This case analysis looks at Southwest Airlines and how the company is in a vital financial position. The analysis was done using news articles, the company’s website and finance websites. The research was used to focus on how they have a strong employee to company relationship and customer to company relationships that they do not want to jeopardize and ruin but they need to bring forth $100 million without laying off employees and losing customers due to raising fare prices.
This analysis shows how Southwest is looking into new ideas that will enhance the brand and in the long run make them successful.
Rollin King and Herbert D. Kellher started Southwest Airline services in 1971. Southwest serves as a low-fare air transportation in many states with over 20 million customers annually. (Yates, 2012.) The airline industry suffered a major financial decrease in 1991 from the critical economic conditions, but Southwest was still holding strong, while other airline companies were in debt. The key to their success and continued success was due to the company being known as having low-costs and keeping their employee to company and company to customer relationships strong, by making every customer and employee feel important.
Also, competitors knew that they could not match Southwest airline’s low prices or the other competitors would go bankrupt, leaving Southwest Airlines to be at the top of the industry.
Southwest Airlines has been a sturdy company for more than 38 years. “If you get your passengers to their destinations when they want to get there, on time, at the lowest possible fares, and make darn sure they have a good time doing it, people will fly your airline” (Southwest Airlines History, n.d., para. 1) stated King and Kelleher, the starters and Presidents of the airline. Using its low-cost, no checked baggage fees, great customer service, and point-to-point strategy, which allows them to pick the most profitable routes to operate, Southwest has been able to expand year after year and stay profitable. As of today, Southwest Airlines is one of the most successful airlines in the struggling airlines economy.
Over the past few years many airlines have had large losses and five of the ten largest airlines have filed for bankruptcy. Southwest has been able to continue to grow but they have started to experience some financial difficulties. The October 18, 2012 Star-Telegram article entitled, “Southwest Airlines plans to cut expenses without layoffs,” (Ahles, 2012) describes the airline company as an organization known for its workplace culture and low airline fees but needs to “reduce corporate overhead costs by $100 million” (Ahles, 2012). The status of the company was examined in detail by the article and it revealed the carrier has a substantial problem that needs to be resolved quick before they have to file for bankruptcy. Facing Difficulties
The airline industry the past few years have had many problems due to increasing energy costs, expensive labor contracts and reduced consumer demand. The heaping problems facing Southwest can be traced to five major causes. The difficulties began with a dramatic change in business travel demand and consumer demand. The terrorist attacks of Sept. 11, 2001 had an immense negative impact on consumer demand. People were afraid to fly and Southwest along with all the other airlines had to find ways to make customers feel safe again. Around the end of May, beginning of June, business travel in the overall airline economy decreased 5.4 percent, (Martin, 2012) the largest decline in any month since April 2010, showing signs of a slowing economy.
Businesses are still doing their core business travel, but converting to more of an electronic approach, for example, Skype, to save on costs. Skype is a free computer program that people can video chat for as long as they want, whereas flying to another state or overseas can cost a company an excess amount, leaving companies that are short on money to convert to an electronic approach to business meetings. Southwest has experienced remarkable growth by continuing to convert cities to Southwest service by purchasing four Air Tran cities for $1.4 billion in 2011. Although this was a smart choice to continue to grow, spending over a billion dollars hurt them financially. They predicted around election time that consumer demand would improve having them gain more revenue, but there predictions were wrong causing them to still be financially tight. In April, Charlotte, N.C., Flint, Michigan; Portland, Maine; and Rochester, N.Y. will be converting to Southwest service.
Fuel costs remain a major concern for the entire airline industry. Southwest paid $3.16 per gallon for jet fuel in the third quarter of this year, $1 more than last year, and expects to pay $3.45 per gallon in this year’s fourth quarter. Although airlines are converting to more energy efficient planes, fuel is about 35% of the airlines total operating costs. According to Martin (2012), “Airfares are not rising as fast as fuel costs, partly because airlines realize that passengers will use alternatives if flying becomes too expensive.” Southwest was one of the most fuel sophistry airlines, but the continuing uprising fuel costs made the airline improve the fuel efficiency of its fleet by purchasing new Boeing 737-700s. They chose to purchase instead of rent to improve cash reserves and have less debt to total capitalization compared to other airlines to stay competitive. Although this was a good decision, operating costs increased because Southwest chose to modernize the Boeing 737-700s with new interior and still plan on putting new seats in by the middle of 2013. In addition to fuel costs, labor costs are an extensive concern for Southwest.
Labor costs have gone up more than 10 percent compared to the same time last year. Southwest’s success is leading its union workers to demand more generous compensation packages. “We are committed to provide our employees a stable work environment with equal opportunity…Employees will be provided the same concern, respect and caring attitude within the organization that they are expected to share externally with every Southwest Customer” is the mission to Southwest employees. Because of their mission, Southwest has always maintained good relationships with its employees, and this may help convince their employees to help the company maintain low cost advantage. In the travel industry, the company that satisfies the customer will grow and be profitable. Southwest was ranked top in customer service last year by the International business awards and Consumer Reports honored them as being best for customer service in May of 2011. Southwest is confident that they can fix their financial problems and not lose customers or employees. Suggestions for a Successful Change
Southwest is in a challenging situation but can easily be remedied with a number of recommendations. It is acrimonious to compete between airlines because of all the similarities between companies but Southwest has a chance to be the top competitor with a few changes. Southwest must reconsider its strategic choices and find new strategies to get back into having a strong financial company. “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” (Southwest Airlines Mission, n.d., para. 1). Although they are in a bind, they do not plan on breaking their mission; they plan on attacking this situation and becoming a stronger more profitable company.
“The carrier is missing its strategic goals for the year and plans to reduce corporate overhead costs by $100 million” (Ahles, 2012) stated Kelly, the CEO of Southwest Airlines. Kelly is not considering layoffs at this point but the company might have to reduce hiring and their total employment in corporate. In 2009, Southwest offered buyouts to employees, trimming 1400 jobs. They might have to offer more buyouts to avoid bankruptcy but they do not want to jeopardize their strong relationship between the company and the employees.
Because of the strong relationship with employees, it could be easy to negotiate with the unions and convince them that low labor costs are required for the long run stability of the company. Many airlines such as United Airlines and US Airways have already cancelled their benefit pension plans and demanded unions agree to take pay cuts while the companies were in bankruptcy. Also, other airlines have used government regulations and threat of other financial cuts to reduce costs. Southwest does not have the same financial dilemmas yet, but they need to be strong with their unions and reduce or maintain its own labor costs to avoid being added to the list of airlines that filed bankruptcy.
In 2013, Southwest Airlines plan to cut operating costs and look for new revenue sources. They plan on looking into new initiatives like charging for early check-ins, changes to the Rapid Rewards program and other small fees that similar airlines have, but are not sure if that will include new passenger fees. Even though competitors generate hundreds of millions of dollars from adding checked bag fees, the company does not want to consider adding them. They do not want to risk their reputation for “best value, best consumer on-time estimates and best luggage policy of all domestic airlines” (Southwest Airlines News, 2009, para. 1) award they received from Zagat. At Southwest, they do not want individuals spending up to $120 on checking in your bags for a roundtrip, they want individuals to put that cash towards their vacation.
Southwest Airlines has no way of controlling the cost of fuel, but they can control the efficiency with how they use its jet fuel. They can increase fuel efficiency through the use of newer and better equipped airplanes. This way they can conserve fuel and compensate for increasing fuel costs. Southwest has already been taking steps to help improve fuel efficiency by adding Blended Winglets to the wings of its aircrafts, since 2003. Also, Southwest has purchased more of the 737-700s, which are better on saving fuel, than any other airline; making them the number buyer from Boeing. Having these planes has increased passenger capacity by 10.8 percent allowing for more revenue. They should continue to add Blended Winglets to the older planes but they should purchase new planes to replace the less efficient models for the long run.
For long term growth, Southwest should look outside the U.S. for suitable, profitable markets. As the airline industry recovers, consumer demand will increase. They have done a good job growing within the United States, but they should think about getting destinations in Canada and Mexico. Going outside the U.S will expand their growth and increase profits.
Southwest Airlines has the confidence that they can raise prices and not lose customers. “We don’t take our commitments lightly. We are dedicated to doing the right thing, we take great strides to ensure your safety and fostering trusting relationships between our Employees, our Customer, our Suppliers and our Planet” (Southwest Airlines Mission, n.d., para. 3). There have been 200 airline bankruptcies since deregulation in 1978 and Southwest is very confident that they will make enough cash to meet its obligations and get there strong financial position back. Gary Kelly stated, “At this point, we’re simply on a mission to see if we can come up with some ideas that we like that we think will be effective that will enhance the brand and it’s just premature to say anything more than that” (Ahles, 2012).
Ahles, A. (n.d.). Southwest Airlines plans to cut expenses without layoffs | Airlines and Aviation | Dalla.. Star-Telegram.com | News, Videos & Commentary about Fort Worth, Arlington, Dallas, Texas, Cowboys & more. Retrieved November 5, 2012, from http://www.star-telegram.com/2012/10/18/4347085/southwest-airlines-plans-to-cut.html Kelly, G. (n.d.). Southwest Airlines | Book Flights, Airline Tickets, Airfare. Southwest Airlines. Retrieved November 5, 2012, from http://www.southwest.com Martin, H. (n.d.). Airfares climb, routes disappear as fuel prices rise – Los Angeles Times. Featured Articles From The Los Angeles Times. Retrieved November 5, 2012, from http://articles.latimes.com/2012/mar/08/business/la-fi-gas-airlines-20120309 Yates, J. (n.d.). Five Reasons Why Southwest Airlines is a Value Play, Not a Value Trap – DailyFinance. Saving. Spending. Investing. Planning. Everything you need for a lifetime of financial decisions. — DailyFinance. Retrieved November 5, 2012, from http://www.dailyfinance.com/2012/11/02/five-reasons-why-southwest-airlines-is-a-value-pla/