Southwest Airlines Cengage Case Study Essay

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Southwest Case

Porter's five force is a good tool for understanding profitability in the U.S. airline industry. The service is largely undifferentiated, with the main points of differentiation being the routes and the price. Southwest is focused heavily on point-to-point journeys, and its expansion to Florida reflects that. Expansion into the Northeast would likely also reflect that as well. The bargaining power of suppliers is fairly limited as major airlines are the buyers on whom industry suppliers depend. The bargaining power of buyers, however, is fairly high. They usually have options with respect to what airlines they fly, and this is particularly true in the Northeast. The barriers to entry are not particularly high. Theoretically, it is expensive to start an airline, but new airlines enter the industry fairly frequently. JetBlue would emerge in just a few years with Southwest's business model (and some of its management) and a northeast base, just as evidence of how easy it is to enter this business. The intensity of rivalry is fairly high amid competition for key slots at key airports, and industry consolidation. Combine all of this with high fixed costs and you have strong downward pressure on prices, high fixed costs, and thus fairly poor profitability. Southwest has maintained its profitability by having some degree of diversification in its service, and tight cost controls. It is right to question the wisdom of the northeastern markets -- slow turnaround and airport delays can cripple profitability in an industry when one extra flight per day is the difference between paying for that aircraft and not. Most budget airlines work with very rapid turnaround times as a key component of their model, to keep their planes in the air.

Load factors are a key industry variable for airlines.

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Not only is it valuable to keep planes in the air to maximize revenue from what is essentially a perishable asset (time not flying represents capacity underutilization that cannot be made up later), but the more people are on the plane the more revenue the airline gets. Load factors have been improving, and fuel costs are low, which means that industry profitability is up. . Southwest recognizes that growth is tied to large markets, but needs to enter such markets in a way that allows it to have healthy load factors.

Southwest's main strength at this point is that it does not have the debt that many of its competitors have. The major airlines tend to have large pension obligations that constrain their cash flow. Southwest does not have this, and can offer lower prices. The biggest weakness for Southwest is that it does not have a strong northeast presence, and that is the country's biggest market. It is strong in its own area, but relatively unknown outside of it. That said, Southwest has a good reputation among those who have used it. As such, if it wishes to expand, it might be able to win customers quite quickly, as people are curious about the airline, and like its prices. The key, as Kelleher notes, is not to expand too quickly. The other airlines, with their massive route networks, are still major threats. They also tend to hold strong positions at major airports -- for Southwest to establish a northeastern hub, it….....

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