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Southwest Airlines SWOT & PESTLE Analysis

ID : 52326853 | Jan 2018

OVERVIEW

Name of the Company: Southwest Airlines

Business Sector: Aviation

Operating Geography: North America

About the Company: Southwest Airlines is a major passenger airline based in the U.S.A., which provides scheduled air transport in the United States and international markets near to USA. Southwest started service on June 18, 1971, with three Boeing 737 aircraft serving three Texas cities of Dallas, Houston, and San Antonio. Presently, it operates a total of 723 Boeing 737 aircraft across 101 destinations in 40 states of the USA, and nine international countries near the USA. Based on the data available from the U.S. Department of Transportation (the “DOT”), as of June 30, 2016, Southwest Airlines was the largest domestic air carrier in USA, measured by the number of domestic originating passengers who boarded. The company’s website, southwest.com, is the only platform for customers to purchase and manage travel online.

Revenue: $20.425 billion – FY ending Dec 2016

Competitive Analysis of southwest airlines

The SWOT analysis for Southwest Airlines is presented below:
Strengths
Weaknesses
1. Good profitability, revenue growth and a strong brand image
2. Strong financial position:
3. A robust network and highest domestic market share
4. Lowest operating cost in the airline industry
1. Increasing operating costs and margins:
2. Dependency on a single aircraft, engine, and other parts suppliers …..
3. Single type of seating offered
4. Labor intensive business
5. Less than 1% of revenues in freight cargo
Opportunities
Threats
1. New Reservation System
2. Expanded Destinations - domestically and locally
3. Use of the latest technologies
4. Expanding the Freight cargo services
1. Volatile fuel prices
2. Stringent government regulations and related costs
3. Intensely competitive industry

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Strength

1. Good profitability, revenue growth and a strong brand image: For the 44th consecutive year, southwest was profitable, earning $2.2 billion net income for the year 2016. It represented a 433 percent growth in profits for the last five year period. Operating revenues rose to a record $20.4 billion. It also has a record 84% load factor, which is an indication of the percentage of seats filled. This is now the 23rd consecutive year that Southwest has been named to Fortune’s list of World’s Most Admired Companies, coming in at #8. Thus southwest has a legacy of strong profits year on year and also growth in revenues. This indicates the good overall profitability of the airline. Moreover, the strong brand image that the airline has built over the years has built great customer loyalty as well.

2. Strong financial position: The finances of southwest indicate a $2.3 billion cash flow in the year 2016 and $2 billion return to shareholders through dividends and buybacks. This is an industry leading figure. The company has huge reserves of cash which has prompted it to go for share buybacks. It currently has $3.3 billion in the form of cash and short term investments. It was the only domestic airline with to receive an investment grade credit rating from credit rating agencies- S&P, Moody’s and others. Since 2010, through March 31, 2017, they have returned nearly $6.4 billion to their shareholders through $771 million in dividends and $5.6 billion in share repurchases. This indicates a very robust state of finances for the airline. Figures clearly indicate industry leading financial position of the company.

3. A robust network and highest domestic market share: Southwest executes the model of point-to-point network of connecting destinations as compared to the hub and spoke network of other airlines. So it serves 657 nonstop city pairs, serving 101 destinations. Its capacity grew by 5.7% in the previous year. “Based on the data available from the U.S. Department of Transportation (the “DoT”), southwest was the largest domestic air carrier in the United States, as measured by the number of domestic passengers boarding it”. In 2016, Southwest Airlines was the leading airline in the U.S., with a domestic market share of 20.65 percent. This indicates a very successful network connecting destinations that has indeed contributed to its industry leading market share in a highly competitive market.

4. Lowest operating cost in the airline industry: Southwest has operating costs which are lowest in the industry. It has the world’s largest Boeing fleet of any airline. Southwest is able to achieve this distinction by being able to keep costs low. They have done this by including a single aircraft type, the Boeing 737, in their fleet. Similar operations requirements for the fleet ensures operating an efficient point-to-point route structure, ongoing work, reduced fuel consumption, and highly productive employees as there is no variation in the maintenance of the fleet. The low-cost structure is one of the competitive advantages, as it has enabled southwest to offer low fares, drive traffic volume, and grow market share year on and also lead the industry in the segment.

Weakness

This section is available only in the 'Complete Report' on purchase.

Opportunity

1. New Reservation System: Southwest is transitioning to a single reservation system on Amadeus’ Altéa reservation solution for both domestic and international reservations. This new reservation system is expected to generate an improvement in EBIT of approximately $500 million by 2020, through added functionality and operational capabilities. This would replace the existing reservation system in place and can attract more customers

2. Expanded Destinations - domestically and locally: Southwest has already launched services to nine near-international countries. Its count of total destinations stands at 101. It is also expected to launch services to newer airports and international destinations like Belize City, Belize; Cancun, Mexico; Montego Bay, Jamaica; and Grand Cayman. These expansions can provide Southwest with an expanding reach of customer base and thus room for increasing revenues.

3. Use of the latest technologies: Launch of technologically superior, fuel efficient, and large capacity aircrafts like, 737 MAX 8 will increase service to more long-haul routes, as well as high-demand, slot-controlled, and gate-restricted airports, by adding seats for such routes without increasing the number of flights by replacing the Boeing 737-300 aircraft. Increased capital expenditure spending on replacing the old fleet with fuel efficient and higher capacity aircrafts can ensure better margins in the future.

4. Expanding the Freight cargo services: Southwest can develop its capabilities as a cargo carrier as well. In that way it can also utilize the opportunities available for cargo revenues. Revenues from freight for 2016 decreased compared with 2015, primarily due to decreasing demand. If Southwest is able to expand its freight cargo, then it can add to its revenue numbers.

Threat

This section is available only in the 'Complete Report' on purchase.

References

1. http://investors.southwest.com/~/media/Files/S/Southwest-IR/Annual%20Reports/2016_AnnualReport_LUV.PDF

2. http://investors.southwest.com/financials/company-reports/one-reports

3. https://www.statista.com/statistics/445683/united-states-domestic-market-share-of-leading-airlines/

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The PESTLE / PESTEL analysis for Southwest Airlines is presented below:
Political
Economical
1. Jet fuel diplomacy among nations
2. International Regulation
3. Airport capacity constraints and air traffic control inefficiencies
1. Unfavourable economic conditions:
2. High and/or volatile fuel prices:
3. Challenges in organic growth resulting in limiting strategic plans.
4. Challenges in maintaining cost structure with the competition
Social
Technological
1. Seasonality of demand1. Increasing dependence on technology to operate its business
Legal
Environmental
1. Pending litigations whose results can affect the image of the company
2. Consumer Protection Regulation
3. Aviation Taxes and Fees
4. Operational, Safety, and Health Regulation
1. Regulations by the Government and respective changes
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Chipotle Mexican Grill SWOT analysis has been conducted by Prerna Pathre and reviewed by senior analysts from Barakaat Consulting.

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