Southwest Airlines Company Analysis

Company Overview:

Southwest is currently America's largest low-fare carrier, serving more customers domestically than any other domestic air transportation provider through optimal customer service, quality employees, an emphasis on safe operations and an extraordinary corporate culture (Southwest Corporate Fact Sheet, 2013). Incorporated in 1967, Southwest, based out of Dallas, Texas, provides air transportation in the U.S. to over 100 million customers each year to over 96 destinations in 41 states, District of Columbia, Puerto Rico, and five near-international countries (Southwest Corporate Fact Sheet, 2013 - Exhibit 1). Operated by roughly 46,000 employees, Southwest Airlines continues to distinguish itself from competitors through a unique and strong emphasis on customer experience (Southwest Corporate Fact Sheet, 2013). Additionally, Southwest continues to support its key target customers through its commitment to low fares and minimum fees. In May of 2011, Southwest completed the acquisition of AirTran airways adding to its capacity. Southwest is able to provide low fares to its customers due to its low costs (Southwest Company Profile, 2013). With an unrelenting triple bottom line focus on company performance, its employees and customers, and the communities in which it operates, Southwest has been able to recognize strong success and growth (Southwest Corporate Fact Sheet, 2013).

Mission and Culture:

In the words of Gary Kelly, CEO of Southwest, "...we are in the Customer Service industry; we just happen to fly airplanes" (About Southwest, 2013). Southwest Airlines has consistently been recognized for putting customers first and this has largely attributed to their success. In 2012, Airline Quality Ratings ranked Southwest as the number one airlines customer service provider (Southwest Corporate Fact Sheet, 2013). The mission of Southwest Airlines is described in the following statement: "The mission of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit." (Southwest, 2013). Additionally, Southwest is able to facilitate a customer centric culture through also emphasizing quality treatment of its employees. Innovation and creativity is encouraged amongst Southwest employees in order to enhance the effectiveness of operations. Southwest works to provide the same concern and respect for its employees as it expects them to share with its customers (Southwest, 2013).

Southwest's Generic Strategies:

The image of Southwest as a plucky upstart taking on the industry giants is rapidly disappearing, as evidenced by a changing marketing strategy (Tuttle, 2013). Southwest television commercials used to emphasize low fares and nonexistent bag fees, but have more recently focused on heartwarming clichés (Exhibits 4 & 5). This appears to be signs of an identity crisis, and is significant because competitors such as Alaska Air, Delta, and United have been lowering their cost structures to better compete with Southwest (Trefis, 2012).

However, these low costs do not always translate into lower fares for customers. Rather, they often result in a larger profit margin than competitors such as United-Continental (Exhibit 6). Southwest's low cost advantage has been declining over the past few years, as its costs rise and its competitors costs fall (Exhibit 7). This is attributed to Southwest's attractive fuel hedges rolling off, as well as their competitors' restructuring due to bankruptcy (Seeking Alpha, 2011). Southwest has historically had lower labor costs than its larger U.S. competitors, but this has also changed as other carriers cut pay and benefits after proceeding through bankruptcy court. In 2010, Southwest's labor costs had reached 3.93 cents per available seat mile, while United's costs were 3.65 cents (Maxon, 2011). Southwest's cost advantage also does not stem from its hedged fuel costs, as evidenced by a 0.47 correlation (-2.4%/-5.1%) between its fuel costs and total operating expenses (Fox, 2013). Fuel and oil costs do not explain even half of total operating expenses, suggesting that Southwest's cost advantage is not a result of exclusive access to productive inputs, but rather due to policy choices. Southwest limits their exposure to costs by offering the minimum services necessary to please customers (Trefis, 2012). Because Southwest operates primarily short-to-medium range routes, they are able to operate almost entirely with a single aircraft type, the Boeing 737. This makes training uniform for all employees and lowers maintenance costs because mechanics only have to be trained on one type of plane and they only have to stock extra parts for one type of plane (Exhibit 8). United operates many domestic and international routes, requiring both long range aircraft and short range aircraft (Exhibit 9). Southwest also flies to many secondary or downtown airports that have lower landing fees and are less congested (Trefis, 2012). Lower congestion allows for higher aircraft utilization as the aircraft spends comparatively less time on the ground. Finally, Southwest has long been known for modest on-board services with add-ons at an extra charge (Exhibit 10). Southwest only has coach seating on its aircraft which increases the number of on-board seats compared to multiple-class seating arrangements employed by United and other major domestic airlines (Trefis, 2012). One final cause for Southwest's cost advantage is the use of winglets as exclusive technology. This addition to their planes saves Southwest millions of dollars per year by reducing draft, and therefore increasing fuel efficiency of flights (Exhibit 11).

Southwest also employs a focus strategy, with an emphasis on underserved markets and operating primarily in the southern region of the United States (Yahoo Finance). This strategy results in shorter flight routes, and allows pilots to fly one hour longer each day than at other airlines such as United (Mouawad, 2010). This cost advantage is much smaller in United's operations, as they service a much wider market and offer many international flight options (SWA Media). The shorter flight routes also give Southwest the ability to offer more frequent flights, giving consumers some flexibility (Exhibit 12). Southwest is also deliberative with its hiring process (accepting only .9% of applicants), choosing employees that embody their values and will promote a positive image (Mouawad, 2010). Southwest has developed a reputation for its "road show" flights, in which flight attendants joke with the passengers, connecting with them according to their locational differences (Mouawad, 2010). This unique relationship