There are two major factors that lead to producing profitable revenue in the airline business, generate high revenue and decrease costs. By attracting enough passengers to fly with you, you can sell more tickets and sell a high price for each individual ticket. An airline can also cut the salary costs, the operation costs, the financial costs, and the management costs and etc. to reach a higher profit margin. Any company need to cut costs and increase revenue to be successful. Firms needs to try to have as many passengers on one flight as possible because there is a high fixed cost associated with flying one route. Firms also need to try to sell the tickets at the highest price possible to increase revenue. According to the supply and demand of economic theory, firms can price differentiate to maximize producer surplus.
Southwest Airlines is a success in the airline business because for the past 21 years in a row, Southwest has been profiting, a deed that no other American airlines that achieved. Especially during the 1991-1992 period, when the US economy was sluggish, Southwest took 40% of the market share. Finally, Southwest had been a success that no one else could compare. The stock price earned over 21,000% return.
Southwest’s sustainable competitive advantage came from its innovative business operations “airline-within-an-airline”. They were able to offer low fares, few flights, and frequent service.
The fact that the routes were often short and highly populated ones allowed Southwest to make direct trains instead of using a hub and transferring everyone from the central hub to everywhere else, as done by other airlines. People often preferred direct flights and tend to avoid connecting flights when searching for one online. Therefore, direct flights offered by Southwest are more attractive. By cutting costs in areas such as meal service, Southwest could significantly decrease the air fare to attract more passengers. The high productivity of its employees also contributed to cost reductions. Its own frequent flyer club increased the user’s viscosity and loyalty to this certain brand. They are less likely to switch to other airlines once they are accustomed to one.
In the beginning, one of the core competencies for Southwest Airlines included having their flight attendants dress in hot pants. This showed that their firm really valued the employees and thought of creative advertising campaign to make their presence in the industry.
Another competency lies in the management style for Southwest. The management at the firm are all willing to connect with the employees and heed to what they really needed. The relaxed management style increased employee’s satisfaction with the firm. Rhoades believed that Southwest’s competitiveness came from its people and how they were managed. The human resource department managed the employees at the firm with compassion and selected the new recruits on a very selective basis. Thus, they ensured that people who entered the firm are competitive ones with abilities to do well. Subsequently, the firm trains the new recruits themselves to ensure that they can best serve Southwest.
However, Southwest Airlines also have some vulnerable aspects such as competitors, and market factors. For competitors, there are many small and regional airlines such as Texas International, Braniff, Continental Lite, United Shuttle and etc. Other larger airlines were also trying to imitate Southwest’s business model, such as USAir and Continental. Also, more substitutes such as driving, or the train are threats to Southwest. The American culture might see more people driving or flying under these kinds of distances. However, in other regions such as China, the people prefer high speed trains because they are cheaper than flights and can save more time checking-in and going through the securities. If the high-speed trains are to develop more in the US, then Southwest’s business will see substitutes.
Southwest could grow in markets beyond North America by finding a place where there is also high traffic comparable with that of California’s. More market research needs to be done in other regions of the world to see which country also needs short route flights, which country drives less or have less trains operating. These will be places that are more likely to need short distance flights and to copy the business model.
Anne Rhoades should raise several issues at the Board meeting including expressing out her concern that it was due to a small and closely managed team that Southwest had achieved today’s performance. Also, she needed to point out that expanding the business further could hinder this advantage because the management style might change and under a bigger firm, everyone might not be able to feel like a family before.
I believe that if the management believes that they really have reached the maximum capacity for keeping the same management style, then do not expand anymore, at least in the California region. Let the Southwest continue to be the Southwest as it was before. For the other competitors, even if they could imitate Southwest’ strategy, they are still late market entrants after all and the existing passengers have already built confidence in Southwest.
As long as Southwest do not do too bad compared with the new competitors, customers are less likely to switch over. If Southwest really has the heart to expand, then, places outside the California region can be considered. As I said in the previous paragraph, more research needs to be done to see whether a similar environment exists elsewhere in the world. People in the New England area, major European cities, Japan, and Eastern China tend to have short and frequent flies; however, they also tend to use the train more. So, more spaces could be discovered where there are less substitutes.