Southwest Airlines. The Case Case Study

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¶ … Southwest Airlines. The case is set in 2010, and Southwest has emerged as one of the leading U.S. airlines (#1 by passenger volume) through a combination of unique culture, sound management practice and focus on the consumer. While most of the legacy airlines have struggled, Southwest continues to succeed. This case examines why the company has been so successful, and what it should do going forward.

The biggest issue facing Southwest is its purchase of AirTran, another discount carrier. AirTran was a good fit in terms of its route networks because it was based out of Hartsfield, the largest airport in the U.S. where Southwest did not currently operate. There are challenges, however, in that AirTran was never run as well as Southwest, did not have the same corporate culture and it also had international routes to the Caribbean. Southwest had never operated an international route before. Integrating AirTran was going to be the major strategic thrust for Southwest during the 2011-year, and it had never acquired such a large competitor before.

Company Introduction

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Southwest Airlines began life with a mission to win business with convenient schedules, a good flying experience, on time flights and low prices. The company began by servicing secondary airports, including its home base of Love Field in Dallas. By 2010, Southwest was able to secure the top place in the U.S. airline industry, with greater passenger volume than any other carrier. The company's strategy is comprehensive, with the different elements working together well. The corporate culture was strong and constantly reinforced, and it contributed to both the high levels of customer service and to the maintenance of low costs. Southwest, however, was now faced with integrating a fairly large competitor into its operations.

Situation Analysis

Case Study on Southwest Airlines. The Case Is Set in Assignment

A major acquisition poses a number of different problems for the acquiring firm. Typically, the merger will come at a cost that is higher than the intrinsic value of the acquired firm, in order for the deal to appeal to the shareholders of the takeover target. This means that for Southwest to make this acquisition profitable, it must add more value to the assets of the target firm than it added in extra value to the shareholders. The acquisition cost was $1.4 billion. The acquisition must be integrated on multiple levels in order to work. The operations must be merged, but so too must the corporate culture. AirTran employees, therefore, must very quickly become Southwest employees.

On the operational side, the first changes that Southwest made involved the AirTran route network, as it began thinning out the less profitable routes and the duplicate routes (Mutzabaugh, 2012). The company also needs to bring in AirTran's workforce. Whereas Southwest manages its culture in part through its selection process, the company now must bring in thousands of employees how have not gone through the selection and enculturation process at Southwest. Worse, the unions became involved in the merger process, and in the selfish pursuit of their interests appear to be causing problems with the integration of the two workforces (Jacksonville Business Journal, 2012).

Strategic Objectives and Goals

For Southwest, the merger represented a shift in strategy, which through the company's history had been focused on organic growth. However, it is reasonable to assume that the company's overall strategic objectives have not changed as the result of the merger, but rather than the merger represents a new approach to achieving those strategic objectives. Southwest has shifted its objectives somewhat from the 1970s, when it was an underdog just looking to survive, to the present day, when it carries more passengers than any other airline in the United States. The company still seeks to win with its discount model, offering superior customer service, maintaining low operations costs and using a number of tactics to support this. Clearly, gaining access to Hartsfield is one of the main operational benefits of buying AirTran, but the size that the company gives Southwest serves to further enhance the company's route network. Thus, Southwest is going to try to integrate AirTran into its operations, and apply the culture, operating efficiency and customer service orientation of Southwest to the AirTran staff and route network, all while folding AirTran into the Southwest brand.

Industry Analysis

The airline industry is a challenging one in which to operate, something that has made Southwest's track record of success all the more remarkable. Airlines have only moderate bargaining power over suppliers. The two major costs for airlines are labor and fuel. Labor costs are often subject to union bargaining, so the airlines face union bargaining power. Jet fuel prices are decided on global markets, and no airline has the buying volume to be a price-setter. As a response to this, Southwest engages in fuel price hedging. The company notes that fuel expense increased $626 million in 2010 and was expected to increase a further $1.3 billion in 2011 (2010 Southwest Annual Report). Highly volatile fuel prices have compelled the company to reduce its hedging program, but the lack of control that the company has over fuel price regardless of hedging is something that represents an operating challenge for Southwest, particularly as it pertains to the company's pricing strategies.

The bargaining power of buyers is generally high. Most consumers are price sensitive, and in fact it was Southwest's ability to tap into price sensitivity with respect to a key substitute (driving) that allowed it to get its start. After deregulation, airline industry competition in the United States has been intense, and few routes are without significant competition. This implies that airlines must be able to serve routes at a very low cost in order to be profitable. The threat of substitutes is also high. Although there is a correlation between airline demand and the use of cars over the same routes (related to prices of both being correlated to fuel costs), the threat of substitution is high, diminishing only as distances become greater. This means that the threat of substitutes is higher on, say Tampa to Fort Lauderdale than Tampa to Albuquerque.

The threat of new entrants is also high. Despite the high costs and inherent challenges associated with starting an airline, there appears to be no shortage of people with the resources and desire to try. Some of these new entrants, such as JetBlue, become significant competitors, while others often do not. The intensity of rivalry is very high in this industry. Southwest's experience starting the airline, and the inability of the airline to kill the absurdly anti-capitalist Wright Amendment illustrates how intense the rivalry can be, and willingness of Southwest's rivals and their political cronies to undermine America's commitment to capitalist values makes the intensity of rivalry a clear threat to firms in this industry (Chang, 2011). All told, there is little opportunity for airlines to make money, something that is evidenced in the number of bankruptcies among the legacy players (Peterson & Daily, 2011). That said, Southwest seems to have good understanding of the different factors influencing its ability to turn a profit and has been able to set a strategic course around these obstacles, delivering profits consistently over its life.

SWOT Analysis

Southwest succeeds in this challenging industry on the basis of having more major strengths than weaknesses. The Southwest cost control program is essential to success in its industry. That the program is ingrained in different parts of the company is essential. Whether the company is keeping labor costs low, turning around its planes faster than the competition or controlling costs associated with fuel prices, that every aspect of the operations is subject to this scrutiny helps the company be profitable on more routes. Another key strength is the corporate culture. While cost is part of the culture, it is more critical that the company's sense of "fun" and "love" are essential to fostering customer loyalty. Southwest's customers are more loyal than those of other airlines, and it does not require expensive loyalty programs to make that happen.

Another strength of Southwest is the route network. The point-to-point approach that Southwest uses is unique among major carriers, but has significant appeal to customers, who prefer not to fly out of their way in order to change planes. In addition, using many smaller airports is important because the flying experience is often significantly better at the smaller airports. With its current size, Southwest reaches most major markets and this allows it to have strong route networks that can compete even with the hub-and-spoke capabilities of the legacy carriers. Lastly, the marketing programs at Southwest have been effective for essentially the company's entire existence. Southwest's marketing slogans and promotions are quirky, and resonate with consumers as a result. That the marketing is backed up by the company's product/service is also important. The additional marketing dollars that Southwest spends pay off in growth for the company.

There are a few weaknesses that the company has. Right now, AirTran represents a weakness, because Southwest must implement a failed airline into its successful operations. This… [END OF PREVIEW] . . . READ MORE

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