Southwest Airlines

Introduction

By October 2002, Southwest Airlines had apparently weathered the initial crisis to the airline industry that resulted from the September 11, 2001 (“9/11”) terrorist attacks. Most of the large national carriers had experienced huge losses in demand, profitability and market share, while in contrast Southwest’s low-fare operations had thrived, even in the face of declining earnings. Yet, only a year after the attacks, Southwest and the industry in general faced still unknown future changes to its operating environment. There was already a new dynamic of security becoming a priority consideration, and new governmental directives and taxes meant to ensure and maintain that security. This new security dynamic had already impinged on Southwest’s key operating strategy of customer-friendly service, due to boarding delays and resulting lower on-time arrival performance levels. Consequently, because of decreased demand due to lingering customer fears, depressed macroeconomic conditions, new federal taxes, and the perception of declining service, Southwest began to experience what other carriers already had: reduced revenue, increased costs and declining profitability.

Therefore, post-9/11 and amid the general industry malaise, Southwest’s management is challenged with strategic decisions regarding the rate and manner of future growth. Also, the changes to the operating environment, such as increased security requirements, taxation, restrictive governmental regulations, and unpredictable responses on the part of competitors, created challenges to Southwest’s operating strategy of offering a differentiated low-cost, customer-friendly service. Consequently, the central issue facing Southwest’s management is: How should Southwest’s future growth strategy be defined and achieved, given a crippled airline industry? In addition, what changes to the airline’s operating strategy should be implemented, and in what ways, to achieve this growth, given the present and future challenges to the structural environment of the airline industry?

Internal Analysis

Southwest’s Strengths

Southwest’s main strategy is providing a differentiated product to airline industry customers. It does this by offering a low-cost, high-convenience, customer-friendly service to its main focus group, the business traveler. Southwest’s business model has proven to be highly successful in providing the company a distinct competitive advantage over its competitors. Southwest’s business model is based on several key activities that form the basis for its long-term and operational strategies.

Southwest has a long-standing policy of conservative growth. This policy limits annual growth in aircraft capacity to between 10% and 15%, and annual station growth to two or three cities, in spite of expansion opportunities. The financial side of the policy is a low debt-to-equity ratio that reduces costs and increases market value. As a result the company has maintained a strong balance sheet, as evidenced by thirty consecutive years of profitability.

Southwest has a strong