Essay on Southwest Airlines: Analysis of External Environment

External Environment

Southwest Airlines is one of the leading low-cost airlines in the United States. Southwest Airlines praises itself as being an airline that is dedicated to providing the best customer service, that is delivered with kindness, and friendliness, and displays their company pride to each of their customers (southwest.com). This case study analysis will take a look into the external and internal environment of Southwest Airlines, along with the various factors that they face in their business on a daily basis. Southwest Airlines operates under NAICS Scheduled Passenger Air Transportation Code 481112.

Political and Legal Factors

Southwest Airlines operates both domestic and international operations which are greatly influenced by the government under the Federal Aviation Administration (FAA). This agency is responsible for regulating the operations and ensuring a safe operation by implementing laws that each airline and the industry as a whole must abide by. If regulation is significantly changed, the business operation of Southwest could be altered in some way, either positively or negatively.

Economic Factors

The airline industry is greatly affected by fuel costs. An increase in the price of oil has a major impact on the profitability of Southwest Airlines. Volatile oil prices can create some level of uncertainty as fuel costs account for nearly 40% of their profit margin (Southwest Q3 10Q).

When the economy enters a recession, customers will obviously have a much lower demand for air travel and an overall reduced interest in traveling, due to cost cutting. Although, because Southwest is a low-cost carrier, it is likely that the demand for low-fares might benefit Southwest and not affect them as bad as some of the other higher cost competitors like United, Delta or American.

Social Factors

Southwest Airlines has a strong commitment towards customer service, and anyone who travels with them will recognize this pretty quickly. The overall message of Southwest Airlines’ as noted in their ‘About Us’ section on their website, is that the company is ‘in the customer service business — they just happen to fly airplanes’ (Southwest, 2019).

Southwest also hires customer service personnel for employment based on their attitude, regardless of experience level, which certainly stood out for me (Jobtestprep, 2017). Their image is dependent on their employees, so if they hire the wrong people, their image will suffer. Another interesting thing is that there is a position for ‘Vice President of Customers’ at Southwest, so this says just how serious they are about treating their customers right (Senior Management Committee, 2019).

Technological Factors

Technological developments have created both new opportunities and improvements, as well as threats for Southwest Airlines.

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Social media has allowed the company to expand their online presence through marketing and sales, while being able to interact with their customers.

The creation of web-based technology enabled Southwest Airlines to grow their presence to consumers through the use of e-commerce. For example, Southwest Airlines was able to introduce ticketless travel through the use of improved technology. This allows customers to access their boarding passes on their smartphones, instead of having to print out a physical ticket (Williams, Jonathan, and Connan Snider, 2011).

Environmental Factors

The emissions released by the aircraft can have a greater impact to the environment (ozone depletion etc.,) because they fly at such high altitudes.

Communities, specifically those who live near busy airports, have also complained about the noise levels created from from aircraft. While this is unjustified, it can be somewhat of a concern because complaints have lead to airport closures by city own airfields such as Santa Monica (LA Times, 2017).

Porter’s Five Forces:

Competitive Rivalry

The competitive rivalry in the airline industry has been increasing, especially through various mergers and acquisitions over the last decade. Delta Air Lines acquired Northwest Airlines in 2008. United Airlines and Continental merged and the most recent being US Airways and American. While the overall number of airlines flying has consolidated, these airlines are offering the flying public access to cities around the United States, while also increasing their service to destinations around the world, this is one area that Southwest does not participate in, even though they recently began service to Mexico. Also, other low-cost rivals have formed since the beginning of Southwest, such as Allegiant Air and JetBlue Airways. These two competitors are competing in low-cost airfare besides Southwest.

Entry Barriers

When it comes to the airline industry, high entry barriers exist, as it takes significant capital to invest. Due to the intense competition, low-profit margins and price wars, it has become increasingly difficult to make a profit being an airline and over-net profit margins have become very thin. It is also to be noted that airlines will often times project losses in their financial statements, so a new competitor to this industry must be able to handle losses at the beginning and still continue the business. Another barrier that might seem rather unknown, is the limited availability of landing slots at most airports around the country. Most of these landing slots are already reserved by well-established airlines and are difficult to get, especially at airports with a high passenger demand such as Atlanta, New York and Chicago (Williams, Jonathan, and Connan Snider, 2011).

Threat of Substitutes

There are many substitutes in terms of travel, such as cars, trains and buses, but flying has a major time-saving advantage, so the risk of being substituted is virtually zero.