Despite its industry-leading position, Southwest Airlines was facing new challenges in mid-2008 which threatened its annual growth potential. Historically, Southwest’s seat availability grew at a rate of 5-10% each year; however, 2008’s projected growth was limited to 3% year-over-year. This is a direct result of strengthened competition which weakened Southwest’s competitive advantage, the onset of an economic recession, a high fixed cost structure with high operating costs—particularly fuel which consumed 31% of the total operating costs—and overall market saturation.
Southwest Airlines was built with a strong cost-leadership strategy, focusing ...view middle of the document...
Increases in operating costs, mainly from higher fuel prices negatively impacted operating margins.
2. New competitive threats emerged as a result of the Open Skies agreement, making the U.S. market accessible by foreign competition, and domestic competitors exiting bankruptcy protection with leaner operating models and cost structures.
3. The impending economic recession decreased both business and consumer spending.
In addition, with its high supplier power, high government regulation, and low profit margins, the airline industry is rather unattractive. As detailed in the external analysis found in Appendix A, buyers (customers) have a significant degree of power in the market with low switching costs, their reliance on the economic conditions to provide funds for both business and leisure travel, and wide array of substitute options.
In response to these external challenges, Southwest should leverage existing core competencies, which has been the cornerstone of its success, to build upon its competitive advantage and maintain its industry stronghold. These assets include their unwavering commitment to operational excellence resulting in cost control across all primary and support activities, the strong customer service relationship they have built and finally, their people-focused culture which is admired across all industries. Evaluating the Southwest value chain (found in Appendix B), these factors, plus the company’s dedication to standardization and technology provide them with a significant competitive advantage in delivering low fares to the customer. By leveraging all aspects of the value chain, they have created strong brand recognition associated with high quality service and an undeniably low cost.
Using both the external and internal data available, the SWOT analysis (available in Appendix B) targets new growth vehicles. Threats such as increased air traffic and increased government regulars are outside of the company’s control, but need to be continually monitored. With Southwest’s industry leading customer satisfaction scores, industry threats such as high customer service demands present a unique opportunity for Southwest if they can effectively leverage emerging social media technology. Further, while the treat of foreign airlines entering the U.S. market is impending, Southwest has the opportunity to expand their service offerings as well to counter potential market share loss domestically, with market share gains internationally.
Considering Southwest operates in the highly competitive, highly traveled U.S. market, the opportunity to increase their market share above its current 64% is present. Southwest could achieve this by acquiring an existing carrier or leasing space in U.S. airports. This opportunity does not require changes to Southwest’s existing business model and enables Southwest to capture market share in new point-to-point cities; however, high sublease costs from “hub”...