case sudyw with specific detailed instructions

Nova Southeastern University

H. Wayne Huizenga Graduate School of Business

& Entrepreneurship

Assignment for Course: MGT 5170 – Applying Strategy for Managers

Submitted to: Dr. Ronald Steffel

Submitted by: Morgan Heath N01763775

Date of Submission: October 7, 2018

Title of Assignment: Southwest Airlines Case Study

CERTIFICATION OF AUTHORSHIP: I certify that I am the author of this paper and that any assistance I received in its preparation is fully acknowledged and disclosed in the paper. I have also cited any sources from which I used data, ideas or words, either quoted directly or paraphrased. I also certify that this paper was prepared by me specifically for this course.

Student's Signature: Morgan Heath

*****************************************************************

Instructor's Grade on Assignment:

Instructor's Comments:

Executive Summary

Problem Statement

Although still a strong competitor in the airline industry, Southwest Airlines faces strong pricing competition, unpredictable fuel prices, innovative technology demands, and the mounting challenge to exceed customer expectations that will challenge Southwest’s ability to remain a cost leader in the industry while staying true to their core values.

Analysis

Southwest Airlines is a strong competitor in their market, the company has the second largest market share just behind American Airlines. Southwest was built on a strong corporate culture that has enabled them to withstand the test of time. Southwest values their employees and ensures that the work environment remains family oriented. Southwest has an impeccable record of never firing an employee, their "No-Layoff Policy" since their inception has helped Southwest maintain their strong culture. Southwest takes pride in their workforce, new hires are put through extensive training hour to ensure that employees are prepared to deliver top-notch customer service. Southwest also has beat out their competition with loyalty programs, international reservations systems and modernizing their aircraft fleet.

Southwest can remain an industry leader if they continue to adapt to the technology that passengers are growing accustomed to. In the age of Amazon consumers desire the convenience of a one-stop shop experience, Southwest will have to discover new ways to adapt to the changing consumer buying patterns. Also, the competitive landscape for commercial airlines is starting to evolve, the market is driven by consumer demand, market maturity and the airline's ability to exceed customer expectations. Southwest is going to need to find ways to position themselves as the pricing leader, while still exceeding customer expectations.

Alternatives:

1. Incorporate travel distribution programs

2. Create enhanced merchandising applications

3. Expand network locally and globally

Recommendation

Southwest has a large untapped network that they can expand upon, the airline industry is saturated with intense pricing competition. Southwest can expand their network locally within the U.S. and also globally by increasing their revenues and customer base.

Implementation:

Southwest could expand to new routes by learning how to set prices, and negotiate deals, while also partnering with global hubs that already exist to save on building costs. Also, the company should ensure that they have a new fleet of airplanes to ensure that a fuel-efficient model of airplanes to fly between countries.

Porter’s Five Forces Model

Figure 1. Porter’s Five Forces Model. This figure analyzes Southwest Airlines’ competitive forces using Porter’s Five Forces Model.

SWOT

Strengths

Strong Brand: Southwest airlines brand is a heart, made with blue, red and yellow that were linked with the tails of the plane. The heart is the symbol caught on making it notable, unique and it became very popular with employees and potential applicants. Southwest also established a language to communicate their fun-loving attitude, warrior spirit and commitment to their customers (McLaren, 2018). Southwest is focused on telling a consumer-centric story, the airline would like the consumer to understand why they operate the way that they do (Gallo, 2018). Southwest has a unique brand positioning, they are able to create experiences for customers that allow them to live their life to the fullest.

Cost Leader: Southwest Airlines also offers one of the lowest-priced options for air travel. Southwest has been able to maintain their low prices, due to their low operating cost business model. Southwest Airlines services smaller airports that do not cost as much. If a consumer can find a lower-priced ticket, Southwest airlines will match that price (Investopedia, 2018).

Weaknesses

Employee safety: Southwest Airlines has been accused of creating a hostile and unsafe work environment for their employees. There have been instances of whistleblowing and there is mistrust in management over the employee's safety. Southwest has short and frequent flights that put more stress on the engines, the crews are subjected to a quicker pace of work. In one instance an employee found corrosion on the plane, this employee was chastised for working beyond their scope of the work they had been assigned (Koenig, 2018). The FAA found that Southwest supervisors discouraged mechanics from reporting some aircraft problems and they found maintenance issues in portions of the plane that had been assigned to inspect (Koenig, 2018).

Lawsuits: Southwest Airlines has paid millions in fines after enforcement actions by the FAA, these lawsuits are creating a negative brand image. Back in 2009 Southwest kept 46 planes flying even when they had skipped critical inspections of the fuselage for metal fatigue, due to this they were slapped with a $7.5 million fine from the FAA (Koenig, 2018). Five years later Southwest was hit with a $12 million fine, over 44 planes that had undergone improper fuselage repairs (Koenig, 2018). Southwest Airlines’ brand is being tarnished with the news of lawsuits and the lack of safety precautions taken by the company.

Opportunities

Digital transformation: Southwest Airlines currently utilizes an OpsSuite tool that allows the employees to monitor gate assignments, ensure luggage is loaded and track traveler data (Ungerleider, 2017). Southwest Airlines has the opportunity to increase revenue and sustain their competitive advantage through the utilization of technology, they are expected to see a boost in their earnings by 2020 as a direct result of the software (Ungerleider, 2017). Back in 2017 Southwest planned to bring OpsSuite’s functionality to phones and tablets in the coming years. They were making this change to ease employee communication at the airline. Southwest is going through an $800 million technological overhaul, which includes $300 million invested in new technology for operations and $500 million in a new reservation system. Southwest can take this a step further by implementing more technology in their daily operations to catapult their organization as a market leader in the industry.

Increase freight business: Southwest Airlines Cargo recently began their international shipping program that traveled from Houston to Mexico City. Southwest has the opportunity to expand upon shipments to other areas such as Cancun, Puerto Vallarta and Los Cabos in the near future. Freight was only about 1% of Southwest Airlines’ revenue in 2017, but this would provide an opportunity to better utilize their aircraft by loading shipments on the cargo holds of their Boeing 737s (Lopez, 2018). The air cargo industry is becoming a growing business opportunity, Southwest could take advantage of over 4,000 flights a day during peak periods to help meet the growing demand for fast delivery (Lopez, 2018).

Threats

Fuel prices: Rising fuel prices could pose a threat to the airline, to offset the high costs of fuel the airline might need to raise their ticket prices. Southwest reported fuel costs of $241 million during the first half of the year, which was a 12% increase from the previous year (Jansen, 2018). To combat the higher fuel prices, Southwest has been forced to raise prices. Southwest customers have seen fare increases, the airline has boosted fares about 7%-14% since the summer of 2007 (Masson, 2018). Southwest airlines had to lower their 2018 outlook for available seats, from 5% to 4% due to the decreased revenue and higher oil prices (Narayanan, 2018).

Government regulations: The FAA Reauthorization Bill is requiring the agency to set minimum seat width and pitch standards within a year. The government could possibly strengthen inspections and regulations to improve airline safety. In the U.S., the average number of seats per aircraft has increased by 8% over the past 15 years (Elliott, 2018). This new trend of standardizing the seats on an aircraft could cause low-cost airlines such as Southwest to be forced to increase their fares.

Financial Analysis

The Quantitative analysis utilizes the income statement and balance sheet and compares the change from 2017 to 2016 for each line item. All income statement and balance sheet figures were retrieved from Yahoo Finance (Southwest, 2018). Southwest had a total revenue increase of 3.65% and net income by 55.44%. Unfortunately, they had a negative 5% gross profit and an operating loss of 12.69%. Southwest increased their total operating expenses, which is most likely due to their increased travel routes.

Southwest Airlines total current assets increased by 7%, total assets increased by 7.83%. Accounts Payable increased by 12.05% and total current liabilities increased by 0.89%. Southwest airlines total current assets are increasing at a larger rate than total current liabilities. In 2017 Southwest Airlines had decreased their liabilities by 1.11%. The common stock stayed the same in 2017, while retained earnings increased by 28.05%. Total Stockholder Equity increased by 23.56% and net tangible assets increased by 28.42%.

Overall, investors will be pleased that total net income increased by increased by 55.44% and dividends increased by 23.42%. Total cash flow from financing and investing activities decreased. Southwest increased their dividend exposure by 23.42%. Southwest Airlines also increase their investment by 27.20%, Southwest is investing in technology and expanding their cargo flights.

Proposed Solutions

Southwest Airlines is one of the top cost leaders in the industry, they are able to provide their consumers with low costs while not cutting corners. Southwest Airlines is facing stiff competition with the other low-cost providers, Southwest needs to diversify their revenue in order to remain competitive in the saturated airline industry.

1. Incorporate travel distribution programs: Southwest has been rolling out new technology that will ease the communication process among their employees while also collecting traveler data. Investing more money into a travel distribution program will better allow Southwest to increase communication between their travelers and the travel agents.

2. Inspect airlines more regularly: Southwest Airlines has had several lawsuits and accidents related to lax inspections with their fleet of airlines. The airline should slow down and make safety their ultimate priority.

3. Expand network locally and globally: The airline industry is becoming highly saturated with several other low-cost airlines. Southwest has the opportunity to service smaller ports all across the world to satisfy consumer demand and to gain more of the market share.

Optimal Solution and Recommendations

Expand network locally and globally: The airline industry is a highly saturated market, Southwest needs to separate themselves from the rest of the competition, by offering more flights globally and locally to gain a competitive advantage within their industry (Jet, 2018). Southwest Airlines has many loyal passengers that would like to start taking flights to Hawaii, and Southwest is looking into offering flights to this destination. Along with Hawaii the airline will be servicing Cancun which is a popular vacation spot, which will help to increase the airline's revenue stream (Jet, 2018). Southwest also has the opportunity to offer non-stop flights to several cities within the United States, Southwest will be able to keep costs low and because they will service smaller airlines.

Implementation

1. Research viable destinations: Southwest Airlines should research potential destinations that would be viable options for them to service. Their R&D teams could search out local and global destinations that would best align with Southwest’s low-cost strategy and would meet consumer travel demand. Southwest could start by learning where their competition is flying and then service those areas that are rarely accessed.

2. Implement marketing: Once Southwest has finalized the destinations they plan to provide flights for, they will need to market their new destination to travelers. A great time to implement this new marketing campaign would be around the holidays when most people are planning getaways. The campaign could tie into their “Every Seat has a story” campaign, and highlight how they have added more places for memories to be made. The campaign would have to be rolled out in parts since Southwest is only going to trial a few destinations at a time.

3. Trial flights: To better gauge demand, Southwest could service the most viable areas found during their research. One of the destinations that garnered great interest was Hawaii, Southwest could start taking reservations for these flights to garner interest. Southwest could do this with several other destinations, to figure out which flights are the biggest revenue drivers.

4. Continue to utilize smaller global hubs: To continue driving down costs while expanding their business, Southwest will need to partner with global hubs. Partnering with global hubs will allow Southwest to utilize pre-existing building rather than investing in the construction of new facilities.

Exhibit 1-Income Statement

Exhibit 2-Balance Sheet

Exhibit 3-Five Year Cash Flow Statement

Resources

Elliott, C. (2018,). Airline seat standards coming, as safety concerns, passenger complaints mount. Retrieved from https://www.usatoday.com/story/travel/advice/2018/07/15/airline-seat-standards-government-regulations-coming/777040002/

Field, J. (2018). Southwest Airlines Announces Additional Expansion Plans. Retrieved from https://airwaysmag.com/airlines/southwest-airlines-announces-additional-expansion-plans/

Gallo, C. (2018). How Southwest Airlines Uses Emotional Storytelling To Connect With Its Customers. Retrieved from https://www.forbes.com/sites/carminegallo/2018/03/28/how-southwest-airlines-uses-emotional-storytelling-to-connect-with-its-customers/

Investopedia. (2015). How Southwest Airlines Has Won Over Travelers. Retrieved from https://www.investopedia.com/articles/investing/061015/how-southwest-different-other-airlines.asp

Jansen, B. (2018). Southwest says fares are down despite rising fuel costs. Retrieved from https://www.usatoday.com/story/travel/flights/todayinthesky/2018/07/26/southwest-offset-higher-fuel-costs-without-raising-fares/844347002/

Jet, J. (2018). Update On When Southwest Airlines Flights To Hawaii Will Start. Retrieved from https://www.forbes.com/sites/johnnyjet/2018/08/21/will-southwest-airlines-hawaii-flights-start-in-october-2018/

Koenig, D. (2018). Southwest Airlines has been faced with fines, union safety complaints. Retrieved from http://www.chicagotribune.com/business/ct-southwest-airlines-safety-investigation-20180424-story.html

Lopez, E. (2018). Southwest Airlines Cargo makes first international trip. Retrieved from https://www.supplychaindive.com/news/southwest-airlines- cargo-expands-international-Mexico/528057/

Masson, M. F. (2018.). Southwest's fuel gamble: Hedges keeps fares in check. Retrieved from https://abcnews.go.com/Travel/story?id=5918252&page=1

McLaren, M. (2018). How Southwest Airlines Built a Stand-Out Employer Brand in 5 Steps. Retrieved from https://business.linkedin.com/talent- solutions/blog/employer-brand/2018/how-southwest-airlines-built-a-stand-out-employer-brand-in-5-steps

Narayana, A. (2018) Southwest Airlines Cuts Views, American Warns in Airfare Hike, IATA Sees Profit Slump. Retrieved from www.investors.com/news/southwest-delta-american-warn-on revenue-profits-load-factor/

Southwest Airlines, Co. (LUV) (2018). Balance Sheet. Retrieved from https://finance.yahoo.com/quote/LUV/financials/

Southwest Airlines, Co. (LUV) (2018). Cash Flow Statement. Retrieved from https://finance.yahoo.com/quote/LUV/financials/

Southwest Airlines, Co. (LUV) (2018). Income Statement. Retrieved from https://finance.yahoo.com/quote/LUV/financials/

Ungerleider, Neal. (2018) Southwest Airlines' Digital Transformation Takes Off. Retrieved from www.fastcompany.com/3065045/southwest-airlines-digital-transformation-takes-off

Valle, L. D. (2018). 8 passengers sue Southwest Airlines over fatal engine failure. Retrieved from https://www.cnn.com/2018/06/21/us/southwest-flight-lawsuit/index.html

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