General Environment Analysis Of Southwest Airlines
The airline industry has been experiencing strong growth in the last 3-4 years. The industry survived major catastrophes such as Nine Eleven and MH370 with those castrophies behind them and fuel prices more reasonable Southwest Airlines has achieved some market stability. Southwest Airlines has always been profitable throughout it’s 42 years of operation. The industry increased their revenues through building partnerships and joining allies and increasing charges for their services such as fees for luggage, services, ticket changes and frequent flyer programs.The airline industry is analyzed through industry statistics, pricing and revenues, margin of growth by region, network carriers, industry deregulation and rise of low cost carriers.
Political factors
The airline industry is greatly affected by regulations related to international trade, tax policy, and competition. War, terrorism, and eruption of diseases are some of the other environmental factors they might have to address. These issues sometimes require government intervention to protect consumers. The Airline Deregulation Act of 1978 removed all regulations governing the airline routes, airfares, entry and exit of commercial airlines. Earlier, this was controlled by the Civil Aeronautics Board. Deregulation brought about changes and offered additional routes and competition increased, lowering airfare. The entry of low-cost carriers brought airfares down even more. CEO Kelly noted that any restrictions on trade would be a concern.
Economic factors
Gross domestic product, per capita income, disposable income, industrial production, level of business, and consumer confidence are all factors that play a role in forecasting demand and travel preferences. The economy is a catalyst for the growth of the industry. Southwest believes in their future and has no plans to change policies regarding bags fly free, no assigned seat and no separate business class. Changes those policies would lead to a loss of millions of customers.Social and demographic factors Demand for air travel has increased significantly, this is an indication of travel preferences of the millennial generation, those who are 16-34 years old. At the same time there is a decline in travel for the baby boomers, those born between 1946 and 1964.
Technological and environmental factors
To survive the intense competition in the airline industry, companies must adopt the most relevant technology. This will allow for lower fuel consumption and improve efficiency while also lowering the cost of their operations.
Technology is one of four supports of the International Airline Transport Association’s strategy to address climate change. All carriers have been replacing old aircraft with new fuel-efficient ones. Industry analysisThe U.S. airline industry has significantly evolved since the mid to late 1900s caused by both external and internal factors. Legislation and regulation, competition, cost of airfares, fuel costs, U.S. demand, and terrorist attacks are among the few changes that have affected and changed the course of the airline industry over the years. Prior to 1978, the airline industry was highly regulated by the Civil Aeronautics Board (CAB) so much so that they could not make decisions on their own. The CAB decided who would fly, how much they would pay, where the airline companies would travel to, and what route they would use to get there. Because airfares were regulated by the government, the airline companies had to ensure that their service was suburb, as this was their only avenue for competition. Travel by air was glamorously designed for the very wealthy consumers across the nation. Low fare travel was not an option prior to 1978.
On October 24, 1978, President Jimmy Carter signed the Airline Deregulation Act which caused some airlines to vanish while other airlines began to rise. The deregulation forced airline companies to utilize their innovation skills to compete in the ever changing and very competitive industry. Airline companies, such as Southwest Airlines, began to take lead in the industry as they devised a business strategy that would make flying affordable to many of the lower class society and low-cost carrier (LCC) services began to rise. Due to the lower airfare costs, demand grew and as a repercussion, airline companies had to strategize to keep up with the demand.
The threat of new entrants are very low in this industry for several different reasons. The amount of capital alone, needed to enter into the industry is enough to make one really research the risks involved to determine whether or not success is even an option. In order to enter into the industry, there are many government regulations, including license, insurance, and many other qualifications that have to be acknowledged and met before even considering a role in the playing field. If they can get through the government regulations and obtain the needed requirements, they have to consider the fact that consumers already have brand preferences and they would have to market their services in a way that would attract the consumer’s attention, then change their perceptions, and build their trust. Airfare today is not very cheap so consumers are more likely to spend their money with companies that they already know and trust. They have to make the consumer feel as though their planes are safe and that their employees are looking out for their best interests. If the new entrant gets past the government regulations and are able to attract the consumer’s attention, they still have to consider the fact that those airline companies who are already established and have high profit margins have the money to cripple the success of those who are not yet established. They can afford to make major changes, add services that the consumer wants, and even discount tickets so much so that they may lose money in the short-run in order to eliminate the competition and win in the long-run. The new entrant may be kicked out of the industry before they even have the chance to pick their plane up off the ground.
The bargaining power of buyers is a bit higher than the threat of new entrants. There are individual buyers and then there are the middle-men through travel agents who work to get the best costs and services for their customers. Because the demand is so high and so many more people are flying in today’s economy and there is low threat of new entrants in the industry, the companies that are established must take into consideration what the customer is looking for and then cater to that customer so that they do not lose their service to another airline. Some flyers are flying for leisure activities and may not be as rushed as those who are flying for business purposes. The leisure flyers may be looking for a more entertaining atmosphere than someone who is flying solely for business purposes. These are just some of the things that need to be researched as changes are being made in the industry. Customers today want things on demand, good technology, customer service that is catered to them, and they want to feel safe, all at a low affordable cost. Access to the internet and internet shopping has put more power in the buyers hands and therefore, it is vital to the success of each airline that they know their customers.
The bargaining power of suppliers is much higher because, much like new entrants into the airline industry, it is very difficult to become an airline supplier because of the large amount of capital needed. Therefore, there are only two (2) companies that dominate this industry, Boeing and Airbus. The airlines companies have put in a very large investment into their equipment and they need the limited suppliers to keep their planes in safe running order. It is likely that the airline companies have long standing contracts and outstanding loans with the suppliers since the equipment that requires attention is so massive. With the growing demand in services, technology, and the high cost of fuel, the suppliers have the advantage in working with the airline companies.
Rivalry among competitors has grown more intense as the demand is greater, low cost carrier services have increased, fuel costs have increased, technology has advanced, and globalization has is now a major factor. Not only does the U.S. have to compete with domestic airlines, they now have to combat the global competition. There are other countries who might have a competitive advantage over U.S. airlines because they have lower fuel costs, thus bringing their fixed costs down and increasing their profit margin.
The threat of substitutes includes other options of travel such as car, bus, or train. There are some places where consumers travel that do not have these other travel options available. If you do not travel by plane, you cannot reach that particular destination so this is just one of many barriers to substituting a means of transportation. Another barrier is the travel time from one location to another where travel by car, bus, or even train takes a significant amount more time to reach a destination and the cost is not much cheaper, if at all.
Financial performance analysis
In order to evaluate a corporation’s internal performance, analysis of strengths and weaknesses is very significant to be considered. While the financial records of the annual report and consolidated report are one tool to be used to accomplish the goal. This part will study the financial records of Southwest Airlines Co. in the point of view of liquidity and profitability.In the airline industry, almost all of corporations holding long-term debts and aircraft leases. Therefore, liabilities in this industry are higher than other industries, and the poor ability in liquidation is a usual thing in this industry. Southwest is also undergoing this situation now. The current ratio and quick ratio are both below 1.0 from 2013 to 2016, which reflects that Southwest might have the had time to convert its assets to cash to cover its liabilities.
On the other hand, according to the most recent data for last quarter in Investing, the current ratio and quick ratio are 0.68 and 0.62 respectively in the airline industry, but these two ratios are 0.7 and 0.64 in Southwest Airline Co. That means Southwest Airline has a better performance in this part in the airline industry. And also, the ratio of total debt to equity is 132.43% in the airline industry, while it is only 31.83% in Southwest Airline Co. That indicates the strength of this company in paying off its obligations comparing with other airline companies.Although Southwest Airline Co. is stronger in liquidity comparing with other similar competitors currently, it is not as good as it showed in the past. As shown on Table 2, the average number of current ratio was above 1.0 from 2008 to 2012. That reflects this corporation was able to pay back its liabilities quickly at that period. That also shows the possibility that airline corporations can maintain the quick ratio greater than 1.0. In order to take a good image in the public and shareholders’ minds, the management should look back the history and tackle a strategic decision in the investment part. That is one weakness the management should to overcome according to the financial records.
In the part of profitability of Southwest Airline Co., a strong business is noticed. Southwest Airline Co. has a good and healthy finance in the past five years according to figures on Investing. The gross margin with 64.47%, operating margin with 15.24% and net profit margin with 10.03% are all far higher than them in the industry, which indicates Southwest Airline Co.’s strength in sales revenue, and ability to cover its operating costs. As indicated on the Investing report, the gross profit of Southwest is increasing steadily in the past six years, and net income after tax in 2016 was tripped that in 2013. That shows a healthy financial position of Southwest in the industry.
Competitor analysis and future objectives
The future objectives in the airline competition are similar because it belongs to the service industry. Almost all of airline corporations set the goal is to provide a safe air transportation, higher quality of customer services, good image to shareholders, and become on of best airlines around the world. While Southwest Airline Co. emphasis the low cost to customers and is building a “more vale for less money” transportation model which makes it different. This is one of valued aspects in the competition.
Current strategy
In 1971 Kelleher began an operation that placed emphasis on charting a different route from other airlines. He started with just four planes headquartered next to Love Filed in Dallas, Texas and began flying to three cities in Texas. It wooed passengers with friendly onboard service, maximized the flights from each plane daily and made money by lowering fares and increasing volume.
Southwest carried 134 million customers in the U.S., more than any other airline in the industry and of the total market Southwest carried about 20%. Every other airline has filed bankruptcy. Southwest has never come close to filing bankruptcy. Southwest has made money for 42 straight years. Stock have delivered 17.5% average annual returns. A top-performer in stock in the S&P 500, posting a 122% return. Even with the success the company will not be dormant. They are currently reworking their strategy. Southwest plans to proceed with a totally new strategy. Southwest has not operated like traditional carriers but has plans to become more like them.
Southwest has stayed competitive due to flying to small airports in big markets, where competition was weak. They could turn around their planes quickly. Now they intend to invade America’s largest and busiest airports and go head-to-head with their biggest competitors — American, United, Continental and Delta. Their goal is to attract more of the most lucrative customers: higher fare-paying business customers flying long distances. Southwest remains unique but is competing more and more with the “big boys”.Assumptions
Southwest had assumptions regarding fuel hedging and pre-tax return on their invested capital goals. Because fuel price and fuel hedging contracts are considered as one important part on the financial plan in the airline industry, these elements occupying a big quantity in the strategic decision. While the environment and industry have influenced fuel, so the management considered the current market is less hedged than more hedged. Chairman, President and CEO Gary Kelly, Speaking with reporters to discuss Southwest’s second-quarter net Profit of $608 million, explained, “Given the current fuel price environment and the current industry environment, we’re achieving tremendous shareholder value. It renders the 15% ROIC target moot. We’re not targeting down to 15%.”
Capabilities
Southwest Airlines Co. has several strengths and weakness in planning strategy comparing with similar companies. Main competitive advantages are the low ticket price and “bags fly free”. Theses two policies have been getting a lot of positive feedback and thus contribute to Southwest win customers in the market.
Although Southwest belongs one of best airlines in U.S., Alaska Airline Co. is considered as the number one airline in recent years according to annual Airline Quality Ratings report released by Wichita State University and Embry-Riddle Aeronautical University. Not only Alaska has a good quality of customer service and friendly relationship with its employees and shareholders, but it gave a great contribution on fuel saving. According to the report released on 2014 by International Council on Clean Transportation, Alaska has ranked the number one as the most fuel-efficient airline operating in the U.S. from 2001 to 2004, comparing with Southwest which ranked number three to five in this designated period. The issue involving fuel efficiency relates to corporation’s budgets and sustainable development of resources. Therefore, this point is one of key strategies in the competitive market for Southwest.
In addition, Southwest is limited to international regions. Although it just expanded the air route to Cuba, it is still unable to compete with Alaska Airlines, United Airlines, American Airlines and other similar U.S. airline corporations in the global market. Because the globalization is an important element that a larger number of corporations can compete with one another as with the increasing global economies, Southwest will be threatened due to losing global market. Conclusion and future challenges/opportunity. In 2016, Southwest took advantage of a few unique opportunities for growth. Adding new destinations like Cuba and California. Southwest has been successful with fuel hedging however, they are aiming for less hedging in the future. They have added new destinations and they are experiencing an increase in bookings since the presidential election. Southwest CEO Gary Kelly, “I think there is a lift in the optimism of the country, and I think there’s a hope about the prospect and change in perhaps some positive ways,” he said. He is hoping that the President will pledge monies toward the infrastructure, including the outdated air traffic control system. He does have concerns about the Presidents’ views on Mexico and Cuba since those are new areas that Southwest hopes to grow into. He said, we plan to add at least one more new destination this year. Despite their growth they plan to expand into South America, Canada, Alaska and Hawaii.
In the U.S. Southwest should also recognize high speed rail as a concern, rail transportation is on the horizon and may pose a threat to the carrier in their US flights. They should open their transportation to an international level. Kelly expressed concern of a disagreement with Delta over use of a gate at Love Field in Dallas and plans to protest that until they win. He also indicated that he would be with Southwest for life.
