Commercial Viability in the Business Model of Southwest Airlines

Rollin King ran a small charter service that ferried hunters around Texas until one day he sat down with his attorney, Herb Kelleher and discussed a new business plan. This partnership plan would be an airline that would offer short hauls, frequent flights and low prices that would fly between the state’s major urban hubs (Woo, 2014). Rollin and Herb came together forming an airline that would be different from the other airlines, called Air Southwest. Air Southwest Co. became incorporated in 1967. This airline was different because they would only fly within the state of Texas. Their flight path was Texas’s three main cities, Dallas, Houston and San Antonio. Competitors fought to shut them down for several years, but in 1971 the Texas Supreme Court decided in favor of Air Southwest (Woo, 2014). This same year the airline created the first profit-sharing plan in the airline industry within the United States and the company’s name changed to Southwest Airlines Co. (Southwest, 2018).

After deregulation in 1978, Southwest expanded their routes outside of Texas. They then became the largest domestic airliner in the number of passengers (Woo, 2014). In 1979 Southwest Air flies outside of Texas to New Orleans. In 1980 Southwest was the first in the industry to offer the frequent miles program. 1984 marked the 4th consecutive year Southwest ranked number one in customer service. In 1994, Southwest became the first major airline to offer ticketless travel. By 1998 they were the 5th largest US air carrier (History, AvStop). In 2013, Southwest added service outside of the 48 contiguous states with service to Puerto Rico. Southwest became an international airline in 2014 when it added flights to Nassau, Bahamas; Montego Bay, Jamaica; and Aruba (Southwest Corporate). In 2017 Southwest reached its 45th consecutive year of profitability. In 2018 Southwest is named on FORTUNE’s 2018 list of the World’s Most Admired Companies (Southwest Corporate).

Unique Business Model

The uniqueness of Southwest’s business model has propelled them to meet the best of the best and enter their 45th consecutive year of profitable operations. This proves that their business model has succeeded, even up to today. They chose to be different by using a point to point flight path versus the typical spoke model. The point to point flight path takes a customer from point A to point B. Whereas the spoke model could have a customer traveling from point A to point B and sometimes point C just to reach point D, their final destination. The point to point flight path gave them the ability to provide flights with shorter routes and travel times for customers. By having shorter routes they were able to take away the food service option and have more customer seating as they did not need to waste room for kitchen galleys. Also, not as many bathrooms were needed. By removing unnecessary options they were able to create more passenger seating. This flight model also allowed the company to offer a lower cost of travel versus other airlines. By keeping fares low they are able to attract more customers (Schmidt, 2015).

Southwest prides itself having a people-oriented business that operates with friendly and approachable employees and team members. Part of their business model is they hire employees who hold the company’s brand messaging in the highest regard and those who have a passion for helping customers. They have very strict policies on how an employee is hired (Investopedia, 2015). Southwest receives job applications every two seconds. In 2015, 287,422 resumes were reviewed, and only 6,582 people were hired. This is less than 2% of those who applied. Southwest does not hire based on skills alone. They go after three attributes, a warrior spirit, a servant’s heart and a fun-loving attitude. Applicants with these attributes, a desire to excel, persevere, passion, joy, treat everyone with respect and the ability to put others first will be hired by Southwest (Weber, 2015).

Largest Passenger Airline

Southwest was able to beat out the competition as they were able to offer something they did not, short commuter flights within the state of Texas. Because of this, the company has been able to grow and become one of the largest passenger airlines. This did not come easy, they had to be innovative and they had to fight their competition to become the best. Gary C. Kelly became the CEO to Southwest in 2004 after working his way up within the company. He was able to help continue to push Southwest to the top. In 2015 Southwest was named “Airline of the Year” by Air Transport World and named one of the Top 20 America’s Best Employers of 2016 by Forbes. In 2017 Southwest was ranked eighth on the Fortune magazine’s list of the most admired company in the world (Kelly).

In 2016 Southwest flew a total of 151.7 million passengers. Over seven million more than American. (Reed, 2017) Every day the airline makes more than 3,600 flights across 95 different destinations that now span various states in the United States and six other countries. They have been able to become the largest passenger airline due to their business model which helped it maintain lower airfares and short direct flights (Schmidt, 2015).

Services

Southwest offers many different services to their customers. Unlike other airlines, they offer a cancellation policy. This policy allows a customer to cancel a reservation up to 30 minutes prior to the departure of the flight. The funds paid are applied towards a future flight. Southwest also offers a rewards program that allows customers to accumulate points for purchasing flights that can be used towards future flights. They also have a credit card that when used to make purchases like gas, clothing, and groceries the customer is earning additional points that will also be used towards future flight discounts (Investopedia, 2015). Southwest also provided in-flight entertainment and WiFi access. They have a selection of free live TV channels and select on-demand TV episodes from popular series. Aircraft that is equipped with WiFi allows the passenger to purchase internet access for $8 per day per device (WiFi Access, 2018).

SWOT

A Southwest SWOT analysis shows their strengths, weaknesses, opportunities, and threats. Being in the top of their industry they have many strengths. To start they now have had their 45th consecutive year of profitable operations. Compared to other US airlines, Southwest has many more departures. They have very strict policies on how an employee is hired which means they only hire the best of the best, they do not settle. Southwest is well known for being a low-cost airline which translates to savings for the customer. They offer customers the option of canceling or changing their flight plans without charging them an extra fee. Southwest is well known for offering short direct trips. Their business model and upper management have made them one of the most profitable airlines to date.

Some may say Southwest has weaknesses just like any other company but are they all really weaknesses? Passengers have to pay an extra fee for WiFi. Cargo space is limited. Rewards program offers the same perks for short or long flights. They depend on one single producer and type of aircraft, the Boeing 737. Using one type of aircraft technically saves Southwest money by decreasing operating and maintenance costs. They only offer one type of seating, there is no business class or first class seating. This could actually be a strength as only having one class they save space and can increase the number of seats on each flight, which also helps keep fares low.

Southwest has opportunities to grow in the future. Air travel is predicted to increase over the next few decades. Up to this point Southwest only flew domestic flights but the International market is growing. Requests to fly to destinations further away are increasing. Consideration to applicants who may lack in their enthusiasm but make up for it with their large base of skills. New technology could be an opportunity to reduce cost and continue to grow.

A threat to Southwest would include fuel prices. If fuel prices increase drastically this will impact their fees as their expenses will increase. If the government were to step in with regulations this could increase their expenses. Customers being afraid to fly because of terrorist threats. Airline security costs have continued to increase. Another threat would be if the economy goes down and prices go up this will reduce the number of people who fly for leisure.

Business Model Comparison

Southwest’s competitors use a spoke model while Southwest uses a point to point model business model. By using the point to point model they are able to offer flights at a lower cost to consumers and shorter flight paths using the same 737 plane which helps keep expenses down. This is accomplished by streamlined training and maintenance programs. There are several areas where Southwest is different from other airlines. For example, Delta Airlines, for one Delta focuses on maintaining its customer base with the upper middle class and business travelers. In contrast with other airlines that are cutting costs in order to compete with low-cost airlines, Delta continues to use the spoke model business plan. While it is less profitable they are able to offer flights to less populated destinations.

In 2005 Delta had to file bankruptcy due to corporate mistakes, rising fuel costs, and high fixed costs. By being flexible and making changes they were able to come back and be an industry leader in 2015. They did this by purchasing used aircraft, vertical integration, low-unionization of labor and industry-leading customer service. Delta airlines also own their own fuel refinery which protects them from cost spikes (Delta Airlines, n.d.). Although Delta made a comeback Southwest has been profitable since day one due to their business model and keeping things simple.

Competitive Advantage

Southwest has proven that they are a competitor by differentiating themselves. I believe that Southwest has a long-term competitive advantage because they have maintained over 40 years of profitability. They accomplished this by having a different business model, providing low-cost flights, customer service through screened employees and always looking into the future. Their business model has allowed them to be flexible. When other airlines were laying off employees and cutting back on services Southwest did not have to make drastic changes as they were already offering low fares. Southwest has also gained loyalty from both their customers and employees. Southwest will continue to be profitable is they stick to their strategic plan and business model.

While competitors thought that the willingness to pay would decline the opposite happened with their “no-frills” attitude. The services such as meals, baggage transfer, and assigned seating are services that have been found to be unimportant by their passengers. Southwest has been superior in other areas such as superior timeliness of baggage handling, fewer situations resulting in complaints, frequency of departure, and employee attitude. All of this results in a net increase in willingness to pay (Hollowell, 1996).

Steps to Maintain Commercial Viability

In order to maintain their commercial viability Southwest needs to keep doing what they are doing. They already have a unique business model and strategic plan that is working. They have been profitable for a record number of years. Southwest has dominated the domestic airline market by being increasingly competitive in price and customer service. Recently Southwest has acquired AirTran and their international routes. This is an opportunity for them to expand and not depend only on the domestic market. Instead of Southwest jumping into the international market not knowing all of the risks and costs they are using the acquisition as a stepping stone. This will enable Southwest to maintain control of its current business plan and image.

Southwest’s unique business model and strategy has lead them to the top of the airline industry. They put the customer first by offering affordable flight costs, on-time performance, direct flights, easy check-in processes and friendly staff. By Southwest dominating the domestic market and stepping foot into the international market they have built a powerful position in the airline industry. As it stands they are not going anywhere, anytime soon, competitors beware, Southwest is here to stay.