The Business Model Of Southwest Airlines

Published Date: 02 Nov 2017

Contents

INTRODUCTION

The Southwest Airlines Co. is the low cost airline company ranked at the top of airline industry. The company has significant issues to avoid their competitors in world area. Therefore, the customer service is treated as the main performance of the company and should be developed with new creativity of employees by company’s spirit.

The mission statement of Southwest Airlines has always been regulated since the company does business. In a statement, the company's mission also stressed their desire to serve customers better, and it gives them direction when they have to make some formal solutions. In a statement, the company's mission is also another way of saying "We always try to do the right thing!" According to the U.S. Department of Transportation, Southwest Airlines has the best cumulative record of customer satisfaction

Southwest Airlines valuable customers to know that they never intentionally try to inconvenience them. Southwest Airlines constantly informs their employees that the company is in the customer service business. According to Southwest Airlines, it is definitely a special privilege to serve the air travel needs of their customers.

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BUSINESS MODEL OF SOUTHWEST AIRLINES

Southwest Airlines (Southwest) is one of the leading low cost airlines in the US. The company ensures scheduled air transportation in the US. The strong operating strategy enables the company to achieve high asset utilization and reliable on-time performance. Additionally, this helps the company to raise their revenues and to tap profitable markets. However, a weak economic outlook for the US might make on obstacle or pressure on the company’s revenue.

SWOT Analysis

Strengths:

Reasonable Estimates: The company carries out price to earnings is only 14.10, which is almost all of the standards are relatively cheap.

Prevalent Reach: By the end of 2011, the company serves 72 cities in 37 states, stretching across the United States, and their acquisition of AirTran now extends its influence in the international skies, mostly over Mexico and the Caribbean islands, so that the activities of the company are not meant concentrated in a particular region.

Mutual Funds: The company currently pays a quarterly dividend of $ 0.01, which puts the annualized dividend as they give 0.44%, while it may seem unimportant and insignificant dividends, it is still almost half a year CD rate (Certificate of Deposit).

Growth in Sales: Year-on-year sales growth was in double digits in recent years. However, the company's growth is projected to slow down to more modest high single digit rate in the future.

Established Brand: Most of the airline's success is due to their prestigious brand, the pilots are flocking to the more famous and prominent companies, renowned for their safety, and having an established brand is an important advantage.

Opportunities:

Enlargement: In 2011, the company added in Charleston, South Carolina, Greenville-Spartanburg, South Carolina, and Newark, New Jersey to the list of cities the company's services, and further expansion likely.

Conquers the market: Recently, American Airlines has appeared in the news in a negative light, with loose seats and mass layoffs, with that comes the opportunity for Southwest to capture the business once American Airlines.

Global Purchase: On May 2, 2011 Southwest acquired AirTran, and further acquisitions are certainly possible, especially in the South-West to be relatively large.

Weaknesses:

Debt Obligations: The company is estimated to have $ 361 million of debt on the balance sheet, and as long as they do not pay these debts will drag on much of their business.

Mounting Operating Expenses: The average cost of a gallon of fuel from 2005 to 2011 increased 182.30%, consumers are constantly demanding more services and amenities to their flights, as well as trade unions are fighting for viscously more money for its members. At the end of the day, the company does not have much money in stock (net profit margin 1.14%).

Relatively High Price of the Product: While Southwest is known for offering great value, it is still a very expensive process to buy a plane ticket, and during the economic downturn, people do not have money to spare.

Threats:

Weather Suspense: As we have seen recently with Hurricane Sandy, natural disasters can lead to a significant loss in business for airlines, and because nature is so unpredictable, there is always a great deal of uncertainty revolves around the company.

Enormous Competition: The airline industry is incredibly competitive, and the race to get the business user often leads to a reduction in margin.

Threat of Rising Oil Prices: When prices are rising jet fuel, airlines are faced with the decision of passing the pain on to their customers, and possibly lose business or acquisition costs and ruining their margins.

The Impact of Shaky U.S. Economy: The company operates primarily in the United States, and, therefore, any slowdown in economic growth only for the American economy can dramatically hurt business in South-West, while other international companies have the ability to weather the storm.

INTERNAL ENVIRONMENT

Distinctive Core Competency

The term "Core Competencies" refers to your organization’s areas of greatest expertise. An organization’s core competencies are those strategically important internal capabilities that are central to fulfilling its mission or a distinctive competence that provides a firm a competitive advantage in its industry. Core competencies frequently are challenging for competitors or suppliers and partners to imitate. Absence of a needed core competency may result in a significant strategic challenge or disadvantage in the marketplace.

Core competencies may involve technology expertise, unique service offerings, a marketplace niche, or a particular business acumen (e.g., business acquisitions). Core competencies focus on an organization’s internal capacities and deep proficiencies that enable a company to deliver unique value to customers. Core competencies also contribute substantially to the benefits a company’s products offer customers.

The distinguishing characteristic of an organization’s core competencies are that they develop overtime and represent the continual accomplishment of a firm’s critical success factors over time. Another distinguishing characteristic of a core competency is that it is hard for competitors to copy or procure.

Southwest Airlines enjoys the US Airline industry’s best cost advantage. This advantage is not solely due to its production and efficiencies but also due to many other internal competencies that are distinctive to the company – including the industry’s fastest turnaround time.

Fast turnaround time defined as the time from when a plane lands to when it leaves again. Due, in part, to a variety of factors such as the use of uncongested airports, minimal food service, and early check-in, the company can turn around a plane in less than 30 minutes – compared to the industry average of more than 45 minutes.

Consider the financial influences if this 15 minute advantage – A carrier with 2,000 flights per day that uses each of its planes for 10 hours per day. The carrier with a 15 minute advantage would save 500 hours per day turning its aircraft. This carrier would need, perhaps, 50 fewer airplanes (500 hours saved/10 hours per day of flying per plane) to offer the same number of Revenue Per Passenger Miles. If each plane costs approximately $50 million, this would translate into a savings of $2.5 billion in assets. The core competencies can allow a company to invest in the strengths that differentiate them in the industry.

In order to develop core competencies a company must:

Determine which internal capacities are key strategic factors to creating and sustaining value.

Conduct an organization wide core competency assessment and isolate strengths and weaknesses.

Benchmark against other companies with the same capacities to ensure that the firm aims to develop key factors.

Create an organizational road map that sets goals for competence building.

Isolate these key factors and hone them into enterprise-wide strengths.

Encourage involvement in core competency development across the enterprise.

Tangible and Intangible Resources

Financial Resources. Southwest has always managed its cash well. In the financial year 2001 , the airline had generated 64 ,446 ,773with an operating income of 821 ,659 and a credit value very good

Physical Resources. In all the cities it operates instead of having agents or computerized booking system Southwest Airlines have the reservation center and vending machines at the airports. Previously Southwest only operated in cities near Texas, but started to expand in 1993 to other areas in the northeast part of US where the population density was the highest. In addition, the company assets have also increased from 22 million in 1971 to approximately 9 billion in 2002

Technological Resources. Southwest has always believed in cutting down additional cost. One of the strategies has been to use only a single type of airplane Boeing 737 for its entire fleet. The size of fleet in 2002 was 355. Of the remaining aircrafts were leased. At the end of 2001, Southwest was committed to 132 s for the 737-700 aircraft. The company’s website is responsible for 46 of the has the one of the largest number of clicks per day among all the airline operators

Human Resources. Southwest airlines increased its employee strength from 195 in the year 1971 to approximately 34,000 in the year 2002. The airline has never laid-off an employee during this period. The company’s management team is excellent be it the president Herb Kelleher, CE James Parker or COO Colleen Parker

Reputation Resources. The brand value of Southwest is one of unique in its area. The airline in addition to being known as a low-cost airline, Southwest is also known for its excellent service and quirky attitude. The customer associate the name Southwest with an airline that is fun to fly with, caring and also economical

Capabilities

Management. The management of Southwest is treated one of the most dynamic of all times. The management policies introduced by Herb Kelleher are considered by industry analysts to be intuitive and effective. Other members of the management chiefly the COO Colleen Barrett also share this quality

Distribution. By April 2002 , Southwest was operating in about 58 cities in United States . The growth plan has been conservative with only a few cities being researched and added each year . The company has also avoided the temptation to start international services

Marketing. Southwest has always been aggressive in promoting itself the slogans of the company are as famous as the airline itself. The most famous example was the ad Nobody’s going to shoot Southwest mott of the sky for a lousy 13 , in 1973 , when Brainiff airlines started selling the tickets for one of its routes at the price for competing with Southwest

SUPERIOR FINANCIAL PERFORMANCE

Objective

To measure the solvency, or the ability, of Southwest Airlines Co. to meet its short-term financial obligations and to assess the liquidity, or the ability, of Southwest Airlines Co. to convert current assets to cash to reduce current liabilities.

The Ratios

The most widely used financial ratios for establishing the short-term liquidity of a company are highlighted in the below chart.

Financial Ratio

Numerator

Denominator

Current Ratio

Current Assets

Current Liabilities

Quick Ratio

Cash + Cash Equivalents +Accounts Receivable

Current Liabilities

Average collection period in days

Average Accounts Receivable x 365

Sales

Inventory Turnover

Cost of goods sold

Average inventory at cost

The short-term liquidity ratios are used in the evaluation of short-term liquidity to convert current assets into cash in order to reduce the financial obligations of the company as they become due. These ratios are particularly significant to the creditors and potential lenders of a company because they determine the ability of that company to meet current payments of a debt. However, investors and stockholders are also interested in the company’s definition of current assets and current liabilities since these classifications have a direct impact on the amount of available working capital of an entity. As a general rule of thumb, a current ratio of 2:1 and a quick ratio of 1:1 are considered to be acceptable.

Other ratios commonly used to evaluate short-term liquidity are average collection period in days and inventory turnover. The main focus of these ratios is to evaluate how soon accounts receivable will be collected and how soon inventory will be sold. Collection period is a key measure of accounts receivable quality. Increases in the average collection period of receivables may indicate increases in acceptance of poor credit risks or less energetic collection efforts. Inventory turnover measures how quickly inventory is sold. Decrease in inventory turnover may indicate problems such as slower-moving merchandise or a worsening coordination of buying and selling functions.

As with all financial ratios, the industry practices and the company’s management and operating practices need to be taken into account during the analysis.

Financial Comparison

 

2009

2010

2011

2012

Current Ratio

1.25

1.29

0.96

0.91

Quick Ratio

1.03

1.13

0.76

0.71

Average Receivable

273.5

279.5

396.5

481.5

Average collection in days

22.8334

21.7475

25.6691

28.5908

Average Inventory

313.5

342.5

443.5

870

Inventory Turnover

12.0032

12.762

12.726

3060

Financial Analysis

As shown in the comparative table, Southwest Airlines Co. short-term liquidity has varied over the 4 years and has persistently remained below a 2:1 ratio which could be perceived as less than optimal, generally speaking. The quick ratio also remained under 1:1, which is considered to be the benchmark value for this ratio. However, relative to the US airline industry, Southwest Airlines Co. Has maintained a higher than average current ratio and quick ratio has remained greater than competitors for three out of the past 4 years. These trends indicate Southwest Airlines Co have been in a better position than a competition to meet short-term obligations.

The airline industry is a debt intensive industry due to the significant amounts of debt incurred in the financing (either leases or purchases) of aircraft necessary for operations. The current and quick ratio can be manly influenced to the number of aircraft leases either debt obligations, whereby the form of assets varies and onwards change to current liabilities. Moreover, the growth of airline operations and service to developed countries, would affected to supplementary liabilities in the form of gate and ticket counter at new airport destinations.

According to comparative table, the Average collection period in days has significantly raised since 2011. Under certain circumstances, the majority of all Southwest’s ticket sales to customers are purchased by cash or credit cards. This results in a low average collection period and is not a crucial factor of Southwest’s short-term policy. As illustrated on the table, the Southwest Airlines average collection period is one of the best in the industry.

Specifically, Southwest Airlines provides low fare air transportation services and therefore is not a highly inventory sensitive entity. Southwest Airlines’ inventories consists of flight equipment expendable parts, materials, and supplies and is carried at average cost, which approximates market value. These items are charged to expenses when issued for usage. Southwest's inventory turnover is relatively high as compared to the industry medium quartiles.

EXTERNAL ENVIRONMENT

FIVE FORCES OF COMPETETIVE ADVANTAGE

The Five forces of Porter is a model that is used to analyze the industry environment of a business by evaluating five forces that affect competitiveness with an industry. The industry environment is closer to the organization than the macro-environment. However, the organization cannot control this environment. The Five forces of competitive advantage involve straightforward principles:

Competitive Rivalry

Existing competitors to turn to firms that are already on the market, and that offer similar products or services. The numbers and the strength of existing competition affects the market share of the company, as well as pricing decisions of the company. U.S. airline industry is highly competitive as it consists of several major airlines such as United Airlines, American Airlines, Northwest, Virgin and Jet Blue, as well as numerous small airlines that operate in niche markets. Intense competition in the industry affected the Southwest Airlines "market share. Nevertheless, Southwest is the largest in the country it controls a significant portion of the market. Increasing competition has also affected a fair price as competitors engage in price wars.

Threat of Entry

The threat of new entrants is not very significant in the aviation industry. This is because the airline industry has many entry and exit barriers. One of the barriers is the high capital requirement. A large amount of capital required to run the airline business, as it provides for the purchase / lease of aircraft, employment of highly qualified personnel and investment in technology. Another barrier to entry is high competition. Intense competition has led to lower prices and significantly reduced the proportion of the market. This makes it difficult for new airlines to the market. High fuel prices, high labor costs and low prices also make it difficult for new entrants to survive in this industry.

Buyer Power

The ability of consumers also affects the prices with the industry. Buyers are more potent if small and / or organized. However, many air travelers in the U.S. and fragmented. This has led to a significant decrease in their ability to influence prices industry. However, buyers are becoming more aware and it is likely to give them power over airlines. When buyers receive the information, they are in a position to know about the differences in the prices of the competition and availability of substitutes.

Threat of substitution

Spare see the products / services that perform similar needs. The threat of substitutes in the aviation industry is very real. There is an alternative airline transport including road, rail and water transport. However, these alternative modes of transport are slower and less convenient, they are relatively cheap, that air transport. This gives them an advantage over potential airlines. The threat of substitutes affect the price of the aviation industry.

Supplier Power

Supplier power has the potential to impact on the price at which the airline receiving inputs. One of the key factors in the airline industry is oil. Powerful suppliers who form a cartel to influence prices characterize the oil industry. Oil suppliers also vertically integrated oil companies, most works of exploration, production, distribution and marketing. This coupled with the high demand of oil supply in full control of the market

SUSTAINABLE COMPETETIVE ADVANTAGE

Sustainable Competitive Advantage

To maintain a sustainable competitive advantage the company must conduct its business value so it is difficult to reproduce or imitate competitors. The competitive advantage is satisfied if the total cost of the implementation of measures the value is lower than the cost of competitors. The level need to back up a competitive advantage for the client that at least compatible with competitors. Otherwise, a lower price to be charged and the net effect will be zero.

Besides, in order to perform the sustainable competitive advantage at the company, the external and internal environment should be equal to each other. Therefore, the substantial performance of sustainable competitive advantage gets higher.

However, there are several ways to check the stability of the firm's competitive advantage. Some of them are obvious, and often taken for granted while some are more subtle and intangible. It is often more subtle ones of which give additional advantages.

Southwest Airlines

Southwest Airlines first flight took off at 18 June 1971. The company began over four years ago, but had a number of tough actions against them before they were able to get its first aircraft in the air. Southwest Airlines began serving Texas in Dallas, Houston and San Antonio.

Although a four-year legal battle that almost went bankrupt Southwest Airlines even before the start of their service, hardtop was the basis for the well-known Southwest Airlines corporate culture. Employees were motivated by tough character Herb Kelleher in legal battles and poor attitude. Lamar Muse, Southwest Airlines first CEO, has also contributed to several legal battles after the first few years after their first swim. Herb Kelleher has been identified and is very successful in the courtroom and in September 1979, Southwest Airlines opened its first interstate service between Dallas and New Orleans.

Competitive Advantages of Southwest Airlines

Southwest Airline’s Competitive Advantages can be viewed by analyzing six major factors:

Procedures

Infrastructure

Edge

Communication

Atmosphere

People

The company’s procedures heavily rely on the strategy of keeping the airplanes in the air as much as possible. This has required an integration of operations and procedures to gain full control and to get a tighter organization. Means that they have used to accomplish this is quick turnarounds and one type of aircraft the Boeing 737 Additional means are the use of under-utilized airports that cost less to operate. The lesser-known airports are usually lesser congested and that makes it easier to achieve fast turnarounds. However, the company has started to extend their markets to larger airports, which makes their strategy to keep the planes in the air hard to achieve.

Less congested airports are vital to the company and are part of what made them less susceptible to cyclical changes in the economy. Capacity utilization is an important factor for the industry, which is largely related to the high fixed costs, such as the aviation industry. Every factor that can reduce costs is therefore vital to make the company "recession-proof" that makes small airports is very important for us, as they constitute one of the foundations of their low-cost strategy.

The company's infrastructure focus is on the process of communication. That is why they only have four layers between the top management and ground staff. This is an important factor for achieving a smooth running operation and reduce costs. The importance of the relationship between the value of activities will reduce the cost per unit, and potentially increase the scale.

CONCLUSION

Southwest offers low cost, friendly and simple service that is different from its competitors and will allow it to maintain profitability in the airline industry. Southwest has managed to build a loyal customer base with its genuine customer service and a love of their employees of their work.

Southwest always remember that in order to succeed in the industry, this is often not the case for a strategy "do it better", and one of the "do it differently." "Southwest has more room for growth than it was aircraft. However, unlike other airlines, he avoided the pitfalls of growing beyond its means. Unless in a conversation with an officer or agent of the ramp, the staff does not seem to be in love with the idea that more is better". Since its inception, Southwest has managed to grow in a controlled manner, adding only a few new cities every year.

Southwest has proven itself successful and they believe it will continue to be profitable as long as it never ceases to offer customers efficient and low cost air transportation. With continuous aggressive promotion and strong commitment. Southwest will remain the preferred airline for providing low fares.

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