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SouthWest Airline Company Analysis

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by

Adam Chen

on 27 November 2013

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Transcript of SouthWest Airline Company Analysis

RECOMMENDATIONS!
SWOT ANALYSIS
ABOUT SOUTHWEST
SOUTHWEST AIRLINE
Company Analysis



STRENGTH
Low Cost

High capacity usage

Acquisition of AirTran

Increase in different type of aircrafts

AIRTRAN ACQUISATION
OPPORTUNITIES
Addition of more domestics flights

Additional acquisitions

Gain Market Share(a.a. declining)

International expansion
WEAKNESSES
Few international Flights

Heavy dependence on passenger revenue

Debt. (~$361 million)

Low profit margins
Increase the number of flights

Expands to Mexico, Canada, and also the Caribbean

Will not be fully integrate until 2014
THREATS
Post 9/11affects

Air Traffic constraints

Economics conditions

Weather

Merger between U.S Airways and Delta

Consumer preference
Low- Fare, high frequency

Point-to-Point carrier

Largest domestic Carrier in the U.S

4 largest airline in the U.S.

96 destinations in 41 states
Competitors
Delta,
AMR CORP,
Continetal Airways,
Jetblue,
US Airways
Airline Industry
The industry consists of about 50 mainline commercial passenger airlines,

15 are considered major airlines, defined as airlines with annual revenues in excess of $1.0 billion

The airline industry is extremely volatile and is subject to various challenges

Barriers to entry are high

Increase in capital intensive, technology intensive, highly regulated, heavily taxed, and makes the industry extremely competitive.

Events such as acts of terrorism, poor weather, and natural disasters has a major effect on the industry


Timeline-1
June 18, 1971
Began airline service Flights to Houston, Dallas, and San Antonio

1977
SW stock listed on NYSE as "LUV"

1982
Appointed Herbert D. Kelleher President, CEO, & Chairman of the Board

1980-84
#1 in customer satisfaction (4th year in a row)
Mission Statement
“As company legend goes, the very first route map was drawn on a cocktail napkin during a meeting between Herb Kelleher and Rollin King.”
The First Three
Flight Map
Timeline-2
1990
announce billion dollar revenue mark
Officially declared a "Major" airline

May 2003

Top ranked domestic passenger airliner

May 2, 2011
Acquire Airtran

2012
Mark the 40 year SouthWest was profitable

•In the midst of a 5 year strategic plan
•Acquired Airtran in 2011
•New Rapid Rewards frequent flier mile program
•Fleet modernization
•The new 737-800 allows for 20% more seating
•International flights
•Maintain the position as America’s most flown airline.

–Keep reputation as a low cost airline.

•Regain returns on investments due to high fuel costs.

–The acquisition of Airtran is an investment intended to pay off.
FUNCTIONAL LEVEL
•Can market themselves in a way that caters to customers who demand cheap flights.
New "Rapid Rewards" frequent flier mile program.

•Introduction of the fuel-efficient 737-Max.

•Offers point-to-point rather than hub-and-spoke transportation.
–Maximizes use of assets such as aircrafts, gates, and employees
Business Level
•Cost Leadership
–A main influence on customers in choosing an airline
–Offers cheap flights
–Maximizes seating capacity
–Little or no amenities
–737-Max will be the most fuel-efficient in its class

•Differentiation
–Low prices
–Point-to-point service

•Response
–Innovating fleet to suit the demand for comfort via "Evolve"
–Now serves 2 new states and 6 new airports
–Will serve 2 additional states and seven new cities
CORPORATE STRATEGY
Rivalry Landscape: SW = New + Champion
Bargaining Power of Buyers
LOW
FIVE FORCE ANALYSIS
MACRO ENVIRONMENT ANALYSIS
Why Organizational Structure


-Implement Strategy

-Maintain high performance


ORGANIZATIONAL STRUCTURE
Group Members

Adam
Ahmed
Antonio
ChenWei

Corporate Level
Global Level
•Too soon to tell which strategy will be followed.

•Recently opened up international flights.

•Most likely will be a global strategy

–High cost reduction
–Low differentiation
Rivalry Among Firms
US domestic competition
Global Competition
Recent Change in Competition Landscape

2010 AirTran
2013 AA + US Airway
Consumers concern about...
"lesser competition means higher price and less choice..."
US Government promises...
"competition will prevail..."
"fare drop 10% passenger traffic up 36%..."

S.A: "Hey! How about me..."
Good?
Bad?
Result...
Unfavored!
DRASTIC increase in competition
Before
After
$ 17000 M
$ 24000 M
$ 17000 M
$ 38000 M
source: mergent
50% +
One supplier in each main service chain
Dependency of Boeing aircraft supplies
Dependency on external parts suppliers
Great purchase volume
$2millions purchase of flight equipment in 2011
High Switching Cost for SA
Cause: Boeing aircraft specialization
Result: Increased cost and related know-how
Risk of entry from competitors
LOW
Difficult to introduce new competitors
Oligopoly
Barrier of entry
Assets
Expense
Bargaining Power of Suppliers
HIGH
No Dominant Buyer
Flexibility in switching customer

2012 10% revenue
Threat of Substitute Products
HIGH
Consumer switching costs are low
Take other low-fair airlines
Inferior customer experience
Address Issue: "Evolve" Program
Buyer Switching Cost is High
As a supplier of two profitable companies
As single service provider
Buyer is Price Sensitive
Better price bargaining opportunity
Price Sensitive on Fuel Supply
Fuel Price : Increase 30% Since 2010
Result: Operation Cost Hiked 5.5% for 2011 alone
Address the Risk: Alternative Fuel
Biomass Plant 2013
Consumers are price sensitive
Slow Economy
Low confidence on income security
Cut back on airline travel: 8% decrease since 2011
Slowly recover but still high unemployment rates
Compare to 10% highest in 2009
We are at 7.3% same as Dec 2008
Consumer willingness to change or without is high
Substitute available (depend on needs)
Virtual Communication, Ground / Sea level transportation

Consumers are better informed
Political / Legal
Taxes & Fees
$100 security fee
$7 for “9-11 Fee”

Strict Legislation Regulating Business
Scrutinize Economic and Operational Regulation

Consumer Protection
Denied boarding compensation
Operational, Safety, and Health Regulations
8 Hours sleep becomes 10 for pilots
Increasingly Tightened Security Regulations
Airport and Airspace
Demographic
Mostly uncontrollable trend
Population
43 % increase in Spanish Customers
2nd Most Used Language
SA Responded:
Website Language
Bi-lingual airline support
Technological Environment
Greater role of technology in company performance
Well Informed customers
Graeter reliance on technology
Reach out customers quicker
Expanded utilization of technology
Why? Convenience

Why? Operational Efficiency
Result? Changes and risk of failure
Risk? Paralyze / Mistakes
Web
Ticket Purchase & Secured-Transaction
Higher technology upgrade frequency
SA reservation system replacement project
AirTran Integration
Rapid Reward Program
Technology level in the airline industry
Gov retain key regulations
Eliminated CAB (Civic Aeronautic Board)
Death of "heavy weight" airlines
(i.e. Pan AM TWA)
Born of SouthWest
Eco restraints lift
Open market opportunity
US Airline Deregulation Act of 1978
Dependency on government agenda
Tech ahead of airline companies
Struggling on architecture upgrade
Boeing
Old App
Cost of moving
Aware of new technology
Capital restraints

Access to Newest Technology
Boeing recognize Open-source technology
iPad App for maintenance
Cloud-based aviation platform
Why? Reduce technology cost
license
R&D

Macroeconomic Environment
Favorable economic conditions
Inflation Rate
Source: BLS
Slowly recovering unemployment rate
Increased consumer disposable income level
Source: BEA
Source: BLS
A downward stock market trend
Source: Forbes
Social Environment
Airlines are still considered as fastest way for travel
Functional Structure
SouthWest Airline uses
Functional Structure

Pros:
-Control over activities
- Reduced costs
- High productivity

Cons:
- Communication problem
- Profitability measurement problem
- Strategic problems

Upper and Lower Organization
Upper Organization
- Centralized
- Vertically Integrated


Lower Organization
- Decentralized
- Horizontally integrated
Upper Organization
IMPLEMENTATION SYSTEM
Set up to :

Maintain standards.

Measure performance against strategic goals

Take action when necessary.





(In first name alphabetical order)
FINANCIAL CONTROL
SouthWest Airlines uses financial instruments to monitor and maintain its corporate strategy, and evaluate strategic performance.

Instruments such as :

ROI- Return on Investment

Stock Prices

EPS-Earning per share

Debt to Equity



RETURN ON INVESTMENT

Measure efficiency of an investment


Southwest Airlines ROI:

2010 2011 2012 2013

7.79% 7.98% 8.43% 8.92%

Stock Price
Price company offers on its stocks to investors

Southwest Airline Stock Price: 18.1%
Earning Per Share
Indicator of profitability

The portion of a company's profit allocated to each outstanding share of common stock

SouthWest Airline EPS

Annual: $0.87 Quarterly: $0.34
Debt to Equity
How much company finances its growth with debt

Low is good


SouthWest Airline debt to equity


Strategic Control System


Southwest Airlines focus on creating value for customers

Controls the strategy by:

Surveying customer satisfaction with service

Estimating percentage of sales


Customer Strategy Control
Employee Strategy Controls
Employee selection procedure

Employee and employer value be similar

Monitor employee through encouragement and teamwork
Happy Q & A Section
:)

Managerial Culture
Create atmosphere of learning and improvement

Provide constructive feedback

Positively reinforce employee output- employee learn from mistake
Overall Structure
Expand more international flights
Will expand their market
Should slowly expand into Mexico and Canada

Gain market share by aqusition or merger
US Airways and American Airlines merger
Full transcript