External Analysis of Southwest Airlines External Analysis Essay

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External Analysis of Southwest Airlines

External Analysis Southwest Airlines

Will Southwest Airline's strategic plan continue to bring success in the new airline industry landscape? This paper sought to answer this question by examining the external increasingly consolidated environment in which Southwest competes. The review was conducted through application of Porter's Five Forces, a PEAT analysis, and a SWOT analysis.

The report concludes that Southwest has gained ground and maintained stability, changing only as much as it needed in order to remain the friendly domestic budget airline it started out as, and to compete effectively but with fidelity to its vision and values.

This paper will present a brief analysis of the competitive landscape for Southwest Airlines based in order to assess the airline's future capabilities in an environment in which other airlines are increasingly co-opting Southwest's successful and innovative strategies. This deductive exploration of the landscape will continue at the micro level through application of Porter's five forces framework. The treatment will follow a tiered approach that examines the macro-environment, the micro-environment, and -- to some degree -- the internal environment. The external analysis at the macro level will be accomplished by analyzing the PEST filters at the micro-environment level. Finally, a SWOT analysis will be generated for Southwest Airlines against the background of the macro level and the micro level analyses. The unit of analysis for this paper is the company level for Southwest Airlines. The NAICS code is 4811, which includes all companies providing scheduled air transportation of passengers and cargo. The Charter and Other Nonscheduled Air Transportation category includes those companies providing nonscheduled transportation.

Strategic Analysis

Southwest Airlines competes with about 600 companies across the domestic airline industry ("Airline Industry," 2011). The major airlines include United Continental, American (which is owned by AMR) and Delta ("Airline Industry," 2011). In addition, there are a number of express delivery companies, such as UPS, FedEx, and DHL. The ten largest companies earn more than 75% of the revenue for the industry ("Airline Industry," 2011). About 70% of revenue comes from domestic flights and approximately 20% comes from international flights. Reservations, and the provision of training, servicing, and maintenance, account for the remaining revenue generated in the airlines industry ("Airline Industry," 2011).

Porter's Five Forces

The structure of an industry can have a profound effect on the level of profitability that can be sustained. Rivalry can best be understood within the context of an industry. Michael Porter developed a model for analyzing the influence of industry context on competition.

Supplier Power. There is virtually no vertical integration in the airlines industry. However, horizontal integration has been very evident. A number of mergers of large airlines have occurred over the past decade. Consolidation is expected to continue as airlines reach for stability and profitability ("Domestic Airlines," 2011). The supplier power force is high.

Buyer Power. Buyers in the airlines industry -- primarily airports -- tend to be weak. However, buyers are trying some new tactics to drive up their share of the revenue. Tampa International Airlines, for instance, is offering $2.5 million in airport fee waivers and advertising over a two-year period to any airline that begins daily flights to Europe with a wide-body 767 (Huettel, 2011). Even new domestic service and shorter international flights will qualify for smaller incentives.

Despite the increased dependence on the Internet, the freight and mail poundage increased by 3.6% from 2010 to 2011 ("Research and Innovative," 2011). Some minor increases in airfare in 2011 did little to dampen flyer behavior, as the number of enplaned passengers increased 2.4% by from 2010 to 2011 ("Research and Innovative," 2011). The percentage of scheduled service fell 3.9% from 2011 to 2011 ("Research and Innovative," 2011). Market shares for the major airlines are as follows: Delta at 16.6%, Southwest at 14.4%, American at 13.5%, United at 10.0%, U.S. Airways at 7.9%, Continental at 7.3%, JetBlue at 4.4%, Alaska at 3.4%, AirTran Corporation at 3.4%, SkyWest at 2.1%, and Other at 17% ("Research and Innovative," 2011). These market shares point to three distinct tiers in the industry, which could certainly be a factor in the wave of consolidation, with larger airlines acquiring somewhat smaller ones. The buyer power force is high.

Threat of New Entrants. Barriers to entry in the airline industry are great. Economies of scale can only be achieved by airlines achieving a fairly substantial size. Local and regional airlines are able to be competitive on a smaller scale than larger airlines and their entry costs are less. New entrants in this category have entered the market.

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Jet Blue, founded in 1999, is a successful example ("Domestic Airlines," 2011) . This category calls for separate analyses of the impact of the five forces on different tiers of airlines, which is determined primarily by the size of the company. For smaller, regional airlines, the threat of new entrants force is moderate. For larger airlines with strong international presence, the threat of new entrants force is low.

Threat of Substitutes. Switching among airlines is common. Higher end consumers tend to loyal and participate in mileage clubs. But a vast number of flyers are price sensitive, and the price-performance trade-offs are very clear. The threat of substitutes force -- within industry -- is high.

There are no viable long-range substitutes for air travel in the U.S. The train system, unlike that in Europe is inadequate for most cross county or interstate travel -- there simply are not enough rails and the costs are higher than budget air travel. The cost of fuel periodically makes long-distance traveling by automobile prohibitive. Traveling by boat is impractical as there are very few domestic water channels, although in some areas ferry travel is competitive with small airplane travel. The threat of substitutes force -- across the transportation industry -- is low.

PEST Analysis

The factors that are most influential on ability of a company to establish and maintain a competitive edge can be classified as political, economic, sociocultural, and technological forces. These forces operate at the micro-environmental level.

Political forces. The political forces that impact airlines include pressures to regulate / deregulate the industry, issues related to safety (pilots' in-air schedules, flight scheduling regulations), foreign instability and war, and international agreements about routes. At any time, changes in the regulatory environment can increase the operating costs of airlines.

Sociocultural. Attitudes held by airlines industry consumers toward the safety and convenience of air travel plays a large role in the industry's ability to attract business. Air travel was once considered a luxury, affordable only to those with considerable discretionary income, and associated with adventure. Flying is now considered just a step up from public transportation, affordable to the masses, and a service to which most people in the U.S. feel entitled. Regulations that inconvenience flyers are as viewed as major impositions. A considerable amount of online energy is devoted to trying to "game" the industry with regard to obtaining cheap flights. Very distinct market segments have emerged as the industry matured.

Economic. The overall health of the economy impacts the volume of air travel undertaken by business and leisure passengers. The cost of labor and the cost of petroleum-based fuel -- pegged more or less to the commodity of oil -- fluctuates in sync with the economy. Most of the cost of doing business by airlines is fixed, making the profit margins vulnerable to economic shocks -- the aftermath of 9/11 is a prime example ("Domestic Airlines," 2011).

Technical. Airlines are dependent on technology, which is naturally very expensive given that it is tied to costly infrastructure and airplanes. The primary components of the basic operations of airlines includes providing and managing flights, staff management, acquiring passengers and freight, acquiring and maintaining airplanes, building and maintaining airport facilities (Airline Industry," 2011). One of the key areas in which technology has substantive influence is the flight equipment in the planes. A second key area is the application of technology to on-the-ground flight tracking.

SWOT Analysis

A SWOT analysis is used here to triangulate the information gathered and analyzed by the PEET analysis and the use of Porter's Five Forces ("SWOT Analysis," 2009; Zahorsky, 2009).

Strengths. Southwest airlines most prominent strength is employees. The recruiting and hiring process is stringent, the performance expectations are high -- and they are met. Employee loyalty and motivation to make the company successful are high. Pricing is another company strength, in that, despite its "cattle call" boarding processes, Southwest has found ways to keep customers happy and prices low. The enthusiasm of employees has a lot to do with those outcomes. The ability to turn a plane around in about half the time other airlines accomplish the task is a substantive strength; this allows Southwest to schedule more flights per day than their competitors.

Weaknesses. Southwest makes promises to employees that it keeps -- sometimes at significant fiscal cost. When the company promised to freeze pilot pay, it.....

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