will compare the group’s strategy with that of the current strategy of Southwest Airlines. First, the group will discuss the current mission and vision statements of Southwest versus the improved statements that the group has developed.

Mission and Vision Statements

Mission and Vision statements are constructed and implemented to achieve two results. The first, in the Mission statement is “What is our business?” and the second via the Vision statement is “What do we want to become?” To achieve these results, managers, strategists, and differing levels of management should all be involved, to varying degrees, with assessing the business from their respective perspectives and then constructing the messages. Southwest currently has an outstanding Mission and Vision Statement which was widely considered to be excellently positioned and focused when written in 2007 and is still, for all intents and purposes, effective . However, as noted by David, “…firms that develop and systematically revisit their vision and mission statements, treat them as living documents, and consider them to be an integral part of the firms culture realize great benefits”(David, 2013, p78). It is assumed that through this exercise, the possible need to change, mature, or maintains the current mission and vision statements of Southwest can be assessed and acted on if needed.

Mission Statements

Southwest “cheats” the standard by incorporating three separate subsections to its mission statement to expound on their statement. Within this paper, the group will follow the original intent of a statement as described in our text. Using this premise as the guide, the current Southwest Airline respective mission statement is:

The mission of Southwest Airlines is dedication to the highest quality of Customer

Service(1)(2) delivered with a sense of warmth, friendliness(8), individual pride(7), and

Company Spirit(7). (Southwest, 2014)

The current Mission statement incorporates four of the nine components accepted within the industry. The following is an improved mission statement that incorporates seven of the nine components.

Our(9) mission at Southwestern Airlines is to provide extraordinary customer service(1),

unsurpassed affordability(7), and defined efficiency(5) to our extended neighbors and

family(6). We decisively embrace and pursue our historic and future responsibilities (7)

to our extended family through engaged first-in-class service, responsive innovations

and enhancements(2,4), standard setting safety, efficiency, stewardship and inspired

community spirit(6,7,8,9). OUR Family, OUR Community, OUR Pride!

The group believes that the revised mission statement is a better statement because it addresses multiple components within the desired industry standard. The revised statement adds another five components to the statement which address systemic weaknesses within the past few years identified by Southwest’s placement within various surveys such as “This is the happiest airline in America” (MSN Money, 2013) where they fell to #4/5, and “America’s Best Airlines” (Forbes Digital, 2013) where they are ranked #8/10. The revised statement also incorporates within the text, the three separate expanded sections that Southwest currently adds.

Vision Statements

Southwest did not have a separate vision statement. The below statement is what he group extracted from the current mission statement that Southwest had on their website:

Southwest Airlines’ vision for a sustainable future is one where there will be a balance

in our business model between Employees and community, the environment, and our

financial viability. In order to protect our world for future generations and uphold our

commitments to our Employees, Customers, and other Stakeholders, we will strive to

lead our industry in innovative efficiency that conserves natural resources, maintains a

creative and innovative workforce, and gives back to the communities in which we live

and work. (Southwest, 2013)

The following is this group’s revised Vision Statement:

The vision at Southwest Airlines is to foster a mutual support community consisting of

our employees, customers, and stakeholders which progressively nurtures and develops

future generations through;

• Exemplary multi-dimensional environmental custodianship;

• Responsible, innovative and efficient financial viability;

• Creative, inspiring, and enduring initiatives that lend support to our local neighborhoods and global community.

The inclusion of the vision statement into the mission sections gives the perception that Southwest does not necessarily place much emphasis into the “What do we want to become” aspect of the statements. It is this group’s belief that by creating a standalone vision statement, a business is able to show that they have a current intent and focus, as well as a future direction in which to guide themselves. It is through this mechanism that the business as a whole projects a directed intent towards maintaining longevity, relevance and viability. The revised statement of the group propels the business from the present into their future, maintaining the corporate roots and developing the means for those roots to both deepen and expand.

Revised Statements Compared to Competitor

To provide validity to the group’s revised mission and vision statements the group was instructed to compare the new statements with that of an industry competitor. However, as the group found out, the other airlines that we researched also did not have a separate vision statement. Therefore, the group only compared the revised mission statement with the mission statement of United Airlines.

Compared Mission Statements

Much like Southwest, United chose to have a mission statement and then several supporting and expanded subsections to the statement. Included below are the actual current mission statement of United and immediately thereafter the revised Southwest statement:

United is committed to supporting the rich diversity of ideas, experiences and cultures that reflect our co-workers, customers and business partners. By working together with dignity and respect, United strives to create an inclusive work environment where all co-workers are equally empowered to contribute to our success. (United, 2014)

Vice

Our mission at Southwestern Airlines is to provide extraordinary customer service, unsurpassed affordability, and defined efficiency to our extended neighbors and family. We decisively embrace and pursue our historic and future responsibilities to our extended family through engaged first-in-class service, responsive innovations and enhancements, standard setting safety, efficiency, stewardship and inspired community spirit.

OUR Family, OUR Community, OUR Pride!

As discussed earlier, the inability to convey a clear, concise, and direct statement projects the image that the business is wildly diverse and possibly not concentrating on its core values. The United statement discusses work but not what kind, and encourages sharing of ideas but does not explain to what shared goal other than the ambiguous “success”. In contrast, Southwest’s revised statement reflects who they are (airline), what they are (customer service, affordability, efficient) and who they want to do it for (neighbors, family, community=stakeholders). This group believes that the revised Southwest statement provides a better-constructed and projected mission statement.

Strategic Application

Interwoven throughout the construction of the revised mission and vision statements is the underlying theme of family, togetherness, value and community. This decisive undertaking is synonymous with Southwest’s roots, corporate image and corporate intent. This theme is conveyed by way of the highlighting of the word our. The revised statements will re-engage the employees, stakeholders, and customers into a joint, mutually supporting and beneficial endeavor.

As Southwest grows through acquisition, and expanded routes, maintaining its core values is tantamount to sustaining their corporate image and unique competitiveness. Over the past 10 years, Southwest has engaged in several disruptive events (loss of amenities, acquisitions, and expansion, union strikes) and has possibly created an atmosphere of discontent or disenfranchisement within its organizational structure. The new, revised “OUR” symbolism may provide a vehicle to reunite the corporate intent with the stakeholders that can make that intent a reality.

Internal Assessment

Southwest Airlines is a company with a stellar rise and a solid brand (David, 2013). However, several weaknesses could undermine any potential strategy they wish to employ if not handled carefully. This internal assessment will cover: the company's overall financial ratios, organizational layout and improvement, current market position, advertising strategy effectiveness, cumulative strengths/weaknesses, digital presence, and a full look at the matrixes used to assess the internal position of the company. Only by knowing where a company is can leaders make the choices necessary to put them in a better place.

Financial Ratios

Financial ratios are a determining factor in the overall health and performance of a company (David, 2013), as they can provide information that is needed for strategic planning using information gathered from the hard data provided by the company. Southwest has several ratios that shed light on where the company is financially, but two of the most important ratios are the Gross Profit Margin Ratio and the Total Asset Turnover Ratio. Both ratios inform on an important area of the Southwest’s overall economic health.

The Gross Profit Margin shows an overall increase in profits over three consecutive fiscal years. This is important as it informs that the company is improving from its previous performance and increasing its total revenue. Strategic planning relies on knowing if the current plan is yielding results (David, 2013), which this ratio shows is the case. The company is getting a solid return on its investment.

Southwest relies on its fleet of aircraft to perform its missions, and the Total Asset Turnover Ratio informs on how often assets have to be replaced. This ratio is low, which means that Southwest does not have to invest the significant capital required to purchase more airplanes than it originally projected for. This allows the company to spend more money in other areas of the business that may need improvement.

Organizational Layout

Southwest Airlines has a functional organizational layout, with departments broken up by specific function and led by an Executive Vice President. The three-tiered structure has allowed the company to have solid growth, while maintaining strong lines of command and control (Fig 1.1). This structure has allowed the company to maintain overall control of the company as it expanded from a small regional airline into a more national player. However, this structure has isolated divisions, which can keep effective lateral communication from occurring.

Communication issues can be resolved by adopting a divisional structure based on overall operations (Fig 1.2). The company needs a strong Chief Operations Officer that can handle the day-to-day logistics without having to engage in a large amount of consultation with other divisions of the company. This will allow all players the flexibility needed to expand in order to keep up with an ever-changing market.

Market Position

How a company is performing in comparison to its competitors can be charted using a market position map (Fig 1.3), which can provide relational spacing, based on several different factors. These maps are useful, as they can give a visual picture to what might otherwise be pure information. Being able to visualize where a company is in relation to its peers will allow leaders to make strategy decisions with spatial relevance.

Southwest Airlines can be evaluated based on the factors of Cost and Quality, with scales ranging from Poor to High. This allows for the company and several of its competitors to be grouped together based on common criteria. Southwest ranges on the low side of the cost allowance, but is on the high side of the quality table (Fortune, 2011). This allows the company to advertise as a low cost, quality alternative to the bigger airlines.

The company is billed as a low cost airline, it is a positive factor that it outperforms several of its competitors on price. While several of Southwest’s competitors outperform it in regards to quality, it is not beat when comparing price and quality combined (Fig 1.3). This allows Southwest to corner the market in the low-cost airline demographic (David, 2013). Customers will sacrifice quality for a lower cost flight, but there needs to be some equilibrium, in order to avoid a customer exodus.

Marketing Strategy

A dynamic marketing strategy is important for a company to be successful. If they cannot efficiently sell their brand and service to consumers, they will not survive. Southwest Airlines has a marketing strategy that is focused on conveying three key ideas to their customers: low cost fares, quality service, and a customer centric approach (Southwest Airlines Co., 2014).

Since its inception in the 1970's, Southwest has cornered the market by being a low cost alternative to the higher priced commercial carriers that are their direct competition. This has allowed them to present and market the airlines as affordable for people who otherwise could not normally afford to fly. Even though Southwest may not be the cheapest airline on any one given day, its reputation as being an affordable alternative is an effective marketing after effect.

Southwest has the fastest turnaround of any single airline in the domestic United States. Southwest readies recently landed aircraft for flight again quicker than their closest competitors did. This has allowed the firm to not only take off faster, but also express to their customers that Southwest is clearly engaged in getting them to their destination as fast as possible. This translates directly into customer loyalty, generating a revolving customer base (David, 2013). The company has been able to translate this loyalty into being named an admired company for several years running (Fortune, 2011).

The customer centric approach is also reflected in Southwest's refusal to follow the lead of their competition and start charging for checked luggage on flights (David, 2013). This was seen as a significant revenue stream by airlines, one that Southwest refused to tap into to. This refusal to start charging more has driven new revenue to them, as customers have been fleeing the rising fees from other sectors of the industry. The company took advantage of this by advertising heavily their policy regarding checked baggage and additional fees. Their marketing strategy is paying off, as the company has posted rising revenues in each of the previous three fiscal years (Southwest Airlines Co., 2014).

Operations Map

Where a company bases its operations out of is an indication of what strategy it has to approach in order to maximize overall effectiveness of the company. Southwest Airlines is geographically spread across the continental United States, as its mission as a low-cost airline requires it to operate at multiple airports (Fig 1.3). While the company originally began operations solely in Texas, it has since spread out to several airports around the country. Southwest also operate on a “Direct Route” model (David, 2013), instead of the more traditional “Hub and Spoke.” While this allows the company to be able to focus on distributing its operations for maximum efficiency, having resources staged at so many separate locations invites several logistics concerns, as more local maintenance teams have to be employed in order to keep the fleet operational. Southwest may need to consider transitioning operations into a more traditional layout during the implementation of the strategic plan.

Digital Presence

In the last twenty years, the way that businesses market and interact with customers has undergone a dramatic shift (David, 2013). As the world has become more interconnected via the internet, companies have invested in their digital presence for reaching their consumers. Having a presence online is important for not only conducting business transactions, but also managing the company’s appearance and social reputation. Word of mouth has always been a major player in a company’s reputation, with customers spreading positive and negative information about the company, shaping the reputation of the company in the process. Managing this in a digital way is a lesson Southwest learned in 2010, when they found themselves embroiled in a negative Social Media campaign (McCarthy, 2010).

Kevin Smith, a Hollywood Director, was boarding a Southwest flight when it was determined that he was in violation of their “Customer of Size” policy (McCarthy, 2010). This policy states that any customer who is too large to comfortably put down their armrests must either purchase two seats or be removed from the flight. While this is intended for the safety and comfort of all passengers, many detractors have labeled it discriminatory (McCarthy, 2010). The cabin crew removed Smith from the flight and offered to reschedule him on a different one with more room later in the day. However, Smith took to his Twitter account and sizeable following to vent his frustrations about the brand. This led to an immediate backlash against Southwest Airlines, damaging their reputation in the process. While Southwest’s social media team tried to respond to the incident, it was not effective enough to stem the backlash.

Southwest needs to improve how they handle digital media interactions to avoid having a strategic decisions undermined by poor public relations. This process has increased significantly with the advent of social networking, which is why companies need to have a capably managed digital presence to both promote and protect their public reputation. (McCarthy, 2010)

Value of the Firm

The value of Southwest lays with the fact their reputation, financials, and overall position in the market is strong. All three factors combine to create a brand that has worth to all stakeholders involved. Southwest is in an overall strong position financially, as they have relatively low debt with solid revenue streams (Fig 1.4). This has allowed the companies to not only invest in their continued development, but to return dividend to shareholders (David, 2013). Their equity and price returned per share are high for an airline that size, and their debt obligations are falling (Southwest Airlines Co., 2014). This makes the firm an attractive bid for investors.

Southwest Airlines has an overall strong market position (Fig 1.4). Starting as a small regional airline in the 1970’s let them carve out a section of the market that was previously underserved. A low-cost airline had, up to that point, not been a reality. Flying was still considered a luxury that was to be used for international and long-distance trips, it had not been thought of as a service for regional transportation (David, 2013). Southwest was able to change this dynamic by offering a low-cost, local service to regional consumers. They were the first to attempt this, which gave them a significant stranglehold on the market for several years.

Strengths/Weaknesses

Southwest has a wide array of both strengths and weaknesses (Fig 1.5). These play into how the company has approached strategic decisions in the past and how they plan to move forward in the future. Capitalizing on the relative strength of the company and mitigating the overall weakness that it faces should be a priority of the company as it moves forward. This will allow the company to face renewed competition in the low-cost airline business from a position of relative strength.

IFE Matrix

The Internal Factor Evaluation (IFE) matrix is an excellent tool in weighing the overall strength and weaknesses of the company. Southwest has several things in its favor, but the challenges it faces could easily overwhelm it, if not handled correctly. Southwest’s IFE (Fig 1.6) provides an overview of the relative weight of a variety of factors that influence the company going forward. Southwest needs to especially focus on the increase in jet fuel prices and the cost of modernization as it moves forward in deciding and implementing a strategic plan.

Overall Assessment

In recent years, the market has become saturated with the low cost airline model, and Southwest is finding that it has to compete more to stay relevant in the market. They are focused on keeping their costs down in order to continue attracting new and returning customers, while also ensuring that they keep their overall strong market position. Improving efficiency will return more money to the stakeholders, while keeping costs down for the consumer. This double effort will help Southwest keep its lock on their overall position in the market. Internally, the company is in a good position with low obligations and significant cash on hand for expansion.

External Assessment

The airline industry is a very competitive industry. Southwest Airlines is a low cost carrier in the industry, which means that they concentrate their airlines on domestic flights at a lower cost than the major airlines. There are several competitors in the airline industry. Two of the main competitors in the industry are American Airlines and Delta Airlines. These two airlines are major airlines and unlike Southwest Airlines, they offer international flights. The recent merger between American Airlines and U.S. Airways made it the largest air carrier in the world (Wallace, 2013). This merger takes American Airlines to over one hundred thousand employees, generating almost seven thousand daily flights to three hundred and thirty-nine destinations in fifty-four countries (finance yahoo, 2014). Delta is also a major airline, which has over seventy-five thousand employees, over nine hundred aircraft (finance , 2014). Delta flies fifteen thousand daily flights serving 322 destinations in 59 countries (Delta, 2014). Southwest has other competitors that are more in their area of the industry of low cost carriers. These competitors include JetBlue and Alaska Airlines. However, these two airlines are well under Southwest’s net income of seven hundred fifty-four million dollars, with JetBlue’s net income of one hundred sixty-eight million dollars and Alaska Airline’s net income of five hundred eight million dollars.

Competitive Profile Matrix

The group developed a competitive profile matrix (Figure 2.1) for Southwest using American and Delta airlines as their comparison. The group used twelve factors in the matrix that they thought were important in the airline industry. The top three factors (price competitiveness, customer service, and customer loyalty) all revolve around the customer, which this group believes is the determining factor to success in the airline industry. The matrix shows even though Southwest Airline is a smaller airline, it still is very competitive in the industry.

Trends in the Airline Industry

As the economy starts to normalize, the airline industry has recovered close to the pre-recession levels of 2008 (PWC, 2013). Since 2008, the industry has decreased the number of flights by eight percent with only a one percent reduction in total passengers (PWC, 2013). Although fuel prices dropped thirteen cents from 2012, the airlines are still paying seventy-three cents more than they did in 2010 (RITA, 2014). This is requiring the airlines to become innovative when cutting fuel costs. One way the airlines are doing this is by cutting the weight of the aircraft by redesigning the cabins with lighter material than has been used in the past (Clark, 2013). The airlines has also been saving money by charging passengers for their checked baggage and some low cost carriers are even starting to charge for carry-on baggage.

External Factor Evaluation (EFE) Matrix

The group developed an EFE matrix (Figure 2.2) using what they thought were twenty of Southwest’s major opportunities and threats in the industry. As the reader can see by the weight factors, the group believes that the biggest opportunities for Southwest Airlines is the increase of over thirty-eight million international travels from 2012 to 2013. Another great opportunity for the company is the availability of one hundred forty-eight gates at major U.S. airports that American Airlines had to give up as part of their settlement with the U.S. Department of Justice (Department of Justice, 2013). The major threat that the group saw for the company was the recent mergers between other major competitors in the industry. The mergers give these airlines an instant advantage at major airports with the availability of more gates. Another major threat is the prices that airlines pay for fuel and the gate fees that airlines pay at airports. Even though Southwest Airlines is doing well in the industry, the reader will notice that according to this group they are below average in taking advantage of their opportunities and responding to the industry threats that they face. The group believes that the company could be doing better and will describe their strategy for the company in the next section of this analysis.

Strategy Formulation

In order for a company to develop a solid strategic plan, they have to conduct research not only on their company, but also on the industry. After they have conducted the research, the strategists has tools that can help them put the information in a more useable form that will allow to get a better picture of where the company is currently and where they could be in the future. The following is a description of the different matrices that this group used to formulate our strategy for Southwest Airlines.

SWOT Matrix

The Strength and Opputunity sector in the matrix shows the ability to purchase tickets using smart phones and mobile devices really hit home with consumers. The process or idea helps with the strategic implemenation of convenience and ease for the customer. The next item would consist of charging for second baggage. Currently the company does not charge for the first two bags, that reduces profits for baggage operations. Finally, the SO sector the reader can observe that company’s expansion comes on the border of international flying. Even though Canada is considered North America many travel there from the CONUS. (Figure 3.1)

In the Strength and Threat sector, the reader can observe that to the rest of the industy, the acqusition of Frontier and JetBlue can help with Southwestern’s expansion to the international flying. Also, with the high cost of fuel, airline refinery fuel can also lower the operating cost of the jet liners that demand one of the most fuel guzzling planes in the industry. Making it cheaper and richer in quality. Finally, in this section the website is not as appealing than competitors, but gain more business than most. Overall, expanding the company to becoming more than a “penny pincher” airline can help promote more flights and consumer business. (Figure 3.1)

The Weakness and Oppurtunity sector shows that Southwest does not serve food, snacks, or beverages. That in turn can be an oppurtunity because it will be less waste and sewege costs. In essence consumers want business and first class seating, but can not offer that with the budget crises and the economy shortfall in the Continental U.S. Overall, in order to keep costs down, the company has to maintain the low fare standard and one way of doing that is not including the ammenities or entertainment within the Boeing planes. (Figure 3.1)

Finally, in the Weakness and Strength sector, the offset of providing first class or business can be beneficial or a burden. The type of customers Southwest attracts are business and middle class workers that are on the convenience fast pace. The weakness could be not filling all the business class seating. Lastly, offering WI-FI, satellite radio, and Video on Demand can be appealing to the consumer, but the cost might not offset the demand. (Figure 3.1)

SPACE Matrix

In the SPACE Matrix (Figure 3.2), you can see that the X-axis is 3.2 and the Y-axis is 1.2, thus showing the aggressive growth with high leverage, liquidity, working capital, cash flow. In the industry position, Southwest’s growth potential with domestic flights compared to international flights have stablized the company’s profit potential. The resources utilization can also showcase the use of the Boeing 717/737s and the expansion of airports to major hubs. In all there are some downfalls the company’s customer loyalty is only firm from low pricing. Any raise in price due to oil can affect the brand of Southwest. Other items that can be explained are the barriers of entry into the international market. With little experience no company will merge with Southwest or assist in getting international license or policies.

Boston Consulting Group (BCG) Matrix

Southwestern Airlines made $805 million dollars in profits within the Continental United States. As the observer, the profit margin shows that the within the (Star) because of the one dimensional flying accomplish within the 50 states. The chart is also lopsided with the Question Mark area because the company does not have international flying. There are many semi internation flying, but not enough to put a dent in the database because they are still considered within North America. (Figure 3.3a,b,c)

Finally, the profit margin between men, women and children is not too drastic because of the age difference. The men make up 80% of the profit margin within the company, 70 % within the women category and 10% in the children category. There are many discriminating factors on flying including economic reasons, regional, business and coach, regional flying compared to International flights (Figure 3.3a,b,c)

Strategy Implementation

Implementing the right strategy for any company requires careful planning, as large companies have several intrinsic stakeholders that all require attention. Careful thought has to be given when implementing a new strategy, as any small move can affect all of these individual entities that have an interest in the company. When the right strategy has been formulated, and the company is ready to proceed, a very clear game plan needs to be built-in order for the company to make changes that will cause the least amount of chaos for the stockholders. Examining the financial standing of the company will allow for the proper implementations. Southwest Airlines has a lot to gain by implementing the proposed strategy, but it needs to do so in a careful manner.

EBIT/EPS Analysis

For the company to properly put in place their projected strategy, they need to have the capital to make it happen. Using the EBIT/EPS analysis (Fig 4.1) can help give the company the proper information needed to make this decision. Earnings made from the company need to be examined for their overall long-term profitability, while examining the impact these decisions will have on shareholders. Using the financial data provided by the airline (Southwest Airlines Co., 2014), a proper picture of their profitability and capital raising abilities can be graphed.(Fig 4.2). Southwest has several outstanding shares that can be leveraged to raise money to finance the new strategy that they wish to implement. Properly utilizing the revenue options available to them will allow the company the financial freedom necessary to move forward with their plan.

Income and Balance Projections

Southwest is in a strong position financially, but implementing the right strategy will require the company to invest in several new airframes and routes, which requires capital. Raising money through the sale of stock will provide the needed revenue to invest in the strategy, while not threatening the overall health of the company as it moves forward. Selling these shares will not significantly damage the overall financial strength of the company. This is necessary, as stockholders will be tempted to pull out if the financial base of the company looks in danger of cracking.

With modest investments and sales of stocks, the company is poised to show short term gains in their financial standing (Fig 4.4) This will allow the company to return an investment to their shareholders, while improving their overall financial future, as their competitors are merging to provide bigger competition (David, 2013). Keeping an eye on this fact will allow the company to avoid a potential hostile takeover and increase their odds of long-term viability.

Financial Ratios

The viability of a plan is only as good as the numbers that support the implementations of it (David, 2013). This is no more evident than in the financial ratios that are apparent in the financial returns for Southwest airlines. Using the predicted financial data (Fig4.3), it is possible to generate a predicted imprint on what the financial outcome for the company will be. Using financial ratios to predict the likelihood of the success of a plan assists in the overall implementation. Two good indicators are the ROA and ROE ratios (Fig 4.3).

Both ratios are an indicator of what the future profitability of the company will be if the strategy is implemented. Using a conservative approach to growth, and staying away from international expansion, will allow the company to focus on what it does best: fly. Investing on this technology, and reorganizing the company to improve on this function will allow the company to slowly increase its revenue over the course of several years of modest investments. Both ratios give an accurate picture of how the company is predicted to hold out over its competition.

Recommondations

Southwest should not expand to the international frontier. Southwest’s main profits and revenue came from domestic travel and flights. With the airline reducing their expansion by maintaining domestic flights would be their strong suit. Southwest is also the largest Boeing 717 and 737 contributor with 529 in fleet and service. With the one model airplane, it behooves the company to stick with short term endeavors. Mexico, Canada and the Caribbean are the only places that Southwest shoud travel to. The company received many customers and amazement because of low fairs to domestic destinations. Southwest has proven to be the brand of the economist and should remain that way. Only inflation or increase in rates to the company should be for fuel and it should not be drastic.

Group’s Strategic Plan vs Companies Strategic Plan

Southwest Airlines entire plan is to prey on the weak companies and beat them down with low prices to get more customers. According to New York Times, Robert Jordan, Southwest’s vice president for strategy and network planning, sees things differently. “We never like to say we kicked somebody out of the market,” he says. “Everybody makes their own choices.”(Mouawad, 2010) He is stating that they came in the market and offered more appealing prices, which in turn gained new customers and the people will receive what is high in demand. Once Southwest lowered their prices, many other companies could not compete. This group believes that Southwest put their competition into submission. Southwest also has an entertainment portion of each trip. Many of the flight attendants joke with the customers, sing to them and some have even rapped for them. Overall, their strategic plan for selling low price flights have generated high revenue for the company and they plan to expand to international flying.

The Strategic plan for Southwest should not be to change anything they have been doing since their origination. The flights should stay domestic and they should not try to expand into the international or global market. The Strategic plan of low air-fair, no food or beverages, and just nice customer service has worked great for the company. Sometimes, when a company expands to new horizons such as adding more to their inventory and schedules, they can become outstretched. Meaning a global or international market would not be suitable for this company. Additionally, adding more features to their planes, such as entertainment items and offering first class seating can add overhead costs.

Conclusion

The airline industry can be a very volatile. There are many different things that can have both positive and negative effects on an airline; such as fuel prices, customer’s needs, and the weather. This group conducted a strategic analysis on Southwest Airlines to determine if they are currently conducting an effective strategic plan and if the group could develop areas of improvement for the airline. Overall, the group found that Southwest Airlines is a very successful company, with forty consecutive years of profits. The group found that the best strategy that Southwest can do moving forward is to actually continue what they are doing now. The group suggests that the airline should stay with the domestic flights and not move into the international flights industry. This will allow the company to concentrate on keeping their airline in the low-airfare carrier business that so many customers have come to expect. The company does however need to invest in the technology of today by expanding their website and technology that is available on the aircraft themselves. The group believes that Southwest can make these investments in their company by selling some of their current stocks, which will allow for this expansion. The group’s overall evaluation of Southwest Airlines is that they continue giving the low cost and great customer service that they provide today.

Appendix

[pic]

[pic]

[pic]

[pic]

[pic]

[pic]

|Competitive Profile Matrix (CPM) |

|  |Southwest |American |Delta |

|Critical Success Factors |Weight |Rating |Score |

|Opportunities |Weight |Rating |Weighted Score |

|More Americans expected to travel over summer |0.03 |3 |0.09 |

|Increase of 38 million international travelers in 2013 from 2012 |0.10 |1 |0.10 |

|The Wright Amendment no longer in affect for Dallas Love Field (Allows for |0.07 |3 |0.21 |

|non-stop flights) | | | |

|148 gates opened at Major City Airports by settlement between American |0.10 |2 |0.20 |

|Airlines and Department of Justice | | | |

|Booking on line is up 10.7% from last year |0.03 |2 |0.06 |

|Airline rewards credit cards use |0.01 |2 |0.02 |

|Ability to use cell phones on aircraft |0.01 |3 |0.03 |

|More business travelers want better travel arrangements |0.05 |1 |0.05 |

|U.S. coming out of recession |0.03 |3 |0.09 |

|Other airlines have baggage fees |0.01 |4 |0.04 |

| | | | |

|Threats |Weight |Rating |Weighted Score |

|JetBlue updating their cabins. More in line with Business travelers |0.03 |1 |0.03 |

|Ticket prices have rose over $49 in last 5 years |0.05 |3 |0.15 |

|Fuel Prices up $2.22 a gallon in last 10 years |0.08 |2 |0.16 |

|Weather delays |0.05 |3 |0.15 |

|Other airlines offer business class |0.05 |1 |0.05 |

|Americans are getting bigger |0.01 |2 |0.02 |

|Airlines that offer in flight meals |0.03 |1 |0.03 |

|Other competitors flying newer aircraft |0.08 |2 |0.16 |

|Gate fees rising for new construction |0.08 |2 |0.16 |

|Mergers of big airline companies |0.10 |3 |0.30 |

|TOTALS |1.00 |  |2.10 |

Figure 2.2 – External Factor Evaluation Matrix

[pic]

Figure 3.1 – SWOT Matrix

[pic]

Figure 3.2 – SPACE Matrix

[pic]

Figure 3.3a – BCG Matrix

[pic]

Figure 3.3b – BCG Matrix

[pic]

Figure 3.3c – BCG Matrix

[pic]

Figure 3.4 – Grand Strategy Matrix

[pic]

[pic]

Figure 3.5 – Quantitative Strategic Planning Matrix

[pic]

[pic]

[pic]

[pic]

|LIABILITIES AND STOCKHOLDERS’ EQUITY | |

|Current liabilities: | | | | | |

|Payable accounts |739 |1,057 | |1,216 |15% increase |

|Liabilities that are accrued |863 |996 | |1,076 |8% increase |

|Liabily insurance |1,198 |1,836 | |2,570 |40% increase for international |

| | | | | |flights |

|Current maturities of long-term debt |505 |644 | |869 |35% increase |

|Total current liabilities |3,305 |4,533 | |5,731 | |

| | | | | | |

|Long-term debt less current maturities |2,875 |3,107 | |5,957 |2850M long term debt portion of new |

| | | | | |strategy |

|Deferred income taxes |2,493 |2,566 | |2,617 |2% increase |

|Deferred gains from sale and leaseback of aircraft |88 |75 | |75 | |

|Other noncurrent liabilities |465 |910 | |956 | |

|Stockholders’ equity: | | | | | |

|Common stock, $1.00 par value: 2,000,000,000 shares |808 |808 | |808 | |

|authorized; 807,611,634 shares issued in 2011 and 2010 | | | | | |

|Capital in excess of par value |1,183 |1,222 | |1,222 | |

|Retained earnings |5,399 |5,395 | |5,685 | |

|Accumulated other comprehensive loss |(262) |(224) | |-239 |Average of two prior years |

|Treasury stock, at cost: 35,050,991 and 60,177,362 shares in|(891) |(324) | |-324 | |

|2011 and 2010 respectively | | | | | |

|Total stockholders’ equity |6,237 |6,877 | |7,152 | |

| | | | | | |

|Total Liabilities and Stockholders' Equity |15,463 |18,068 | |35,371 | |

| | | | | | |

Figure 5.1 – Balance Scorecard

Reference:

David, F. R. (2013). Strategic management: A competitive advantage approach (14th ed.).

Upper Saddle River, NJ: Prentice Hall.

Davis, E. (2003, June). 32 years of LUV. Boeing Frontiers , 02 (02).

Delta (2014, February). Press Kit. Delta. Retrieved from



Department of Justice. (2013, November 12). Justice Department Requires US Airways and

American Airlines to Divest Facilities at Seven Key Airports to Enhance System-wide

Competition and Settle Merger Challenge. Retrieved from

Diaz, Al;. (2013). America's Best Airlines. Retrieved from

pictures/ffdj45feld/americas-best-airlines/

Forbes Digital. (2013). Investing News. Retrieved from



Fortune. (2011, December). 2011 Most Admired Companies. Retrieved from CNNMoney:



Goldman, P. (2013, December 18). 2013: The Year of the Fearless International Traveler.

Huffington Post. Retrieved from

Jones, G. (2013). Organizationonal theory, design, and change. Upper Sadle Rive: Pearson.

McCarthy, C. (2010, February 16). What Kevin Smith means for the future of PR. Retrieved from

C|Net:

Mouawad, J. (2010, November 20). Pushing 40, Southwest Is Still Playing the Rebel. New York

Times. Retrieved from



RITA. (n.d.). TranStats. Research and Innovative Technology Administration Bureau of

Transportaion Statistics. Retrieved from

Southwest Airlines Co. (2014). FY14 Form 10 K. Southwest Airline Co.

Southwest. (2014, March 10). Mission & Vision. Retrieved from



vision

United. (2014). Diversity and inclusion. Retrieved from

US/content/company/globalcitizenship/diversity.aspx

Wallace, G. (2013, December 8). American Airlines, US Airways to form largest air carrier

Monday. CNN. Retrieved from

Yahoo! Finance. (n.d.). Southwest Airlines Co. Retrieved from



xdGVyNzJxBHNlYwNVSCAzIERlc2t0b3AgU2VhcmNoIDEx;_ylg=X3oDMTByNTk1Y

2NrBGxhbmcDZW4tVVMEcHQDMgR0ZXN0AzUxMjAxMg—

;_ylv=3?uhb=uhb2&fr=uh3_finance_vert_gs&type=2button&s=LUV

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download