CASE ANALYSIS OF SOUTHWEST AIRLINES 1

An Analysis of Southwest Airlines

Company Information

Southwest Airlines Co. is a major passenger airline centered around providing air transportation
in the United States and near-international markets. Southwest Airlines Co. was first founded in
1967 by Rollin King and Herb Kelleher as a “low-cost/low fare” airline centered around the
Texas area. Southwest Airline has a fleet of Boeing 7373 which helps carries it passengers to the
many states and the District of Columbia, Puerto Rico, Mexico, Costa Rica, Belize, Jamaica, the
Bahamas, Aruba, and the Dominican Republic. Southwest Airlines would later expand
CASE ANALYSIS OF SOUTHWEST AIRLINES 2

throughout the United States offer point-to-point service. which allows for low operating cost
and direct non-stop routing. Southwest Airlines has achieved major success in many areas
including being listed as Fortune’s list of World Most Admired Companies. In 2016, Southwest
Airlines was the world’s second largest airline in total passenger boarded but the first in the
number of originating domestic passengers.

The mission of Southwest is to offer “the highest dedication to the highest quality of Customer
Service delivered with a sense of warmth, friendliness, individual price and Company Spirit.”
The Southwest mission is centered around the idea of “love” that they provide to its customers
by providing a fun and enjoyable experience which they strive to implement through their
company culture. They believe this in collaboration to their keys to success will allow for them
to fulfill their vision to be “the world’s most loved, most flown and most profitable airline.”
Southwest believes that its employees should hold a warrior spirit, a servant’s heart and a “Fun-
LUVing Attitude”. This enables Southwest to have employees that genuinely believe that the
customer is important and treated them warmly and kindly was the right thing to do.

Industry Analysis

Driving Forces

The key drivers of the domestic airlines industry are domestic trips by US residents, corporate
profit, disposable income, world price of oil and trade-weighted index (the weight of the US
dollar compared to other currencies).

Industry SWOT Analysis

The strengths of the domestic airline industry low imports, high revenue per employees, high
barriers to enter and require high levels of investment and assistance. The weaknesses of the
industry are that this industry has high competition, high capital requirements and high service
concentration. The opportunities of the domestic airline industry are a high predicted revenue
growth and low cruel oil prices. Another opportunity is the increase of disposable income in the
United States. This will allow for an increase in demand for domestic trips by US residents. The
CASE ANALYSIS OF SOUTHWEST AIRLINES 3

threat of the domestic airline industry is noneconomic environment factors such as weather,
terrorism, and disease.

Competitors

The major players in the domestic airline industry are Delta Air Lines Inc., American Airlines
Group Inc., and United Airlines Holdings Inc. Delta Air Lines currently holds the most market
share out of the four companies. This is followed by American Airlines and United Airline. In
2017, Southwest Airlines had the smallest market share. Most of Southwest Competitors focuses
on the United States domestic market; however, they also earn revenue from international flights.
Delta Airlines international makes up a little less than one-third of company’s annual revenue. In
2017, Southwest surpassed all its competitors in terms of the number of domestic passengers
traveling in 2015. All Southwest Airlines’ competitors have a larger reach in the internal airline
industry where Southwest Airlines just entered. There are other competitors called low-cost
carriers which may not have much share but are taking Southwest’s price conscious customer
such as Allegiant and Spirit.

Company Analysis

Key Successful Forces

CASE ANALYSIS OF SOUTHWEST AIRLINES 4

Southwest Airlines Co. accredits their success to their employee selection process, their customer
service, low fare, and operation costs and finally the company’s financial strength. The
company’s extensive customer selection process allows for confident, friendly, customer-
oriented people to enter the organization and continue to offer quality customer service. This
builds up Southwest Airlines brand and helps them strive to reach their five strategic objectives.
The low-fare and low operations cost helps Southwest Airline differentiate themselves from their
major airline competitors. Finally, their financial strengths allow for them to prepare for external
threats of the company.

Porter’s Five Forces

The bargaining power of the supplier is high. This is since Southwest Airlines fleets only consist
of Boeing to keep operating and maintenance costs low. Boeing has a high bargaining power in
regard to aircrafts. When looking at other parts and material, Southwest Airplanes, has a supplier
have lower power than Boeing. For other equipment and parts, the supplier power is moderate.

The bargaining power of the buyer is high. This is due to the fact that the domestic airline
industry is highly competitive. Airlines try to offer the best price which leads to high price
competition. Southwest focuses on offering their customers the best services at the best price so
they have to cater to them more than any airline in regards to price.

Due to the rise of low-cost carriers like Allegiant, Frontier and Spirit, there is a moderate threat
of substitutes. While there are many low-cost carriers at the moment, they still do not offer the
same travel quality and customer service that Southwest does. Compared to Delta, American
Airlines and United Airlines, customers may not find them as a suitable substitute because of the
price and the additional fees one may have to pay.

There is no to low threat of new entrants in the domestic airline industry. This industry requires a
large amount of capital and also have high legal and regulation barriers. Talented piolets and
staff require a high pay which is hard to offer in the first stage of a company cycle. These factors
prevent many companies from entering the induThstry.

The competitive rivalry in the industry is incredibly high. Many of Southwest competitors hold
large market shares however smaller low-cost carriers are also gaining market share based solely
on the low prices they offer.
CASE ANALYSIS OF SOUTHWEST AIRLINES 5

SWOT Analysis

One of the strengths that Southwest Airlines has is the big emphasis on customer service. The
great company cultures are also a strength. This allows for a low turnover rate and overall
happier employees willing to give quality service. They also have many policies that many of
their competitors do not have such as free baggage policy, no additional fees for seat selection,
snacks, curbside check-in, or telephone reservation and finally a wide range of entertainment.
There point-to-point system is a strength. It allows them to keep operational costs low.

The weaknesses of Southwest Airlines are the limited amount of flights that travel out of the
country. Many of Southwest competitors have increase their revenue with the inclusion of
international travel. Southwest is missing out on an opportunity. The low-cost causes Southwest
to miss out higher profit margins. Another weakness is their dependency on Boeing. This could
prevent them from other cost-saving operation measures other aircrafts could provide.

The opportunities of Southwest Airlines are the ability to expand overseas. Many of their
competitors are continuing their brands strategic plans in those countries which can allow for
Southwest to enter and offer low-fare and point-to-point in other countries. The improvement of
technology can allow for Southwest Airline to make beneficial additions such as more
entertainment capabilities, as well as monitors for fuel emission.

The threats of Southwest Airlines are the intense competition in the industry. As stated before,
Southwest Airlines must compete with competitors that hold major market share as well as low
cost carriers that are stealing customers away. The unstable change of fuel prices. If fuel prices
drop many competitors such as Delta Air Lines can stop charging additional fees which takes
away Southwest competitive advantage. As time passes, gate costs and landing fees are
increasing. As Southwest expands past point-to-point service, they will have to pay more to go
through hubs.

Financial Analysis

The four ratios that are best to analyze the financials of the airline industry is Quick Ratio,
Return on Assets, Debt-to-Capitalization Ratio and Average Collection Period.
CASE ANALYSIS OF SOUTHWEST AIRLINES 6

Quick Ratio – The quick ratio reveals whether the company can cover all of it short-term debt
obligations with liquid assets. Throughout the years, Southwest Airlines quick ratio has been
raising. This showcases that company is has been quickly converting receivables into cash o
meet financial obligations. In 2017, the quick ratio of Southwest is higher than that of its
competitors. This means amongst its competitors it is at a better position to pay back short-term
debt then its competitors. However, it is lower than that of the industry average. Which means
the industry as a whole is a better financial position than Southwest especially since their quick
ratio is not higher than 1.

Quick Ratio
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2015 2016 2017

Southwest Delta
American Airlines Industry

Return on Assets – The return of assets indicates the profitability the company earns on its
assets. When looking at the trend of Southwest Airlines, one can see that it has been relatively
stable these past three years. It did experience a drop when the whole industry’s return on assets
dropped but Southwest’s only dropped by 1%. The following year it increased by 3% to be 14%.
In 2017, Southwest’s return on assets was higher than that of the industry and all of its
competitors.
CASE ANALYSIS OF SOUTHWEST AIRLINES 7

Retun on Assets
25%

20%

15%

10%

5%

0%
2015 2016 2017

Southwest Delta American Airlines

United Airlines Industry

Debt-to-Equity Ratio – The debt-to-equity ratio shows a company’s financial leverage. It shows
who is financing their company through debt or their own funds. If you look at the trend,
Southwest debt-to-equity ratio has small movement downwards, showing that they are using less
debt as the years to finance their company. Compared to its competitors, Southwest is using less
debt to finance their operations. They are still above the industry average though.

Debt-to-Equity
7

0
2015 2016 2017

Southwest Delta American Airlines

United Airlines Industry
CASE ANALYSIS OF SOUTHWEST AIRLINES 8

Recommendations

Company Strategic Plan

The main corporate strategy that the company is currently using is the fare structure strategy.
This is a fare strategy system where the customer chooses the best fare based on there needs.
There are four different options. The options differ on how far in advanced you may have to
purchases a ticket, frequent flyer points earned, those looking for early boarding and finally age.

The second strategy that are using is a low-cost operations strategy. The accomplish this by using
a single aircraft type, point-to-point service structure, and cost-efficient practices such as having
stewardess clean up after the customers.

A growth strategy that is currently in place is market penetration by adding more routes
especially after the acquisition of AirTran and entering major cities and hubs.

This is partnership with the company culture putting employees first and creating fun
experiences for the customer are currently in place.

Problem Identification

The most important question a company can ask themselves is how they can continue growing
and striving toward their vision. The vision of Southwest Airlines is “the world’s most loved,
most flown and most profitable airline.” The leads to the first question are “How can Southwest
be more profitable?”. There are two ways the company can achieve this, the first would be
lowering operating cost and the second would be to increase revenue. Currently, Southwest has
an opportunity to expand internationally. This will resolve some its weaknesses while also
increasing the profit that can be earned.

Recommendations

My recommendation would be for Southwest Airlines to expand internationally by continuing

their previous strategies which include using Boeing airplanes, choosing international secondary
hubs and hedging fuel prices. In order for this be successful they have to implement their
CASE ANALYSIS OF SOUTHWEST AIRLINES 9

company culture into the international locations. They would need to do so by training and
offering competitive employee benefits.