The aviation industry, specifically Southwest Airlines, is a great example of the decision making process and its effects on the marketplace throughout the years. Southwest Airlines has made several organizational changes that have altered the concept of flying. Are these changes positive? This paper will provide a brief history of Southwest Airlines, including its production function, risk, uncertainty, and the impact that government regulations have made domestically and abroad. It will also investigate pricing trends, new products/services, profitability, the competitive market, and non-price competition. The final analysis of this paper will describe specific recommendations regarding changes and improvements for Southwest Airlines.
Southwest Operations History: Risk or Uncertainty?
According to Fortune Magazine, Southwest Airlines persists to be one of the “World’s Most Admired Companies”. Founded in 1967 by Rollin King and Herb Kelleher, Southwest Airlines began its service on June18th with three Boeing 737 aircrafts that primarily serviced Houston, Dallas, and San Antonio (B, et al., 2010). Since its inception, Southwest has continued to produce profits year after year. “With 40 consecutive years of profitability, Dallas-based Southwest Airlines (NYSE: LUV) continues to differentiate itself from other carriers with exemplary Customer Service delivered by nearly 46,000 Employees to more than 100 million Customers annually” (SWA.com, n.d.). As notated in Figure 1, since its recent acquisition of AirTran Airways, Southwest Airlines has become the nation’s largest carrier in terms of originating domestic passengers boarded and, operates the largest fleet of Boeing aircraft in the world to serve 97 destinations in 41 states, the District of Columbia, the Commonwealth of Puerto Rico, and six near-international countries (SWA.com, n.d.).
Fiscal year is January-December. All values USD millions. 2008 2009 2010 2011 2012 5-year trend
Sales/Revenue 11.02B 10.35B 12.1B 15.66B 17.09B
Sales Growth - -6.11% 16.95% 29.36% 9.13%
Cost of Goods Sold (COGS) incl. D&A 5.85B 5.28B 5.99B 8.47B 14.24B
COGS excluding D&A 5.25B 4.67B 5.36B 7.76B 13.4B
Depreciation & Amortization Expense 599M 616M 628M 715M 844M
Depreciation 599M 616M - - 819M
Amortization of Intangibles - - - - 25M
COGS Growth - -9.68% 13.31% 41.50% 68.16%
Gross Income 5.17B 5.07B 6.12B 7.19B 2.85B
Table 1. Five year gross income trend.
Known at the lost cost service provider, its business model from an operational standpoint is one that immulated by other low cost carriers nationwide and abroad. In the competitive airline industry, Southwest has been successful in positioning themselves as a low-fare, point-to-point, high-frequency, and exciting carrier. By incorporating this method of simplistic operations, the organization has found a way to create more efficient trip times, decrease delays, and minimize connections. According to B. et.al (2010), Southwest’s operations consist of one flight class, open seating (first come first serve), no meals, one aircraft type (Boeing 737 to reduce training and maintenance costs), and a ticketless travel system to avoid paying commissions to travel agents. These were all risks that in successful outcomes for the airline.
External Environment Uncertainty While Southwest does seem to be on an all-time high, there are a few uncertainties that could affect their financial outcome. One example is the global price of oil. Although this has not been an issue for Southwest, it