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Southwest Airlines SWOT & PESTLE Analysis

ID : 52326853 | Mar 2018 | 16 pages

COMPANY PROFILE - Southwest Airlines

Business Sector : Aviation

Operating Geography : North America

About Southwest Airlines : Southwest Airlines is a major passenger airline based out of the U.S.A., headquartered in Dallas, Texas, 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 became the largest domestic air carrier in USA in 2003, measured by the number of domestic originating passengers who boarded and has ever since maintained its position. The company’s website, southwest.com, is the only platform for customers to purchase and manage travel online. The airlines continues to differentiate itself by extraordinary customer service flying 120 million passengers annually and employs around 56000 employees as of 2017.Southwest airlines USP or unique selling proposition lies in being the largest low cost carrier in the United States, pioneering ticketless travelling, offering free baggage bags-fly-free service (first 2 checked pieces of luggage with size and weight limits applicable) to everyone. The airlines vision is "To become the world’s most loved, most flown, and most profitable airline". The mission of Southwest Airlines is dedication to the highest quality of Customer Service; delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.

Southwest Airlines 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. Heavy dependency on Boeing
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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Detailed SWOT Analysis of Southwest Airlines

 

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. It is one of the major airlines who pioneered ticketless travelling and the only airlines in the United States to offer bags-fly-free service (first 2 checked pieces of luggage with size and weight limits applicable) to everyone, no change fess, although differences in fares might be applicable.

As launch Customer of the Boeing 737 MAX 8 in North America, Southwest Airlines boasts of the largest fleet in the world of Boeing aircraft, all of which are equipped with satellite-based WiFi. Passengers using the WiFi network through personal devices are permitted to engage in on-demand content streaming i.e view movies and television shows, as well as nearly 20 channels of free, live TV.

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. As per records of 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. In spite of it being a low cost no-frills airline, it persistently wins the passenger-satisfaction awards year after year. Southwest flies 4000 flights on weekdays to about 100 locales in America and 10 additional countries during surges in peak travel periods. It has recently declared its intention to sell tickets in 2018 for flights to Hawaii, subject to approval by the government.

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

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Opportunity

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Threat

1. Volatile fuel prices: Fuel expenses accounted for about 22 % of Southwest’s operating expenses for FY16. Therefore, irregularities and anomalies in the fuel supply can directly dent the airline’s operations negatively. The company’s strategic plans and future profitability are likely to be impacted by the company’s ability to effectively address the rise, volatility and availability of fuel prices. Moreover, as it has the perception of a low-cost carrier, it would be tough to increase ticket prices if there is a fuel price rise.

2. Stringent government regulations and related costs: Regulations in the airline industry introduced by the respective Governments, Government and legislative agencies can impact the airlines’ operations and finances.

Some of the regulations include – “Consumer Protection Regulations, Aviation Taxes and Fees, Operational, Safety, and Health Regulations, Security Regulations, Environmental Regulations and International Regulations”. The incidence of terrorist attacks and security concerns increase the overall security costs and thus can impact the airlines’ operations.

This has resulted in increased safety and security costs for the company and the airline industry generally. Safety measures create delays and inconveniences and would likely have a further significant negative impact on the company and the airline industry.

3. Intensely competitive industry: There is immense competition from domestic, regional and entry level players that Southwest is facing. Also, other physical transportation modes, including surface, underground and water modes and a flurry of virtual modes like internet voice calls, and video-conferencing pose a threat to the airline industry at large as they are seen as a substitute for physical meetings.

This reduces both cost and time. The Company’s revenues are sensitive to what the other carriers do with respect to pricing, routes, frequent flyer programs, scheduling, capacity, customer service, comfort and amenities, cost structure, aircraft fleet.

References

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

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

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

The PESTLE / PESTEL analysis for Southwest Airlines is presented below:
Political
Economical
1. Political interference and control1. High and/or volatile fuel prices
2. Challenges in organic growth resulting in limiting strategic plans.
3. Challenges in maintaining cost structure with the competition
Social
Technological
1. Seasonality of demand1. Increasing dependence on technology to operate its business
2. Integrate digitization to offer holistic experiential packages
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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Detailed PESTLE Analysis of Southwest Airlines

 

Political

1. Political interference and control: Domestic operations of Southwest airlines are controlled by The Federal Aviation Administration (FAA). In 1979 ‘Wright Amendment’ promulgated by the USA government, restricted Southwest Airlines to fly non-stop or provide through-plane service from Dallas Love Field to any other than 7 designated cities. This impacted business for almost over 26 years and the law was repealed only recently in 2014. Southwest wanted to fly all between states from Love Field Airport which was quite close to downtown Dallas. Apprehensions over Southwest to acquire larger market share prompted rivals to conspire with Fort Worth Congressman Jim Wright and block inter province flights from Love Field Airport. Southwest fought against this injustice and finally arrived at an understanding with the courts which is known as Love Field Compromise. It enabled Southwest to operate from Love Field airport non-stop flights cities in and around Texas viz. Louisiana. Arkansas. Oklahoma. and New Mexico, but at the same time the jurisprudence restricted South West to publish agendas or menus or look into luggage of any airlines flying from Love Field.

Economic

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

Social

1. Seasonality of demand: The Company’s business is seasonal. In some seasons in most of the markets, demand is high in summer, thus leading to higher revenues in the second and third quarters than the first and fourth quarters of the financial year. Hence, the company’s operations reflect this seasonality. Factors that could alter this seasonality include, among others, the price of fuel, general economic conditions, extreme or severe weather, fears of terrorism or war, or changes in the competitive environment. Therefore, the company’s quarterly operating results are not necessarily indicative of operating results for the entire year, and historical operating results in a quarterly or annual period are not necessarily indicative of future operating results.

Technological

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

Legal

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

Environmental

1. Regulations by the Government and respective changes: The company is subject to various federal laws and regulations relating to the protection of the environment, including the Clean Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Safe Drinking Water Act, and the Comprehensive Environmental Response, Compensation and Liability Act, as well as state and local laws and regulations. The airlines deals with drinking water supplied on the aircraft, emissions, storm water release, aircraft decibel levels, disposal of materials such as jet fuel, chemicals, hazardous substances, and aircraft deicing fluid from its daily operations. Southwest uses a lot of new technologically advanced components to minimize adverse effects on the environment. In order to minimize the release of these into the environment it has installed “blended winglets” to reduce drag and enhance fuel efficiency. It also uses electric ground power for aircraft air and power support, auto throttle and fuel efficient initiatives.

References

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

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

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

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Copyrights and Disclaimer

Southwest Airlines SWOT and PESTLE analysis has been conducted by and reviewed by senior analysts from Barakaat Consulting.

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