2010

CASE STUDY ON SOUTHWEST AIRLINE

CHUOP Theot Therith

TABLE OF CONTENT Table of Content 1. Case Abstract .......................................................................................................................................................... 1 2. Propose a Vision Statement............................................................................................................................ 2 3. The company mission statement and mission statement proposed .................................................. 2 4. List the corresponding Mission Statement components ......................................................................... 2 5. Perform an External Audit.............................................................................................................................. 3 6. Competitive Profile Matrix (CPM) ............................................................................................................... 5 7. The EFE Matrix .................................................................................................................................................... 5 8. Perform an Internal Audit ............................................................................................................................... 7 9. The IFE Matrix ..................................................................................................................................................... 8 10. TOWS Analysis ................................................................................................................................................. 10 11. The SPACE Matrix ............................................................................................................................................11 12. The Grand Strategy Matrix ...........................................................................................................................12 13. The IE Matrix...................................................................................................................................................... 13 14. The Matrix Analysis and TOWS summary ...............................................................................................14 15. The QSPM ...........................................................................................................................................................14 16. The EBIT/EPS Analysis .................................................................................................................................... 18 17. The Recommendation .................................................................................................................................. 20 REFERENCES

REFERENCES 1. Fred R. David, Strategic Management, 9/e, 2003 by Prentice-Hall, Inc., A Pearson Education Company, Upper Saddle River, New Jersey 07458 2. Dr. V.V.R. Seshu Babu, Strategic Management hand out, 2010, BBU, Phnom Penh 3. Strategic Management Club Online www.strategyclub.com 4. Shahzad Trading & Consulting FZE: www.shahzadtc.com 5. MindTools: www.Mindtools.com/subscribe.htm 6. Web site: www.maxi-pedia.com 7. Southwest Airlines: http://www.southwest.com/ 8. Web site: www.iflyswa.com 9. Wikinvest: www.wikinvest.com/stock/Southwest_Airlines_Company_ (LUV)/Data/EBIT

Strategic Management

1. CASE ABSTRACT Southwest is an Airline Company, based in Dallas, Texas Herbert D. Kelleher, Chairman, President, and CEO Since 1987, when the Department of Transportation began tracking Customer Satisfaction statistics, Southwest has consistently led the entire airline industry with the lowest ratio of complaints per passengers boarded. Many airlines have tried to copy Southwests business model, and the Culture of Southwest is admired and emulated by corporations and organizations in all walks of life. Always the innovator, Southwest pioneered Senior Fares, a same-day air freight delivery service, and Ticketless Travel. Southwest led the way with the first airline web page southwest.com, DING! the first-ever direct link to Customers computer desktops that delivers live updates on the hottest deals, and the first airline corporate blog, Nuts About Southwest. Our Share the Spirit community programs make Southwest the hometown airline of every city we serve. In 2007, Southwest Airlines signs a ten-year contract with Galileo to make low fares available to all Galileo-connected travel agencies in North America. We returned to San Francisco International Airport in the Summer and expanded to have an eighth crew base located in Las Vegas. In keeping with customer demands, we kept our open seating policy but adopted a new boarding procedure to make the process quicker. Our gate areas are also undergoing makeovers and weve added a new Business Select fare for our most frequent business fliers. Southwest's current strategy is to position itself as a cost leader with a focus strategy. The companys management and employees aim to cost-effectively and reliably fly large number of customers on short, non-stop flights, and to have fun doing it. They are devoted to making flying available to everyone. The company has been successful in implementing this strategy, having experienced strong growth and profitability. Southwest is now the largest carrier in the U.S. in total customers. It has operated profitably for 32 consecutive years in an industry with a volatile earnings history. The main strategic issue facing Southwest at this time is to evaluate this strategy and determine its future course of action.

CHUOP Theot Therith: Southwest Airlines (2010)

Strategic Management

2. PROPOSE A VISION STATEMENT FOR SOUTHWEST AIRLINES Southwest Airlines Vision (proposed) is to be the famous mature and new generation Airlines Company that provides the most affordable, reliable and comfortable flight transportation in both domestic and oversees. 3. THE COMPANYS MISSION STATEMENT . The currently mission statement The mission (existing) of Southwest Airlines is dedication to the highest quality of Customer Service delivered with a sense of warmth, friendliness, individual pride, and Company Spirit. . The mission statement proposed A better Mission Statement proposed is to provide quality service for the everyday person. Southwest services air travel to cities all around the U.S with the latest technology and the most luxurious planes. Through the search for the greatest advantage in todays busy world, we competitively provide the lowest air-fare price with ensuring high company sprit and long term financial prosperity. Southwest is committed to offers the highest standards of safety/integrity for all our customers at an affordable/reasonable price. We ensure all processing is respect to the governmental regulations and we also have the policy for annual donation regularly to various charities throughout the United States. Since the first flight of Southwest in 1971, our employees have been the vital asset in making Southwest the most recognized airline today. 4. LIST THE CORRESPONDING MISSION STATEMENT COMPONENTS The mission statement is the most public and visible part of the strategy management process, it must include the 9 elements: Customers, Products or Services, Markets, Technology, Survival growth and Profitability, Philosophy, Self-concept, Concern for public image and Concern for employees. Therefore, the corresponding mission statement components to the mission statement proposed for Southwest are shown below: 1. Customer: the Southwests customer is the everyday person, to provide quality

service for the everyday person

2. Products or Services: the major service of the Southwest is air travel, Southwest

services air travel

3. Markets: the geographically where the Southwest compete is cities all around the U.S, Southwest services air travel to cities all around the U.S

4. Technology: the technologically current of Southwest is the latest technology, with the latest technology and the most luxurious planes
CHUOP Theot Therith: Southwest Airlines (2010)

Strategic Management

5. Concern for survival, growth, profitability: the Southwest committed to growth

and financial soundness is the lowest air-fare price, we competitively provide the

lowest air-fare price with ensuring high company sprit and long term financial prosperity 6. Philosophy: it is, Southwest is committed to offers the highest standards of safety/integrity for all our customers
7. Self-concept: the distinctive competence or major competitive advantage is reasonable price, all our customers at an affordable/reasonable price 8. Concern for public image: the Southwest responsive to social is governmental regulation and annual donation, We ensure all processing is respect to the

governmental regulations and we also have the policy for annual donation regularly to various charities throughout the United States
9. Concern for employees: it is, our employees have been the vital asset in making

Southwest the most recognized airline today

5. PERFORMANCE OF AN EXTERNAL AUDIT (RESULT) An evaluation of the external opportunities and threats based on the case study (Southwest Airlines, 2002) and additional references (by 2009) is as follows: Opportunities:

There are opportunities for growth markets share, and expansion to new markets 1. More than 100 new cities have encouraged Southwest to offer flight service (2003) 2. There is an increased demand for international travel 3. Increased demand for cities that are currently (by 2009) without Southwest airline flights such as New York, Atlanta 4. With an increase of nearly 3 million people in the US there is an expansion of developing cities across the United States 5. Increased amount of upper level business travelers has led to greater demand for better seats.

Technological competency and its popularity of Southwest 6. First airline on the web 7. Booked online 13.6% more than American Airlines (in 2004) 8. Top-ranked web site in customer satisfaction among travel sites (by 2004) 9. Increase popularity of internet leads to an expected rise of 22 percent from 2006 in flight booked online

CHUOP Theot Therith: Southwest Airlines (2010)

Strategic Management

There are barriers to entry for other competitors in the airline industry, the bankruptcy, and decline. 10. There is a decline of 11 percent in airline companies with funding leading to used planes being able to be purchased 11. Each year, airline companies (such as Delta and Northwest in 2006) are declaring bankruptcy leaving more cities existing allowing more airlines to fly to 12. Decline of 11 percent in airline companies with funding leading to experienced workers being laid off.

Threats:

Jet Blue Airline 1. Specialization expertise of Jet Blue using one plane model allows them to provide less expensive mechanics to maintain planes. 2. Jet Blue is the only airline to carry satellite televisions on planes.

Southwest's ability to hold the line on costs will impact its cost leadership position. 3. The largest cost component (36.9% of expenses) is labor. This cost could be impacted by union actions, which cover 84% of Southwest's workforce. 4. The second largest cost component is fuel (11.2%), which could be negatively impacted by economic or political events, high cost of fuel leads to increase in ticket prices

Other threats 5. New tax system, higher ticket taxes. 6. Increase in airport security due to possible terrorism, terrorists attacks 7. Many companies such as AirTran Airways are offering a business class in their B717 jet. 8. Competing airlines offer satellite radio in their passenger jets, newer and more technologically advanced jets with luxury items and some of competitors offer inflight meals adding luxury 9. Alternative forms of transportation, such as a high-speed railway, could weaken demand for air travel. Also, if the economy weakens, people may choose to drive rather than fly 10. Southwest would be hurt if the public perception were that low price equates to low quality. An incident like the ValuJet crash could reinforce this perception.

CHUOP Theot Therith: Southwest Airlines (2010)

Strategic Management

6. COMPETITIVE PROFILE MATRIX (CPM) Based on the case study and some extra information, it enables to prepare a Competitive Profile Matrix (CPM) as following: South West Critical Success Factors Advertising Global Expansion Market Share Price competitiveness Financial Position Consumer Loyalty Management Security Precautions Customer Service Organizational Structure Total Weight 0.14 0.07 0.12 0.09 0.11 0.09 0.09 0.09 0.14 0.06 1.00 Rating 3 1 2 4 3 4 4 3 4 3
Weighted Score

American Rating 3 3 4 3 1 2 3 3 2 3
Weighted Score

United Rating 2 3 3 3 1 2 3 2 1 2
Weighted Score

0.42 0.07 0.24 0.36 0.33 0.36 0.36 0.27 0.48 0.18 3.07

0.42 0.21 0.48 0.27 0.11 0.18 0.27 0.27 0.28 0.18 2.67

0.28 0.21 0.36 0.27 0.11 0.18 0.27 0.18 0.14 0.12 2.12

7. EXTERNAL FACTOR EVALUATION (EFE) MATRIX According to the result of performance an external audit above, the EFE matrix is presented as below: Key External Factors (KEF) Opportunities 1. More than 100 new cities have encouraged Southwest to offer flight service (2003) 2. There is an increased demand for international travel 3. Increased demand for cities that are currently (by 2009) without Southwest airline flights such as New York, Atlanta 4. With an increase of nearly 3 million people in the US there is an expansion of developing cities across the 0.01 2 0.02 0.09 1 0.09 0.04 0.09 4 1 0.16 0.09 Weights
0.0 to 1.0

Rating 1 to 4

Weighted Score

CHUOP Theot Therith: Southwest Airlines (2010)

Strategic Management

United States 5. Increased amount of upper level business travelers has led to greater demand for better seats. 6. First airline on the web 7. Booked online 13.6% more than American Airlines (in 2004) 8. Top-ranked web site in customer satisfaction among travel sites (by 2004) 9. Increase popularity of internet leads to an expected rise of 22 percent from 2006 in flight booked online 10. There is a decline of 11 percent in airline companies with funding leading to used planes being able to be purchased 11. Each year, airline companies (such as Delta and Northwest in 2006) are declaring bankruptcy leaving more cities existing allowing more airlines to fly to 12. Decline of 11 percent in airline companies with funding leading to experienced workers being laid off. Threats 1. Specialization expertise of Jet Blue using one plane model allows them to provide less expensive mechanics to maintain planes. 2. Jet Blue is the only airline to carry satellite televisions on planes. 3. The largest cost component (36.9% of expenses) is labor. This cost could be impacted by union actions, which cover 84% of Southwest's workforce. 4. The second largest cost component is fuel (11.2%), which could be negatively impacted by economic or political events, high cost of fuel leads to increase in ticket prices 5. New tax system, higher ticket taxes. 6. Increase in airport security due to possible terrorism, terrorists attacks 0.04 0.09 2 3 0.08 0.27 0.10 3 0.30 0.03 1 0.03 0.05 2 0.10 0.10 3 0.30 0.03 3 0.09 0.04 2 0.08 0.01 1 0.01 0.01 0.02 0.03 0.03 0.03 1 1 1 2 3 0.01 0.02 0.03 0.06 0.09

CHUOP Theot Therith: Southwest Airlines (2010)

Strategic Management

7. Many companies such as AirTran Airways are offering a business class in their B717 jet. 8. Competing airlines offer satellite radio in their passenger jets, newer and more technologically advanced jets with luxury items and some of competitors offer in-flight meals adding luxury 9. Alternative forms of transportation, such as a highspeed railway, could weaken demand for air travel. Also, if the economy weakens, people may choose to drive rather than fly 10. Southwest would be hurt if the public perception were that low price equates to low quality. An incident like the ValuJet crash could reinforce this perception. TOTAL 8. PERFORMANCE OF AN INTERNAL AUDIT (RESULT)

0.04

0.04

0.04

0.08

0.04

0.04

0.04 1.00

0.04 2.03

An assessment of the internal strengths and weaknesses based on the case study (Southwest Airlines, 2002) and additional references (by 2009) is as follows: Strengths

1. Southwest has successfully adopted a cost leadership strategy

2. Southwest has a reputation for great customer service: Southwest won the Department of Transportations Triple Crown 5 years consecutively for ontime service, baggage handling, and least number of customer complaints. The company has topped the National Airline Quality Rating three years consecutively. 3. Employee loyalty: the company has a strong, fun-loving, employee-oriented culture. The company's mission statement focuses on these aspects of the business. The result is a loyal employee base that is willing to work hard to achieve the company's goals. 4. Thirty-seven consecutive years of profitability 1972 till 2009 (31 consecutive years of profitability by 2003) 5. Eighty-five percent hedge position on fuel. 6. RPMs for 42.2 billion 7. Excellent public image. 8. Strong management team. 9. Thirteen billion in market value.
CHUOP Theot Therith: Southwest Airlines (2010)

Strategic Management

10. In 2009 Southwest has three hundred and eighty-eight new jets (30 new jets in 2003) 11. Average age of jets is least than 10 years around 8 years 12. Fourth largest domestic airline. 13. Growth rate higher than industry. 14. 54 % of revenues from online booking via SW Website (25% in 2003, 50% in 2004). 15. Seventy-five percent of flights are E-tickets. Weaknesses 1.

The company's mission statement is weak. Although there appears to be clear

communication of the company's goals, the mission statement doesn't even mention what industry Southwest is in.

2. Depend on single producer, 3. SW has highest percentage of full-time employees leading to increased overhead. 4. Southwest only flies one plane, the Boeing 737. 5. They will not fly outside the continental United States, 63 cities and 32 states. 6. Difficult to convince customers SW offers benefits other airlines do not. 7. Flying only 737s could lead to negative press if problems with that plane arise. 8. Does not accommodate for severely handicapped. 9. Large cities (Atlanta, Charlotte, etc) are without SW service. 10. No business section on plane, do not provide a first class for passengers, do not provide assigned seating. 11. Southwest does not offer any type of in-flight meals. 12. Southwest offers in domestic only, no international flights. 9. INTERNAL FACTOR EVALUATION (IFE) MATRIX By the performance an internal audit above, the IFE matrix is presented as below: Key External Factors (KEF) Strengths Weights
0.0 to 1.0

Rating 1 to 4

Weighted Score

1. Southwest has successfully adopted a cost leadership strategy 2. Southwest has a reputation for great customer service 3. Employee loyalty 4. Thirty-seven consecutive years of profitability 1972 till 2009 (31 consecutive years of profitability by 2003)

0.07 0.07 0.07 0.04

3 3 4 4

0.21 0.21 0.28 0.16

CHUOP Theot Therith: Southwest Airlines (2010)

Strategic Management

5. Eighty-five percent hedge position on fuel. 6. RPMs for 42.2 billion 7. Excellent public image. 8. Strong management team. 9. Thirteen billion in market value. 10. In 2009 Southwest has three hundred and eightyeight new jets (30 new jets in 2003) 11. Average age of jets is least than 10 years ~ 8.4 years 12. Fourth largest domestic airline. 13. Growth rate higher than industry. 14. 54 % of revenues from online booking via SW Website (25% in 2003, 50% in 2004). 15. Seventy-five percent of flights are E-tickets.
Weaknesses

0.07 0.04 0.07 0.07 0.04 0.04 0.04 0.03 0.07 0.02 0.03 0.02 0.01 0.03 0.01 0.04 0.01 0.01 0.01 0.05 0.01 0.01 0.02 1.00

4 3 4 4 3 3 4 4 3 3 4 1 1 2 1 2 2 1 1 1 1 2 1

0.28 0.12 0.28 0.28 0.12 0.12 0.16 0.12 0.21 0.06 0.12 0.02 0.01 0.06 0.01 0.08 0.02 0.01 0.01 0.05 0.01 0.02 0.02 3.05 9

1. The company's mission statement is weak 2. Depend on single producer 3. SW has highest percentage of full-time employees leading to increased overhead. 4. Southwest only flies one plane, the Boeing 737. 5. They will not fly outside the continental United States, 63 cities and 32 states. 6. Difficult to convince customers SW offers benefits other airlines do not. 7. Flying only 737s could lead to negative press if problems with that plane arise. 8. Does not accommodate for severely handicapped. 9. Large cities (Atlanta, Charlotte, etc) are without SW service. 10. No business section on plane, do not provide a first class for passengers, do not provide assigned seating. 11. Southwest does not offer any type of in-flight meals.
12. Southwest offers in domestic only, no international flights.

TOTAL
CHUOP Theot Therith: Southwest Airlines (2010)

Strategic Management

10. THE TOWS ANALYSIS Here, the TOWS matrix an effective way of combining internal strengths with external opportunities and threats, and internal weaknesses with external opportunities and threats. (Base on the external audit at point 5 and internal audit at point 8)
External Opportunities (O)

External Threats (T) 1. T1 2. T2 3. T3 . 10. T10 ST Strategy (maxi-mini)

program to offer one reward point for every made on three the purchases

1.

O1

2. O2 3. O3 . 12. O12 SO Strategy (maxi-maxi ) customer service to penetrate Internal Strength (S) 1. S1 2. S2 3. S3 . 15. S15 & attract customers from other 100 new cities (S2-O1) 2. Through market value, offer flight service in the cities currently without SW (S9-O3) 3. Base on increasing of revenue
from online, continue to satisfy

1. Use the reputation for great 1. Expand the rapid rewards

Southwest website at least one month in advance.

2. Upgrade our fleet by adding

12 of the similar Boeing 717 jets in order to accommodate to the travelers desiring the luxury of a business class.

customer via internet (S14S15 O6O7O9) WO Strategy (mini-maxi) Internal Weaknesses (W) 1. W1 2. W2 3. W3 . 12. W12 (W3-O12) 2. With airline planes companies SW can selling

WT Strategy (mini-mini) by Southwest such as

1. Hire more part time worker 1. Add new cities not flown to Atlanta, Charlotte, Chicago, and New York the B737s in order are

purchase models similar to 2. Shorten the flight life span the 737, which could lead to of the 737 arises (W7-O10) better press if a problem with maintain planes that technology

consistently up to date with

CHUOP Theot Therith: Southwest Airlines (2010)

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Strategic Management

11. THE SPACE MATRIX Internal Strategic Position Financial Strength (FS) ROI ROA Leverage Net income Inventor Turnover FS average Competitive Advantage (CA) Market Share Product/service quality Customer loyalty Competitions capacity utilization Technological know-how CA average Conclusion Directional vector coordinates: Rating 3 3 2 3 2 2.6 Rating -2 -1 -1 -2 -1 -1.4 External Strategic Position Environmental Stability (ES) Rating Technological changes -2 Risk involved in business -3 Rate of inflation -3 Competitive pressure -5 Price of elasticity of demand -2 ES average -3.0 Industry Strength (IS) Profit potential Growth potential Financial policy Resource utilization IS average Rating 6 5 4 5 5.0

X-axis -1.4 + 5.0 = 3.6 Y-axis 2.6 + (-3.0) = -1.4 Therefore, the Southwest Airline should pursue Competitive Strategy FS

Conservative

+6

Aggressive

CA -6 +6

IS

(3.6,-1.4) Defensive -6 ES Competitive

CHUOP Theot Therith: Southwest Airlines (2010)

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Strategic Management

The directional vector locates in the competitive quadrant of the SPACE Matrix, indicating competitive strategies. So Southwest should take backward, forward, and horizontal integration;

market penetration; market development; product development; and joint venture.

12. THE GRAND STRATEGY MATRIX According to the Market Growth and Competitive Position of Southwest (via the case), therefore Southwest is in the Quadrant I (please see the matrix below). . Rapid Market Growth
Quadrant II 1. Market development 2. Market penetration 3. Product development 4. Horizontal integration 5. Divesture 6. Liquidation Quadrant I 1. Market development 2. Market penetration 3. Product development 4. Forward integration 5. Backward integration 6. Horizontal integration 7. Concentric diversification

Southwest

Weak Competitive Position

Quadrant III 1. Retrenchment 2. Concentric diversification 3. Conglomerate diversification 4. Horizontal integration 5. Divesture 6. Liquidation Quadrant IV 1. Horizontal integration 2. Concentric diversification 3. Conglomerate diversification 4. Joint ventures

Strong Competitive Position

Slow Market Growth

CHUOP Theot Therith: Southwest Airlines (2010)

12

Strategic Management

13. THE INTERNAL-EXTERNAL (IE) MATRIX Use the findings score of EFE (at point 7) and IFE matrix (at point 9), we get the IE matrix based on the following two criteria: 1. The total weighted score from the EFE matrix: 2.03 this score is plotted on the y-axis 2. The total weighted score from the IFE matrix: 3.05 this score is plotted on the x-axis Now we plot these values on axes in the IE matrix.

EFE total weighted score Strong 3.0 to 4.0 4.0 High 3.0 to 4.0 3.0 Medium 2.0 to 3.0 2.0 Low 1.0 to 1.99 1.0 VII VIII IX IV V VI I II III Here, Southwest is in cell VI (2.03,3.05) Average 2.0 to 3.0 Weak 1.0 to 1.99

2.0

3.0

4.0

IFE total weighted score

As the matrix, Southwest is in cell VI that suggests the hold and maintains strategy. In this case, Southwests tactical strategies should focus on market penetration and product

development.

CHUOP Theot Therith: Southwest Airlines (2010)

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Strategic Management

14. MATRIX ANALYSIS AND TOWS SUMMARY As the result of IE matrix (at point 13), SPACE matrix (at point 11), Grand Strategy Matrix (at point 12) and TOWS analysis (at point 10), we find out the Alternative Strategies such the table below: N 01 02 03 04 05 06 07 08 09 10 11 12 13 Alternative Strategies Forward Integration Backward Integration Horizontal Integration Market Penetration Market Development Product Development Concentric Diversification Conglomerate Diversification Horizontal Diversification Joint Venture Retrenchment Divestiture Liquidation IE SPACE GRAND TOWS Count 3 2 2 3 2 3 2 0 0 1 0 0 0

15. THE QUANTITATIVE STRATEGIC PLANNING MATRIX (QSPM) This QSPM compares two alternatives. Based on strategies in the stage 1: the input stage (EFE, CPM, IFE) and stage 2: the matching stage (TOWS analysis, SPACE matrix, IE matrix, GSM), company executives determined that Southwest needs to pursue an competitive strategy aimed development of new product and further penetration of the market. It means the possible strategies for Southwest Airlines are (1) market penetration strategy: Expand into more cities that are currently without SW airline flights (such as Atlanta, New York) and (2) product development strategy: Add 12 B17s to Fleet.
Expand into more cities such

Add 12 B17s to Fleet

Key External Factors (KEF)

Weight
0.0 to 1.0

as Atlanta, New York

AS Opportunities

TAS

AS

TAS

1. More than 100 new cities have encouraged Southwest to offer flight service (2003)

0.04

0.16

0.08

CHUOP Theot Therith: Southwest Airlines (2010)

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Strategic Management

2.

There

is

an

increased

demand

for

international travel 3. Increased demand for cities that are currently (by 2009) without Southwest airline flights such as New York, Atlanta 4. With an increase of nearly 3 million people in the US there is an expansion of developing cities across the United States 5. Increased amount of upper level business travelers has led to greater demand for better seats. 6. First airline on the web 7. Booked online 13.6% more than American Airlines (in 2004) 8. Top-ranked web site in customer satisfaction among travel sites (by 2004) 9. Increase popularity of internet leads to an expected rise of 22 percent from 2006 in flight booked online 10. There is a decline of 11 percent in airline companies with funding leading to used planes being able to be purchased 11. Each year, airline companies (such as Delta and Northwest in 2006) are declaring bankruptcy leaving more cities existing allowing more airlines to fly to 12. Decline of 11 percent in airline companies with funding leading to experienced workers being laid off. Threats 1. Specialization expertise of Jet Blue using one plane model allows them to provide less expensive mechanics to maintain planes.

0.09

0.36

0.27

0.09

0.36

0.27

0.01

0.03

0.02

0.01 0.02 0.03 0.03

2 -

0.02 -

4 -

0.04 -

0.03

0.01

0.02

0.02

0.04

0.08

0.04

0.03

0.03

0.03

0.10

0.10

0.20

CHUOP Theot Therith: Southwest Airlines (2010)

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Strategic Management

2. Jet Blue is the only airline to carry satellite televisions on planes. 3. The largest cost component (36.9% of expenses) is labor. This cost could be impacted by union actions, which cover 84% of Southwest's workforce. 4. The second largest cost component is fuel (11.2%), which could be negatively impacted by economic or political events, high cost of fuel leads to increase in ticket prices 5. New tax system, higher ticket taxes. 6. Increase in airport security due to possible terrorism, terrorists attacks 7. Many companies such as AirTran Airways are offering a business class in their B717 jet. 8. Competing airlines offer satellite radio in their passenger jets, newer and more technologically advanced jets with luxury items and some of competitors offer in-flight meals adding luxury 9. Alternative forms of transportation, such as a high-speed railway, could weaken demand for air travel. Also, if the economy weakens, people may choose to drive rather than fly 10. Southwest would be hurt if the public perception were that low price equates to low quality. An incident like the ValuJet crash could reinforce this perception.
Sub total of weight and TAS Strengths

0.05

0.05

0.10

0.03

0.10

0.04 0.09 0.04

1 1

0.09 0.04

1 3

0.09 0.12

0.04

0.04

0.08

0.04

0.04

0.04

0.04

1.00

1.42

1.40

1. Southwest has successfully adopted a cost leadership strategy 2. Southwest has a reputation for great
CHUOP Theot Therith: Southwest Airlines (2010)

0.07 0.07

0.14

0.07

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Strategic Management

customer service 3. Employee loyalty 4. Thirty-seven consecutive years of profitability 1972 till 2009 (31 consecutive years of profitability by 2003) 5. Eighty-five percent hedge position on fuel. 6. RPMs for 42.2 billion 7. Excellent public image. 8. Strong management team. 9. Thirteen billion in market value. 10. In 2009 Southwest has three hundred and eighty-eight new jets (30 new jets in 2003) 11. Average age of jets is least than 10 years ~ 8.4 years 12. Fourth largest domestic airline. 13. Growth rate higher than industry. 14. 54 % of revenues from online booking via SW Website (25% in 2003, 50% in 2004). 15. Seventy-five percent of flights are E-tickets.
Weaknesses 0.07 0.04 0.07 0.07 0.04 0.04 0.04 0.03 0.07 0.02 0.03 0.02 0.01 0.03 0.01 0.04 0.01 0.01 0.01 2 2 1 4 2 2 2 2 2 1 2 1 3 2 1 0.08 0.14 0.07 0.16 0.08 0.08 0.06 0.14 0.04 0.01 0.06 0.01 0.12 0.02 0.01 2 1 1 2 3 3 1 1 2 2 1 4 1 1 2 0.08 0.07 0.07 0.08 0.12 0.12 0.03 0.07 0.04 0.02 0.03 0.04 0.04 0.01 0.02 17 0.04 0.07 -

1. 2. 3. 4. 5. 6. 7. 8.

The company's mission statement is weak Depend on single producer SW has highest percentage of full-time employees leading to increased overhead. Southwest only flies one plane, the Boeing 737. They will not fly outside the continental United States, 63 cities and 32 states. Difficult to convince customers SW offers benefits other airlines do not. Flying only 737s could lead to negative press if problems with that plane arise. Does not accommodate for severely

CHUOP Theot Therith: Southwest Airlines (2010)

Strategic Management

handicapped. 9. Large cities (Atlanta, Charlotte, etc) are without SW service. 10. No business section on plane, do not provide a first class for passengers, do not provide assigned seating. 11. Southwest does not offer any type of inflight meals.
12. Southwest offers in domestic only, no international flights.

0.05

0.20

0.05

0.01

0.01 0.02 1.00

0.08 1.5 2.92 >

0.02 0.98 2.38

Sub total of weight and TAS SUM TOTAL ATTRACTIVENESS SCORE

Note:

. AS = Attractiveness Score, TAS = Total Attractiveness Score . Attractiveness Score: 1 = not attractive; 2 = somewhat attractive; 3 = reasonable attractive; 4 = highly attractive.

Doing calculation in the QPSM, we conclusion that market penetration strategy: Expand into more cities that are currently without a SW airline flight (such as Atlanta, New York) is a better option. This is given by the Sum Total Attractiveness Score figure. The market penetration strategy yields higher score than the product development strategy: Add 12 B17s to Fleet. The market penetration strategy has a score of 2.92 in the QSPM shown above whereas the Add 12 B17s to Fleet strategy has a smaller score of 2.38. 16. CONDUCTION AND PRESENTATION THE EBIT/EPS ANAYLYSIS (Assume $500 million needed; in millions) Amount needed Interest Tax rate Share price Shares outstanding $500 millions 5% 38% $7.2 770 millions

CHUOP Theot Therith: Southwest Airlines (2010)

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Strategic Management

EPS/EBIT Analysis for the Southewest Airlines (in millions except)

Common Stock Financing Recession Normal Boom Debt Financing
Recession

Combination Financing (70% Stock 30% Debt)

Recession

Normal Boom

Normal Boom

EBIT
Interest

300
0 300 114 186 839.51

500
0 500 190 310 839.5

800
0 800 304 496 839.5

300
50 250 95 155 770

500
50 450 171 279 770

800
50 750 285 465 770

300
15 285 108.3 176.7 818.65

500
15 485 184.3 300.7 818.65

800
15 785 298.3 486.7 818.65

EBT Taxes EAT

#Share

EPS

0.22

0.37

0.59

0.20

0.36

0.60

0.22

0.37

0.59

EPS

0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0 200 400 600 800 1000
EBIT

Series1 Series2 Series3

Note: Series1 is Common Stock line Series2 is Debt line Series3 is Combination (70% Common Stock, 30% Debt)
1

839.5 = 770 + (500/7.2)

CHUOP Theot Therith: Southwest Airlines (2010)

19

Strategic Management

17. RECOMMENDATION TO SOUTHWEST AIRLINES Based on QSPM, the best looking strategy would be the market penetration expanding geographically market to mare cities that are currently with out Southwest Airline flight such as Atlanta and New York. It is recommended Southwest penetrates its flights to more cities both in domestic and internationally.

Last modified: July 28, 2010 Submitted Date: July 31, 2010

CHUOP Theot Therith: Southwest Airlines (2010)

20