(Solution) Southwest Airlines: Flying High with Low Costs

Southwest Airlines: Flying High with Low Costs Case Analysis

Solution

Southwest Airlines Case Analysis Summary

1. Southwest profitability relative to industry
   • Southwest led industry from 1990-2002
2. Southwest Airline’s unique value proposition
   • Low prices; frequent departures; friendly service; on time arrivals;
   • fast transport;
   • Full service airlines are appealing to a very different demographic
3. How Southwest wins
   • Fast plane turnarounds lead to high airplane and labor utilization
     • SW employees have 20% higher revenue per employee
     • Savings calculation from faster turnaround time
   • High market share by airport city pair
     • Economies of scale at individual airports allow for lower labor and overhead costs per passenger
4. Market share predicts hub and spoke profitability
   • But not Southwest or Jetblue profitability
   • Higher market share for hub and spoke airlines leads to higher profitability
5. Disadvantages of scale in an economic downturn
   • Higher hub and spoke market share lead to lower profits
6. Airline industry market cap
   • Southwest has 60% of the market value of all major airlines
7. Labor, Fuel, and Fleet Lead Airline expenses
   • Goal of a firm: Lower major expenses relative to competitors
   • Southwest has been able to do that and they lead in labor, fuel, and fleet lead costs
8. Why is it hard to imitate Southwest?
   • While each individual strategic choice made by southwest may not be impossible to imitate, imitating them all, and having the same reinforcing fit, to accomplish the same thing (in this case fast turnaround time) is very difficult.
9. Cost reduction at US auto plants
   • Cost reduction increases exponentially the more a plant imitates Toyota’s production system)
10. Why is Southwest’s strategy so hard to imitate?
    • Strategy is a bundle
    • Protected by barriers including:
      • Control over gates at secondary airports
      • High market share in city pair markets
      • Incumbents are constrained by their current structures.

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Southwest Airline’s External Analysis

1.0 Porter’s Five Forces Analysis

1.1 Threat of New Entrants (Low)

• 1.1.1 There are high barriers of entry in the US airline industry, due to high fixed costs such as purchasing aircrafts (C-49), limited control over operating costs such as labor costs (C-44) and federal regulations (C-46)
• 1.1.2 Major players are well established and have positive brand awareness, evident in their high market shares and customer satisfaction ratings (C-41) 
• 1.1.3 Steady growth and high performance of major players in terms of low prices, friendly service, speed and frequent departures make it difficult for a new entrant to imitate (C-52)
• 1.1.4 Established airlines have economies of scale as a result of initial investments and growth; increases in efficiency (the ability to spread fixed costs of production and nonproduction costs, and specialization of equipment and people) reduces costs (Strategic Management: Concepts and Cases, page 26)

1.2 Substitutes (Weak to Moderate)

1.2.1 Substitutes to the airline industry are substitute modes of transportation, such as driving, trains and buses (C-46) 

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Instructions and Purpose

The purpose of this document is to provide guidance in the preparation of your individual case and your group case. Each of these assignments will require an Appendix and a Report to the CEO.

Process

For the individual case assignment, there is a company case assigned and you apply the BUS 800 analysis tools and put your analysis into an Appendix. Your instructor grades the Appendix and makes suggestions for improvements. Then you resubmit the improved Appendix and make recommendations based on the revised Appendix in a Report to the CEO of the company. For the group case assignment, you do the analysis and produce an Appendix and a Report to the CEO in one document. You may only use information provided in the cases to construct the Appendix and Report to the CEO.

Submissions

You will submit the individual case assignment in two separate parts (an Appendix, which will be returned with comments, and then a revised Appendix and Report to the CEO in one document). You will submit the group case assignment consisting of the Report to the CEO and Appendix in one document. See Course Outline for exact dates. The group case appendix has more analysis tools than the group case, specifically those that are covered in the second half of the report.

Length of both assignments

The Appendix contains:

• An External Analysis and
• An Internal Analysis, including a maximum 4-page Financial Analysis

A maximum total of 14 single-spaced pages in 12 pt. font, with 1.25″ margins all around, in Word, which is the only acceptable format. While most of it is expected to be in point-form, certain sections such as summary statements or the Strategic Issue section may be formatted as paragraphs.

When constructing the Appendix, please use a numbering system to identify the sections and the related analysis for a particular strategic tool. For example, you might want to consider numbering the General Environment analysis section as 1.0, and creating subheadings for each of the dimensions: 1.1 for Complementary Products and Services, 1.2 for Technology Change, 1.3 for General Economic Conditions, etc. This way, if you were including data from Technology Change in your Report to the CEO, simply state (1.2) to reference it. Apply the same logic and referencing format for the entire Appendix.

The Report to the CEO (excluding the title page) should not exceed 1500 words, using a 12 pt. font. Anything written beyond the 1500 word limit will not be read.

Sources and referencing for each assignment

For the individual case and the group case, all data must come only from the case itself. Therefore, the citations for this will be from four possible sources in the following formats: from the case use (Case, page number), from the textbook use (Text, page number), from your instructor’s slides (Week x, slide number) and from your Appendix use (the numbered section, e.g. 1.2, as explained above).

Be sure to examine all relevant data from the case. Number crunching of relevant financial information (e.g. relevant ratio analysis) is expected and you should also consider other statistics (i.e. market or industry related, operational) provided in the case exhibits, not just those related to financial statements. Only include charts in your analysis that are supported by analyses of the data presented in those charts. The completion of each section or subsection of the Appendix depends on the information available in the case. If there is indeed a lack of information to apply a particular tool, your instructor will eliminate such sections from the grading rubric. ALL OBSERVATIONS, FACTORS, FEATURES AND DATA USED IN THE APPENDIX MUST BE SOURCED TO THE PAGE WHERE YOU FOUND THEM.

Title page

• Specify the case name, the industry your analysis will be based on (see pp. 19-21 of text), and include your names(s) and the date. Enter group members’ names in alphabetical order by last name.
• Failing to include the industry on your cover page will result in a 5% penalty on your assignment, which will be subtracted from your final mark.

Appendix Sections by Assignment

Individual	Group
1 Porter’s Five Forces 20 marks	1 Porter’s Five Forces 20 Marks
2 General Environment 20 marks	2 General Environment 20 Marks
	3 Innovation and the Industry Life Cycle 10 Marks
	4 Strategic Group Map 10 Marks
5 Financial Analysis 20 marks	5 Financial Analysis 20 marks
6 Competitive Advantage and VRIO 20 marks	6 Competitive Advantage and VRIO 20 marks
7 Current and Generic Strategy 10 marks	7 Current and Generic Strategy 10 marks
8 Strategic Issue 10 marks	8 Strategic Issue 10 marks

The Appendix should be organized into the following sections:

Company’s External Analysis

Your External Analysis should be completed from the perspective of the industry. Use point form. (See Chapter 2 in text)

1. Porter’s Five Forces analysis (Chapter 1, pp. 21-30)

Identify the power of each force as either Weak, Weak to Moderate, Moderate, Moderate to Strong, or Strong with supporting point form evidence. You must state conclusions about the effect of the four forces on rivalry and the overall attractiveness of the industry by identifying which force(s) contribute the most to making it more attractive and which force(s) make it less attractive.

• The General Environment (Chapter 2 pp. 31-36)

Your answer should include all 8 categories discussed in the chapter, and should explain which are relevant, which are not, and why. This is an analysis of the categories in the external environment that affect the entire industry, and not a list of how each category can affect specific internal aspects the case company.  These categories are produced by long term, structural elements in the external environment and are generally outside the control of firms in the industry. What are the strategic opportunities and/or threats to the profitability of the industry?

• Innovation and the Industry Life Cycle (Ch 10) Group Assignment only

Identify the stage of the industry with respect to the S Curve (pg. 190, Figure 10.5), and explain why you believe it is in this stage.  Has the industry been subject to the forces of innovation?  Explain why or why not.  If so, identify the type of innovation using categories identified on pg.179-180.

• Strategic Group Map (Chapter 11, pp 195-199) Group Assignment only

Create a strategic group map for the industry.  You must identify two dimensions that drive the relative positioning of all relevant firms to create the X and Y axis of the map. These factors are usually criteria that customers use to make purchase decisions. Characterize the importance of each competitor based on market share, or a similar, relevant metric. This is a total of three factors that are used to create the strategic group map. Identify any barriers that might create subgroups of competitors. Identify potential empty space opportunities for movement on either axis, using arrows, and the resulting changes in competitive structure in the industry.

Company’s Internal Analysis

• Financial Analysis (4 pages max) D2L Financial Template (16 marks for all calculations; 4 marks for noting the relevant strategic impacts and stating a general conclusion.)

Evaluate the current financial health of the company by presenting your findings of relevant financial information based on a subset of the following:

Ratios: 1) liquidity 2) profitability, 3) leverage, 4) efficiency, 5) operating, and 6) market value and investment ratios. (See the template)

Also, using trend analysis, and/or common size analysis, and/or longitudinal analysis based on CAGR (Compound Annual Growth Rate – see CAGR in Investopedia.com ) to either reinforce staying with the company’s status quo or to suggest changes in strategy in light of the results.

If applicable, also include competitive financial analysis and/or other relevant financial findings by investigating all quantitative information provided.

For each of your calculations or observations note whether a trend is up, down or flat (see template) and note the strategic impact of each finding.

A concluding summary statement should address the strategic implications arising from your analysis of the financial health of the company.

An excel template for your financial analysis will be provided by your instructor on D2L.  You will need to export your analysis into a Table and insert it into your report, which should be submitted as a word document.  Financial analysis submitted as a separate Excel file will not be graded.

• Competitive Advantage Pyramid & VRIO (Chapter 3)

Identify a minimum of 3 resources, 3 capabilities and 2 priorities of the case company.  Assess the potential of each to create sustainable competitive advantage based on the criteria found in Figure 3.2 and 3.3, and Tables 3.1 and 3.2).  Your assessment should identify dynamic capabilities and whether the firm can achieve sustainable competitive advantage with any of these factors. Be sure to identify the strategic implications.

• Current and Generic Strategy (Chapters 4 and 5)

Identify the Mission of the company. Is the firm pursuing a cost or differentiation strategy? Explain, what factors enables it to achieve a low cost or product differentiation strategy. How well is the company’s present strategy working, based on the data in the case?

• Strategic Issue

Identify one strategic issue you think merits front-burner managerial attention.

The issue should be framed as a question (How to…? What to do about …? and Whether to …?). Identify one strategic issue only. While there may be more issues that deserve managerial attention, the focus of your report will be based on supporting only the one issue you identified. Make sure your issue is not too general; for example, to improve profits is a generalized statement. The issue you identify must be actionable. Provide a minimum of 5 supporting and relevant observations based on various conclusions up to now from the External and Internal Analysis. Do not include any observations not discussed and analyzed previously (issues out of nowhere = 0). You should be able to identify all the relevant facts from your Appendix that led you to conclude that the issue you identified deserves managerial attention. Every fact that you think supports your main issue should be identified as they will ultimately become an outline for the analysis section of your report, referencing each of the facts identified from the Appendix.

Your answer should include a short and succinct paragraph identifying the key issue facing the company that has emerged from your work.

Changes to Appendix for the individual case only (5 marks)

You will receive feedback on your Appendix for the individual case and are expected to improve it for the final submission. Do this by using track changes or comments and different coloured text on the original submission file.

If you choose to change your issue after further consideration, you are allowed to refine and/or change the key issue. However, make sure that you identify the new issue to the reader by providing a new question and bulleted supporting points highlighted clearly at the end of your Revised Appendix.

The Grading Rubric for most sections of the Appendix

Below Expectations	Meets Expectations	Exceeds Expectations
0% – 59.9%	60% – 79.9%	80% – 100%
Does not identify available data from the case. Strategic Analysis of the tool is superficial and does not address the true implications of the data in the tool. Strategic Analysis is a summary of the information found in the tool and not an analysis of how the tool is affecting profitability. More than two impact statements or points are questionable or lacking. Unsatisfactory – varying degrees of unacceptable answers – too many missing points, superfluous points, inappropriate use of the tool, etc.	Is not in point form Identifies most of the data from the case. Provides a satisfactory analysis of the data used in the tool.  Strategic Analysis shows critical thinking and identifies more than superficial ways the information used in tool affects the profitability.   One or two impact statement(s) or point(s) or ranking is questionable or lacking.	Effectively and thoroughly identifies all available data from the case relevant to an analytical assessment. Provides a coherent and above average analysis of the data used in the tool showing critical thinking and logic to validate the affects the data has on profitability. Shows strong understanding and application of strategy analysis, concepts and techniques. Varying degrees of excellence in capturing, ranking (when practical), supporting and referencing ALL of the strong points, AND including ALL strategic impacts i.e. answering the question ‘So what?’.

Financial Analysis Grading Rubric

Below Expectations	Meets Expectations	Exceeds Expectations
0% – 59.9%	60% – 79.9%	80% – 100%
Utilizes only a little bit of the available financial information from the case and has limited financial analytical assessments (ratio analysis, income statement analysis, etc.). Draws weak or no conclusions regarding the overall financial health of the business based on the results of the analysis. The data, calculations, and financial analyses are not clearly presented.	Presents clean, error free data and utilizes most of the available financial information from the case.  Answers the nine questions using the correct tools. Draws an accurate conclusion regarding the overall financial health of the business based on the results of the analysis. Presents data, calculations and financial analyses both clearly and professionally.	Effectively and thoroughly identifies all available data from the case relevant to a financial analytical assessment. Provides a coherent analysis of the relevant data available in the case. Draws an accurate conclusion regarding the overall financial health of the business. Presents financial results in such a way as to allow insights to be drawn.

Issue Identification Grading Rubric

Below Expectations	Meets Expectations	Exceeds Expectations
0% – 59.9%	60% – 79.9%	80% – 100%
Does not identify key issue derived from the analysis of the external and internal environments. And/or does not articulate issue as a question.	Identifies key issue that is derived from the analysis of the external and internal environments. Issue is articulated as a question.	Identifies key issue that is evidently derived from the analysis of the external and internal environments. Issue is clearly articulated as a question

The Report to the CEO

• Individual assignment: 60 marks – This total includes 5 marks for a revised appendix submission.
• Group assignment: 55 marks – There is no revised appendix grade for this assignment.

The Report to CEO is your recommendation to top management. Be sure the Report to CEO is a useful decision-making tool, based on facts. It should persuade top management to act on the recommendation. 

The use of headings and sub-headings will help organize your discussion and focus the reader’s attention.  Headings should have a consistent style. The Report to the CEO should include the following sections and headings:

Report Body

Introduction—5 marks

• Introduce the industry, the company, its current strategy and the issue you identified at the end of the Appendix. Establish the scope of the Report. Don’t include a lot of background material. An introduction of no more than 150 words is sufficient.

Analysis– 15 marks

• This is the heart of the Report where the issue is analysed.
• Identify the issue more fully. Demonstrate its importance by examining the factors that contributed to the issue and how they relate to strategy.
• Include only relevant and significant background information that supports the issue identified.
• Be sure to support your analysis by referencing specific data from your Appendix. This can be accomplished by inserting the number from the appendix identifying the section referred to (your Appendix will use numbered headings, and the numbered heading will be sufficient for your reference). For example, if you reference something from section 2.1 of your Appendix, then you place (2.1) immediately after the fact you are referencing from the Appendix. Do not reference case material directly; if there is an important fact from the case you would like to include in your analysis, that fact should be included in your Appendix. If you want to include facts from the case in your analysis, they must be added to the Appendix.
• Using facts referenced from the Appendix, convince the reader that the issue you identified needs to be dealt with by management.

Alternatives– 15 marks

• Identify three alternatives for management’s consideration to address the issue identified.
• Include a brief discussion of each alternative, clearly identifying each alternative with sufficient detail that it is clearly specific to the case.
• Identify the pros and cons for each alternative. Refer to relevant material from the analysis and the Appendix (remember to reference the Appendix if you use facts from the Appendix), including the financial feasibility or implications for each alternative. Use point form for you Pro/Con analysis.
• Be critical in the Cons section of your discussion. Management needs to assess both the pros and the cons of the alternative.
• A clear and convincing rationale for your recommendation should emerge from your analysis of the alternatives.
• Don’t use trivial alternatives; each alternative should be strategic and executable.

Recommendation– 20 marks

Make a recommendation. Your recommendation must be actionable, realistic, and in line with company resources. It must be strategic and have a reasonable chance of leading the company to success. Please include the following:

• Summarize the support for your recommendation. Illustrate how your recommendation will address the issue identified as the major issue facing the company.
• Discuss how your selected strategy fits with the external/internal variables, especially with the financial resources.
• Discuss how your strategy will achieve a competitive advantage and enhanced profitability over time.
• Discuss why you did not pursue the other alternatives keeping in mind the pros and cons you identified for each.
• Discuss why the con you identified for your recommended alternative can be mitigated.      

Important suggestions for success

Only use data from the case. Case data reflect real life and can be imperfect at times. If there are insufficient data available, the section or subsection will be eliminated from the grading rubric. 

Failing to conduct the External Analysis consistently from the perspective of the industry you identified on your cover page will result in a poor grade.

Always cite your sources and make direct quotes of other people’s words (” “). Always follow Policy 60.  Turnitin similarity scores do not reliably indicate whether you have plagiarized.

In the group assignment, read, understand and help revise everyone’s contribution.

The Report to the CEO Grading Rubric

Section Title	Marks	Below Expectations	Meets Expectations	Exceeds Expectations
		0% – 59.9%	60% – 79.9%	80% – 100%
Title Page and Introduction	5	The industry, company and key issue are vaguely introduced. And/or the issue introduced does not match the issue from the appendix.	The industry, company and key issue are introduced. The issue introduced matches the issue from the appendix	The industry, company and key issue are clearly introduced. The scope of the report is established. The issue introduced matches the issue from the appendix.
Analysis	15	Does not support issue. Does not utilize sufficient, credible and relevant information from the appendix.  Information is not referenced and does not establish support for the issue. Mostly makes superficial statements.	Supports issue fully. Utilizes sufficient, credible and relevant information from the appendix.  Information is referenced and establishes support for the issue. Utilizing the facts from the appendix making deeper rather than superficial statements.	Convincingly supports issue fully. Utilizes sufficient, credible and only relevant information from the appendix.  Information is referenced and effectively establishes support for the issue. Utilizing the facts from the appendix making very deep statements and no superficial statements.
Alternatives	15	Identifies weak or infeasible alternatives with little relation to key issue. And/or does not have an understanding of the pros and cons of the alternatives.	Generates 3 feasible alternatives for resolving the key issue facing the organization. Has an understanding of the pros and cons of the alternatives.	Develops 3 insightful alternatives for resolving the key issue, offers specificity and originality. Has a complete understanding of the pros and cons of the alternatives.
Recommendation	20	Offers weak recommendations, which do not address key issue.	Provides well-reasoned recommendations that follow from the analysis and address the key issue.	Provides persuasive original, insightful and well-reasoned recommendations that clearly follow from the analysis and effectively address the key issue.

Written Communications Grading Rubric (up to 5% of the total grade may be deducted due to poor grammar)

Well Below Expectations	Below Expectations	Meets Expectations
Spelling and Grammar
Frequent spelling errors and poor grammar that distracts the reader.	No spelling errors and the grammar has been carefully proofread and edited.	No spelling errors and the grammar has been carefully proofread and edited.  Writing style and skills meet the expectations of the grader for a fourth year University Student.

Multiple Choice Questions – Southwest Airline

1. What is Southwest Airline’s strategy and what are the key success factors for Southwest airlines?
   a. Smaller airports; point to point routes
   b. Low prices
   c. High market share between city-pairs
   d. All of the above
   “Answer”: D
2. What are the key things it does to keep its costs lower than competitors?
   a. Lower labor costs
   b. Aircraft hours saved through faster turnaround
   c. Better financing on aircraft
   d. Reducing fuel usage
   “Answer”: B
3. What prevents larger competitors (e.g., American, Delta, United) from imitating Southwest’s approach?
   a. Economies of scale do not benefit airlines
   b. Southwest uses point to point model rather than a hub and spoke model
   c. Market share is positively correlated to operating profits in economic downturns
   d. Large airlines cannot sufficiently cut costs
   “Answer”: B
4. What prevents new entrants from successfully imitating Southwest’s approach?
   a. Barriers to entry in the airline industry are very high
   b. New entrants cannot obtain large start-up capital
   c. New entrants cannot gain similar market share in point to point captive routes
   d. The industry is saturated
   “Answer”: C
5. How should Southwest should grow, given that fact that it has largely saturated its short-haul markets with point-to-point service? Should it expand into long haul and add a longer range aircraft? Should it expand into international service? If it does, how will this differ from its current
   strategy/business model and how will this influence performance?
   a. Southwest should not expand to long haul flights because of capital investment costs
   b. Southwest should acquire planes with higher seating capacity
   c. Southwest should only expand to long haul on routes where they can remain the low-cost leader
   d. Southwest should adopt the hub and spoke model.
   “Answer”: C

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