Southwest Airlines’ Value Chain: the Evolution and Strategic Analysis

Southwest Airlines began operating three Boeing 737-200 airplanes from Dallas to Houston and from Dallas to San Antonio on June 18, 1971. It had been four years since the company was founded as Air Southwest Co. by Herb Kelleher and Rollin King, and during that time, litigation from competing airlines kept the new air carrier grounded until an appeal to the Texas Supreme Court gave them legal permission to fly; the company name was changed to Southwest Airlines Co in March 1971 when the company bought the three Boeing planes.

Competitive Advantage through Strategic Growth

By January 1974, Southwest posted its first annual profit, the first of 45 years in a row the company made money in the very competitive air carrier industry (Southwest-About, 2018). The factors that made Southwest successful, the events that failed to stop this airline from operating at a profit, and the future viability of its commercial success will be addressed in this analysis.

Herb Kelleher drew The original company plan on a napkin, depicting a triangle connecting the Texas cities of Dallas, Houston, and San Antonio. Kelleher believed they could avoid federal price restrictions by keeping the routes to destinations inside one state. He spent the next eight years defending Southwest in court defending that point against rival airlines Braniff, Texas International, and Continental tried to sue Southwest out of existence. This is the first example of how SWA used its competitive advantage to grow in Texas; Kelleher is a dedicated lawyer and defended his company in court pro bono and even paid the court costs out of his pocket, saving the company thousands, if not millions of dollars (Southwest-About,2018).

The second example of growth for SWA is low fare prices. This developed from the various “wars” over price against Braniff with occasional “attacks” into each other’s primary customer base. SWA experimented with business class fares and service while Braniff and other competitors lowered their prices. Southwest could compete because they filled their planes, kept expenses low, and had a 10-minute “turnaround” between flights, allowing them to add more flights and further reduce fair prices. This fare strategy was a direct result of being in business only in Texas, which protected the carrier from federal regulations fixing prices at a higher level to protect the established airlines in the U.S. from losing money. Southwest served its one-millionth customer with just three planes in thirty months, and the following historical advantage would be to grow outside of Texas (Southwest-About,2018).

On October 24, 1978, President Jimmy Carter signed the Airline Deregulation Act, which, among other provisions, allowed increased “competitive market forces to determine the quality, variety, and price of air services” (Cannon,1978) over five years when all domestic fare regulation would stop. SWA was already making moves to fly to New Orleans, LA, and ended its war with Braniff by leasing two Boeing 727s from its rival. During the next twenty years, hundreds of airline companies went bankrupt or were liquidated while Southwest continued to grow and expand its service throughout Texas and outside the state.

The Wright Amendment to the 1978 Airline Deregulation Act in December 1979 placed some restrictions on airplanes flying out of Love Field in Dallas, SWA’s headquarters, namely that planes could not have more than 56 seats if they flew beyond the states contiguous with Texas. Southwest added four more seats to each of its planes and added more flights inside of Texas, bringing the cost per ticket even lower and eventually expanded service with 20 provisioning stations, 50 destinations in and out of Texas, and 355 Boeing 737 airplanes by 2001 (Southwest-About,2018).

Emphasis on Employee Well-being

In the wake of the 9/11 attacks on New York and Washington, Southwest Airlines did not lay off employees or change its schedule, while thousands in the airline industry were left jobless, and other airlines reduced schedules. SWA is known for having a corporate climate that encourages its people to be happy and spread that cheer to their customers. Most of the over 31,000 SWA employees were in labor unions at that time, and the executive mindset under Kelleher was to work with unions to make life better for Southwest’s workers.

This policy would continue until Kelleher left the company: Employees first, customers second, and shareholders third, or as Kelleher put it in 2004, “You put your employees first. If you truly treat your employees that way, they will treat your customers well, your customers will come back, and that is what makes your shareholders happy.” (Lucier, 2018). After Kelleher’s retirement, Gary Kelly was made Southwest’s CEO, and under his watch, said this in 2015: “Our people-first approach, which has guided our company since it was founded, means when our company does well, our people do well.” (Dahl, 2017).

Lastly, Southwest Airlines purchased Airtran Airlines for approximately $3.4 billion on May 2, 2011, which added significant growth to the fourth-largest air carrier in the United States. The acquisition added 25 new destinations for Southwest, including cities in the Caribbean and Atlanta, Georgia, the largest city in the U.S. that SWA did not fly to. The two companies merged on December 29, 2014, the day after AirTran made its last flight. The addition of 117 Boeing 737 and 88 Boeing 717 aircraft and aircraft orders were part of the acquisition; the Boeing 717s were refitted and leased to Delta Airlines because Southwest only utilizes the 737 variants in its fleet (Compart, 2012).

All SWA aircraft are Boeing 737s, which is another part of how efficiency is realized by using the same aircraft, the same spares, a similar number of seats, and similar flight characteristics. Southwest purchased several other airlines before the Airtran buyout, adding more routes and similar aircraft to the company, including Muse Air, Morris Air, and ATA (Southwest-About,2018).

Strategic Acquisitions and Efficiency

The mission of Southwest Airlines is a dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit (Southwest-About, 2018). Initial training at SWA involves not just learning how to do a job but an indoctrination of the company’s core value that happy employees make happy customers and happy shareholders. Moreover, it also leads to operational productivity by empowering employees to fix problems with creativity and innovation; for example, the uniforms are designed by the employees. However, more important is the high level of operational efficiency of Southwest.

There is a strong bond between Southwest and Boeing which is seen chiefly in Southwest owning over 700 Boeing 737s; this bond is the foundation of SWA’s ability to cut costs. Boeing has been helping Southwest purchase planes since 1971 when it financed 90% of the cost of three planes (Southwest-About, 2018). This also makes maintenance cheaper: mechanics only have to know 737s, and the spare engines and other spare parts are more cost-effective.

Next is turnaround time; Southwest can refuel, clean, inspect, deplane, and board passages in an average of 25 minutes, making that unit available for more flights. Passengers board first come, first served, which saves time over other boarding schemes. Most flights are direct flights, so SWA is not concerned with connecting schedules, which are less efficient. Running an efficient airline provides the next company strategy, low-cost fares.

Operational Excellence and Future Prospects

Transparency and “Still nuts after all these years” are two trademarks of Southwest Airlines that define the company’s fare strategy. Adding low-cost entertainment in the form of WiFi access, in recent years, SWA stopped serving nuts but has maintained the core value of offering low-cost air travel, including two free bags checked or carry-on and no transfer fees. All ticket purchases are through Southwest’s website or customer service, saving more money on third-party booking fees. Southwest has adopted some of its competitor’s strategies, like frequent flier rewards and early boarding (for an extra fee) while maintaining its iconic reputation.

Southwest Strengths, Weaknesses, Opportunities, and Threats

Strengths

• Strong Market Position – 45 years of profitability, leader in passengers carried
• High capacity usage (Load factor)
• Dominates domestic short-distance routes
• Utilizes only Boeing 737 aircraft/less training, cost advantage for spares

Weaknesses

• Most employees belong to a union
• 1% of income from cargo, 4% from hotel, car rental partnerships
• Increased Hub/Spoke by default, increased layover without planned connections
• Utilizes only Boeing 737 aircraft/deficiency can involve entire fleet, less cargo space

Opportunities

• Increase in air travel in the next ten years
• Increase in air cargo
• New technology – better efficiency and additional services
• Growth by adding more domestic services such as Hawaii and international flights

Threats

• Terrorism/Weather events
• Intense competition
• Fuel Prices
• Government regulation

SWOT Analysis and Future Considerations

Southwest has a competitive advantage in efficiency, profitability, and stability. However, an event such as the fatal accident aboard a Southwest flight on April 17, 2018, has tarnished SWA’s brand, which has always included its safety record. Every Southwest plane with similar engines to one that exploded had to be inspected, which canceled some flights. Public relations for Southwest went into overdrive, acknowledging that there would be a loss of revenue and a cessation of marketing for a time in the aftermath of the accident. Internal conditions indicate that only some Southwest employees are happy.

A news release by four of Southwest’s labor union boards of directors all completed votes of “no confidence” of CEO Gary Kelly and COO Mike Van de Ven (Madden et al., 2016). Operational failures were the main complaint, alluding to a router failure at the Love Field Data Center on July 2016 that led to 2300 flight cancellations during the five days it took to solve the problem (Shine, 2016).

Southwest’s income statement, balance sheet, and financial ratios reflect stable growth over the last three years, new planes are ordered, and routes are planned. The stock price has fluctuated between 47.10 – 66.99 (Morningstar-LUV, 2018), which is in line with analysts’ fair value price of $58-62. This year’s slump in earnings will be exaggerated by a fuel increase of 16% in the third quarter but may be blunted by a drop in fuel prices in the fourth quarter and fuel hedging that Southwest has been investing in during the past year.

Suppose Southwest needs to remain true to its core values, as some have suggested, and it is becoming more inefficient. In that case, its employees are increasingly unhappy, and its stability is impacted by severe lapses in safety and operational failures; Southwest could lose its competitive advantage and, perhaps for the first time since 1972, fail to make a profit. It is likely to make a profit in 2018, turn around its annus horribilus and continue to expand service and maintain consumer value to its millions of customers in old and new ways. Southwest cargo has been a steady 1% of revenue for years and could double with competitive rates and a growing economy in the next five years.

New technology, planes, and infrastructure like data processing can help lower costs and improve performance. Improving labor relations does not involve money as much as a lack of confidence in the executives embracing the Southwest corporate culture they have continued to preach. However, events have presented that they do not practice. SWA must get an agreement with the already embattled mechanics union, which the government is auditing before the FAA can approve Southwest’s coveted new destinations in Hawaii.

References

1. 1. Cannon, J. (1978). “Airline Deregulation Act of 1978.” H.R. 11002.
   2. Lucier, J. (2018). “Why Southwest Airlines Is the Most Loved Company in America.” Inc.
   3. Dahl, D. (2017). “Gary Kelly, Chairman and CEO, Southwest Airlines.” SmartBrief.
   4. Compart, A. (2012). “Southwest Airlines’ First 40 Years: AirTran Brings Bigger Presence in Atlanta.” Aviation Week Network.
   5. Madden, J., Grantham, R., & Gibson, K. (2016). “Southwest Airlines union calls for CEO’s resignation.” The Dallas Morning News

Did you like this example?

272

11