Southwest Airlines External Analysis
Southwest Airlines has been making changes over the past few years that helped them become the largest low-cost carrier in the United States. Most other airlines have been struggling to make it through this economy, but Southwest has found a way to thrive. The airline has dropped their prices and eliminated fees for extras that have allowed them to fill up most flights. One cost they continue to struggle with is offsetting the increasing fuel prices. This has caused some airlines to merge or sell the company to competitors. Introduction:
This document will be using Porter’s Five Forces Model and a Political, Economic, Social, and Technological (PEST) analysis to conduct an external analysis on Southwest Airlines. Porter’s Five Forces can be used to review the competition within the industry and assess the competitiveness of the airline industry. Americans have preferred air transportation over anything else because it is time saving and cost-effective. Some countries use railroads to get around, but the United States is not efficient with trains and has become a very costly way to travel.
Airlines have been competing with each other and most chose a certain path of pleasing customers. Some have chosen low fares while others try to win customers with luxury. No matter the path, Southwest Airlines has been successful in standing out from its competitors. Porter’s Five Forces: Threats of Entry (low)- There are many airlines to compete with but Southwest Airlines has proved they can compete with them with their lower prices and no baggage fee. JetBlue is an airline company that started up operations in 2000 and has been steadily grown in the United States.
They have cheap flights just like Southwest which kind of makes them a rival. The only reason why they are not labeled as a threat is because they do not have as much coverage as Southwest. They have only been around for twelve years while Southwest has been around since the 1970’s. In about ten more years, JetBlue may be a true competitor. Besides JetBlue, I do not see any new competition for Southwest Airlines coming to the United States. There are a lot of cost and investments that need to occur that can be extremely risky in this poor economy.
The established airlines are the only ones that have a chance to survive with customers cutting down their cost and flying is a luxury in most cases. Any chance of a small airline attempting to sprout out in the next ten years is extremely low. Rivalry (high)- The airline community is very competitive and some airlines have had to give in and merge with enemies in order to survive in this economy. There has been no real dominate airline in the past but Southwest tries to stay on top with cheap fees and great customer service.
In order to create a pleasant flight, Southwest must have the best employees that are excited to be working for their company and they accomplish this by paying their employees more than their counterparts. Southwest has already bought one of their rivals, Airtran. All other airlines are competing with prices, loyal customers (customers that receive rewards for having accounts with the airline), and fees. Fixed costs such as planes, staff, and fuel has affected all airlines’ profits. Not to mention the cost of meeting government regulations and always improving technology.
Southwest Airlines was one of the first to sell tickets online while other continued to use travel agents which gave them a huge boost over their competition. Substitutes (medium)- Businesses have been using airlines for years to improve their processes. Some employees travel to other branches to help assist with organizing how business is being done while others use it to come together to discuss how the corporation can improve all around. This type of travel has been cut down tremendously because of the advancement of communication and budget cuts.
Internet connections have become faster that has also allowed video conference to take the place of airline travel. Another substitution to the other general public is using a car, bus, or train. With the gas prices rising up every year, it seems like traveling by car is about the same price as flying. The big advantage over bus, car, and train is saving time which is huge to customers who cannot leave their job for a long period of time without being fired or replaced. Bargaining Power of Suppliers (medium)- As I stated before, Southwest Airline employees are the highest paid in the industry.
The only employees who do not have unions backing them up and can request more money are pilots. This is because there are so many of them awaiting jobs. Another area Southwest has no power over are airplane manufacturers. Companies like Airbus and Boeing can pretty much charge whatever they want because of the experience and technological advances they bring to large aircraft development. Since there are a couple of suppliers, most of these manufacturers know if the deal is not attractive, then the airline will take their business elsewhere.
Bargaining Power of Customers (high)- Customers has several options when it comes to flying. But the main attraction to customers are low prices and Southwest makes it known that they have some of the lowest airfares. The only way Southwest can take back the power is by offering direct flights to cities that other airliners do not offer. Besides the small occurrence of having a direct flight to a city that no other airline has, Southwest bargaining power remains low. PEST:
Political Environment- The United States has developed strict safety regulation since the terrorist acts on September 11th. This has caused all airlines to fork over more money than ever to meet these regulations. For example, security has been increased to gates that have required new technology and more personnel. Economic Environment- The rising price of aviation turbine fuel (ATF) will lead to burning a big hole in flyers’ pockets. Airlines will have to ensure flights are filled up to keep airfare cheap in order to keep their customers.
Sociocultural Environment- Customer satisfaction is very important to Southwest and cheap airfare might attract customers, but not having assigned seats is causing disgruntled passengers. Another are customers are dissatisfied with are strict safety regulations that have them waiting in line forever and causing them to arrive at the airport hours before their flight takes off. Technological Environment- Customers are buying more items online and airlines have been trying to keep up with website functions to meet this demand.
Also, more individuals desire WiFi during their flight which has caused airlines to adapt and purchase the technology to provide during flights. Overall Impressions Concerning the Company’s Environment: Southwest strategy is to operate point-to-point flights with profitable destinations. The company should continue to expand to other big cities that do not have low fare services. There are many large cities that the airline does not offer flights that may allow other airlines to pull ahead. One of the airlines could be JetBlue.
The company is still young but has been steadily adding new cities and adding cheap fare with a little more luxury than Southwest. This type of airline can pose a huge threat if Southwest is not there to pull in customers first. Conclusion: Southwest Airlines has been very successful in the airline industry and has proven it a top contender. The airline’s success has changed the industry causing airlines to adjust their pricing to lower fares. The company has many rivals and challenges ahead of them but as long as the corporation continues pleasing the flyer with cheap airfare and updated technology, the airline will survive.