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Case Study: Southwest Airlines Competitive Advantages

For most of the last fifteen years, the U.S. airline industry has been one of the least attractive to be in. Following the 1978 deregulation of the industry, twenty-nine new airlines entered the industry between 1978 and 1993- This rapid increase in air ­line carrying capacity led to a situation of overcapacity. As more and more airlines chased passengers, fares were driven down to levels barely sufficient to maintain the prof ­itability of U.S. airlines. Indeed, twice since 1978 the indus ­try has been engulfed in an intense price war–first in the1981-1983 period and then again in the 1990-1993 period. So intense did the com ­petition become during these two periods that in 1982 the whole industry lost $700 million, while in the 1990-1992 period the industry lost a staggering $7.1 billion, more than had been made during the previous fifty-year history of the industry.

Despite the obviously hostile nature of this industry, one company, Southwest Airlines, has not only been consistently profitable but also has been its performance improve during years when its competitors were wallow ­ing in red ink. Southwest is a regional airline with a major presence in Texas. In 1992, when every major U.S. airline except Southwest lost money, Southwest actually reported a sharp jump in its net profit to $105.5 million on rev ­enues of $1.68 billion, up from $26.9 million on revenues of $1.31 billion in 1991.

Southwest is profitable because of two factors: its low costs and the loyalty of its customers. Its low costs come from a number of sources. Southwest offers a no-frills approach to customer service. No meals are served on board, and there are no first-class seats. Southwest does not subscribe to the big reservation computers used by travel agents because it deems the booking fees too costly. The airline flies only one type of aircraft, the fuel-efficient Boeing 737, which keeps training and maintenance costs down. Southwest’s customer loyalty also comes from a number of sources. Due to its low cost structure, Southwest can offer its customers low prices, which builds loyalty. Southwest also has a reputation for being the most reliable carrier in the industry. It has the quickest turn ­around time in the industry (it takes a Southwest ground crew just fifteen minutes to turn around an incoming a craft and prepare it for departure), which   helps keep flights on time. The company also has a well-earned reputation for listening to its customers. For example, when five Texas medical students who commuted weekly to out-of-state medical school complained that the flight them to class fifteen minutes late, Southwest moved the departure time up fifteen minutes. In addition, South west’s focused route structure (it serves just fifteen states, mostly in the South) has helped it build a substantial regional presence and avoid some of the cutthroat competition that the nationwide airlines have to grapple with.

Last but not least, the airline has a very productive work force. Southwest Airlines’ People Department, is touted as the crux on their groundbreaking route to success in the airline industry, and there is no question that both the ingrained and manufactured personality traits along with the both the innate and encouraged behavior patterns of Southwest employees have been an important factor in their recent success, however their true competitive advantage lies in the simplicity and streamlined nature of their product and operation.  Southwest’s original business plan to dominate in the interstate air traffic in both Texas and California was forced upon them by the actions of their competitors, and it was at this time in the company’s history that the underdog/scrapper nature of their employees, especially Herb Kelleher, the CEO, really made a huge impact. Kelleher even compared himself at the time to a medieval crusader, which shows the depth of his passion and commitment to his company. When Southwest was faced with such a daunting uphill climb to be competitive in the industry, that unique spirit that is still highly-valued was crucial to their success in the introduction and growth phase of the company. That spirit provided the inspiration for extremely high levels of organizational commitment Southwest needed for employees to struggle for years to achieve even the beginnings of a successful airline. Employees felt, and still feel, like they had true ownership in the company and that their behaviors and attitude on a daily basis led to the company’s success. Though these feelings have proven to be helpful it is Southwest’s very targeted business plan and their slow expansion that is their advantage. Southwest choose to be the best at what they were “given” in the early 1970’s, they threw everything at it with a crusader’s commitment and it worked. Then by maintaining their low cost, no frills beginnings as they unhurriedly expanded the continued underdog attitude has worked because essentially as Southwest expands they are underdogs in the markets they are joining. Their competitive advantage is their business model, a difficult one to initiate and maintain in the airline business therefore they need the unique employee spirit to implement such a difficult strategy. For example, their pilots work more hours for less pay but their commitment to making the Airline a success and the feelings generated by the organizational commitment of upper management and their colleagues make that extra work fulfilling because the pilots are conditioned to feel they themselves and their actions are crucial to Southwest’s triumph.  In addition, Southwest operates a gener ­ous stock option plan that extends   to all employees. As a result about 10 percent of the airline’s stock is owned by its employees, which gives them an additional incentive to work hard.

Case Discussion Questions

• What does the success of Southwest Airlines tell you about the relative importance of industry company-specific factors in explaining a con performance?
• What   is the basis of Southwest Airlines competitive advantage? How might it lose that advantage?

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A unique take on Southwest Airlines Strategy

Anyone who has studied business management either as a degree or as an elective would have definitely studied Michael Porter’s 5 Forces framework. This framework was first published in  Harvard Business Review  in 1979. The model is very much relevant in 21st-century business as well due to its deep 360-degree view of a business.

One of the 5 forces is called “Barriers to Entry” and more often than not either Oil & Gas or Airline industry would serve as an apt example of an industry with very high barriers to entry due to its high Capex and Opex requirements.

But wait, then with so many barriers to entry, why do airlines still bleed red? There are many reasons for this, but one of them is stiff competition with low-cost carriers, the 5th, and the framework’s central force (competition among the players).

Before we move on, the below is an interesting tweet response from Anand Mahindra, on being asked to buy the ailing “ Jet Airways ”.

Remember the quote: “If you want to be a millionaire, start with a Billion dollars and then start (buy) an airline!” https://t.co/dYRdwup3kK — anand mahindra (@anandmahindra) June 29, 2019

The US Airline Industry

Following the 9/11 attacks, the US airline industry has been through rough weather. 20+ airlines have filed for bankruptcy protection under Chapter 7. 60+ airlines have filed for bankruptcy protection under Chapter 11.  This list also includes the top 3 out of 4 airlines namely, American Airlines, United & Delta Air Lines, however they were able to exit the bankruptcy within a few years.

The landscape has been constantly changing with a high volume of mergers and acquisitions, resulting in changing market share statistics.

The graph above covering the period January to December 2020 showcases that the top 4 airlines constitute approx. 65% of the market share.

In this story, we are focusing on Southwest Airlines that was founded on the notions of the low-cost carrier but with its unique strategy has been profitable for the last 45 years in a row. 

The takeoff strategy of Southwest Airlines

Southwest Airlines Co. , typically referred to as Southwest, is one of the United States’ major airlines and the world’s largest low-cost carrier airline. The airline was established on March 15, 1967, by  Herb Kelleher  as Air Southwest Co. and adopted its current name, Southwest Airlines Co., in 1971, when it began operating as an intrastate airline wholly within the state of Texas first flying between Dallas, Houston and San Antonio. 

Most airlines back in the 1960s followed the most popular “Hub and Spoke” model for their operations.

Hub and Spoke model – As the name suggests, there is a defined hub from where the flights originate, and the destinations are the spokes.

The benefit of a hub and spoke model is that it has fewer routes, but the major drawback of this model is its rigidity, and if there is a slight change in the airline routing due to weather, etc., it can have cascading consequences to the other planned flights.

Point to Point model – Southwest, being a low-cost carrier, focused more on the point to point model and bought significant process improvements, in a way mastered it to achieve very high operational efficiency.

In the point-to-point model, each flight is a single journey. The origin and destination are connected via a single non-stop flight. The point-to-point model offers more travel options and flexibility as compared to the hub and spoke model.

For passengers undertaking further journeys, they will have to collect the baggage and recheck them for leg 2 of their journey. This model has considerably led to saved travel hours and done away with the necessity for connecting flights.

Key Differentiating Factors in Southwest Airlines Strategy

Southwest airlines is the third largest airline in the United States of America and arguably the biggest in the low-cost carrier segment across the globe.

So, was the operational efficiency gained due to the change in the flight operations model the only reason why Southwest airlines is the #1 low-cost carrier in the world?

NO, let’s understand what differentiated Southwest airlines strategy from its counterparts.

Customer Eccentricity

For Southwest, they keep the customers at the center of their business operations. They offer certain benefits to flyers which are not offered by other airlines, like

• Southwest allows two checked-in bags, free of cost, unlike many of its competitors.
• Flight change thirty minutes prior to the departure is allowed by Southwest.
• Southwest offers free in-flight entertainment like Live TV, Movies, use of whatsapp and imessage. It offers Wi-Fi services at very nominal rates.

All these have resulted in Southwest being the airline with the least number of complaints, according to the Department of Transportation of the United States of America.

Only one type of aircraft

Many airlines have different types of aircraft in their fleet, but not Southwest. Southwest operates by using only Boeing 737 aircraft. It saves a lot of money by:

• Training cabin crews and support staff on only one type of aircraft.
• Maintenance of inventory of spare parts for one aircraft type.
• In case of breakdown, alternate aircraft can be arranged immediately.
• Its policy of not assigning seats helps tremendously as customers can take any available seat when boarding the aircraft, thereby reducing the boarding time. In the case of alternate aircraft also, this policy hugely benefits the airline reducing the turnaround time.

Right recruitment policies

Southwest stresses a lot on the customer experience and hence it is very imperative for the airline to hire the right kind of people. Southwest focusses on hiring people who have an attitude for serving customers.

Employees undergo various pieces of training which also includes cross-training. Training is heavily centered around team building and collaboration.

The Southwest Airlines case study is a lesson in cultural strategy. An organization built on the fundamentals of customer eccentricity, effective processes, and a dedicated team is meant to achieve success and overcome challenges. This model of exceptional customer service can help a business earn an impeccable reputation in the industry. That’s what makes the Southwest model uniquely priced, yet one profitable in this cruel airline industry.

Southwest’s ability to be different and not follow the herd—not to mention becoming America’s largest airline—can be traced in large part to the Airline Deregulation Act. Thanks to this act, Herb and Rollin realized their Vision and the traveling public benefits on every flight, every day. Gary Kelly, Chairman & CEO, Southwest Airlines

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Vinit Joshi is Corporate Planning & Strategy professional with 15+ years of experience across renowned & diversified business groups. When not working or spending time with family, Vinit loves listening to a variety of music

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Southwest Airlines’ Generic Competitive Strategy, Growth Strategies

Southwest Airlines’ generic competitive strategy (Porter’s model) ensures product/service attractiveness and competitive advantages for successfully implementing intensive strategies for growth (Ansoff Matrix). With a strategic position as one of the main competitors in the commercial aviation industry in the United States, the company is popular for its low fares and high accessibility. These variables relate to Southwest’s intensive growth strategies and generic competitive strategy. In Michael E. Porter’s model, competitive advantage is developed through generic competitive strategies that the airline company can apply. On the other hand, based on Igor Ansoff’s matrix, Southwest Airlines can use various intensive growth strategies. These corporate strategy frameworks are considered in this business analysis of the commercial aviation company and its approach to growing despite strong competitors. Southwest’s success indicates effective implementation of its generic strategy for competitive advantage and intensive growth strategies suited to the business.

Southwest Airlines uses its generic competitive strategy to counteract the competitive power of other firms, such as Delta Air Lines, United Airlines, and American Airlines. These competing commercial aviation companies possess resources and the operating scale to grow despite the competitive landscape. Southwest’s intensive growth strategies facilitate the operational scale needed to maintain the corporation’s generic strategy, thereby also strengthening its competitive advantage and competitive positioning in the industry.

Southwest’s Generic Competitive Strategy (Porter’s Model)

Southwest Airlines’ generic competitive strategy is cost leadership , which creates competitive advantage based on low costs and correspondingly low prices. To address competition, the company’s strategic objective in this generic competitive strategy is to minimize operating costs, optimize profit margins, keep low prices, and offer its airline services to the mass market. The large-scale operations linked to this generic strategy for competitive advantage supports the fulfillment of Southwest Airlines’ mission statement and vision statement , which aim for global leadership in the industry. The commercial aviation corporation’s success depends on effectiveness in implementing the generic competitive strategy of cost leadership.

Cost leadership as a generic competitive strategy is observable in Southwest Airlines’ service offerings as a low-cost carrier. The company’s advertising campaigns frequently emphasize low fares as a selling point, in contrast to other firms that use the focus strategy or the differentiation strategy, such as Delta. In a way, Southwest has a best-cost provider strategy, as the company continues to minimize costs while also maintaining a high level of customer satisfaction through service quality. Based on its generic competitive strategy, the enterprise presents itself as a major commercial aviation contender in terms of price and in terms of warmth and friendliness in its customer service.

Southwest’s Intensive Growth Strategies (Ansoff Matrix)

Market Penetration . With its generic competitive strategy, Southwest Airlines applies market penetration as its primary intensive growth strategy. The company’s strategic objective in this intensive strategy is to grow its revenues by providing more of its current air transportation services to more passengers in markets where it currently operates. Southwest’s generic strategy of cost leadership ensures low costs that translate to across-the-board low prices that are a competitive advantage for keeping a large share of the commercial aviation market, in support of market penetration as an intensive growth strategy. The price sensitivity of customers in the transportation sector is one of the factors that make cost leadership and market penetration effective strategies in this case. The business strengths and competitive advantages identified in the SWOT analysis of Southwest Airlines Co. attract customers and support the success of market penetration. The strong airline brand and attractive prices enable this intensive growth strategy. Also, Southwest Airlines’ marketing mix (4P) determines how the company penetrates the target market.

Product Development . Product development is a minor intensive growth strategy in Southwest’s organizational development. The corporation’s competitive advantage depends mainly on cost leadership as its generic competitive strategy, and market penetration as its intensive strategy for airline business growth. Southwest’s product evolution has already stabilized, which means that the business has been aiming its product development efforts mostly at enhancing its current offerings. Thus, product development, as an intensive growth strategy, minimally contributes to growing the airline company. Changes in current products require corresponding changes in Southwest Airlines’ operations management, which manifests the applied intensive growth strategies and generic competitive strategy for competitive advantage in commercial aviation. The organizational culture (corporate culture) of Southwest Airlines is also a factor integrated into product development, as the company relies on organizational cultural variables to optimize its service quality and customer satisfaction and loyalty.

Market Development . The growth of Southwest Airlines minimally depends on market development. This intensive growth strategy aims to offer current services to new commercial aviation markets. When applying market development, the generic competitive strategy of cost leadership ensures competitive advantage in new civil aviation markets. However, Southwest continues to focus on its limited multinational operations in the United States and a few other countries. Thus, market development is not a significant intensive growth strategy for the airline business.

Diversification . Diversification is an insignificant intensive growth strategy for Southwest Airlines. The objective of this intensive strategy is to grow the company through new operations, such as service businesses related to air travel operations. Southwest focuses on growing within its current markets, with minimal emphasis on using the generic competitive strategy of cost leadership for competitive advantage in diversifying its business. Thus, diversification is an insignificant intensive growth strategy in the airline business. The addition or expansion of business operations requires accompanying changes in Southwest Airlines’ organizational structure (business structure) .

Key Points – Southwest’s Generic Competitive Strategy & Intensive Growth Strategies

Southwest Airlines applies cost leadership as its generic strategy for competitive advantage, along with intensive growth strategies to maximize market share and move toward its long-term goal and strategic plan of becoming a global industry leader. The intensive strategy of market penetration provides support for the airline company’s generic competitive strategy of cost leadership, and vice versa. Southwest’s brand image and service quality reflect these strategies and associated competitive advantages. For example, customers know the company for low airfares, which are a consequence of cost leadership as a generic competitive strategy that leads to cost-based and price-based competitive advantages. Also, Southwest is known for its large-scale operations, which are a result of market penetration as an intensive growth strategy.

• Kerkemezos, Y., Pennings, E., Karreman, B., & van Reeven, P. (2023). Price asymmetries and the path dependence of market power: Evidence from the US airline industry. International Journal of Industrial Organization, 87 , 102921.
• Liang, X., Luo, Y., Shao, X., & Shi, X. (2022). Managing complementors in innovation ecosystems: A typology for generic strategies. Industrial Management & Data Systems, 122 (9), 2072-2090.
• Southwest Airlines Co. – Form 10-K .
• Southwest Airlines Co. – Proven Business Strategy .
• U.S. Department of Commerce – International Trade Administration – Travel, Tourism & Hospitality Industry .
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Case Study: Profitability Takes Flight, Southwest Airlines Unique Business Model Unveiled

Southwest Airlines is a renowned American low-cost airline established in 1967 and has since become one of the industry’s most successful and profitable carriers.

With its headquarters in Dallas, Texas, Southwest operates an extensive domestic network, serving more than 100 destinations across the United States.

Significance of Profitability in The Airline Industry

Profitability is a critical aspect of any business, and the airline industry is no exception. Achieving consistent profitability is a significant challenge in an industry characterized by intense competition, volatile fuel prices, and economic uncertainties.

However, Southwest Airlines has managed to stand out from its competitors with its unique and highly successful business model.

Southwest Airlines’ Unique Business Model

Southwest Airlines was founded on providing customers with low-cost, efficient, and reliable air travel.

From the outset, its founders aimed to differentiate Southwest from traditional carriers by implementing a business model that focused on simplicity, operational efficiency, and a strong emphasis on customer satisfaction.

Critical Elements of the Business Model

Here are the key elements of Southwest Airlines’ prestigious business model:

Low-cost operations

Southwest Airlines has distinguished itself as a low-cost carrier by implementing various cost-saving strategies.

These include utilizing a single aircraft type (Boeing 737) to simplify maintenance and training, operating from secondary airports to reduce fees, and minimizing unnecessary frills such as assigned seating and in-flight meals.

High Aircraft Utilization

Southwest maximizes the utilization of its aircraft by keeping them in the air for a significant portion of the day.

Quick turnarounds, efficient boarding processes, and high aircraft utilization rates contribute to cost savings and increased revenue potential.

Point-to-Point Routes

Unlike traditional hub-and-spoke models that many airlines employ, Southwest’s point-to-point route system allows direct flights between smaller airports, reducing transfer times and increasing operational efficiency.

This approach also enables Southwest to serve niche markets and respond quickly to changing demand.

Customer-Centric Approach

Southwest Airlines places a strong emphasis on customer service and satisfaction. Southwest has built a loyal customer base with its “Bags Fly Free” policy, no change fees, and friendly customer service.

The airline strives to provide a hassle-free and enjoyable flying experience, differentiating itself from competitors.

Efficient Workforce Management

Southwest focuses on building a stable and motivated workforce. The company’s employee-friendly policies and positive company culture have resulted in high employee satisfaction and productivity.

The airline’s efficient workforce management contributes to operational efficiency and cost control.

Case Study: Southwest Airlines’ Profitability

Southwest Airlines has consistently reported profits for several consecutive years, even during industry downturns and economic challenges.

This remarkable achievement sets Southwest apart from many other airlines struggling to maintain profitability.

Factors Contributing to Profitability:

Many different elements are responsible for the continuous progress of the airline. Some of the critical factors that played a crucial role in Southwest Airlines’ profitability include the following:

Strategic Route Planning

Southwest strategically selects routes that align with its business model, focusing on high-demand and high-frequency routes.

This approach allows the airline to optimize revenue potential while minimizing operational complexities.

Cost Leadership and Operational Efficiency

Southwest’s relentless focus on cost reduction and operational efficiency has significantly driven its profitability.

The airline maintains a competitive advantage in the industry by keeping costs low and implementing efficient operational practices.

Revenue Management Strategies

Southwest employs effective revenue management strategies, including dynamic pricing and capacity management.

These strategies ensure optimal seat utilization and maximize revenue per available seat mile (RASM).

Strong Customer Loyalty and Brand Reputation

Southwest’s commitment to customer satisfaction has resulted in a strong brand reputation and customer loyalty.

Repeat business and positive word-of-mouth recommendations contribute to sustained revenue and profitability.

Challenges and Limitations of Southwest’s Model

Here are some challenges and limitations faced by one of the most successful Airlines in the United States. 

Vulnerability to Fuel Price Fluctuations

Like any airline, Southwest is exposed to the volatility of fuel prices. Increases in fuel costs can significantly impact the airline’s profitability, as fuel represents a substantial portion of its operating expenses.

Fluctuations in fuel prices require Southwest to employ effective fuel hedging strategies and closely monitor its fuel efficiency to mitigate risks.

Limited International Presence

While Southwest has been highly successful in the domestic market, its international operations could be more extensive.

The airline primarily focuses on serving domestic destinations, which may pose challenges in expanding its market reach and tapping into lucrative international markets where competition may be fierce.

Potential Risks of Focusing On the Domestic Market

Relying heavily on the domestic market exposes Southwest to potential risks associated with economic fluctuations, regulatory changes, and geopolitical events that could impact domestic air travel demand.

Diversifying its operations to include more international destinations could mitigate these risks.

Southwest Airlines’ Response to Challenges

Fuel Hedging Strategies

Southwest employs fuel hedging strategies to mitigate the risks associated with fuel price fluctuations.

These strategies involve entering into contracts to secure future fuel purchases at predetermined prices, reducing the impact of sudden price increases.

Expansion of International Routes

Recognizing the growth potential in international markets, Southwest has gradually expanded its global operations.

By adding more international destinations to its network, the airline aims to diversify its revenue streams and reduce reliance on the domestic market.

Mitigation Plans for Market Risks

Southwest monitors market trends, economic indicators, and regulatory changes to adjust its operations and strategies proactively.

The airline maintains an elegant approach, quickly adapting to changing market conditions and mitigating potential risks.

If you want to know further, an inclusive case study solution can help you the right way.

Southwest Airlines case study solution , written by experts, lets you take a comprehensive look into the airline’s history, profitability model, challenges, how they tackled them, and many other aspects.

Conclusion:

Southwest Airlines has established a unique and highly successful business model that centers around low-cost operations, efficient utilization of resources, and a customer-centric approach.

Its focus on simplicity, operational efficiency, and customer satisfaction has contributed to its profitability and competitive advantage in the airline industry.

Southwest Airlines’ profitability stands out in an industry often plagued by financial challenges.

The airline’s ability to consistently generate profits can be attributed to its distinctive business model, which enables cost leadership, operational efficiency, and strong customer loyalty.

Southwest’s success serves as a valuable case study for the airline industry. It highlights the importance of innovation, adaptability, and a customer-centric approach in achieving profitability and sustainable growth.

Other airlines can learn from Southwest’s strategies and consider adopting elements of its business model to enhance their own competitiveness and financial performance.

Read more case studies here .

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Please note you do not have access to teaching notes, disruptive innovation: the southwest airlines case revisited.

Strategy & Leadership

ISSN : 1087-8572

Article publication date: 5 July 2011

The standard explanation of Southwest's success is that it applied a low‐cost competitive strategy. This paper aims to address this issue.

Design/methodology/approach

The paper argues that Southwest was actually employing a disruptive strategy. Financial data show that Southwest's results were highly variable during the time it was growing into a national carrier.

The paper finds that Southwest's disruptive strategy of innovative operational cost reduction did not produce striking financial returns until it adopted more efficient aircraft, which made its fuel costs competitive.

Practical implications

Cost efficiencies alone do not make a firm a disruptor. What is required is the combination of a low‐cost business model and enabling technologies.

Originality/value

This paper points out that managers should learn to see operational innovations and cost savings in the context of disruption, not just price advantage.

• Competitive strategy
• Low‐cost strategy
• Low‐cost carrier
• Industry disruptor
• Point‐to‐point route
• Cost‐cutting innovations
• Disruptive innovation
• Disruption theory
• Delivery services

Raynor, M.E. (2011), "Disruptive innovation: the Southwest Airlines case revisited", Strategy & Leadership , Vol. 39 No. 4, pp. 31-34. https://doi.org/10.1108/10878571111147387

Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

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HRM / Organizational behaviour Case Study

Southwest airlines: generating competitive advantage through human resources management.

Publication Year :  2004

Authors:  Saxena G, Ganesan S

Industry:  Transportation

Region: USA

Case Code:  HRM0001

Teaching Note:  Available

Structured Assignment:  Available

Abstract: Texas-based Southwest Airlines was considered the most successful airline company in the US. While the entire US airline industry was reeling under heavy losses following the September 2001 terrorist attacks, Southwest was successful in posting modest profits. Moreover, when the major carriers started laying off thousands of employees, Southwest kept recruiting. Many credited this competitive edge of the company to its founder Herb Kelleher, who had instilled a unique culture of 'fun at workplace'. He strongly believed that a happy workforce was a productive workforce and hence put his employees ahead of even the customers.

• To discuss the following issues
• Southwest's faith in human resources (HR) as a means for competitive advantage
• The concept of HR branding for one to be an employer of choice
• Southwest's empowerment and individuality processes
• If having fun at work was a great motivator, why is that we have not heard many such success stories at higher levels
• Compare and contrast Southwest's management style with that of other companies such as SAS Airlines, Semco, People Express, etc.

Keywords :  Southwest Airlines, People management, Herb Kelleher, Corporate culture, Southwest spirit, HRM Case Study, Competitive advantage through people, Southwest's recruitment policy, Training, Graveyard video, Spirit weaver

Related Case Studies

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• Introduction
• Background note
• Competitive advantage through people
• Recruitment
• The positive effect

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In 1994, both United Airlines and Continental Airlines launched low-cost airlines-within-an-airline to compete with Southwest Airlines. From 1991 to 1993, Southwest had increased its market share of…

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In 1994, both United Airlines and Continental Airlines launched low-cost airlines-within-an-airline to compete with Southwest Airlines. From 1991 to 1993, Southwest had increased its market share of the critical West Coast market from 26% to 45%. Considers how Southwest had developed a sustainable competitive advantage and emphasizes the role of human resources as a lever for the successful implementation of strategy. Asks whether competitors can successfully imitate the Southwest approach.

Jan 1, 1995 (Revised: Apr 5, 2006)

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Stanford Graduate School of Business

HR1A-PDF-ENG

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Solved Case Study of Southwest Airlines from “STRATEGIC MANAGEMENT: AN INTEGRATED APPROACH” 9TH EDITION BY HILL & JONES (CENGAGE LEARNING)

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hasan ahmed

This article analyzes the sources of Southwest Airlines' competitive aduantage using an integrative approach, employing economic analysis tools to illustrate the roles of commitment and organizational capabilities in delivering competitive advantage at Southwest. A framework is presented illustrating that much of the value Southwest generates is (1) created through employee needs satisfaction, (2) converted to customer and shareholder value via organizational capabilities, and (3) captured by the firm as a result of its cost advantage and superior service. This three-part framework may be applicable to other labor-dependent service organizations.

Elena Pavlova

Master Thesis

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Southwest Airlines: Operational Efficiency Analysis Case Study

Introduction, business problem and critical issues, parameters for analysis, action recommendation.

Southwest Airlines has been a strong growth organization over the 40 years and has been a pacesetter in the US airline industry. Using its low fares, fun-loving culture, friendly service, on-time flights, point-to-point operational strategy, the airline has been able to maintain profits and a record growth rate through the years while other airline companies run out of business and file bankruptcy due to depressed market conditions.

Southwest begun offering hauls between Dallas, San Antonio and Houston, and it has diversified its markets and now carry more passengers than any other American air company (about 90 million during 2010) and lately announced the buyout of AirTran Airways for $1.4 billion.

The airline now has a market capitalization of over US$ 14 billion and is placed as one of the strongest airlines in the ailing air transport business (Bamber, Gittell, Kochan & von Nordenflytch 2009).

The entire airline industry appears to be on the mends after enduring expensive labor contracts, soaring fuel costs and reduced consumer demand. However, Southwest has experienced growth in the harsh airline industry because it’s no frills business model focuses on controlling costs.

Southwest targets routes with high customer demand and the advanced experience of Southwest’s staff allow Southwest to fast turnaround aircraft and keep their planes in the air more hours per day than its rivals.

However, although Southwest is in many ways has been a success story for the U.S. airline industry, Southwest airlines is currently facing stiff challenges that are threating its enviable success. Though these challenges do come as a surprise to the company as they have already been experience actross the airline industry and have brought to knees many of the industry leaders to an extend of bankruptcy.

The airline industry has been faced by a lot of challenges lately, which have brought big companies to their knees and even others files for bankruptcy to avoid litigations and eventual dissolution. Issues are:

Economic crises

The economic hard times have really hit on the airlines industry, with most consumers reducing on travelling to say holiday destinations, and preferring even cheaper modes of travelling like road for shorter distances.

This has really affected the operations of Southwest airlines as the number of flights per day have decreased significantly, while its costs like employee maintenance and plane maintenance have remained constant or even gone up (Rob 1997).

However, this might not seem as a great challenge for Southwest as its well know for its low-cost flights and at a time when customers are cutting on their transportation costs, the airline comes in handy and is expected to reap from the hard times.

Increase in fuel costs, shift in fuel hedging contracts

The high cost of fuel is conceivably the most apparent challenge facing the airline industry currently, with many imposing fuel surcharges on customers. The high costs are a factor for most industries, but fuel is a particularly important factor for airlines.

Fuel represents 25% to 40% of the airlines operating expenses and experts approximate that a $1 per barrel price increase in fuel costs the airline industry US$175 million annually.

With the price per barrel hanging in the high US$ 60 plus mark (the price moved above US$ 50 at the end of February 2005), airline companies are feeling the heat on their bottom-line.

This is so evident that each time crude prices go up, airline stock prices dwindle down because of the knee-jerk reaction from the airline industry investors (Terry 2007).

For the Southwest airlines most of its fund hedge contracts were running until 2010, and now the company had to sign new hedging contracts. Given the uncertainty of the oil industry the company is forced to sign expensive contracts with are rather not in tandem with its cost cutting austerities.

For 2012, ticket prices are expected to jump about 15% and this is a major challenge to Southwest as it aims to provide cheap transport options with effective travel packages.

Increase in maintenance costs

With the cost of almost everything in the global markets going up, every aspect of the airline industry has gone up. Maintenance costs have soared up as the cost of labor and materials have almost doubled up over the last decades. The maintenance engineers are demanding new pay packages

One of the move Southwest airlines has taken to reduce the maintenance costs it to have its maintenance done at overseas facilities, which are rather cheaper considering the extensive overhaul needed for airplanes on a time-to-time basis.

However, American maintenance workers are far more efficient doing the maintenance, but they are very expensive and demand as much as three fold what others demand in the global market (Rugman, Oh & Lim 2012).

The increase in maintenance prices may make its way down to the consumers, thus Southwest may be forced to increase its prices to remain profitable though this might hurt its business models of cheap transport means.

Demand by employees, pilots for more pay

Southwest airline’s mainly unionized employees have been pushing for pay increases to equal the rich contracts negotiated by other airlines.

Currently, Southwest offers a first-year minimum pay of US$ $49,572 for its pilots, considering that the company normally recruits more experienced pilots than other airline companies. Though as of 2010, it was ranked the best paying airline company its pilots are demanding for an increase in their pay.

Porter’s Five Forces

According to Porter, the success of Southwest’s strategy is due partly to its consistency and integration and the unity that ties everything together. Instead of the classic hub-and-spoke system used by most major carriers, Southwest applies a point-to-point strategy which allows it to pick the most profitable routes to ply.

The airline provides service to 61 airports in 31 states with its fleet of over 500 Boeing 737s. In terms of annual revenue and available seat-miles (ASM) Southwest outdoes many of the legacy carriers and is ranked as one of the largest American carriers.

Nevertheless, Southwest is also categorized as a regional or discount carriers due to its point-to-point operational system and discount services.

Internal Rivalry

The airline industry is typified by several carriers who have very little differentiation in their product. Thus, due to these factors and the current market conditions, the airline industry is in a vulnerable situation.

Over the recent times, four major airlines filed bankruptcy; Delta Airlines Inc, Northwest Airlines Corp., United Airlines and ATA Airlines. The partial differentiation of the products of most major airline companies together with the rising demand elasticity has seen the airline industry use price competition as its major way of rivalry.

This unhealthy price competition has eroded profits as the price-cost margins have reduced tremendously.

Southwest came into the market with its niche as discount airlines. Southwest Airlines is in a unique situation since it is one of the principal driving forces in the current price competition. Presently, Southwest has the lowest cost per available seat mile (CASM) of the major airlines and this makes the company control prices to maintain its profitability level.

Nevertheless, Southwest Airlines cost per available seat mile has been gradually increasing due to increased labor costs and a decreasing fuel hedge.

Though Southwest could be facing challenges, Southwest is expected to have a competitive advantage over other airlines even discount airlines as they are trimming their margins and thus have the potential of a lower cost per available seat mile.

The airline industry is a highly centralized industry with the top ten players taking more than 90% of total American air traffic as of 2004.

In spite of the consolidation of industry and the depleting earnings of most major carriers, many new players are attempting to venture into the airline industry in past years, for example Jetblue which came into the market in 2000 and has registered positive margins.

However, entry into the industry is rather difficult considering the stiff barriers in the industry.

The big financial liabilities experienced by many major carriers in recently and the decreasing customer demand that has been experienced resulting in the tightening of the capital markets for the financing of start-ups.

However, industry analysts predict that there could be a significant change in both industry demand and profitability that could match with increased access to capital markets for new ventures and thus create an incentive for new entrants (Raynor, 2011).

The distinctive approach of new entrants could be to pursue regional markets that have more profitable routes and offer lower prices that the existing airlines given their low marginal costs since they have lower labor and maintenance cost.

Substitutes and Complements

Airlines compete with other forms of transport. The primary substitute for the airline industry is the automobile. The integrated inter-state highway system in America makes it possible to go almost anyplace by car.

Road travel leads short distance travel because of the unrealistic nature of flying such short distance, though as distance needed to travel lengthens usage of carriers considerably increases and vice versa.

In 2010, only 13% of road trips were longer than 1000 miles, comparing to 75% of airline trips. Also rail transport is another substitute to the air transport.

These regional forms of transportation don’t correspond to a direct substitute for the air transport but they may be a competitive advantage that regional carriers have to consider.

That why Southwest Airlines operates a point-to-point destination schedule between regional cities that may also be connected by considerable bus or railroad traffic.

Increased lag times at many airports as a result of increased security checks means the time advantage gained by using air travel has diminished. Thus, the marginal benefit of using air carriers for transport has decreased and the use of train or automobile may become more viable options.

Supplier Power

The airline industry is susceptible to supplier power through three principal inputs; jet fuel, airframes and labor. However, jet fuel suppliers have the strongest supplier power.

Jet fuel prices may not perfectly correlate with oil prices but since 2005 when the historical price level of oil reached US$ 70.85, the effects have got worse for the airline industry.

Like the rest of the airline industry, Southwest Airlines has been facing dwindling margins due to increasing fuel costs, especially now that the company has got into new fuel hedging contracts after its contracts expired in 2009.

Southwest now utilizes dynamic hedging strategies that allow it to apply hedging to control the episodic nature of jet fuel prices by countering anticipated higher prices in the future.

Southwest currently has an advanced hedging program that is continually trying to determine future cash flows relating to jet fuel prices to optimize their hedges.

Buyer Power

Consumers recently have a significant buyer power over the airline industry. The economic crisis and terrorist threats have had a considerable effect on consumer demand. From their high in 2000, revenue passenger-miles (RPM) have decreased significantly and though they have rallied lately they remain at a low level.

The industry has attempted to reduce available seat-miles to react to reduced RPM but the reaction hasn’t been sufficient thus there is a lower load factors.

Carriers excess capacity and the perishable nature of plane seats have made customers to put a lot of pressure on the price of airline tickets. The demand for airline services is highly demand elastic and consumers react fast.

Southwest was the first airline to offer online reservations as a way of reducing costs (this saves the company over $40 million annually) and the commissions paid to travel agents.

Southwest does not offer joint travel website like most carriers do as the management argues that their competitors will gain competitive advantage over it and work negatively on its brand loyalty.

Southwest has suffered considerable criticism from the investment world because of its increasing CASM. Other new regional entrants airlines have entered the market in the attempt to challenge Southwest’s dominant position. As CASM increases, Southwest becomes more susceptible and appears to be losing its most important market advantage.

Southwest needs to counter increasing fuel costs with improved non-fuel cost management and fuel hedging strategy. The non-fuel costs Southwest needs to focus on are maintenance and labor.

Many of the other operational costs will be harder to control but with its current market position, Southwest can take steps now to ensure that it retains its low cost advantage.

Over 40 percent of Southwest’s total CASM is due to salaries, wages and benefits for a labor force that is over 80 percent unionized. Many of these unions’ contracts will become amendable during the next several years.

The outcome of these agreement negotiations, especially the pilots’ union, will have a considerable effect impact on the carrier future cost structure. The airline is currently in a strong financial position but it must take into account the dramatic reduction in labor costs that are occurring throughout the rest of the industry.

Also Southwest’s traditional strategy for growth may not continue to work in the future due to its hub airport strategy of the legacy airlines. Southwest traditionally selects only highly profitable city pair routes on which they can establish a strong market share through low prices and high load factors.

However, Southwest has already entered many of the most profitable markets. Growth opportunities still exist for Southwest in expanding operations in cities already serviced.

It is recommended that Southwest enter new cities especially those that have been serving as hubs for weakened legacy airlines. Also Southwest should to expand by opening service to international destinations using their current operational strategy (Owen, 1999).

Also the company should continue to successfully hedge fuel prices and Improve employee-management relations to avoid disruptive contract negotiations.

Through consistent focus on operational efficiency and cost control, progressive human resources management, upbeat marketing, service to understand markets, and a dedication to quality at every level, Southwest Airlines is poised to remain profitable and dynamic.

Bamber, G.J., Gittell, J.H., Kochan, T.A. & von Nordenflytch, A., (2009). Up in the Air: How Airlines Can Improve Performance by Engaging their Employees. Ithaca: Cornell University Press.

Owen, B., (February 22, 1999). Southwest’S Now In A New York State Of Mind | Nuts About Southwest. Blogsouthwest.com .

Raynor, M. E., (2011). Disruptive innovation: the Southwest Airlines case revisited. Strategy & Leadership 39, no. 4, 31-34.

Rob K, (February 21, 1997). Southwest may add cities to Iceland deal. Baltimore Business Journal, 56-89.

Rugman, A. M., Oh, Chang H. & Lim, D., (2012). The regional and global competitiveness of multinational firms. Journal of the Academy of Marketing Science, 40, no. 2, 218-235.

Terry, R. J. (December 10, 2007). Icelandair stopping flights out of BWI. Web.

• Chicago (A-D)
• Chicago (N-B)

IvyPanda. (2024, March 26). Southwest Airlines: Operational Efficiency Analysis. https://ivypanda.com/essays/case-study-southwest-airlines/

"Southwest Airlines: Operational Efficiency Analysis." IvyPanda , 26 Mar. 2024, ivypanda.com/essays/case-study-southwest-airlines/.

IvyPanda . (2024) 'Southwest Airlines: Operational Efficiency Analysis'. 26 March.

IvyPanda . 2024. "Southwest Airlines: Operational Efficiency Analysis." March 26, 2024. https://ivypanda.com/essays/case-study-southwest-airlines/.

1. IvyPanda . "Southwest Airlines: Operational Efficiency Analysis." March 26, 2024. https://ivypanda.com/essays/case-study-southwest-airlines/.

Bibliography

IvyPanda . "Southwest Airlines: Operational Efficiency Analysis." March 26, 2024. https://ivypanda.com/essays/case-study-southwest-airlines/.

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