Strategic Management Of Southwest Airlines In 2016

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Introduction

Southwest Airlines is a major American based airline headquartered in Dallas, Texas. It started out as a low-cost airline which has seen tremendous success year after year. Since its establishment as Southwest Airlines by Herb Kelleher Rollin King in 1967, the company has survived many ups and downs, including a recession and every airline industry downturn without having to layoff a single employee. SWA has stayed and is here to stay in the coming years, but in order to weather today’s market demands that stay is not going to happen without change and adaptation to the new ways.

1. What is impressive about Southwest Airlines?

The most impressive thing for me at Southwest Airlines is its culture and the reputation that is has created and maintained. Herb Kelleher, SWA’s founder has quoted on several occasions that “competitors can buy tangible assets but they can’t buy culture”. At SWA the culture code put’s it’s employees first, which is rare to find in companies. I mean companies always talk about culture and its employees because they are almost required to if they want to hire talent, but it isn’t always practiced the way it is preached. It was also impressive to read that the airline has never laid off employees since its creation in 1971. There are very few companies that are this solid. As far as its proven strategy is concerned, which is clearly spelled out on Southwest Airline’s website under Our Company, SWA continues to focus on its robust route networks, compelling brand appeal and brags about its superior financial position. All in all, a true win.

2. Key policies, procedures, operating practices, and core values

Southwest Airline’s Mission, Vision, and Triple-Bottom-Line Commitment to Performance, People, and Planet is very compelling to begin with. They pledge to using cost-effective and environmentally beneficial operating procedures (including facilities and equipment), which allowed them to reduce the amount of materials they used and, when combined with their ability to reuse and recycle material, at the same time preserve environmental resources (Thompson, Gamble, Peteraf, & Strickland, pg. 321). Additionally, they only used a single aircraft type for a very long time, specifically the Boeing 737, which enabled them to keep their inventory in check for parts and other materials and gave them overall many cost savings benefits. Inventory is usually is a headache for most companies, and keeping it in check is a daunting task, especially without a crystal ball. Southwest’s Point-to-Point Route Structure Strategy proved to be a winner as scheduling of flights was more cost-efficient than the hub-and-spoke systems used by most all rival airlines. And above all, Southwest always directed its operational teams to find wats to cut costs, which is a winning approach to keep funds available to offset rising costs.

3. Key elements of Southwest’s culture & foreseeable problems

As answered in question number 1, above, Southwest Airlines had and continues to have a corporate culture that is unlike any other. While others chose to focus on their customers, SWA chose to focus on their employees first, with the mindset that happy employees led to superior service which led to happy customers. This was Herb Kelleher’s mantra, and since becoming the company’s CEO, Gary Kelly also continuously echoed the views of his predecessors: “Our People are our single greatest strength and our most enduring long-term competitive advantage.” (About Southwest Airlines, SWA Webpage). And even though Herb Kelleher stepped down from the CEO role in 2001, he continued to stay on with the company until his retirement in 2016, which then provided a guiding force for James Parker and eventually Gary Kelly. The only problem I foresee that could arise in future is the different styles of leadership, especially now that Herb is no longer with the company, which to think of if haven’t come up as yet, they likely won’t in the future, however, other than that Gary has pretty much followed on the same path as his predecessor Herb, as he has forged ahead.

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4. Southwest’s strategy execution approaches and operating practices

Strategies such as expansion of operations in terms of added locations, and added flights contributed to the continued success of SWA. Other factors such as hiring exceptional talent, and offering them packages and growth to retain them has been one of their superior strategies. Apart from that, offering stellar customer service and maintaining its low-cost strategy has also proven to be a winner for the company. As mentioned above, the company only utilizes a single aircraft type which helped reduce its expenses for parts and overall inventory. Southwest also always operated with a safety net plan, which has worked for them over the years in keeping them profitable with a strong balance sheet. As a matter of fact, one of Gary’s goal was to “stay prepared for bad times with a strong balance sheet, lots of cash, and a stout fuel hedge” (Thompson, Gamble, Peteraf, & Strickland, pg. 320).

The strategic objectives that focused around quality workplace, safety, stellar customer service, and offerings which included convenient flight schedules and great travel experiences were and are at the helm of SWA’s strategy.

5. Southwest Airlines performance for its shareholders over the past several decades.

According to the financial details presented in our text by Thompson et el, the June 2016 dividend payment marked the 159th consecutive quarter Southwest had paid a dividend to shareholders (Thompson, Gamble, Peteraf, & Strickland, pg. 311). Southwest earned record after-tax profits of $2.2 billion on revenues of $19.8 billion, easily surpassing the 2014 record after-tax profits of $1.2 billion on revenues of $18.6 billion. At the end of 2017, Southwest Airlines also reported in their investor’s relations section on their website, that was the 45th consecutive year of profitability (SWA Webpage). Also, according to the financial data presented in the case, SWA showed a YOY growth in operating revenues from 2011 to 2015, along with a drop in operating expenses in 2015 when compared to 2014, their operating profit surged 85 percent (SWA 2015 Annual Report). Their net income was a record $2.2 billion, or $3.27 per diluted share, easily surpassing the previous record, set a year ago. SWA was able to return $1.4 billion to Shareholders in 2015 in the form of dividends and share repurchases. And, we were able to maintain strong liquidity with $3.1 billion of cash and short-term investments at year-end 2015, along with a $1 billion, fully-available, bank line-of-credit. Over the past several decades they have continued to see growth in the bottom line. Overall, Southwest has a history of remarkable financial strength and a reputation for a solid balance sheet. Southwest’s fundamentals, consistent performance, and low P/E ratio that is about half of the S&P 500 make it a premier value stock.

6. Strategic issues and problems Gary Kelly and Southwest executives need to address & recommendations beyond 2017.

It is true that Southwest Airlines have many things that have worked in their favor. Their strategies have more than paid off, however, Gary Kelly could face issues as times are changing, and technology is changing. Millennials who think very differently entering the workforce at Southwest may not like the old methods, and therefore it would be advisable to Mr. Kelly and Southwest executives to change their code of conduct to accommodate the younger generations. For example, work from home policies, giving them chances to make a difference, provide personal engagement opportunities and above all give them the opportunities to learn and grow. The millennials are at a different pace altogether.

I would also suggest Southwest airlines to re-think their statement when they categorize themselves as a “low-cost” airline. The truth is that they are not low cost at all. “Southwest was once synonymous with budget air travel, but in light of newer business models Southwest appears more of a hybrid” (Harper, 2019). Southwest can offer very limited low fares during its advertised fare sales, however, otherwise much of its fares are pretty high and up to par with the other major airlines such as Delta, United and American. Because they offer flexibility and have a simple business model, they have developed a cult of business travelers who prefer the airline over others.

References:

  1. Harper, J., 2019. Is Southwest Airlines a Low-Cost or Budget airline? Retrieved from: https://pointmetotheplane.boardingarea.com/is-southwest-airlines-a-low-cost-budget-airline/
  2. Southwest Airlines, 2020. Proven Business Strategy. Retrieved from: http://investors.southwest.com/our-company/proven-business-strategy
  3. Southwest Airlines, 2020. About Us Retrieved from: https://www.southwest.com/html/about-southwest/index.html?clk=GFOOTER-ABOUT-ABOUT&irgwc=1&clickid=0RkXWJ3MJxyOT6owUx0Mo3cjUknSqZTAQ0eySU0
  4. Southwest Airlines 2015 Annual Report. Retrieved from: http://investors.southwest.com/~/media/Files/S/Southwest-IR/documents/company-reports-ar/ar-2015.pdf
  5. Thompson, A., Gamble, J., Peteraf, M., and Strickland., A., 2017. Crafting and Executing Strategy. Twenty First Edition. McGraw Hill Education.2

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Strategic Management Of Southwest Airlines In 2016. (2021, August 16). Edubirdie. Retrieved January 24, 2022, from https://edubirdie.com/examples/strategic-management-of-southwest-airlines-in-2016/
“Strategic Management Of Southwest Airlines In 2016.” Edubirdie, 16 Aug. 2021, edubirdie.com/examples/strategic-management-of-southwest-airlines-in-2016/
Strategic Management Of Southwest Airlines In 2016. [online]. Available at: <https://edubirdie.com/examples/strategic-management-of-southwest-airlines-in-2016/> [Accessed 24 Jan. 2022].
Strategic Management Of Southwest Airlines In 2016 [Internet]. Edubirdie. 2021 Aug 16 [cited 2022 Jan 24]. Available from: https://edubirdie.com/examples/strategic-management-of-southwest-airlines-in-2016/
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