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2010

CASE STUDY ON SOUTHWEST AIRLINE
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. Grand

The

Strategy Matrix

12

The

13. 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.

 

6.

Web site: www.maxi-pedia.com

 

7.

Southwest Airlines: http://www.southwest.com/

 

8.

Web site: www.iflyswa.com

9.

 

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 Southwest’s 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 pagesouthwest.com, DING! the first-ever direct link to Customer’s 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 we’ve 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 company’s 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.

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 COMPANY’S 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 today’s 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 Southwest’s 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…‖

Technology: the technologically current of Southwest is the latest technology,

4.

―…with the latest technology and the most luxurious planes…‖

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

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 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.

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 American United

South West

American

United

     

Weighted

 

Weighted

 

Weighted

 

Critical Success Factors

Weight

Rating

Score

Rating

Score

Rating

Score

 

Advertising Global Expansion Market Share Price competitiveness Financial Position Consumer Loyalty Management Security Precautions Customer Service Organizational Structure

0.14

3

0.42

3

0.42

2

0.28

0.07

1

0.07

3

0.21

3

0.21

0.12

2

0.24

4

0.48

3

0.36

0.09

4

0.36

3

0.27

3

0.27

0.11

3

0.33

1

0.11

1

0.11

0.09

4

0.36

2

0.18

2

0.18

0.09

4

0.36

3

0.27

3

0.27

0.09

3

0.27

3

0.27

2

0.18

0.14

4

0.48

2

0.28

1

0.14

0.06

3

0.18

3

0.18

2

0.12

 

Total

1.00

 

3.07

 

2.67

 

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:

 

Weights

Rating 1 to 4

Weighted

Key External Factors (KEF)

0.0 to 1.0

Score

Opportunities

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

0.04

4

0.16

2. There is an increased demand for international travel

0.09

1

0.09

3. Increased demand for cities that are currently (by 2009) without Southwest airline flights such as New York, Atlanta

0.09

1

0.09

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

Strategic Management

United States

     

5. Increased amount of upper level business travelers has led to greater demand for better seats.

0.01

1

0.01

6. First airline on the web

0.02

1

0.02

7. Booked online 13.6% more than American Airlines (in

     

2004)

0.03

1

0.03

8. Top-ranked web site in customer satisfaction among travel sites (by 2004)

0.03

2

0.06

9. Increase popularity of internet leads to an expected rise of 22 percent from 2006 in flight booked online

0.03

3

0.09

10. There is a decline of 11 percent in airline companies with funding leading to used planes being able to be purchased

0.01

1

0.01

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

0.04

2

0.08

12. Decline of 11 percent in airline companies with funding leading to experienced workers being laid off.

0.03

3

0.09

Threats

1. Specialization expertise of Jet Blue using one plane model allows them to provide less expensive mechanics to maintain planes.

0.10

3

0.30

2. Jet Blue is the only airline to carry satellite televisions on planes.

0.05

2

0.10

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.

0.03

1

0.03

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

0.10

3

0.30

5. New tax system, higher ticket taxes.

0.04

2

0.08

6. Increase in airport security due to possible terrorism, terrorists’ attacks

0.09

3

0.27

Strategic Management

7. Many companies such as AirTran Airways are offering a business class in their B717 jet.

0.04

1 0.04

8.

Competing

airlines

offer

satellite

radio

in

their

   

passenger

jets,

newer

and

more

technologically

0.04

2 0.08

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

0.04

1 0.04

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.

0.04

1 0.04

 

TOTAL

1.00

2.03

8. PERFORMANCE OF AN INTERNAL AUDIT (RESULT)

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 Transportation’s 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. RPM’s for 42.2 billion

7. Excellent public image.

8. Strong management team.

9. Thirteen billion in market value.

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:

 

Weights

Rating 1 to 4

Weighted

Key External Factors (KEF)

0.0 to 1.0

Score

Strengths

1. Southwest has successfully adopted a cost leadership strategy

0.07

3

0.21

2. Southwest has a reputation for great customer service

0.07

3

0.21

3. Employee loyalty

0.07

4

0.28

4. Thirty-seven consecutive years of profitability 1972 till 2009 (31 consecutive years of profitability by 2003)

0.04

4

0.16

Strategic Management

5. Eighty-five percent hedge position on fuel.

0.07

4

0.28

6. RPM’s for 42.2 billion

0.04

3

0.12

7. Excellent public image.

0.07

4

0.28

8. Strong management team.

0.07

4

0.28

9. Thirteen billion in market value.

0.04

3

0.12

10.

In 2009 Southwest has three hundred and eighty- eight new jets (30 new jets in 2003)

0.04

3

0.12

11.

Average age of jets is least than 10 years ~ 8.4 years

0.04

4

0.16

12.Fourth largest domestic airline.

0.03

4

0.12

13.Growth rate higher than industry.

0.07

3

0.21

14.54 % of revenues from online booking via SW Website (25% in 2003, 50% in 2004).

0.02

3

0.06

15.Seventy-five percent of flights are E-tickets.

0.03

4

0.12

Weaknesses

 

1. The company's mission statement is weak

0.02

1

0.02

2. Depend on single producer

0.01

1

0.01

3. SW has highest percentage of full-time employees leading to increased overhead.

0.03

2

0.06

4. Southwest only flies one plane, the Boeing 737.

0.01

1

0.01

5. They will not fly outside the continental United States, 63 cities and 32 states.

0.04

2

0.08

6. Difficult to convince customers SW offers benefits other airlines do not.

0.01

2

0.02

7. Flying only 737s could lead to negative press if problems with that plane arise.

0.01

1

0.01

8. Does not accommodate for severely handicapped.

0.01

1

0.01

9. Large cities (Atlanta, Charlotte, etc) are without SW service.

0.05

1

0.05

10.

No business section on plane, do not provide a first

     

class for passengers, do not provide assigned seating.

0.01

1

0.01

11.

Southwest does not offer any type of in-flight meals.

0.01

2

0.02

12. Southwest offers in domestic only, no international flights.

0.02

1

0.02

 

TOTAL

1.00

 

3.05

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. O1

 

1. T1

2. O2

2. T2

3. O3

3. T3

………….

 
   

………….

 

12.

O12

10.

T10

 

SO Strategy (maxi-maxi )

ST Strategy (maxi-mini)

Internal Strength (S)

1.

Use the reputation for great customer service to penetrate & attract customers from

1. Expand the rapid rewards program to offer one reward point for every three purchases made on the Southwest website at least one month in advance.

1. S1

other 100 new cities (S2-O1)

2. S2

2.

Through market value, offer

3. S3

flight service in the cities currently without SW (S9-O3)

………….

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.

15.

S15

3.

Base on increasing of revenue from online, continue to satisfy

 

customer via internet (S14S15 O6O7O9)

 

WO Strategy (mini-maxi)

WT Strategy (mini-mini)

1.

Hire more part time worker

1. Add new cities not flown to by Southwest such as Atlanta, Charlotte, Chicago, and New York

Internal Weaknesses (W)

(W3-O12)

1. W1

2. With airline companies

2. W2

 

selling planes SW can

3. W3

purchase models similar to the 737, which could lead to

2.

Shorten the flight life span

………….

of the B737’s in order maintain planes that are consistently up to date with technology

12.

W12

better press if a problem with the 737 arises (W7-O10)

Strategic Management

11. THE SPACE MATRIX

Internal Strategic Position

External Strategic Position

 

Financial Strength (FS)

Rating

Environmental Stability (ES)

Rating

ROI ROA Leverage Net income Inventor Turnover

3

Technological changes Risk involved in business Rate of inflation Competitive pressure Price of elasticity of demand

-2

3

-3

2

-3

3

-5

2

-2

FS average

2.6

ES average

-3.0

Competitive Advantage (CA)

Rating

Industry Strength (IS)

Rating

Market Share Product/service quality Customer loyalty Competition’s capacity utilization Technological know-how

-2

Profit potential Growth potential Financial policy Resource utilization

6

-1

5

-1

4

-2

5

-1

 

CA average

-1.4

IS average

5.0

Conclusion Directional vector coordinates:

X-axis

-1.4 + 5.0

= 3.6

Y-axis

2.6 + (-3.0) = -1.4

 

Therefore, the Southwest Airline should pursue Competitive Strategy

CA

FS +6 Conservative Aggressive IS -6 +6 (3.6,-1.4) Defensive Competitive -6
FS
+6
Conservative
Aggressive
IS
-6
+6
(3.6,-1.4)
Defensive
Competitive
-6

ES

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).

.

Weak

Competitive

Position

Rapid Market Growth

Quadrant II

Quadrant I

1. Market development

2. Market penetration

3. Product development

4. Horizontal integration

5. Divesture

6. Liquidation

1. Market development

2. Market penetration

3. Product development

4. Forward integration

5. Backward integration

6. Horizontal integration

7. Concentric diversification

6. Horizontal integration 7. Concentric diversification Southwest Strong Competitive Position Quadrant III 1.

Southwest

Strong

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

Slow Market Growth

Strategic Management

13. THE INTERNAL-EXTERNAL (IE) MATRIX

Use the finding’s 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

 

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

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

Southwest’s

development.

tactical

strategies

should

focus

on

market

penetration

and

product

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:

Alternative Strategies

IE

SPACE

GRAND

TOWS

Count

01

Forward Integration

 

3

02

Backward Integration

 

 

2

03

Horizontal Integration

 

 

2

04

Market Penetration

 

3

05

Market Development

 

 

2

06

Product Development

 

3

07

Concentric Diversification

   

2

08

Conglomerate Diversification

       

0

09

Horizontal Diversification

       

0

10

Joint Venture

 

   

1

11

Retrenchment

       

0

12

Divestiture

       

0

13

Liquidation

       

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.

 

Weight

Expand into more cities such as Atlanta, New York

Add 12 B17s to Fleet

Key External Factors (KEF)

0.0 to 1.0

AS

TAS

AS

TAS

Opportunities

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

0.04

4

0.16

2

0.08

Strategic Management

2.

an international travel

There

is

increased

demand

for

0.09

4

0.36

3

0.27

3.

Increased demand for cities that are currently (by 2009) without Southwest airline flights such as New York, Atlanta

0.09

4

0.36

3

0.27

4.

With an increase of nearly 3 million people in the US there is an expansion of developing cities across the United States

0.01

3

0.03

2

0.02

5.

Increased amount of upper level business travelers has led to greater demand for better seats.

0.01

2

0.02

4

0.04

6.

First airline on the web

 

0.02

-

- -

 

-

7.

Booked online 13.6% more than American Airlines (in 2004)

0.03

-

- -

 

-

8.

Top-ranked web site in customer satisfaction among travel sites (by 2004)

0.03

-

- -

 

-

9.

Increase popularity of internet leads to an expected rise of 22 percent from 2006 in flight booked online

0.03

-

- -

 

-

10. There is a decline of 11 percent in airline companies with funding leading to used planes being able to be purchased

0.01

2

0.02

2

0.02

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

0.04

2

0.08

1

0.04

12. Decline of 11 percent in airline companies with funding leading to experienced workers being laid off.

0.03

1

0.03

1

0.03

Threats

 

1.

Specialization expertise of Jet Blue using one plane model allows them to provide less expensive mechanics to maintain planes.

0.10

1

0.10

2

0.20

Strategic Management

2.

Jet Blue is the only airline to carry satellite televisions on planes.

0.05

1

0.05

2

0.10

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.

0.03

-

- -

 

-

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

0.10

-

- -

 

-

5. New tax system, higher ticket taxes.

 

0.04

-

- -

 

-

6. Increase in airport security due to possible terrorism, terrorists’ attacks

0.09

1

0.09

1

0.09

7. Many companies such as AirTran Airways are offering a business class in their B717 jet.

0.04

1

0.04

3

0.12

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

0.04

1

0.04

2

0.08

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

0.04

1

0.04

1

0.04

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.

0.04

-

-

-

-

Sub total of weight and TAS

 

1.00

1.42

1.40

Strengths

1. Southwest has successfully adopted a cost leadership strategy

0.07

-

-

-

-

2. Southwest

has

a

reputation

for

great

0.07

2

0.14

1

0.07

Strategic Management

customer service

           

3. Employee loyalty

 

0.07

-

- -

 

-

4. Thirty-seven consecutive years of profitability

1972

till

2009

(31

consecutive

of

0.04

-

- -

 

-

profitability by 2003)

years

5. Eighty-five percent hedge position on fuel.

 

0.07

-

- -

 

-

6. RPM’s for 42.2 billion

 

0.04

2

0.08

2

0.08

7. Excellent public image.

 

0.07

2

0.14

1

0.07

8. Strong management team.

 

0.07

1

0.07

1

0.07

9. Thirteen billion in market value.

 

0.04

4

0.16

2

0.08

10.

In 2009 Southwest has three hundred and

         

eighty-eight new jets (30 new jets in 2003)

 

0.04

2

0.08

3

0.12

11.

Average age of jets is least than 10 years ~ 8.4 years

0.04

2

0.08

3

0.12

12.Fourth largest domestic airline.

 

0.03

2

0.06

1

0.03

13.Growth rate higher than industry.

 

0.07

2

0.14

1

0.07

14.54 % of revenues from online booking via SW Website (25% in 2003, 50% in 2004).

0.02

-

-

-

-

15.Seventy-five percent of flights are E-tickets.

 

0.03

-

-

-

-

Weaknesses

 

1. The company's mission statement is weak

 

0.02

2

0.04

2

0.04

2. Depend on single producer

 

0.01

1

0.01

2

0.02

3. SW has highest percentage of full-time employees leading to increased overhead.

0.03

2

0.06

1

0.03

4. Southwest only flies one plane, the Boeing

         

737.

 

0.01

1

0.01

4

0.04

5. They will not fly outside the continental United States, 63 cities and 32 states.

0.04

3

0.12

1

0.04

6. Difficult to convince customers SW offers benefits other airlines do not.

0.01

2

0.02

1

0.01

7. Flying only 737s could lead to negative press if problems with that plane arise.

0.01

1

0.01

2

0.02

8. Does

not

accommodate

for

severely

0.01

-

-

-

-

Strategic Management

 

handicapped.

           

9. Large cities (Atlanta, Charlotte, etc) are without SW service.

0.05

4

0.20

1

0.05

10. No business section on plane, do not provide a first class for passengers, do not provide assigned seating.

0.01

-

- -

 

-

11. Southwest does not offer any type of in- flight meals.

0.01

-

- -

 

-

12.

Southwest

offers

in

domestic

only,

no

         

international flights.

 

0.02

4

0.08

1

0.02

Sub total of weight and TAS

 

1.00

1.5

0.98

SUM TOTAL ATTRACTIVENESS SCORE

 

2.92

>

2.38

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

$500 millions

Interest

5%

Tax rate

38%

Share price

$7.2

Shares outstanding

770 millions

Strategic Management

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

Common Stock

Combination Financing (70% Stock 30% Debt)

Debt Financing

Financing

 

Recession

Normal

Boom

Recession

Normal

Boom

Recession

Normal

Boom

EBIT

300

500

800

300

500

800

300

500

800

Interest

0

0

0

50

50

50

15

15

15

EBT

300

500

800

250

450

750

285

485

785

Taxes

114

190

304

95

171

285

108.3

184.3

298.3

EAT

186

310

496

155

279

465

176.7

300.7

486.7

#Share

839.5 1

839.5

839.5

770

770

770

818.65

818.65

818.65

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 Series1 0.4 Series2 0.3 Series3 0.2 0.1 EBIT 0 0 200 400
0.7
0.6
0.5
Series1
0.4
Series2
0.3
Series3
0.2
0.1
EBIT
0
0
200
400
600
800
1000

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)

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