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Date: October 4, 2017

To: Don Kopka
From: Elizabeth Neary
Subj: Strategic Analysis for Southwest Airlines

This strategic analysis for Southwest Airlines uses established tools and techniques to

first present a hard-hitting environmental analysis of Southwests external and internal

conditions. The strategic issues facing Southwest are then identified, followed by evaluation of

potential alternative solutions and recommendations for future strategies.

EXTERNAL AND INTERNAL ENVIRONMENTAL ANALYSIS

External Analysis

There are two conditions Southwest Airlines face within the airline and transportation

industry:

1. Ability to compete in the airline industry without expansion

2. Increasing customer offerings while still operating at a low cost

Appendix 1 outlines the key success factors in the industry, three of which include customer

satisfaction, low operating cost, and more options for fliers. These strategic issues are further

supported in Appendix 2 using Porters five forces model. Evidence of this include other modes

of transportation which can impose a high risk for the airline industry. Many people have a fear

of flying and consider air transport to be a pain which makes other modes of transportation more

appealing to these customers. Customers have a high buying power due to lack of differentiation

in service offerings. The only differences flights have to offer is the type of seating, meals

offered, and efficiency of travel from one place to the next. Customers can easily buy an airline
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ticket from a competitor and receive the same results they were looking for, which is to get from

one place to another. Supplier power is also high because of the low amount of producers and

manufacturers of airplane parts.

Internal Analysis

Southwest Airlines is known for its low fares, ability to reach the destination quickly, and

its outstanding customer service. While Southwest does have the lowest fares, it does not offer

some of the luxury options other airlines offer. Appendix 3 shows the internal weaknesses

Southwest has. For example, Delta Airlines offers two types of seating: economy and business.

This gives the flier an option have more comfort at a higher cost or standard comfort at a low

cost. Although many people are dedicated to only fly with Southwest, if they had some extra

money they wanted to spend to make their flight more comfortable, they wouldnt be able to do

it because Southwest only offers one type of seating. While Southwest dominates the market for

standard fliers, its presence within the upper class is low.

One thing that Southwest does offer that no other airline offers is a free carry on in

addition to two free checked bags. This keeps customer satisfaction high because the price for

the ticket is the price they pay. There are no hidden fees in baggage. Other airlines have tried to

give their customers the same value but have had little success due to their higher operating

costs. For example, United Airlines offers two free checked bags but only if the customer has a

Club or Presidential Plus Card. Delta offers one free checked bag but only for frequent fliers.

Appendix 3 shows more strengths within the company.

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STRATEGIC ISSUES FOR SOUTHWEST AIRLINES

Southwest has dominated the U.S. market but has little room for growth if it does not

decide to pursue international flights. As noted in Appendix 1, Southwest is in the mature stage

in the industry and the only stage left for them to follow is decline. If Southwest continues to

only offer the same start and end locations, they are likely to start declining. In addition to this, if

they do want to pursue international transport, they will likely have to add more luxury options

to fliers because of the longer flights. This could be costly and cause them to explore different

aviation models apart from the one model they are used to using.

STRATEGIC ALTERNATIVE EVALUATION

The strategic alternatives for Southwest are shown in Appendix 7 and 8. Appendix 7

looks at the pros and cons of different ways to expand while Appendix 8 explores the pros and

cons of offering more luxury options to customers during flights. Alternatives for issue 1 include

offering international flights or expanding their start and end location options in the U.S.

Alternatives for issue 2 include the addition of different types of seating, more food offerings,

and integrating comfort items, such as pillows and blankets, during the flight.

STRATEGIC RECOMMENDATIONS FOR SOUTHWEST

Issue one is of the most importance to Southwest because without growth and expansion,

their company will fail. Many businesses who were not able to adapt to changing environments

and higher expectations failed. If Southwest does not continue to change and adapt to the

surrounding environment, they may have already hit their highest point in the industry. While

they do offer low fares and superior customer service, this may not be enough in the long haul.
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Americans are starting to feel more entitled every day and they may not want to sit with the

lower-class people. This will make customers move toward other airlines because Southwest

cannot accommodate them.

APPENDIX 1: Selected External Analyses

Key success Factors for industry competition:

Low operating costs
Outstanding customer service
Quick flights with no layovers
Positive employee relations
Low cost fuel
Use of technology for efficient travel

Stage of Industry

Mature stage in the U.S.

o Low operating costs
o Strong brand loyalty
Embryonic in international locations
o No international flights
o Have not yet pursued expanding their market outside of the U.S.

General Environment
Transportation
Oil prices

APPENDIX 2: Five Forces of Competition External Analysis

Threat of new entrants: High

entrants have cost advantages
Moderate capital requirements
Little product differentiation
Deregulation of governmental barriers

Threat of substitutes: Moderate

Cars
Trains
Busses

Supplier power: High

Strong labor unions
Not many producers and manufacturers of airplane parts
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Buyer Power: Medium/High

Low switching costs
Tons of access to information about other options
Cost for travel is expensive so every dollar counts. Cheaper flights usually prevail since
there is not much product differentiation

Industry Rivalry: High

Many options
Little differentiation
Excess capacity
High fixed and variable costs
Cyclical demand

APPENDIX 3: Internal Analysis Southwest Airlines Value Chain

Value Chain Strength Weakness

Secondary
Activities

Firm flexibility at work place No luxury options for

Infrastructure Recognition and customers
appreciation for Not very many options for
outstanding performance as destinations
well as for the length of No international flights
service Do not participate with
Stress on positive attitude booking agents
rather than skill No meals on flights
Taking home satisfaction
rather than salary
Low costs, free baggage
Strong CRM

Human Testing an applicants Heavily unionized

Resource ability to perform actual job
Management behaviors
Make sure employees use
required skill and
demonstrate specific
knowledge of the job.
finding people with the
right attitude that will
thrive in the Southwest
culture

Value Chain Strength
Secondary
Activities
Technology barcode system for ticket
Development scanning
Implemented new cockpit
software that saves fuel,
cuts noise, and reduces
delays
RNP procedures in place
Procurement Only use one type of
aircraft so getting the right
part from the supplier is
easy
Fuel purchasing is now part
of the operations
department
Support green initiatives
Inbound Implementing new cargo
Logistics companion asset-tracking
service
Operations Low cost operations
Online booking
Labor is fuel are biggest
operating expenses
Outbound Automated ticketing
Logistics Simple offerings on flights
reduce expenses
Marketing Electronic tickets
Rewards are based on the
number of trips instead of
the number of miles
Promote love
Tickets only available
through southwest website
Cheapest airline prices
6
Weakness
rely heavily on employees to
solve problems rather than
technology
Flights have been delayed
and cancelled because of
technical issues that could
have been avoided
Suppliers would like
southwest to increase aircraft
diversity so they aren't
always buying the same
product
Gaps between origin pickups
and destination delivery
Suppliers experiencing
bottlenecks
40% of operating expenses
goes towards labor
Do not offer much else to
their customers other than
cheap tickets and free
checked bags
Limited options for
customers
Rely on low prices and good
customer service instead of
luxury flying
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Value Chain Strength Weakness

Secondary
Activities

Service Best service in the airline Only one type of service is

industry offered: low fares and free
Every customer gets same baggage check
value of service

APPENDIX 4: Competitive Advantage Building Blocks

Innovation Involves customers in processes

The worlds only short haul, high frequency, low fare, point
to point carrier
Made sure their fares were cheaper than the cost of driving to
the same destination

Efficiency Very timely

Lower cost operations than competitors
High income per labor hour

Customer Customers love their low-cost fares and simple flying

Responsiveness procedures
Free checked baggage is highly preferable by fliers
Customers love the efficiency of how southwest operates their
flights and transfers

Quality High customer satisfaction rate

Best customer service in the industry
Universal aircraft allows for easy part ordering and fixing
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APPENDIX 5: Internal Analysis Selected Southwest Financial Results

2013 2014 2015 2016

Return on Investment (%) 5.52 8.03 16.59 14.61

Total Asset Turnover .89 .89 .90 .91

Net Profit Margin (%) 11 11 6 4

Gross Profit Margin (%) 56.1 62.36 71.63 69.6

Selling, General, Administrative as Percent of Sales 6.6 7.6 6.9 7.1

Delta Airlines 3.5 5 2.3 2.7

United Airlines 6.7 6.7 7.7 6.8

American Airlines 7.2 8.2 14.6 12.1

APPENDIX 6: Stakeholder Satisfaction

Investors Averagereturns have been increasing with some fluctuation throughout.

Somewhat inconsistent for investors

Employees Excellent low employee turnover; emphasis on taking home satisfaction

rather than survey

Customers Excellent - Number 1 in the industry for customer satisfaction

Suppliers PoorSouthwest has not been increasing or expanding what they get from their
suppliers

Competitors Poorhigh threat of competition due to lack of differentiation and difficulty

matching low prices

APPENDIX 7: Pro-Con Alternative Analysis for Issue 1: Limited expansion opportunities
Alternative 1: Expand flights internationally
Pros
charge more for tickets
Give customers the ability to stay loyal
to the brand while still getting to their
desired destination
More competitive advantage against
other airlines that only go nationally
Alternative 2: Offer more start and end locations in the U.S.
Pros
Could still maintain their low fares
and efficiency motto
Would not need to find employees
willing to fly internationally
More offerings to customers to make
drop off and pick up more convenient
for them
Would not need to find bilingual flight
attendants
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Cons
Need more space for fuel on
longer flights
Difficulty coordinating with
foreign airports to accommodate
them
Would have to find employees
willing to travel internationally
May have to start charging for
checked bags
Cons
Would have a harder time filling
aircrafts with as many people as
they would like
Some cities may not be as
populated as the ones they
already cater to
Loss of efficiency with direct
flights
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APPENDIX 8: Pro-Con Alternative Analysis for Issue 2: No luxury offerings

Alternative 1: Add 1st class or business option

Pros
Charge more for tickets which would
increase revenue
Satisfy customers even further than
they already do
Less irritation to upper class people
who do not enjoy loud children
Cons
Expensive to change interior of aircraft
or get an entirely new model
May not go with their company
strategy

Alternative 2: Provide customers with more food options

Pros Cons
Higher revenue Food storage
Customer satisfaction increase Decreased efficiency because of
Take away customers from additional items to be put onto the
competitors plane
Possible losses from expired food

Alternative 3: Provide customers with special on-board comfort items

Pros Cons
Increased customer satisfaction Need more storage
Decreased irritability on flights washing/cleaning comfort items
Easy to integrate Would need to replace broken or torn
items
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