An Analysis of the Porter Five Forces Model on Southwest Airlines

In this assignment, the impact of external factors on Southwest Airlines' revenues and profits is discussed. The four pillars under IATA's strategy to address climate change are technology, environmental, industry rivalry, entry and exit, substitutes, suppliers, and buyers. Technology advancements have improved on-time performance, reduced noise by 30%, and enhanced ticketless travel. Environmental regulations influence operational costs, while the airline has implemented measures to reduce greenhouse gas emissions. Industry rivalry is high due to low differentiation of services and low switching costs for consumers. Entry barriers are substantial, but the airline's point-to-point strategy and economical prices have reduced expenses. Substitutes include automobile travel and train transportation. Suppliers' power originates from limited numbers or unique resources, affecting input prices. The bargaining power of customers is impacted by information availability and the airline's efficiency.

NAME: JOHNSON JEFF
STUDENT ID: 139017773
MODULE TUTOR: MATTHEW
TEALE
MODULE CODE: SIM 337
WORD COUNT: 4000 WORDS
EXCLUDING EXECUTIVE
SUMMARY, ORGANIZATION
PROFILE, TABLES, DIAGRAMS,
APPENDICES OR REFERNCES.
Hand in date: 6TH JANUARY 2016
CONTEMPORARY DEVELOPMENT IN BUSINESS MANAGEMENT

Table of Contents
Executive Summary ……………………………………………………………………..3
Task 1……………………………………………………………………………………..4
External environment diagram………………………………………………………….4
PESTLE Analysis ……………………………………………………………………….4
PESTLE diagram………………………………………………………………………..5
Political Factors …………………………………………………………………………5
Economic Factors ……………………………………………………………………….5
Socio-cultural Factors…………………………………………………………………..6
Technological Factors………………………………………………………………….6
Improved Efficiency of new generation jet planes diagram…………………………7
Ecological Factors ………………………………………………………………………7
Role of reducing Technology diagram ………………………………………………..8
Industry Analysis ……………………………………………………………………….8
Porter five forces diagram………………………………………………………………9
Force 1: Industry Rivalry……………………………………………………………….9
Force 2: Barrier to Entry and Exit……………………………………………………..9
Force 3: The Threat of Substitutes……………………………………………………10
Force 4: Supplier power………………………………………………………………..10
Force 5: Buyer power …………………………………………………………………..10
Task 2……………………………………………………………………………………..11
The Effect of Barriers to Globalization on Airline industry and policies …………..11
Relevance of Barriers to Globalization to Southwest ……………………………….12
Southwest Resources and Competencies diagram ……………………………….13
Southwest strategy overview diagram…………………………………………………14
The Effectiveness of Southwest Response to the Barriers to Globalization……….14
Porter Competitive Advantage Diagram ……………………………………………….15
Cost Leadership Strategy ………………………………………………………………15
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Strategic clock tool diagram ……………………………………………………………16
Differentiation Strategy………………………………………………………………….16
Market Focus Strategy…………………………………………………………………..17
Combination of Strategies……………………………………………………………….18
Recommended Areas for Improvement for Southwest ………………………………18
Conclusion…………………………………………………………………………………20
Harvard Referencing……………………………………………………………………..21
Appendix 1- Company profile……………………………………………………………28
Appendix 2- Swot Analysis table ………………………………………………………..31
Appendix 3- Additional Pestle Analysis…………………………………………………32
Appendix 4- Additional Porter five forces Analysis …………………………………….34
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Executive Summary
This report seeks to critically assess the influence of external business
environmental factors and porter five forces on southwest and this report is only in a
position to assess the opportunities and threats of southwest. Because of the word
constraints on the assignment additional information on pestle and porter five forces
will be in appendix 3 and 4.
Pestle model is used to evaluate the macro-economic factors, connect
opportunities and threats which are evident in swot analysis table in Appendix 2.
The disapproval of pestle factors is that it is out of date and not suitable for today
competitive environment. (Heckroodt, 2014).
The competitive position of southwest will be evaluated with the Porter’s (1980)
model by evaluating changing elements, rising markets which might influence the
future progression of the company which has been criticised by a lot of scholars that
the model was based on past times which was based on intense rivalry and cyclical
progression which has altered in recent years due to advancement in technology.
(Miller and Dess, 1993).
Furthermore, the report analyses the relevance of barrier to globalization to
southwest and how it influences policies and decision making in the company and
the airline industry in the form of foreign ownership laws and restrictive air service
agreement. In addition, the report evaluate the efficiency of southwest in responding
to the barrier to globalization and this report uses porter competitive advantage in
the form of cost leadership, differentiation, focus strategy or a combination of
strategies.
Additionally, the report demonstrated some areas of improvement in reactions for
southwest in the form of integrating Airtran onto its point- to-point strategy so they
can maintain its low cost structure and not lose its individuality; expand into
international market and use more fuel efficient fleets.
In conclusion, these policies in addition to dedication to consumer service and
investing in technological advancement and research will allow southwest to
preserve and increase its market position in the future
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MACRO ENVIRONMENTAL FACTORS AFFECTING SOUTHWEST AIRLINES
Figure 1.1: The External Environment diagram
Source: (Fee, 2013).
Pestle Analysis
A PESTLE analysis is an important model for identifying the ‘big picture’ of the
macro environment in which a business is operating. The alterations happening in
the world creates an uncertain macro environment which has an influence on the
objectives of the company. (Harrison, 2009). This analysis will improve
comprehension of the dangers linked with southwest business growth or non-
success, and also the targets and position of the business. Criticisms of PESTEL
analysis is that it can be very subjective and the result can be misguided for
analysis. (Heckroodt, 2014).
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Figure 1.2- Pestle Diagram
Source: Hunger and Wheelen, (2001)
Political/ Legal
Southwest local activities are extensively controlled by Government organizations;
mainly Federal Aviation Administration (FAA). For example, the 1979 ‘Wright
Amendment’ banned southwest to fly non-stop or provide through-plane service
from Dallas Love Field to any other than 7 allowed cities. Recently, a law has been
approved to retract the Wright Amendment to be in effect in 2014. Southwest can
now expand to international markets like Mexico and Caribbean which makes
southwest more profitable. (Hethcock, 2015).
Southwest has on frequent circumstances won legal encounters against competitors
in the law court. (Gamble and Thompson, 2012).
Economic Factors
Airline industry is rigorously affected by fuels prices. An increase in the fee of oil has
a key effect on Southwest productivity (BBC News, 2011). The potential trends of oil
price are volatile because fuel expenditure account for almost 30% of airlines
operational overheads (PwC, 2013).
Due to economic recession, the reduced economic development is having an
influence on the buying clout of the customers which has reduced the demand for
air travel across the US, but however the customer demand for inexpensive prices,
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no-frills air travel has stayed undeterred and certainly experienced development
(Osborne, 2010).
Socio-cultural Factors
Southwest has interrelated well with its consumers and dealers which made the
business owns a training centre from where they give tutoring to the workers on how
to fly an airline as well as additional carrier associated undertakings. The business
is deeply unionised so as to address the difficulties and distresses of the workers.
Southwest offer management programs for their workers and also offer earnings
sharing plans and stock- based reimbursement. The new live TV and Wi-Fi has an
impact on the customer satisfaction and experience. (Southwest, 2014).
Technological Factors
Technological improvement has been the motivating cause for improvement of
southwest operational competence. Southwest decreased expenses by developing
operations by means of innovative aeroplane engine expertise and mobile
technology. (See fig 1.3) Technology improves connectivity and greater
passengers’ travel experience. For instance, Southwest was able to introduce
ticketless travel through the use of technology; the new international reservation
system will help Southwest boost its revenues. (Maxon, 2014)
Emergence of information and communication technology has a negative impact on
Southwest because there are new technologies like conferencing and social
networks which has reduced the need to travel. (Lin, 2010).
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Source: Adopted from Boeing cited from Market Realist
Ecological Factors
Southwest has used alternate fuel usage which aids to decrease the threat of
damaging wildfires in western U.S. (Southwest, 2014). Airplane emissions causes
significant damage to the atmosphere and that is why southwest have purchased
renewable energy for their Dallas and Houston operations. (Penner et al. 2001).
(See fig 1.4). With projects like Evolve, which comprises of the remodel of the
cabins on the craft to accommodate efficient waste disposal as well as decrease
weight from waste on the craft. Southwest recently contracted Pratt and Whitey to
supply southwest with Eco-power water pressure washing systems that allowed
southwest to wash the grime of the engines turbine blades while their planes were
parked at the gate which permits southwest to involve in ecological sociable
conducts. (DeWit et al, 2000).
7

Source: Adopted from Department of transportation cited from Market Realist
Industry Analysis
Conducting a business analysis is necessary for businesses as it helps business
decide the cost-effectiveness of the business within the competitive business
(Morrison, 2011). This report is supported by the five forces model that was
obtainable by Porter, (1980), its resolve is to produce and achieve competitive
advantage for a business that allows it to be in advance of the instant rivalry.
Criticisms of Porters models is outdated and no longer useful, an effective policy
should be centred on a number of models that carefully evaluates the external and
internal issues and the forthcoming progress of the business. (Dalken, 2014).
Fig 1.5- Porter Five forces diagram
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Source: (Porter, 2008)
Industry Rivalry
Porter (1985) advocates that the most apparent of the forces is the power of
competition that is present within a competitor which assist to determine the level at
which the assessment generated by an industry will be depraved through separate
rivalry. Factoring competition among southwest competitors are variables including
competition, marketing, and sustainability of competitive advantage through
modernization.
Rivalry exists in the form of price discounting, innovation and publicity in terms of
the airline business, a high level of competitive rivalry is mainly due to the huge
numbers of airlines that offer a variety of air travel services which made Southwest
set apart their services and this is apparent in their low cost and differentiation policy
which consumers say is reliable and a price sensitive. Additional contributions to the
intense competition are the high fixed costs associated with operating an airline
which are expenses of planes, fuel, pilots. (Morrison, 2001).
Entry and Exit
Southwest was faced with a high amount of entry barriers into the airline business
which was the Wright Amendment which made the owners of the business to give
attention to the local market establishing themselves with the demand in the state of
Texas. In 2014, the law was abolished these caused southwest to increase the
amount of direct flights into U.S as well as growing internationally. Recently,
integration of airlines has also generated a problem for Southwest because these
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mergers augment the capital incomes for other airlines enabling them to invest more
in lucrative investments which reduces southwest market shares and consumers.
(Maxon, 2013).
Substitutes
Substitutes to southwest air travel flights are generally car, bus, and train
transportation but air journeys have benefits over other substitutes in terms of
swiftness and comfort. Supplements to airline journey including guesthouses and
hire purchase cars which has enhanced collaboration between airlines, hotels, and
rental car businesses that have enabled carriers to package products to provide
low-priced travel bundles which is apparent in southwest with their rapid rewards
which made southwest incorporate their internet booking system with these deals
by linking likeable schedules and packages allowing their consumers to
conveniently make reservations and look at all their choices straight from the
southwest website. Eventually, the cost of these complements will only potentially
have a consequence on the holiday traveller as the commercial traveller has a much
more inelastic demand. (Percy, 2002).
Supplier
In addition to the risk of new competition, Porter also regards the bargaining power
of suppliers as a force influencing business rivalry which means planes makers
have extraordinary negotiating influence due to the huge substituting expenses
connected with altering planes which means the main companies in the plane
making business are Boeing and Airbus, can get away with charging slightly higher
charges than would be possible in a perfectly competitive environment which makes
for the recent deteriorated state of the carrier business. Southwest is the biggest
buyer of Boeing planes which creates a situation of over dependence on Boeing and
this can cause Boeing to wield an amount of control over southwest airlines.
(Fleming et al, 2013).
Buyers
Consumers have very minute control, as there is still no considerable alternative for
air travel which enhances rivalry on price in the business which causes airlines to
have very little turnover margins so there is not much room for buyers to decrease
the price lower even if they had power which is evident in the continuous increment
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of additional fees in the business notwithstanding general customer fulfilment.
Nevertheless, customers are now more knowledgeable and this is likely to give
them influence over the carriers to know about changes in price among competitors
and accessibility of alternatives. (Nhuta, 2012).
TASK 2
2.1 The Effects of Barriers to Globalization on Airline Industry Decisions and
Policies
Globalization involves the creation of linkages or interconnections between nations
which is usually understood as a process in which obstacles separating different
regions of the world are removed, thereby invigorating trade of goods and services.
(Hamilton and Webster, 2012). The airline industry has become considerably more
globalized and less regulated over the last 30 years. In 1978, Airline Deregulation
Act freed the nation’s airlines from the CAB an agency that dictated the routes and
prices but before Deregulation airlines contested for service alone as fares were
controlled by the government. Many consider this era fondly as the “golden age of
aviation,” when flying was mostly for the wealthy because of the expensive fare
price and its luxuries. Deregulation gave rise to a new kind of airline which was the
low-cost carrier (LCC) which was instrumental to the development of the industry
and revolutionized many processes due to the straightforward procedures required
by these airlines. When deregulation was at the inception stage, southwest was a
small regional carrier prevented by CAB rules from flying outside of Texas but today
southwest is the leading domestic U.S. airlines in terms of passenger traffic,
something no one could have predicted in 1978. Southwest is a success story, but
Deregulation gave room for southwest to innovate their business models which
permitted southwest to fly more travellers often. (Unnikrishnan, 2015).
Regardless of the level of deregulation, there are two main barriers affecting the
total globalization in the airline industry which are ownership laws and restrictive air
service agreements which bring about unpredictability in the airline industry.
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With the Ownership laws, Countries are not prepared to give influence of their airline
companies to overseas companies because they feel if they give foreigners access
their national security can be exposed and they see their national airlines as the
country icon. The US laws restricts overseas businesses from buying more than
25% of an American carrier and for European carrier the figure is 49% which is
preventing huge investments from overseas investors.
The breakdown of past investment of the merger between British Airways and US
airways contributed to the non increment of the control of shares in American
carriers. Advancement can be made through the re-negotiation of the air service
agreement between nations which are the bilateral or multilateral accord discussed
between two or more nations that outline the policies of the air service between the
nations which means it can restricts carriers in the form of prices and restriction to
fly within certain cities in a country. In recent years, they have been more
comfortable ASA between nations which was the “open skies” which allowed for a
liberated market which brought about economic benefits of increased competition
among airlines. (Stengel, 2013).
2.1.2 Relevance of Barriers to Globalization to Southwest
With barriers to globalization upsetting southwest there will be normal rivalry, profits,
and same investment in technology and employees but However, if there is no
barrier upsetting southwest there will be improved competition among rival airlines
for market share which will lead to price wars, lower income and also increased cost
in technology and workers development and training which will make southwest split
the market share with other airlines which will reduce it operating profits and will
lead to reduced growth. (Ringbeck et al, 2010). Since the barrier to globalization,
Southwest has been faring well bearing in mind the high level of sales and market
shares recorded over a period of time as shown in appendix 1.
The company has been profitable for about 42 years since commencement hereby
growing in market shares and sales because the strategies of southwest are
strategically coherent. (Southwest, 2014). Strategic coherence signifies the degree
to which the various functional strategies a business utilizes harmonize and support
one another. Thus, coherent strategies often result in a sustainable competitive
advantage which is the skill of a business to contend effectively hinges on on how
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distinctive its policy is to the business. Strategic competitiveness is actualized when
a business effectively develop and execute an efficient policy like southwest in
which others businesses try to duplicate but fall short because of the strategic
competitiveness (Peter and Donnelly, 2011). Southwest has achieved competitive
advantage by successfully putting the organization in customers minds through its
human resources system, most of which falls under the heading of employee
branding and also its resources and competencies. (Miles and Mangold, 2005).
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Fig 1.6- Southwest Resources and Competencies
Source: (Johnson et al, 2008)
Southwest has been using the same low cost and differentiation policy in running
their business and southwest has been firm in these strategies meaning that these
barrier to globalization has not determined policies in southwest which is evident in
southwest having to be the only airline recording profits for 42 successive years
when other carriers were filling for bankruptcy like American airlines. This was
possible because of southwest manager’s skill to foresee future markets and lessen
future risks. (Allvine et al, 2007).
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Fig 1.7- Southwest Airlines Strategy overview
Operating strategy
 Operates only Boeing aircraft
 Flying to cheaper less crowded airport
 Mechanical pilots are trained on one aircraft
 Quicker turnaround time of plane
Marketing strategy
 Offering direct flights to cities across U.S
 Open seating policy
 Serving snacks only
 Utilizing own distribution systems
Lower fares than rivals
Human Resource Strategy
 Cross training and flexible work place
 Never any lay-off
 High efficiency with higher wages than others
Source: (Gabreski, 2013).
2.2 The Effectiveness of Southwest Response to the Barriers to Globalization
Globalization has brought about adjustment in consumer preference which caused
augmented rivalry together with the introduction of innovative technologies that has
immensely eased airline product distribution and the melting of trade barriers that
make it straightforward for new competitors. The real test for southwest will be to
manoeuvre the difficulty of an increasingly globalized market place which means
southwest must extend diverse global business relations and strategies that will
present them with a well-defined existence in the domestic market in US and
overseas markets. (Worthington and Britton, 2009).
Michael Porter advocated that in order for businesses to achieve economic benefits
they need to decide amongst: quality improvement; cost effectiveness and invention
The strategy that probable reduce rivals power, reduce consumer influence and
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allow southwest be ahead of the competitive rivalry, reduce risk of replacement and
control the danger of competitors in order to attain economic benefits could be the
cost effectiveness policy, Differentiation policy, market focus policy or amalgamation
of the policies. (Porter, 1985).
Fig 1.8 Porter competitive Advantage diagram
Source: Porter, (1985)
2.2.1 Cost Leadership Strategy
This is a strategy where a company aims to out-price its rivals by reducing the
expenses connected with fixed costs. (Porter, 1980). The cost efficiency policy of
Southwest is conducted with the purpose of providing excellent package to
consumers at an inexpensive price, set against what is available from the business
competitors. Southwest aims at retaining standard service delivery with lean profit
generation as a way of entering into a new market ground in which quality service is
not essentially renounced at the altar of rendering low-cost flight. The job of
southwest is to have consumers enjoy flying at the rate of driving a car between two
cities which is a great way of ensuring that the price of operations stays low is the
business use of minimizing practices in its fuel purchasing strategy. Southwest was
looked down upon because it was not having an effective business model or a
conventional hub-and-spoke policy like other established carriers. Southwest has
been doing well since it’s started by serving the need for inexpensive, dependable
16

air journey, fast turnaround time which brought about high aircraft utilisation, lesser
costs and greater workforce efficiency. (David, 2014)
Southwest is well-known for their "The Low Fare, No Frills Airline" which increased
the quantity of consumers purchasing the packages of the business. The risk
connected with this policy is that cost discounting are not inimitable to southwest,
new rivals may well duplicate the policy and hi-tech advancement can open up cost
reduction for competitors like JetBlue to cancel out southwest past investment and
hard-won gain in effectiveness. But southwest can reduce these risks and continue
to be the low cost leader by spending on research and development and preserve
tight control over production and expenses. Southwest is placed between number
one and two, wherein it retains lowest costs for its operations through its no-frill
strategy. (Ankli, 2006) (See Fig 1.9)
Source: Johnson et al, (2008)
2.2.2 Differentiation strategy
Differentiation as a source of advantage means offering distinctive brand, expertise,
consumer service and products to increase market share. (Porter, 1985).
Southwest is an economical carrier that centres on point- to- point, no-frills service
and also its operational speed and its effective staff policy has distinguished it
services from its rivals. But this strategy can be a hindrance to southwest because
they can lose flight ticket sales to their competitors because they don’t offer long
haul flights or first class seats for customers who like their luxury and privacy for
business and leisure purposes. Another Shortcoming of this strategy is when
17

southwest fail to be aware of what the customers regard as value but southwest can
generate value by reducing buyer’s costs, increase buyer’s performance and
sustainability. (Phelps, 2014).Southwest can thrive using differentiation strategy by
advertising thereby making the market understand the advantage associated with
the distinguished product of southwest. (Saunders and Lewis, 2012).
Southwest’s other important differential policy is what they call insistent advertising
which take their key promotional points and put them into self-explanatory
advertising which let their policies speak for themselves, southwest emphasized on
its inexpensive prices and two free baggage policies, importance on employees, and
its customer service which is apparent with their twitter account which has 1 million
followers which illustrate their great customer base and low customer complaints.
This advert sets the company distant from rivals which make potential consumers
aware of Southwest’s distinctive policies. (Gabreski, 2013). In addition, southwest
focuses on the future which it does by having long term benefits. With the
acquisition of AirTran, it will allow for lower priced destination by expanding network
and spreading into different market which will increase market share and profitability
of southwest which will invariably bring about future growth. Southwest has made a
deal with Boeing to purchase their new planes which are more fuel effective and
environmentally pleasant which will benefit Southwest’s economical and efficient
consumer policies which makes southwest more socially responsible. (Freiberg and
Freiberg, 1996).
2.2.3 Market Focus strategy
In the focus strategy, a business focuses on a particular section of the market
(Porter, 1996). For instance, Southwest prominent for its inexpensive structure
basically follows a linear route structure, it only flies one type of plane and it want to
stay in high density markets and also be highly proficient. Southwest has chosen to
provide services since not all people are its target consumers. In the market section,
southwest acknowledged two groups of targeted consumer mainly travel at their
own costs, the passengers and small business workers. The criticisms of this
strategy are that concentrating on a specific type of market is a risk because there is
a possibility that any of your rivals can match the business in serving the narrow
target market. (Daft and Marcic, 2006).
2.2.4 Combination of Strategies
Porter, (1996) emphasize that a thriving policy entails a business to insistently stake
out a market position, and that different strategies entails distinctly different
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approaches to challenging and operating the business. To be "all things to all
people" means being "stuck in the the middle" with no different competitive
advantage. The distinction between being "stuck in the middle" and effectively
seeking combination strategies merits discussion. (Hooley et al, 2004)
Although Porter, (1996) illustrate the chance of not doing well in both cost control
and differentiation, a few businesses thrive using mixture of policies which is evident
in southwest being a cost leader while preserving a distinguished product Southwest
has joined cost efficiency with differentiation by reducing costs by not allocating
seats and by removing food on its planes which enhances the promotion that no one
gets distasteful food on its air travel which makes its prices low enough to draw a
significant amount of traveller allowing the airline to thrive. (Hanlon, 2007).
2.3 Recommended Areas for Improvement for Southwest
Southwest has a few planned decisions that it can take advantage of in order to
maintain and develop its competitive advantage over their rivals in the airline
business.
2.3.1 Incorporate AirTran to their point -to -point policy
AirTran presently works with hub-and-spoke route policy, in which paths have a
tendency to link through a (“hub”). Smaller planes crop up in these policies since
smaller planes are used to transport travellers to the airline’s hub. Nevertheless,
Southwest now influences AirTran’s flights, there are contradictory path policies but
in order to harmonize these dissimilarities and preserve their economic advantage,
Southwest ought to implement their point-to-point policy onto AirTran’s preferable
destination which is Atlanta, where Southwest does not operate from because of its
overcrowding and Southwest should replace the smaller planes with the new
effective planes which will decrease costs and allow southwest benefit revenue from
the acquisition. (Lester, 2015).
2.3.2 Growth Opportunities into international Destinations
This international destination provides important growth prospect for Southwest if
they can preserve the similar low-cost structure that has made them effective.
Southwest revamped the technology behind their reservation system so as to assist
reservation to international location.
Expanding into international markets can serve as a hindrance to southwest
because it will threaten their low cost strategy because they will start offering long
haul journeys which will augment costs and also flights time which will disagree with
its policy of keeping it straightforward. Additionally, in terms of differentiation
19

southwest will drop their uniqueness and start offering food because of the long haul
journey involved and slow turnaround times which will result in price battles among
recognized airlines as a result of the extreme competition. In addition, southwest
can also acquire legal costs from expanding internationally to foreign countries.
(Tully, 2015).
2.3.3 Using more Fuel Efficient planes
Southwest can develop their CASM by decreasing the dependence on fuel which is
the key contributor to the operational expenses of southwest any decrease would
help their operating margin to enlarge. Recently, Boeing created new planes which
are lighter and more fuel efficient which is a more urgent upgraded innovation, as
southwest do away with old planes which are basically needless in the point-to-point
policy they use. Southwest must continue to be on the forefront of these
developments by spending on research and development with expertise to reduce
fuel costs and distinguish themselves from their competitors. By enforcing the new
innovative Boeing, southwest also advance the cost-effectiveness of long-haul
journeys. Recently, southwest offers some but still reasonably few long-haul
journeys which can expand capacity by adding longer paths at comparable levels of
lucrativeness to shorter ones which with bigger aircrafts, the marginal cost of extra
consumers is reduced while they bring in the same profits, increasing the cost
effectiveness while the risk here is that the demand must be continuous so as to
constantly make the trips full of passengers or the losses on these trips would be
probable. (Ausick, 2015).
3.0 Conclusion
After evaluating southwest with porter’s five forces and pestle analysis
correspondingly, this report further analysed the effectiveness of southwest
reactions to the above mentioned models and the influence on decision making to
southwest. Furthermore, southwest has been doing well since the commencement
of the business for 42 years notwithstanding the degree of competition in the airline
industry. Nevertheless, for southwest to always do well bearing in mind the
changing dynamic environment it has to incorporate the reactions of the strategies
stated above and also invest in technology which will assist southwest to be ahead
in the commercial airline business and give southwest competitive advantage.
20

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Appendix 1- Company profile
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 Company name – Southwest airlines
 Where is the company based- Dallas, Texas, USA (www.southwest.com)
 What does the company do?
o Southwest Airlines Co. operates passenger airlines that provide scheduled air
transportation services in the United States and near-international markets.
o Business model- Southwest Airlines is an incorporated business
(www.swamedia.com)
 Industry- Regional airlines (www.southwest.com)
 Sector- Services (www.southwest.com)
 Company Perspectives- The mission of Southwest Airlines is dedication to the
highest quality of Customer Service delivered with a sense of warmth, friendliness,
individual pride, and Company Spirit. (www.southwest.com)
 Company Slogan- Low fares. Nothing to hide (www.southwest.com)
 Competitors- American Airlines Group Inc, Delta Airlines Inc, JetBlue Airways
 What stock Exchange does southwest airlines trade in – NYSE
 What is the Market structure of southwest airlines- Southwest
airlines is an oligopolistic structure.(www.swamedia.com)
 Key business strategy- Low costs structure and Low fares.
 Symbol on NYSE - LUV (www.swamedia.com)
 Employees- 47,000 employees (www.swamedia.com)
 Cities Served- Southwest serves 94 destinations across the United
States and six additional countries. (www.swamedia.com)
Financial Highlights 2014
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Available at: (www.southwest.com)
Reported record net income of $1.1 billion and, excluding special
 Financial highlights for the Financial year 2014
2014- 12
Operating Revenues USD MIL $ 18605
Operating Margin % 12.0%
EPS(Earnings Per Share) USD 1.64
Dividend Growth $ $0.2
Revenue Growth % 5.1%
Operating Expenses $ $16,380
Operating Income $ $2,225
Dividend USD 0.22
Payout Ratio % 12.1%
Note: USD- US Dollars, Mil- Millions, USD Mil- US dollars million
Available at: Financial.morningstar.com
 Market share-
Domestic market share of leading U.S airlines for 2015
Airline Domestic Market Share Share
Delta 16.3%
United 16%
Southwest 15%
American 12.9%
US airways 8.2%
Jet blue 5%
Alaska 3.9%
Air Tran corporation 2.7%
Express Jet 2.5%
Sky West 2.3%
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Others 15.2%
Source: www.statistic-brain.com
Appendix 2 – SWOT Analysis Table
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Strengths (Internal )
 Low cost pricing
 Comprehensive training program
 Excellent employee/ union
relations
 42 years of constant profitability
 Possess Advanced information
technology
 Point-to-point
 Customer service
 Lowest complaint record
 Successful marketing strategies
Weaknesses (Internal)
 Over dependence on Boeing
 Change in consumer preference
 No lay-off policy
 Damaged reputation from the
failing to conduct timely airplane
inspection
 Limited booking system
 Limited market segmentation (no
business class lounge, no lounges)
 Growth opportunities limited with
current strategy
 No baggage transfer outside
southwest system
Opportunities (Internal)
 Improved efficiency through
online presence
 Acquiring rival firms
 Global expansion via Acquisition
of AirTran
 Expansion into international
markets
Threats (External)
 Rising prices in energy
 Growing bargaining powers of
buyers
 Increased competition from rivals
 Government intervention
 Improving teleconferencing and
telecommunication
Source: (Gabreski, 2013)
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Appendix Three- Additional Pestle Analysis
Political/ legal
The political environment is made up of factors such; government policies, rules and
regulations as well as style of governance (Capon, 2009). There are several
elements of the political/ legal environment that have an impact on Southwest which
is safety regulation. U.S has experienced increased threats to national security in
the past which made the government develop tough security policies which affected
the airline industry and had an influence on the airport experience for travellers
which reduced the profits from airlines because a lot of customers didn’t want to fly
because they felt the security check became very stressful. (Blalock et al, 2007).
The airline industry is widely impacted by regulations and restrictions related to
international trade, tax policy, and competition. However, the U.S. Department of
Transportation (or DOT) controls the airline competition. The government wants
to protect consumer interest and prevent monopoly which was evident when there
was a case in court to stop the merger of U.S airways and AMR Corp because of
fears that the union would unsettle rivalry in the business. (Plumer, 2013).
Southwest is subject to the jurisdiction of the FAA with respect to Southwest’s
aircraft repairs and procedure and other matters affecting airline security. Southwest
is controlled by Federal and local laws relating to occupational safety and well-being
and Food and Drug Administration regulations. (faa.gov)
Economic
The elements of the economic environment that has had an impact on Southwest is
economic growth. In 2008, U.S experienced slowed economic growth because of
the financial crisis of 2008. The economic recession had an influence on the
employment situation and the buying power of the consumer which lead to
unemployment which impacted on the purchase of airline tickets. The airline
business has been affected as people opt to travel only when it is necessary and
also made them to start buying alternatives substitutes to air transport. (Goyal and
Negi, 2014).
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Socio- cultural
Socio-cultural environment influences southwest in the aspect of social mobility.
The U.S has become highly cosmopolitan which means people are moving from
their moving from one place to another because of work, leisure and travel which
results in increased business for Southwest having an positive impact on the
southwest revenues and profits. (Eldad, 2005). However, southwest are lacking in
substance in areas like in on- time performance, flight cancellations and lost
luggage which can make consumers buy rivals flights ticket. (McCartney, 2014).
Technological
Technology is also one of the four pillars under the International Airline Transport
Association strategy to address climate change. Technologies can be used to reduce
noise by as much as 30% which improves distance that the aircraft can travel.
Southwest carrier procedures like repairs and on-board processes have better quality.
The technological advancement of the ticketless travel made customers arrive on time
and customers didn’t have to wait in slow lines at the ticket counter. (Cederholm, 2014).
Environmental
Southwest is influenced by federal and local regulations concerning the safety of the
atmosphere which includes the release or removal of resources like chemicals and
hazardous waste. Furthermore, new laws concerning thing that can influence
southwest operational cost like emissions and leakages. However, laws has been
introduced in the legislature to regulate so-called “greenhouse gas emissions.” The
law could enforce extra costs or restrictions on all transportation-related activities,
the impact of which is presently unpredictable. Southwest selected a “Green Team”
to concentrate on areas that need enhancement to help improve their business
while still using the policy which made the highly successful. Southwest published
an Environmental Report describing Southwest’s policies to reduce greenhouse gas
emissions and addressing other environmental matters such as waste management
and recycling. (Gabreski, 2013).
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Appendix Four- Additional Porter Five Forces
Industry Rivalry
Low differentiation of the services provided by southwest and other airlines
combined with low switching costs for consumers encourages price competition and
price wars in order to win new customers. Since most major airlines serve similar or
identical flight routes and offer similar luxuries and in-flight services, competitors are
forced to compete on the basis of cost in order to gain competitive advantage.
This high volume of airlines contributes to the ease with which consumers can
switch between alternative firms and nearly guarantees slow industry growth, price
competition, and generally low returns on investment which further contributed to
the intense rivalry. (Plumer, 2013).
Entry and Exit
The substantial barrier to enter the airline industry is the rivalry form traditional
carriers existing which made southwest enter the domestic markets which is very
lucrative. Southwest have reduced marginal costs since they have reduced
expenses because of their inexpensive fares and their point- to- point strategy which
made them give consumers an alternative with their economical prices.
In Previous years, airlines found it straightforward to secure a loan in order to lease
a fleet of planes and enter the market but in recent times because of the financial
crisis it has become harder to obtain loans from banks because of their recent
conservative policies. (Cederholm, 2014).
Substitutes
Porter’s framework holds that the ability and willingness of consumers to switch to
substitute products or services directly affects industry competition which impacts on
the threat of substitute products and services is ease of substitution, parity of quality
and price, and the number of substitute products available in the market. Automobile
travel dictates short distance travel because of the impracticality of flying short
distances and the goad road system in America. Travelling by air take over because
journeys of longer times are unreasonable by car.
Another alternative is the train transportation, but trains have several difficulties
which can be journey being too long increased and not been readily accessible and
not enough in supply for travellers, but they have comparative benefits over air
35

travel. With air travel getting too expensive trains might become a viable alternative
for travellers who want to be economical. (Wensveen, 2010).
Suppliers
Porter refers to the suppliers of raw materials, components, labour and services as
having varying degrees of power over a firm or industry. The power of suppliers
originates in part from the existence of a limited number of suppliers to an industry
or the presence of substitute inputs, and an ability to charge high prices for unique
resources or even refuse to do business with certain firm.
Southwest is very proficient to meet demands of the market. The power of suppliers
has the possible influencing of fee at which carriers are attaining inputs. The
significant inputs in the airline business is oil, the oil business is categorised by
influential sellers who form alliances in order to affect prices. The oil sellers have
combined vertically with most oil businesses running exploration, manufacturing and
advertising activities which makes the airlines over reliant on the suppliers. (Pwc,
2013).
Buyers
The bargaining power of customers refers to the ability of customers to put pressure
on the firm, be it through decreasing their purchase of certain goods or services or
switching to substitutes. Also impacting the power of customers is the high volume
of information available to them. The power of the consumers has been decreased
by the capability of the southwest to make their flights more efficient. (Cederholm,
2014)
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