A STRATEGIC PAPER FOR SOUTHWEST AIRLINES CO.

- 2007

Lacanilao, Karen Joy V.

I. INTRODUCTION

Southwest Airlines is the largest airline measured by number of passengers carried each
year within the United States. It is also known as a ‘discount airline’ compared with its large
rivals in the industry. Rollin King and Herb Kelleher founded Southwest Airlines on June 18,
1971. Its first flights were from Love Field in Dallas to Houston and San Antonio, short hops
with no-frills service and a simple fare structure. The airline began with one simple strategy:
“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.” This approach has been the key to Southwest’s success. Currently, Southwest serves
about 60 cities with 71 million total passengers carried in 2004 and with a total operating
revenue of $6.5 billion.

The basic concept in marketing is marketing mix that is composed of four P’s; product,
price, place and promotion. Key strategic decisions related to these four P’s determine
success of any firm. However, strategies for the four P’s require some modifications when it
is applied to services. Because services are usually produced and consumed simultaneously,
customers are present in service firm and are actually part of service production process.
Also, because services are intangible, customers seek any tangible indication to help them
understand the nature of service experience. Acknowledgement of the importance of these
additional communication variables has led services marketers to adopt the concept of an
expanded marketing mix for services. In addition to the traditional four P’s, the services
marketing mix includes people, process and physical evidence. These new elements may
decide the success and failure of any service firm because any or all of them may influence
the customer’s initial decision to purchase a service, as well as the customer’s level of
satisfaction, repurchase decisions and word of mouth publicity. Southwest airlines is
the best example for explaining the importance of people, process and physical evidence
in the success of service firm. Southwest model made it seventh largest US airline by 1993. It
created a winning model for profits in Airline industry. According to Money magazine,
Southwest’s stock performance was the best performance in the Standard and Poor’s 500
during that time. This paper presents its strategies with respect to people, process and
physical evidence that helped it to achieve this marvellous success.
II. HISTORY

Southwest Airlines was founded by Rollin King and Herb Kelleher and began in
1971, servicing Dallas, Houston and San Antonio. In the mid 1980's Southwest Airlines
was the first to offer the frequent miles program. Allowing the passenger to bank
travelled air miles to be latter used credit for a free ticket or reduced airfare. Southwest
Airlines were also the pioneers of the senior discounts, fun fares and the fun packs. 1984
marked the 4th consecutive year Southwest Airlines ranked number one in customer
service. By 1998 Southwest Airlines was the 5th largest US air carrier, caring over 50
million passengers a year servicing the Northeast, Southwest and other key locations
throughout the United States. In 1987, Southwest Airlines took over Tran Star Airlines
and in 1994, southwest took over Morris Air. This gave southwest a stronger edge in the
market.

Southwest Airlines was originally incorporated to serve three cities in Texas as Air
Southwest on March 15, 1967, by Rollin King and Herb Kelleher. According to
frequently-cited story, King described the concept to Kelleher over dinner by drawing on
a paper napkin a triangle symbolizing the routes Dallas, Houston, and San Antonio. Some
of the incumbent airlines of the time initiated legal action, and thus began a three-year
legal battle to keep Air Southwest on the ground. Air Southwest eventually prevailed in
the Texas Supreme Court, which ultimately upheld Air Southwest’s right to fly in Texas.
The decision became final on December 7, 1970, when the U.S. Supreme Court declined
to review the case without comment.

The story of Southwest’s legal fight was turned into a children’s book,
Gumwrappers and Goggles by Winifred Barnum in 1983. In the story, TJ Love, a small
jet, is taken to court by two larger jets to keep him from their hangar, and then to try and
stop him from flying at all. Taken to court, TJ Love’s right to fly is upheld after an
impassioned plea from The Lawyer. While no company names are mentioned in the
book, TJ Love’s colours are those of Southwest Airlines, and the two other jets are
coloured in Braniff and Continental’s colours. The Lawyer is designed to resemble Herb
Kelleher. The book was adapted into a stage musical, Show Your Spirit, sponsored by
Southwest Airlines, and played only in towns serviced by the airline. Southwest Airlines
 founder Herb Kelleher studied California-based Pacific Southwest Airlines extensively
and used many of the airline’s ideas to form the corporate culture at Southwest, and even
on early flights used the same "Long Legs and Short Nights" theme for stewardesses on
board typical Southwest Airlines flights. The original flight attendants that worked for
Southwest Airlines were chosen by a committee of individuals that included the same
person who had selected hostess for Hugh Hefner’s Playboy jet. The selection resulted in
a group of female flight attendants that were described as long-legged dancers,
majorettes, and cheerleaders with "unique personalities". Southwest Airlines and Herb
Kelleher proceeded to dress these individuals in hot pants and go-go boots.

The airline adopted the first profit-sharing plan in the U.S. airline industry in
1971. Through this plan and others, employees own about 10 percent of the company
stock. The airline is about 87 percent unionized. The pilots are represented by the
Southwest Airlines Pilots’ Association, a union separate from the much larger Air Line
Pilots Association.

VISION

To become the world’s most loved, most flown, and most profitable airline.

MISSION

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.

III. INTERNAL ANALYSIS

Internal Competencies Southwest Airlines has several unique qualities that help
distance itself from the competition, the most prevalent being their execution of
targeted customer service. Southwest is marketed heavily towards individuals that view
the airlines as nothing more than transportation: consumers that seek quick, reliable
service without the hassle.Offering15minute turn around sand flights that don’t require
a seating chart, southwest created a market for business men and women as well as
frequent flyers. Another quality that sets Southwest Airlines apart is its unique
 emphasis on worker culture and worker attitude. With a unique hiring style, Southwest
manages to attain, train, and retain skilled and energized workers that are the envy of
the entire industry.

IV. EXTERNAL ANALYSIS

A. Economic Factors

Southwest Airlines is a carrier that operates in the American domestic market. It is 2012
the airline became the largest domestic carrier in the country, according to the number of
domestic passengers. However, the company has been struggling to maintain
competitiveness within the market. This paper presents an analysis of the firm’s external
environment with the aim of forecasting the opportunities and threats that the organization
is likely to encounter. The external environment of a firm has a significant impact on the
competitiveness of firms and, understanding this environment will enable the company to
enhance its competitiveness.

Prevailing economic condition the market also has an impact on Southwest Airlines. One
of the elements of the economic environment that has had an impact on Southwest is
economic growth. In the last five years, the US has experienced slowed economic growth.
Slowed economic growth is having a substantial impact on the employment situation and
the purchasing power of the consumer. Due to slowed economic growth, employment
opportunities have become limited. This has impacted on the purchasing power of
consumer. Consequently, the travel industry has been affected as people opt to travel only
when it is necessary. Even when people have to travel, a good number of passengers are
opting for cheaper alternatives.

1. Technological factors

The technological environment had both positive and negative impact on the airline
industry. Ticketing is one of the areas in which technology has resulted in a positive impact
for the company. Technology has enabled the airline to do away with the paper tickets and
introduce electronic method of ticketing. This has enabled the company to reduce costs
associated with printing tickets. Electronic ticketing has also enabled the airlines to manage
its visitors more efficiently. This is because passenger details can easily be conveyed to
airline attendants as well as be easily conveyed from one terminal to another.
Communication technology is also having a negative impact on the airlines. Technologies
such as; telephones, the internet, social networks, teleconferencing and satellite are making
it possible for people in distant places to interact reducing the need for travel.

2. Cultural factor

Southwest was created as a different kind of company and from its beginnings a
unique culture was nurtured. In 1990 Colleen Barrett formed the Southwest Culture
Committee. This is unique within the industry and among all large companies. The
committee also has a mission statement: “This group's goal is to help create the Southwest
spirit and culture where needed; to enrich it and make it better where it already exists; and
to liven it up in places where it might be struggling. In short, this group's goal is do
whatever it takes to create, enhance, and enrich the special Southwest spirit and culture that
has made this such a wonderful Company. It is this unique approach to company values
that has created a culture that Southwest Airlines Operation

3. Legal and Politician Factor

The political environment is made up of factors such; government policies, rules

and regulations as well as style of governance. There are several elements of the legal
environment that have an impact on Southwest Airlines. One of this element concerns
safety regulation. The country has experienced increased threats to national security.
Consequently, the government has developed tough security policies which affect the
airline industry. Airlines have been compelled to heavily in security thus increasing
business cost.

4. Competitive factors

Competitive Strategy Low-cost Generic Competitive Strategy in the United States,

Southwest Airlines has, by most measures, been the most successful airline in its industry.
This success is largely due to the competitive advantage Southwest has gained by
effectively positioning the organization in customers' minds. By pursuing a low-cost
provider strategy the company is able to sustain a distinct advantage over its rivals.
“Striving to be the industry’s overall low-cost provider is a powerful competitive approach
in markets with many price-sensitive buyer” (Thompson, Peteraf, Gamble, & Strickland
III, 2015). Such is the case within the airline industry. Southwest is able to do this by
incorporating features and services that consumers consider essential; such as little to no
extra charge for luggage. They call it the “Bags Fly Free” campaign Southwest Airlines
Co. “Did you know… that Southwest Airlines does not charge for your first or second
checked bag? That’s right! While bag fees have become the norm amongst our competitors,
we've stayed true to our reputation as the maverick of the airline industry by not charging
for bags” (Southwest Airlines Co., 2015). In keeping with their already lower than
competitors fare charges, Southwest has gained an advantage even further by not passing
additional fees onto their customers with bag fees. These strategic methods come with even
further cost advantages by allowing the value chain to be performed more cost-effectively
than rivals. Falling under the service branch of their value chain the company is more than
doubling their recuperation on costs by announcing the savings for customers with just the
first two bags. Competitive advantage is thereby sustained when customers see the value
that comes along with their ticket price which leads to an increase in market share for
Southwest.

B. Socio Economic Factor

1. Political – The government has developed tough security policies which
affect the airline industry. Airlines have been compelled to heavily in
security thus increasing business cost.
2. Economic – The travel industry has been affected as people choose to travel
only when it is necessary. Even when people have to travel, a good number
of passengers are opting for cheaper alternatives.
3. Social - Traveling has increased across the country as people move from
area to visit relatives and friends who live in another area. This has resulted
in increased business for the airline industry. There is also high movement
of labour across the different states of the country. This has also increased
the volume of travellers thus having a positive impact on the company
revenues.
 4. Technology - Technology has enabled the airline to do away with the paper
tickets and introduce electronic method of ticketing. This has enabled the
company to reduce costs associated with printing tickets. Electronic
ticketing has also enabled the airlines to manage its visitors more efficiently.
This is because passenger details can easily be conveyed to airline
attendants as well as be easily conveyed from one terminal to another.
Communication technology is also having a negative impact on the airlines.
Technologies such as; telephones, the internet, social networks,
teleconferencing and satellite are making it possible for people in distant
places to interact reducing the need for travel.

V. STRATEGY FORMULATION

A. SWOT ANALYSIS
Southwest Airlines SWOT Analysis Strengths
• More departures than any other US airline
• Considered the best low cost carrier in recent years.
• One of the most profitable airlines, while many other airlines are unprofitable
• Maintains very good relationships with its unions
• Management has a history of making successful acquisitions
• Low-cost, efficient operations equates to low fares/great value
• Employees are allowed/encouraged to have and show their sense of humour
• It feels fun to fly on Southwest
• Employees work very well as a team
• Very good safety record
Southwest Airlines SWOT Analysis Weaknesses
• Few morning flights offered
• No flights to international destinations
• Only one class of seating is offered
• Booking flights is not available except directly through Southwest Airlines
• It does not offer frills such as airport lounges, videos on board, etc.
• Can only carry a small amount of cargo and freight
Southwest Airlines SWOT Analysis Opportunities
• New technology - opportunities for new services and products
• Better use of the Internet for marketing, ticketing, etc.
• Longer flights are a growing market
• Southwest Airlines SWOT Analysis Threats
• Fuel price increases could reduce air travel
• Decline of leisure travel due to terrorism and a depressed economy
• New government regulations could make air travel more costly
• Cost will likely rise since there is not many more areas for cost-cutting
 VI. SWOT MATRIX
STRENGTH WEAKNESS
 Ticket less travel airline  No international
 Operates one type of boeying flight
 Point to point scheduling  Little room for
 Has develop good strategies to strategic
expand the company management

OPPORTUNITIES STRENGTH -OPPORTUNITY WEAKNESS –

 Passenger likes  Operated the other type of OPPORTUNITIES
lower price flight, boeing or world's largest  Make an innovation
do that Southwest aerospace company in technology
airlines still could  It’s strengthen its
develop their position through
position in the alliance.
industry.

THREATS STRENGTH – THREATS WEAKNESS – THREATS

 Increase in labor  Keep promote the new  Create barriers to
and fuel cost facilities and features to entry with
 Competitors offer customers using all kind of implement
product and media. innovative strategies
service like  Try to find another supplier
southwest that can reduce operating
airlines. cost.
 Government rules
and regulation.
VII. STRATEGY IMPLEMENTATION
Southwest Airlines long-term strategy is to make a unique set of short-term
activities that will maintain its reputation to deliver low-cost, convenient service to its
customers. A couple of these activities include the limitation of flights to short
distances and to fly only between midsize cities and secondary airports in large cities.
Southwest Airlines has managed to implement organizational innovations and
technological innovations on a continuous basis while maintaining its stake in the
market. Their competitive advantage strategy exists both in a red ocean because it
competes within the same industry and market as its competition and in a blue ocean
because it disrupts the industry and market through innovation.

VIII. EVALUATION OF STRATEGY

In order to hold a sustainable competitive advantage, managers need to focus on

strategic positioning and fit. They must understand how customer needs differ, and
have a unique set of activities that satisfy these customer needs. If a company has a
set of activities that best meet customer needs, the more that these activities differ
from what other companies are currently doing, the chances that the entire system of
activities can be copied are low.

Strategic positioning and the fit of an organization’s activities are what lead to
sustainable competitive advantage. The goal of strategic planning is to find a new
strategic position or evaluate a company current position, and evaluate the fit between
the company's strategic position and its operations. A strategic plan should result in
focus: a clear mission, vision, values and strategy that reinforce one another to allow
the company to deliver a unique system of activities that best meet customers needs.
IX. CONCLUSION
The airline industry has risks that are much greater than other industries because of
its liability to the global economic system, political disturbances, terrorist activity,
wars, and public health. Southwest airlines operations in the industry are continuously
growing because of the rising cost and a very high demand for a customer service. One
of Southwest Airlines main way for its success is low-cost. Southwest Airlines is a
company that built its reputation on sustainability over a long- period of time,
considering itself as superior. Also, the company has used technologies in its favour to
sustain efficiency in its business operations. The internal strengths of the company goes
within its corporate culture, and motivated and committed workforce.