Southwest Airlines Term Paper

The 2016 report on Southwest Airlines prepared by Thompson and Gamble (2016) shows that Southwest Airlines lacks a stable pricing program, and this paper will review this problem, with the sole focus on how Southwest Airlines can solve it.

Analysis
An intensive review of the report prepared by Thompson and Gamble (2016) reveals that Southwest Airlines has had an impressive performance on nearly all its sectors of operations. One of the parameters through which the organization’s activities can be evaluated is its financial standings. In 2015, the company earned a $2.2 billion after-tax-profit – a record that nearly doubled the 2014 $1.2 billion after-tax-profit on $18.6 billion revenues.

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In 2016 and 2017, Southwest Airlines earned $2.244 billion and $3.488 billion, respectively. The steady growth in the company’s revenues is a reflection of its remarkable financial performance and strength. Part of its financial growth is also reflected in the increase in the share price. In May 2015, the company purchased a $1.5 billion program for share repurchase, thus allowing it to continue raising the price of its shares from $0.075 (starting from June 2015) to $0.10 (starting from June 2016).

Another parameter through which Southwest Airlines’ growth can be evaluated is the rise in the number of passengers. In 2015, the company served 144.6 million passengers, thus making it the second largest Airline in the world to fly passengers around the globe. The first spot was taken by the Delta Air Lines, with 180 million passengers, including those who used flights operated by the international and regional joint ventures of the company. However, according to the recent report by the U.S Department of Transportation, Southwest Airlines had more domestic passengers than Delta and its other closest rivals – United Airlines and American Airlines. Another factor that mirrors the company’s success rate includes the fact that it was the seventh most admired company in the world in 2015, featuring in the Fortune’s list for the 22 years in a row. 2015 also saw it earn profits for the 43rd year in a row, thus making it the only company in the world to reach this mark. As at now (2018), it has been profitable for 45 years in a row.

Southwest Airlines’ impressive performance – especially in the recent years – is owed to its current CEO, who uses four strategies to drive the company towards success.

The first strategy involves hiring great employees and treating them like family by asking them to live the “Southwest Way.” The CEO also urges the company to care for its customers and treat them warmly as guests and keep operating costs and fares lower than the other airlines by fostering safety, operational excellence, and efficiency. The last strategy includes being ready for the trying times by maintaining a strong balance sheet, stout fuel hedge, and adequate money. In addition to these strategies, the CEO also introduced a strategic plan for five years, starting in 2011. The plan involved adding at least 100 new Boeing 737-800 airplanes to the company’s fleet, integrating AirTrain into the company, and modernizing the company’s existing fleet of airplanes. Other projects of the plan included launching a new system of reservation and international service, and increasing membership in the Southwest Airlines’ frequent flyer program called Rapid Rewards. With such a visionary approach to leadership, the CEO, Kelly C. Garry, has proved instrumental to nearly all the company’s roadmaps to growth and high performance since he took over the leadership.

In the views of Dunlop (2017) and Kottler, Berger & Bickhoff (2016); one of the tools of strategic management is dynamism. Dunlop (2017) explained that strategies are never inherently defective, but they fail to deliver the desired results because organizations fail to execute them effectively. It is for this reason that she reviewed three approaches that organizations can use to implement their strategies successfully. They include translating the strategy into specific, explicit choices and guidelines for implementation, adapting to the changing conditions, and enhancing the strategy sustenance by building the capabilities of the organization. For a company that has a strategy for nearly each of its operations, it is only deducible that Southwest Airlines has proper measures for implementing its strategies. An intensive review of its strategies reveals that the company efficiently implements them to reap their benefits. For example, it developed a flexible fare structure in 2016 with four categories designed for particular groups of passengers.

The fare structure strategy was categorized into seniors’ fares for older passengers, “Business Select,” “Anytime,” and “Wanna Get Away.” Primarily, Southwest Airlines used pricing, rewards, and timing to ensure successful implementation of this strategy. For example, it charged the lowest fares for the “Wanna Get Away” category and charged no changing fee, but only provided tickets within 10 minutes of departure if they were not changed or canceled. These tickets were non-refundable; therefore, they could be used for future travels. With such a flexible implementation approach to the fare structure and other strategies, the company does not only enjoy success and growth but also defeats its rivals in many ways. For example, it did not charge changing fee while its rivals demanded as much as $100 to $175 to have passengers change their schedules for traveling.

Judging by the above reviews, Southwest Airlines’ recipe for success is embedded in its successful implementation of strategies, and impressive financial growth. With a steady growth of revenues and dropping operating costs, the company has enjoyed profits on a yearly basis for more than 43 years consecutively – a record that no other company holds. Some of the areas that indicate Southwest Airlines’ growth include revenues, number of passengers, shares, and operating costs.

SWOT ANALYSIS
Southwest Airlines has proved to be one of the highly efficient organizations in the US airline and transport industry, and this standard is set by several internal and external factors outlined below:

Strengths

• Strong financial standing and growth from yearly surge in revenues and profits
• Maximized use of the internet for booking and reservations, which helps it save about $50 million in a year
• Ability to operate over 3300 flights to about 100 destinations on a daily basis
• A strong staff base of 37,000 employees

Weaknesses

• Overdependence on only the domestic (American) market
• High competition from rival LCC carriers, which hampers its market share
• Unstable pricing strategy which fails to respond to emergency cases
• Opportunities
• Growing customer base would increase its revenue growth
• Expansion to other states across the country
• Potential for further research in advertising and marketing

Threats

• The likely rise in the operating cost would force it to raise air fare
• Surge in fuel prices would also bring a similar impact

Alternatives
The following are some of the alternatives that the company can use to averse its pricing problem:
The first strategy is the use of fare promotions. Although the company primarily aims at creating and sustaining lowest pricing to differentiate itself from other airlines, attract customers, and foster its growth; low pricing alone cannot drive its operations, especially during the tough economic times or emergencies. Although the company had already used this approach in the past, it should consider applying it again. In 2008, other airlines charged several add-on fees to defray the high price of jet fuel, which skyrocketed from 15% of the operating costs in 2000 to 40% in mid-2008 due to the recession. Southwest Airlines, however, chose to stick with its all-inclusive fair pricing. It also introduced “Bags Fly Free” campaign to provide a cost-effective way of traveling to passengers. In addition to this approach, the company also regularly initiated special fare promotions when it considered reservations on some routes or specific time of the day or weeks. The company could still use this approach to solve similar problems when they arose. In July 2016, for example, it had to delay or cancel over 2,000 flights due to a failure in its computer system, and Hethcock (2016) reported that the company would lose $82 million and $54 million in increased cost and lost revenues, respectively. Such an incident was nearly impossible to avoid, but the company would have raised more money from ticket sales if it introduced special fare promotions to lure the affected customers and new ones back to the company. While the computer glitch would have some people reconsider using Southwest Airlines for their transportation, special fare offers would attract them to the company.

Another alternative to Southwest Airline’s fare problems is the introduction of in-person pays. Primarily, the company relies on internet ticketing, which helps it to save on time, money (almost $50 million per year or 1% of its annual revenues), and serve a wide array of customers. The problem with this approach is that it does not provide the chance for handling emergency cases. For example, the 2016 computer glitch, which caused delays and cancellations, forced the company to make refunds to customers who were inconvenienced by the issue. Since the customers had already made online bookings, the company ‘owed’ them flights; therefore, it had to pay back through refunds to those who could not wait for Southwest Airlines to fix the problem. If it also allowed in-person ticket purchase, some customers could have considered alternative airlines, in which case the company could have avoided the losses related to their refunds.

Recommendation
The alternatives mentioned above would help Southwest Airlines deal with both the pricing issues at the company and the other financial losses linked to them. However, I would recommend that the company adopts the first suggestion because it is likely to yield better results than the second one. Price offers are ‘baits’ that nearly all customers cannot avoid, and Southwest Airlines is fond of adjusting its pricing structure from time to time. Therefore, customers would only welcome another change. Judging from the views of Shen (2016), a one-day computer glitch would prompt the company to spend as much as $136 million in covering the delays, hotel bookings, and cancellations, among other fees. With special offers, Southwest Airlines could have raised about $50-$70 million to help recover the quoted losses. I also feel that the company should take the first suggestion because it is better than the second one. While people are likely to be attracted by price offers, they could show hesitance towards paying at the airport rather than using internet booking. The general notion is that online booking is cheaper than over-the-counter ticket purchase. Therefore, those who could buy tickets at the airport are those who trust that Southwest Airlines always offer fair prices.

Implementation
In 2008 and 2009, Southwest Airlines used ad campaigns to announce its cost-effective pricing. While such an approach is still productive, the company should also apply other measures to air its offers to the public, especially if it prefers that such news should be conveyed faster. It could use the radio and televisions commercials for the adverts to reach out to a larger audience across the country. The newspapers could also help the company achieve this ambition. With its financial strength, Southwest Airlines can develop ad programs that inform that the public of its price offers to ensure that most customers get the message.

Making brochures given to all passengers on board would also prove helpful to the company’s efforts to spread the news about its fare offers. Another move that would target the customers is posting the information on its official website to enable the customers booking flights to have quick access to the new changes. In using the internet to advertise the price offers, Southwest Airlines should also use the social media to have the information reach many customers faster at a lower price.

References
Dunlop, A. (2017, Jan 4). A Dynamic Approach to Strategy. Retrieved from The Wall Street Journal: http://deloitte.wsj.com/cio/2017/01/04/a-dynamic-approach-to-strategy-execution/
Hethcock, B. (2016, Aug 11). Southwest Airlines computer outage costs could reach $82M. Retrieved from Dallas Business Journal: https://www.bizjournals.com/dallas/news/2016/08/11/southwest-airlines computer-outage-costs-could.html
Kotler, P., Berger, R., & Bickhoff, N. (2016). Current Focal Areas in Strategy Practice: Four Significant Management Concepts of the Past 20 Years. The Quintessence of Strategic Management, 55-105.
Shen, L. (2016, Aug 11). Southwest Airlines’ Delays Will Cost Millions. Retrieved from Fortune: http://fortune.com/2016/08/11/southwest-airlines-delays-will-cost-millions/
Southwest Investor Relations. (2018, Jan 2018). Southwest Airlines Reports Record Fourth Quarter And Annual Profit; 45th Consecutive Year Of Profitability. Retrieved from Southwest Investor Relations: http://investors.southwest.com/news-and-events/news-releases/2018/01-25-2018-113046083
Thompson, A. A., & Gamble, J. E. (2016). Southwest Airlines in 2016: Culture, Values, and Operating Practice.