I.
Sean
Dery
II.
Finance
– Jim Trauth – Accounting – Eric Turk – IS – Josh Paull
III.
Jim
Trauth
IV.
Eric
Turk
V.
Brent
Hairston
VI.
Nate
Book
Part
I: Southwest Airlines’ Strategic
Process
The Central Strategic Question Southwest is Asking
From its inception, Southwest has proven successfully to be the best and most consistent profitable low-fare airline in the industry. This raises the central question that Southwest is facing: How will Southwest continue to be able to sustain their success, given the current restructuring in the airline industry and the threats from new players in the industry and the growing security concerns. From this central strategic question, Southwest has derived other specific questions, which includes:
· How can Southwest compete against the car with the raising operating costs of the industry?
· How can Southwest become more efficient in their management of jet fuel?
· With what process can Southwest continually evaluate their value chain to maximize the airline’s profitability and growth?
· What opportunities are present that can reduce the overall operating costs of Southwest while providing differentiation?
· What are ways that Southwest can continue to remain a competitive force with the addition of other low-fare airlines such as JetBlue and Airtran?
With the solutions and the implementation of these specific questions, it will provide Southwest with the ability to answer its strategic question of how it will be able to sustain their success and growth in a changing environment.
A recurring question that Southwest asks itself is how it can appeal to its market to fly rather than drive to their destination. Southwest approaches this question by presenting a medium to its market that offers a lower total cost of travel involved and at the same time a faster way to get to a specific destination. However, certain events such as terrorism have significantly affected the whole airline industry. The fear of terrorism has created consumer dissent in flying in two ways; the fear of another terrorist attack and the freedoms that were taken away from airline customers in reaction to heightened security the airline industry has taken. This is a major disadvantage to Southwest in that customers may not want to have the hassle in dealing with higher security measures or the fear of terrorists hijacking their plane.
On the other hand, overall fuel costs have risen, which can have a positive effect on Southwest with customers finding it to be cheaper to fly rather than drive to their destination. However, since overall fuel prices have increased, Southwest is facing greater fuel costs. This raises the question for Southwest on how it can control its operating costs to continue to be able to offer low fares to its customers.
With the increasing costs of jet fuel, Southwest will look for new ways to better manage and make use of their jet fuel consumption. Two strategies Southwest undertakes with jet fuel are the conservation of fuel and the purchasing and management of its fuel inventory. Fuel conservation is critical in Southwest’s bottom line since that a penny increase in the price of a gallon of jet fuel to raise their annual operating costs by more than $11 million. This figure shows that it is imperative that Southwest needs to design innovative ways to further conserve the use of jet fuel for each flight, in order to minimize its operating costs.
Another key factor that Southwest needs to ask is what new ways can the company manage and purchase its fuel inventories to maximize its total asset utilization. Some ways that Southwest has managed its inventory are by hedging or buying its annual fuel requirements at today’s prices and by updating their airport fuel systems which allows more fine tuning in the logistics of supplying fuel to the airports that Southwest serves. Even through these actions, Southwest needs to further integrate themselves in new technologies and processes to allow for a more efficient use of its jet fuel consumption.
Intense competition, changing customer requirements, and emerging technologies require Southwest to continually evaluate their value chain to see where they can increase customer satisfaction and convenience, and reduce costs. They are the industry benchmark for low cost/high value air service, and have reached this because of their competencies in; manufacturing/operations, logistics, marketing and sales, service managerial infrastructure, HR management, and technology development. However, with intense competition for market share, Southwest must continue to evaluate and develop competencies in these areas to maximize their profitability and sustain their growth. Southwest must assess their current process for the evaluation of their value chain, and restructure the new process to further imbed Southwest in new opportunities available.
How can Southwest Position the Company to Seize New Opportunities?
With a new infrastructure for the evaluation of the company’s value chain, Southwest will then allow itself to open new doors to reducing costs as well as providing differentiation. A position that Southwest can take to create new opportunities could be in the consideration of forming alliances or joint ventures with other companies to leverage their purchasing and marketing power. Southwest formed an alliance with Sea World which provided an excellent way for Southwest to leverage its marketing programs, and extend the brand image to project a certain lifestyle. Southwest should ask itself, what other companies the firm can form an alliance with to further leverage their power. Another position Southwest may consider is what emerging technologies can open opportunities and maximize their logistics and sales force on the market. Southwest has been aggressive in implementing ticketless travel and Internet reservations, which have helped to streamline many functions with Southwest’s logistics and sales. Southwest should ask and consider other positions to take in conjunction with emerging technologies.
Besides, Southwest being able to remain competitive through the reduction of its operating costs, the company needs to discover other ways to remain a competitive factor in the industry. Southwest needs to consider the advantages and disadvantages of entering and targeting new markets, or develop a cost benefit analysis for the acquisition of smaller airline and aviation technology companies to provide a differentiation from its rivals. Southwest should consider in conducting a in depth research project that focuses on the changes in the industry and what types of incentives their rivals are offering, and find solutions that uniquely sets Southwest apart from its competition.
Part II: Management
Perspectives from Team
Information Systems
Management Perspective of Southwest Airlines
Southwest Airlines’ strategy is to provide short-hop, low-fare, and point-to-point flights, and in 2001, Southwest was the only U.S. airline that provided these features to airline passengers. In conjunction with these provided features, Southwest wants to make air travel affordable to a wide segment of U.S. air travelers. To make a profit on the other hand, Southwest needs to operate at a low cost. Over the years, they developed a number of operating strategies to keep their operating cost low and below that of rival airlines.
It is expensive for Southwest to sell their tickets through travel agents and even their own internal reservation systems. To lower these cost, Southwest developed a website where customers can purchase tickets and make reservations. This would bypass the cost paid to travel agents and reduced the number of employees needed to operate the Southwest reservation centers. In January 2001, Southwest was able to cut the commission paid to travel agents and management estimated that the move saved Southwest $40 million in 2001.
Through the website, perspective customers can find an assortment of information. Southwest provides a listing of all scheduled flights, along with the rates. This would allow customers to compare the different fare options offered by Southwest. Customers can also make reservations for flights, hotels, and car rentals. In addition, special offers for air fare, car rentals, hotels, and cruises are provided on the website. To celebrate their 30th anniversary in 2001, they came up with a special air fare. To receive the special offer, it was required that customers purchase tickets seven days in advance through the website. Furthermore, if desired, a customer can even find company history, the customer service commitment and mission statements’, and current press releases about Southwest on the website.
For the website to be effective, it must be trouble-free for customers to use. By means of exploring the website, I found it easy to navigate through and do the things I desired. They make it easy to make reservations for tickets, hotels, and car rentals. When going through these processes, they provided clear, detailed instructions. One thing not discovered was air fares of other airlines. I believe it would benefit Southwest if they provided comparison of their air fares to those of other airlines.
Today technology is making it easier for companies to lower operation cost by eliminating processes that would be completed by an individual. For Southwest to keep operating cost low, so they can make a profit, new technology will need to be implemented. In an attempt to lower operation cost, Southwest is using kiosk to lower the number of ticket agents. The website and other technologies used by Southwest will continue to help lower operating cost, like they desire, but Southwest must make these technologies customer friendly. Doing this will help Southwest maintain there strong customer market and attract newer customers.
Finance Management
Perspective of Southwest Airlines
Having just completed its 31st consecutive year of profitability in an industry that is well-known for contracted periods of losses, a case study of Southwest Airlines provides great insight into solutions for real-world problems for businesses today. As with the financial analysis of any firm, this report includes an examination of capital structure, operating data, some of Southwest’s financial policies. Also included is a short analysis of investment worthiness.
Southwest Airlines currently carries nearly $1.3 billion in long term debt, with total debt reaching nearly $1.6 billion. With shareholder equity estimated for 2004 at approximately $5.5 billion, Southwest’s debt-to-equity ratio is approximately 0.3. The industry average, though somewhat inflated due its lackluster performance over the last three years, is 1.7. Using the industry average as the standard, this means that Southwest could issue another $7.4 billion dollars in debt, and still be slightly less leveraged than its average competitor (Boeing 737-700s have a list price of $48 million, so expansion does not come cheaply).
Southwest already has one the lowest cost structures in the industry, with an average cost of only $0.076 per seat-mile in 2003. Southwest keeps ticketing costs low by offering non-assigned seats and books 85% of its customers electronically (though electronic booking only accounts for 54% of revenues). Last February, the company consolidated its previous nine reservation centers into six. It is currently in the process of adding “blended winglets” to its entire fleet of aircraft. These wing augmentations extend the range and save fuel for aircraft, in addition to reducing engine maintenance costs. For 2004 and 2005, probably the most prescient decision made by management was its choice to hedge 80% of its fuel costs through crude oil futures contracts. Between volatility in many of the oil-producing regions of the world, and increasing demand in industrializing Asian nations (read: China and India), the ability to pay today’s prices in the future despite what prices may be then is a strategy that may save Southwest up to $250 million this year alone.
Despite industry turmoil in recent years, Southwest Airlines has had continued success by doing two things well: providing solid, pleasant service to customers and making sound business decisions. Competing through customer service and through competitive pricing, Southwest has won over and retained customers. By making good business choices, it has avoided over-extending its resources, and in so doing, often insulated itself from the cyclical nature of the airline industry. If the industry is set for a rebound, Southwest will likely lead the pack. I recommend Southwest airlines to investors seeking a long-term holding within the airline industry, specifically because of the “insulation” that it creates for itself from the industry’s volatility.
From an investment standpoint, Southwest seems to be appropriately valued. The Value Line Investment Survey currently forecasts three to five year share price appreciation of 60%-125%. It has 128 Boeing 737-700s on order for delivery from 2005 through 2012, with the option of up to 269 more. Coupled with its virtually non-existent dividend, it is evident that Southwest management clearly believes it has still has strong growth potential.
Accounting Management
Perspective of Southwest Airlines
Southwest Airlines seems to be one of the leader’s of airline industry. This may have not been easy for them but they are very profitable. I really like the drive behind the company. They had to fight so long and hard to actually even become a company. The mentality of survival and everyone’s wiliness to commit to hard work is the reason this company is still here today. From an accounting perspective their really is not that much to say. Their financial statements are very well in order. They seem to be on the right track. This industry has gone through a huge change since Sept. 11.
In the second quarter of 2004 profits are down 54% from last year. Which seems like a huge loss, but actually is still a great return with the events that have taken place in the industry. Last year during the second quarter Southwest showed 246 million in net profit. This actually included a 270 million dollar government grant. They may only made about have the amount of profit this year but that sill is 113 million dollars. This in my opinion is very good and after some research is above the industry norm.
I have found out that Southwest Airlines has been implementing a balance scorecard approach to accounting. This is a new approach to accounting that many companies are trying to use to improve profits. Anderson and S. Mark Young, KPMG Foundation Professorship in Accounting and Professor of Management and Organization, University of Southern California received funding to conduct a “Business Performance Measurement at Southwest Airlines,” in consultation with several executives at Southwest Airlines. This is a quote from Anderson about Southwest.
“Southwest is a company with a low-cost business model, good employee and vendor relationships, and it is a much disciplined company about growth. Mark and I want to study what kind of accounting, governance, and control systems they have in place which keep them so disciplined. Southwest is implementing balanced scorecard accounting, and we want to learn if it will work for them,” said Anderson.
The scorecard is an analytic framework for translating a company's visions and high-level business strategies into specific, quantifiable goals and for monitoring performance against those goals. The methodology breaks high-level strategies into objectives, measurements, targets and initiatives. It does not just look for financial or analytical ways of profit. It uses many non-financial measures to increase total profits. This is really to me accounting of the future.
For example, Southwest Airlines Co. employs a number of scorecards, one of which relates ground-crew performance to company profitability. It arranges the four quadrants of the balanced scorecard—learning, internal, customer and financial—in a hierarchy that shows how objectives relate to one another.
I copy this quote just so it will give everyone a better idea of how this idea relates to Southwest.
Directly relating a financial measure such as "lower costs" with operations metric like "fast ground turnaround" is a relatively new idea at the Dallas-based airline, says Mike Van de Ven, vice president of financial planning and analysis. "Historically, the budget system was the primary system to monitor costs, and if you were an accountant, you got it," he says. "But if you were an operations person, and you weren't used to cost centers and general ledgers and budget-to-actual variances, it didn't make any sense to you."
Part III. Coverage of Issues Relevant to Southwest Airlines and its Industry.
After the “Internet bubble” burst in 2000, the U.S. economy entered a recessionary period. The passenger airline industry began a slow decline, largely due to its service of business people and travelers with discretionary income, all of whom had fewer resources to allocate to travel. Then on September 11, 2001, terrorists attacked the United States by crashing commercial airliners into the World Trade Centers and the Pentagon. Among the victims of those attacks was the airline passenger industry. For 2001, the top ten passenger carriers posted losses of approximately $7.6 billion, on revenues of $87.2 billion. As evidence of continuing difficulties, Standard & Poor’s estimates that if the U.S. government had not provided compensation for war-related security costs, eight of the top ten airlines would have produced losses of $4.5 billion on revenues of $81.6; five were unprofitable despite the aid. The issues relevant to the continued business success Southwest Airlines and the recovery of the passenger airline industry as a whole are numerous. This report identifies and discusses the following issues are the most pertinent: U.S. economic recovery; increases and volatility in fuel pricing; emerging competition; technological developments; ongoing labor disputes; the terrorist threat.
The highly cyclical nature of the passenger air transport industry is due to ebb and flow of the economy that supports it. After a number of years of staving off the threat of deflation, the U.S. economy is finally beginning to be show positive signs of recovery. The importance is twofold. First, as businesses begin generating (or have greater expectations of generating) cash flows, they will spend more on business-related travel in hopes of producing greater revenues. Secondly, as individuals work more to support expanding businesses, they will at the same time receive increasing wages and salaries. Part of the increased wages and salaries can then be spent on discretionary travel, i.e. vacation and sightseeing trips. The recent decision of the Federal Reserve Board to raise the Federal Funds Rate by 25 basis points (bp) is an effort to protect against the threat of inflation. If this action were not taken, incremental increases in the prices consumers pay for everything from milk to furniture to jewelry would erode the extra discretionary consumer earnings. If, on the other hand, the Federal Funds Rate is raised too much, or too quickly, it could choke off the economy and workers will never have the opportunity to make more money to begin with. Southwest has been particularly skilled at partially insulating itself from the business cycle, so while the state of the economy may not make Southwest unprofitable, it can certainly make Southwest less profitable.
As anyone who has filled their car with gas in the last few months can attest, a strong or unexpected variance in fuel prices can have an unpleasant impact on one’s budget. The same is exactly true for the passenger airline industry, as fuel costs are second only to labor-related costs. Accurate internal forecasting of needs and expected intrinsic price levels lead some airlines to hedge fuel costs through the use of futures contracts, a type of derivative security. Many airlines are currently forced to have higher fares than others or absorb losses in order to match lower fares because they did not as accurately predict an uptick in fuel costs for the summer. Southwest, on the other hand, remains 80% hedged for 2004 and 2005 fuel costs. This option is not free, but it has the potential to create great savings.
More than thirty years ago, Southwest Airlines pioneered the discount airline business model. Today, virtually all new entrants to the market use the same basic tenets that Southwest started with and still depends on today. New firms focus on no-frills, direct flights, often to smaller airports in only one or two types of aircraft, while providing top-notch customer service. JetBlue, Delta’s Song, United’s Ted, and Independence Airlines are the most recent heavy entries into the passenger airline industry and all are discount airlines. Southwest has set a strong enough precedent that it is slowly becoming the standard. Southwest’s strength in the past was that it was smaller and more agile in the business world. Today, with a market capitalization of $12 billion, it will be forced to learn how to use its size to its advantage. Additionally, it will need to learn how to stay one step ahead of the competition—JetBlue has installed DirecTV for free use for every passenger in all of its aircraft, and is currently installing XM Satellite Radio, also to be free of charge. Some would suggest that Southwest is behind the curve.
Technology is changing the business landscape everywhere, and for the airline industry, it is a double-edged sword. Check-in kiosks now permit airlines to hire fewer ticket agents and online sales reduce the transaction costs for ticket sales. Logistics systems for maintenance and inventory minimize non-cash assets. The emerging threat of technology, however, lies in its ability to bring businesspeople closer together. Video teleconferencing and electronic document transfer have greatly reduced the need for businesses to send employees cross-country. Today, the use of such technology is nowhere near as widespread as it could be, and some dismiss its use as a fad. Twenty-five years ago, these same persons would have said the same of the fax machine and the cell phone. Though the extent to which business travel will decrease because of new technology cannot be forecasted with accuracy, but the possibility is not one that airlines can afford to ignore. This affects the entire industry, including Southwest.
For a more real-world issue, most of the major “legacy,” or traditional carriers are currently involved in labor disputes. The ability of many of the major airlines, including Delta, United, AMR Corp. (American Airlines), and U.S. Airways, to stay in business, depends on their ability to obtain concessions from their respective labor unions. Should collective bargaining win out over necessary cost controls, some or all of these firms may find themselves insolvent and unable to service debt. This is not currently an issue for Southwest Airlines; it has a long-running reputation of employee empowerment uncalled for pay raises. Only once in 33 years has Southwest ever had a labor dispute.
The airline
industry is in such a quandary today, of course, mostly because of the
terrorist attacks of September 11, 2001.
There is an opportunity cost to the industry that cannot truly be
measure quantitatively, but would be found in the answer to this question: how
many persons have chosen not to fly on a commercial airline because of the
threat of terrorist attacks? For a more
tangible consideration, how much have airlines spent to protect its customers,
and to convince them that flying is still safe? Costs will continue to be high to the industry for some time to
come, even if the rate of actual terrorist events subsides. The cost driver for the industry is not the
events themselves, but the threat of terrorism.
Part IV: Application of
Major Strategic Concepts to Southwest Airlines
The mission of Southwest Airlines is
dedication to the highest quality of Customer Service delivered with a sense of
warmth, friendliness, individual pride, and Company Spirit.
They are very committed to making
their customers happy. By taking care of its employees and customers is this
company’s main goal. This is some what rare today that a company is nit mostly
focused on its profits. After reviewing the company’s website I found that they
focus on taking care of people and the profit will follow.
Southwest Airlines will fly any plane,
as long it's a Boeing 737, and let passengers sit anywhere they like, as long
as they get there first. Sticking with what works, Southwest has expanded its
low-cost, no-frills, no-reserved-seats approach to air travel throughout the US
to serve about 60 cities in 30 states. Southwest offers ticket less travel to
trim back-office costs and operates its own reservation system. A top-10 US
airline, Southwest stands as the inspiration for scrappy low-fare upstarts the
world over. It has also enjoyed 31 straight profitable years.
While the biggest airlines are
still drowning in red ink, Southwest reported a $113 million net profit for its
second quarter, down from $246 million in the year-ago period. But the current
quarter included charges for an early-retirement offer for employees -- an
initiative that will save Southwest money in the future -- and a $12 million
expense related to its tentative flight-attendant agreement, expected to be
ratified by the end of this month. Last year's quarter included the impact of a
$271 million government grant.
While Southwest's costs are clearly under pressure, the good news is that its
revenue for each seat per mile flown was up a lofty 7.9% in the quarter, and
the airline noted that bookings are strong for the next several months. The
outfit is also stepping up growth, with capacity expected to rise nearly 7%
this year and 10% in 2005. Most analysts believe Southwest still has plenty of
room to spread its wings, especially with the network carriers facing an
ongoing slather of woes. If rivals are hoping that the executive shakeup at
Southwest will slow it down, they're likely to be disappointed.
I think that southwest competitive strategy is very aggressive and they will fight to the end. It started off as mostly survival with all the court cases the company had to over come. Southwest Airlines has a history of being aggressive during tough times. Looking at the airline industry one month after the terrorist attacks of September 11, 2001, Southwest was repeating this behavior. Instead of cutting costs by reducing its flight schedule and laying off workers, Southwest kept all its employees and flights. Management cut costs by delaying delivery of 11 new Boeing 737s and reducing travel-agent commissions.
The discount carriers increased their share of the business traveler market to 20 percent in 2003 from only 6 percent in 1992. The Internet helped these carriers crack this lucrative market as more business travel managers used the Web to find low fares to reduce travel costs during the slumping economy. Southwest moved aggressively into new, long haul, business-travel routes to capture more of this market. During the fourth quarter of 2001, Southwest gained 2 percentage points of domestic market share, moving them from 9.5 percent to 11.5 percent.
Southwest’s employees are more productive than its competitors’ employees in many ways. Southwest pilots fly 80 hours per month compared to 50 hours for United Airlines pilots. And Southwest’s pilots watch costs carefully because they are paid partially by stock options. I thought this was very interesting and thought that it may attract certain employees Flight attendants work 150 hours per month compared to 80 hours at many rival airlines. United’s senior flight attendants get 52 vacation days per year compared to 35 days for Southwest’s veterans. Flight attendants at Southwest clean the cabin between flights; competitors’ attendants do not. Southwest mechanics change tires faster than other airlines’ mechanics do, and the overall efficiency of ground operations keeps Southwest’s 737s in the air 10.9 hours per day, more than any other major airline. Southwest’s jets fly at 7.5 cents per seat mile, the lowest cost of any major airline and lower than any airline except JetBlue’s 7 cents per seat mile. The bottom line is that Southwest has a market value of $10.8 billion, more than all the other majors combined. This information is the ways that Southwest sets itself apart from other airlines.
SWOT
This company’s strength is obvious. The way that it treats each customer and employee makes them return to Southwest. From the previous paragraph you can see many reasons why someone would want to be employed by Southwest. Strength is the company’s ability to cut costs. They only use one type of aircraft; this saves tremendous amounts of money on parts and the inventory for these parts. Their location at Love Airport is one of their greatest strengths because it does not have the congestion of major airports. The weaknesses I see are that they do not have a central CEO. This constant change could lead to some indecision of the company’s future. The opportunities that Southwest needs to grab a hold of id to expand. They are very profitable in these hard times. They need to use this to their advantage. If other airlines are showing negative profits this is the time to move forward. They have a great name continue to grow the market share and advertise more frequently. Being a low cost provider maybe even run new specials. Their will always be a threat of terrorists and hijackers. I would suggest hiring and training the best security possible. Also and the issue of safe flying into commercials.
Forces of Competition
I think that every market is very competitive. The Airline industry is no exception everyone is competing for the same customers. With what has happened recently in the market is that I would say there is a moderate to high rivalry between competitors. The potential entry for new airlines is low. I think that it would be a very expensive business venture to start a new airline business. It is not impossible but very hard. The industry has a lot of reliance on the name of the airlines. It would be hard to start a new name. The best way to enter the market would be to buy out an existing mane or airline. The only substitutes that I can think of are private airlines. Which the flights are almost too expensive to even be a substitute service. I would say that the substitutes are low. The pressures between the buyer-seller mostly deal with service and time. The time it takes to get on the flight is a big issue to the customer or buyer. The friendly an airline is the better the reputation and the happier and frequent customer it will have.
Part V:
Importance of Presented Data to Southwest Airlines’ Strategic Situation
It was previously stated that Southwest Airlines has had continued success by doing two things well: providing solid and pleasant airline service to customers and making sound business decisions. Southwest has also outrivaled its competitors via competitive pricing. Or so Southwest has appeared to have outrivaled, but things are not always as they seem, as shown below in a briefing of Southwest’s strategic situation.
A major limiting factor for the airline industry to contend with has been the threat of rising fuel costs. In recent months, as oil prices have fluctuated greatly and reached record highs, those firms that hedged well have had the greatest success, while those that did not have struggled to compete.
Fuel conservation has been critical to Southwest business. An increase in the price per gallon of jet fuel by one cent has the potential to raise Southwest’s annual operating costs by more than $11 million per year. Fuel costs have proven to be a difficult challenge for firms, as customers have been unwelcoming of small increases in fares to cover the additional costs of operations. Generally speaking Southwest has been able to evade the recently unwelcome rising fuel cost without outwardly taxing air line consumers. The business of competitive pricing is difficult and often damaging with unstable essential resource markets.
The airline industry’s business models have been changing in recent times. The “discount airline” model is now almost as prevalent as the traditional model. Speaking generally, a discount airline usually attempts to cut costs in a number of ways, and in turn pass on savings to passengers, in the effort to attract greater numbers of customers.
Southwest cuts cost through:
The traditional method of flight organization is known as the “hub and spokes” system. This system routes flights from smaller airports (“spokes”) to regional hubs for connecting flights to other hubs, followed by the possibility of another “spoke.” Discount airlines, on the other hand, route only direct flights. This system provides two benefits: First, customers enjoy direct flights because they do not have to worry about missed connections or lengthy layovers. Second, because flights are more uniform in size, discount airlines can use just one or two types of aircraft, which greatly reduces maintenance costs.
In an effort to join the discount airline sub-industry, Delta has announced its “Song” airline, and United has started its own discount airline, “Ted.” These new entrants by way of foreseen older parent company competition may pose consequence for Southwest’s future.
Should Southwest treat these new entrants as threats or simply view them as a facet of the major airlines’ fight for survival, now becomes an issue. Southwest must also consider the fact that major airlines, such as American Airlines (AMR), Delta, and United are struggling with labor groups for contract concessions. Failure to gain concessions could possibly leave these airlines in increasingly illiquid positions and at risk of bankruptcy, as many of the major carriers are highly leveraged. This should be a major area of focus for Southwest, opportunity is upon them.
JetBlue’s direct assault on the discount airline industry is characterized by many of the same traits as other discount airlines including Southwest, such as direct flights and a culture dedicated to customer service. What JetBlue brings to the competition is superior management, and a willingness to innovate. JetBlue aircraft have leather seating and free DirecTV service for every customer, and are in the process of being updated with XM Satellite Radio.
Southwest must be careful not to let JetBlue overtake them in the customer service arena. Southwest cheap no frills stance is highly subjective to JetBlue’s cheap, but with frills approach, maybe better stated as inexpensive, but highly attractive approach. Perhaps it is time for Southwest to deploy some defensive strategy tactics.
As broader economic growth develops, increasing numbers of business travelers will return to the skies. Economic growth usually also leads to greater consumer spending, a portion of which may reasonably be expected to be spent on travel. That said, strong gains are not guaranteed; Standard & Poor’s predicts that the top ten airlines will still lose approximately $2.5 billion in 2004. Possibly the only encouraging thing that may be said about that is that it is a great improvement from the $4.5 billion lost last year (that includes $5 billion in cash grants distributed across the industry from the U.S. Air Transportation Stabilization Act).
Whether a $4.5 billion loss or a 2.5 billion dollar loss is at stake, both provide Southwest as well as its major competitors such as JetBlue a vast window of opportunity. Southwest’s strategic situation seems to be a good one contrasting competitors, but is rapidly slipping away from them. Southwest must siege and capitalize on opportunity while keeping a strong focus on there core value of customer service. JetBlue stands to be a major hurdle for Southwest.
Part VI: Presentation and Cost-Benefit Analysis of Alternative Solutions
New Technology on
Board
All technology discussed in this section is available at every seat and free of charge unless otherwise noted.
Southwest seems to be falling behind in technology on board their planes. Although offering such amenities goes against the basic philosophy of a low-cost airline, Southwest should start offering new technology amenities.
DirecTV is currently available free of charge on JetBlue Airways flights. They plan to offer XM Satellite Radio in the near future. Song offers Dish Network and pre-recorded music streams. AirTran Airways is currently installing XM Satellite Radio and will offer it on every flight by year-end 2004. Southwest has an opportunity to differentiate itself by offering Dish Network’s full line-up, including the new addition of the Sirius Satellite Radio channels. By buying all content from one provider, Dish Network, Southwest stands to cut costs over the alternative of DirecTV and XM.
Southwest can get ahead of the other discount carriers by offering access to a Wi-Fi hotspot on each plane. To maintain an Internet connection, the equipment on board will be required to transmit as well as receive. Transmission costs greatly increase the cost of equipment and service. Because of the increased cost compared to TV or radio, Southwest will likely need to charge users a small fee per flight. An alliance with Boingo, T-mobile, or some other hotspot provider could reduce the cost of installation and maintenance. This option will mostly only appeal to business travelers.
International Alliances
Forming international alliances will allow Southwest to be the first to market as an international discount airline. The strategy is to focus on flights to Europe. If successful, Southwest can pursue other areas of the world. Instead of growing the current fleet of planes to include long-haul jets, Southwest needs to partner with existing international carriers and discount carriers abroad.
Take, for example, someone flying from Cleveland, Ohio to Barcelona, Spain. Currently, one has to reserve a seat from Cleveland to London, England, and then one from London to Barcelona. This can be done through one carrier at a high expense, or through two or more carriers. Most likely, the person flies to London on Virgin Atlantic, and then flies Easy Jet (a low-fare no-frills airline in Europe) to Barcelona. It is time consuming to schedule such a flight so that there are no long layovers. Even if a flight can be scheduled with no long layovers, there is a good chance that one of the flights will be delayed causing the traveler to miss a connecting flight. It is not always easy to convince an airline to put you on a different flight because a connecting flight was delayed. The same flight will be available through Southwest. The difference is that the entire flight will be booked from the Southwest web site; the experience is cheaper and smoother for the traveler. Since Southwest has scheduled the whole trip, there will be less chance of flight missing delays. If a flight is missed, Southwest can easily put the traveler on the next scheduled flight. Thus, Southwest can achieve its strategy of high customer satisfaction.