Southwest Airlines


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Net income = $421M Operating income = $623M Profit = $8.4B Total equity = $6.9B Employees = 45,861 Team Members Financial statistics (2012 ) Tracy Davis William Delugach Alexander Lloyd William Rich Robert Steeples Instructor: Frances Fabian Team Case Study


Agenda Company Profile -History -Culture -CEO Case Study Analysis Part I: SWOT Analysis Part II: Business Strategies Part III: Corporate Strategies Conclusion

Company Profile - History:

Company Profile - History

Company Strategy:

Company Strategy To seek high levels of performance through customer maximization, which is achieved through on-time deliveries, discounted fares, free baggage, and the highest qualities of customer service. To maintain a low-cost structure that offsets the discount services it provides. Strategic philosophy has guided the company throughout 40+ year existence.

Strategic Model:

Strategic Model

Financial Statistics as of 12/31/12:

Financial Statistics as of 12/31/12 Market Cap: $9.71B Primary competitor: Delta $14.25B Current Ratio: 0.83 Delta: 0.61 ROE: 5.44% Delta: N/A Debt-Equity Ratio: 42.93 Delta: N/A P/E Ratio: 26.24 Delta: 16.02 Total Cash: $3.14B Delta: $3.6B Operating Cash Flow: $1.82B Delta: $2.65B

Humorous Culture:

Humorous Culture Slogans "Love Is Still Our Field” "Just Plane Smart” "The Somebody Else Up There Who Loves You” Their airline's current slogan is "A Symbol of Freedom" They also market their bags fly free through the "Good Cop, Bag Cop" campaign. The pieces are composed of baggage handlers chasing after airlines that charge fees to transport luggage CLICK THIS TO SEE: Humorous Bags Fly Free Commercial

Current CEO history Gary C. Kelly Salary $4M in 2012 :

Current CEO history Gary C. Kelly Salary $4M in 2012 “Gary received a B.B.A. in Accounting from the University of Texas at Austin and is a Certified Public Accountant…Gary began his career at Southwest Airlines as Controller, moving up to Chief Financial Officer and Vice President Finance, then Executive Vice President and CFO, before being promoted to CEO and Vice Chairman in July 2004. Gary assumed the role of Chairman in May 2008 and President in July 2008.”


Tidbits Headquartered in Dallas, Texas in the Dallas Love Field neighborhood. Featured on Fortunes most enviable business list for the past 10 years. Bought smaller rival AirTran Airways for $1.4 billion, expanding the company's reach in the Northeast. Southwest flights are also technologically advanced. Since 2009 they have offered Wifi on flights via satellite. Also recently in 2012 they started providing television on flights.

Issues of Southwest:

Issues of Southwest 1. The most recent sequestration. The government is having a significant impact on the airline industry. 2. Southwest acquisition of AirTran in 2011. Integration of AirTran takes some time and there are potential problems/issues that could come about. There is alot to cover here that we can discuss. 3. Labor Union. The airlines industry is like the American car industry. There is a heavy unionized presence.

Issues Cont.:

Issues Cont. 4. Southwest has historically had a problem with maintenance. Because of their "low cost" mentality, they have some pretty old and battered planes in their fleet. The airline has been issued some pretty significant fines by the FAA in the past and just several weeks ago had a flight that was in the air and a giant hole ripped in the top and they had to do an emergency landing. The FAA is now forcing airlines to do more critical maintenance checks and they are no longer able to check using manpower, they must use these machines (which will raise costs). 5. Obamacare. Its an issue for everyone.

Part I:

Part I Structure-Conduct-Performance Model S.W.O.T. Analysis Porters 5

The Structure-Conduct-Performance Model:

The Structure-Conduct-Performance Model Industry Structure Number of competing firms Homogeneity of products Cost of entry and exit Performance Firm Conduct Price taking Product differentiation Tacit collusion Exploiting market power Firm level: Competitive disadvantage, competitive parity, competitive advantage Society: Productive and allocative efficiency, level of employment, progress

S.W.O.T Analysis:

Threats FAA fines American and US Airways merger FAA furloughs Opportunities Improvement in maintenance Growth in additional markets More nonstop flights Memphis airport incentives Memphis market growth Additional signing of Rapid Rewards program Additional signing for SW visa card Weaknesses Government regulations/involvement Unions presence Older fleet No longer fuel below market price Strengths Low cost leaders Award winning customer satisfaction Handles all ticketing Low fare strategies Flights to Atlanta and San Juan Largest domestic passenger carrier in US No extra fees Positive Negative External Internal S.W.O.T Analysis

Porters Five:

Threat of New Entry Low Supplier Power Low Competitive Rivalry Moderate Buyer Power Moderate Threat of Substitution Low Competitive Rivalry 1. Historically becomes leader in industry 2. Other airlines Threat of New Entry 1. Low, others tend to move out of the market Buyer Power 1. Choice of airline Threat of Substitution 1. Travel by train, bus or car Porters Five


Information Southwest will enter the Memphis market in August hopefully resulting in airfares dropping. First will offer special introductory low fares Southwest enters a market offering low fares hoping to increase the market share and become the airline leader. With the acquisition of AirTran in May 2011, it added 37 new markets, Atlanta being the largest. Incentives for entering the Memphis market, to include landing fee credits and terminal fee credits to offset start up costs. The airport authority will also match 50% if Southwest markets the new flights.

Part II:

Part II Business Strategies

Product Differentiation - Advantages:

Product Differentiation - Advantages Low-Cost leader Quality Service “Feel good” airline Above average on-time rates “Bags ride free”

Product Differentiation - Disadvantages:

Product Differentiation - Disadvantages Lack of variety Only uses one type of aircraft, the Boeing 737 Product complexity – Quality - Many aircraft are banged up and in bad shape Relationship between Southwest and its customers is at risk Perception and reputation are critical here

Relationship between Firm and Customers – Reputation:

Relationship between Firm and Customers – Reputation Reputation is perhaps the most significant element of a firm-customer relationship Historically, consumers perceive Southwest to possess great value Low fares Great service Consistently on time No baggage charge However, recent strategies and decisions would suggest that Southwest’s reputation could be at risk

Relationship between Firm and Customers – Reputation:

Relationship between Firm and Customers – Reputation Recently, Southwest has began to restructure its business model. Started to shift its focus away from what differentiated itself from the competition Became more focused on profits Reduced overall legroom Revamped its frequent-flier program Expanded its scope Adversely affected the on-time rate

Multidimensional Scaling:

Multidimensional Scaling Technique for analyzing the perceived similarity of a set of products or services. Historical perception vs. Future perception Historically provided benefit and value Risk of competitive disadvantage Going against what made Southwest popular

Cost Leadership:

Cost Leadership Firms with a low-cost position typically reduce the threat of rivalry Customers will generally go with the products/services of the low-cost airline as long as the alternatives struggle to differentiate Southwest automatically enables its competitors to differentiate from itself Poor quality of aircraft

Part III:

Part III Corporate Strategies

Vertical Integration:

Vertical Integration Helps control the quality at all levels Ability to control customer experience (Award-winning customer satisfaction) Southwest does not build aircraft Boeing 737s Handles all of its own ticketing In-flight entertainment Wifi, movies on demand, etc


Diversification Single business firm with limited corporate diversification Diversification is limited to expansion of the airline and investment activities Southwest Airlines Cargo (Award-winning)

Concentration on a Single Business:

Concentration on a Single Business Advantages Operational focus on a single familiar industry or market Current resources and capabilities add value Growing with the market brings competitive advantage Disadvantages No diversification of market risks Vertical integration may be required to create value and establish competitive advantage Opportunities to create value and make a profit may be missed

Strategic Alliances:

Strategic Alliances Non-equity alliance with Boeing as a supply agreement Marketing partnership with Adams Golf Rapid Rewards Partners Codeshare agreement with Volaris Airlines Ended February 22, 2013………

Mergers & Acquisitions:

Mergers & Acquisitions Acquisition of AirTran helped expansion of geographical areas Southwest and AirTran currently serve 97 destinations in the U.S., Mexico, and the Carribbean (International Strategy resulted from acquisition)





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