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Business Analysis on Southwest Airlines

BusinessAnalysis on Southwest Airlines

Business Analysison South West Airlines

In 1979, MichaelE. Porter developed a simple, but very powerful tool for analyzingthe position and competitive strength of a business organization. Thefive forces include- threat of substitute products that implycustomers have the opportunity to switch to the availablealternatives. Availability of bargaining power for customers, whichmeans the firm’s ability to change prices, is restricted.Bargaining power of suppliers suggests that the firm’s power whendealing with suppliers is low and thus high prices may be charged forinputs. Threat of new entrants and the intensity of rivalry in themarket may lead to low profitability. The porter’s five forces,value chain, value proposition and financial analysis will determinethe performance of South West Airlines (Magretta, 2012). RollinKing and Herb Kelleher developed South West Airlines Company in theyear 1971. Initially, the planes were flying in Texas along the SanAntonio, Houston and Dallas. South West Airlines have had the leastnumber of complaints about all the passengers boarded since 1987.South West was the first airline company to implement internetinnovations and it is the most successful high frequency, low fare,point-to-point carrier. In the year 2008, South West Airlines werethe best in operational excellence and customer service. The airlineindustry has faced challenges due to the economic crisis but despitethis, South West Airline has reported profits for 36 consecutiveyears. Increase in jet fuels meant a reduction in the company’sprofit but the effect was not enough to lead the company to losses(Lauer, 2010).

AnalysisFiveForces Threat of new entrants is an important aspect offive forces. However, this threat in the airline business is minimaldue to the huge capital required to start such a company. Existingcompanies also collude and lower prices to the point of making losseschase new firms with small customer base out of the market (Gittell,2003). Although the switching cost from one brand to another is low,customers prefer existing brands because of the trust developed.Despite this, threat of entrants is worth considering because fewcompanies are still joining the airline industry such as BartiaAirlines Inc. in the year 2011.Rivalry among existingfirms Airline industry is marked with intense competitionwhere many firms aim to increase their market share through reducedprices. The business cycle of this industry seems to be in the maturecycle where the profitability is low and no company wants to leave.The only factor that lessens the competition is brand identity andthat explains why South West positions itself on low prices. The lowswitching costs imply no company can hold a large marketshare.Threat of Substitutes Substitute riskto this industry is low. Although customers can use other means oftransport such as train, buses, boat or cars, airline is the quickesttransport mode and is by far the most convenient. However, customersmay decide to use other modes of transport if the distance to becovered is short and this exposes the airline industry to some risk.

Bargainingpower of suppliers Suppliers of airlineproducts are very few and this reduces their bargaining power.Furthermore, their customers are only their airline companies andthus they have to treat them well. Currently, Boeing and Airbus arethe two top manufacturers of airplanes. However, inability of airlinecompanies to change suppliers due to contract agreements poses arisk.Bargaining power of customers Dueto the low switching costs, customers are able to move from oneairline to another that matches their preferences. However, customersrarely shift due to developed loyalty. South West Airline haspositioned itself on low cost and loyal customers rarelychange.Value chain Value chainrefers to a series of activities that lead to value addition in allstages of product manufacturing or provision of services (Schmitz,2005). South West inbound logistics includes drinks, food, supply offuel, loading and unloading of cargo, and passenger boarding. SouthWest does not have reserve seating because all seats are constructedthe same. Airline flight is considered as the core operationalactivity of the South West Airlines and all inbound logistics leadsto this. The market focus of South West Company is the cost mindedcustomers and the time minded customers. Internet acts as the maintool for sales and marketing in South West airlines. In terms ofsecondary activities, the airline uses the most recent technology toreduce administrative cost. The company has dedicated and motivatedemployees that enable South West to be ahead of the competition. Theuse of only one source of the plane (Boeing) reduces trainingexpenses and parts replacement.ValueProposition and Financial Analysis Valueproposition refers to values that the firm promises to provide to itscustomers (McGrath, 2013). South West Airline is based on three valuepropositions, which are lowest prices, fun travel and fastestdoor-to-door travels. In respect to financial analysis, Southwestreturn on equity for the year 2013 was 13 percent compared to 6percent in the year 2012, which represents a 4 percent increase.However, the liquidity of the company decreased as indicated by acurrent ratio of 79 percent in the year 2013 compared to 90 percentin the year 2012. Overall, Southwest reported a high financialperformance for the year 2012 but so were similar firms in theindustry.Conclusion Porter’s forces are veryuseful tools in determining the competitiveness of a firm and/or theprofitability of the business. An in-depth analysis of SouthwestAirlines Company using five forces, value chain, value propositionand financial analysis reveal that the company has distinguisheditself from competitors. The friendly and low cost services offeredby Southwest Airlines imply sustained profitability in the industry.

References

Gittell, J. (2003). The Southwest Airlines way using the power ofrelationships to achieve high performance. New York:McGraw-Hill.

Lauer, C. (2010). Southwest Airlines. Santa Barbara, Calif:Greenwood.

Magretta, J. (2012). Understanding Michael Porter: the essentialguide to competition and strategy. Boston, Mass: HarvardBusiness Review Press.

McGrath, R. (2013). The end of competitive advantage : how tokeep your strategy moving as fast as your business. Boston,Massachusetts: Harvard Business Review Press.

Schmitz, H. (2005). Value chain analysis for policy-makers andpractitioners. Geneva: International Labour Office.