Term Paper on "Southwest Airlines Company 2004"

Quoted Instructions for "Southwest Airlines Company 2004" Assignment:

You are to write a 20-page paper. Read the Case Study below. For Outside Sources, Use Internet Only.

**Your analysis should include all 12 of the strategic steps below. Additionally, be sure to conduct a financial analysis which allows you to present a future cash flow analysis to demonstrate that the firm can implement your recommendations.**

*****In writing a comprehensive written analysis. You must follow the steps outlined below, which correlate to the stages in the strategic management process.*****

12 Strategic Steps

Step 1: Identify the firm*****s existing vision, mission, objectives, and strategies.

Step 2: Develop vision and mission statements for the organization.

Step 3: Identify the organization*****s external opportunities and threats.

Step 4: Construct a competitive profile matrix (CPM)

Step 5: Construct an external factor evaluation (EFE) Matrix

Step 6: Identify the organization*****s internal strengths and weaknesses.

Step 7: Construct an internal factor evaluation (IFE) Matrix.

Step 8: Prepare a strengths-weaknesses-opportunities-threats (SWOT) Matrix, strategic position and action evaluation (SPACE) Matrix, Grand Strategy Matrix, and Internal-External (IE) Matrix. Give advantages and disadvantages of alternative strategies.

Step 9: Recommend specific strategies and long-term objectives. Show how much your recommendations will cost. Itemized these costs clearly for each projected year. Compare your recommendations to actual strategies planned by the Company.

Step 10: Specify how your recommendations can be implemented and what results you can expect. Prepare forecasted ratios and projected financial statements. Present a timetable or agenda for action.

Step 11: Recommend specific annual objectives and policies.

Step 12: Recommend procedures for strategy review and evaluation.

Southwest Airlines Co.-2004

Despite terrorist attacks, new security measures, dramatic increase in aviation insurance costs, industry downsizing, rising energy costs, and a severe production in consumer air travel, Southwest Airlines is still poised for success. For 12 the consecutive years 1991 through 2002, the Department of Transportation and travel consumer report listed Southwest Airlines and among the top five all major carriers for on-time performance, best baggage handling, and fewest customer complaints. In a highly competitive industry, all Kerry is continually strive to place first in any of these categories of the Department of Transportation report; Southwest is the only airline to ever hold the Triple Crown for its annual performance. In addition to this honor, Southwest is consistently among Fortune magazine*****s most admired companies second in 2002, and it is also one of the magazine*****s list for a 100 best companies to work for. In 2002, Southwest ranked first among airlines customer service that expansion, as reported in the Wall Street journal. In addition, Southwest ranked first in Money magazine feature for the 30 best stock since 1972.Southwest continues to operate profitably despite geopolitical tensions: in 2003, it had $442.0 million in net income on $5.8 billion in revenues (Southwest annual report, 2003).in an industry that historically has been awash in red, where airlines continually go in and out a bankruptcy or fail, Southwest has an enviable record of holder 30 consecutive years of operation at a profit. But, considering the tremendous strain in current economical and political environment, can this record of success continue? In their best-selling book Nuts, Kevin and Jackie Freiburg point to a company with people who are committed to working hard and having fun and who avoid following industry trends. The Freiburg note that Southwest, based in Dallas, Texas, is a company that likes to keep prices at rock bottom; believes the customer comes second; runs recruiting ads that says, work at a place wearing pants is optional; paints its $30 million assets to look like killer whales and state flags; avoids trendy management programs; avoids formal, documented strategic planning; spend more time at planning parties than writing policy; and once settle a legal dispute by arm wrestling. This strategy has always worked, but will he continue to work?

History and Growth of Southwest Airlines

Rollin King and Herb Kelleher completed the necessary paperwork to create airline Southwest Co. later named Southwest airlines. The two filed for approval with the asked FAA; and on February 20, 1968, the Texas Aeronautical commission approved their plans to fly between the three cities. In the 1980s and 1990s, Southwest continued to expand, and by 1993, it was serving 34 cities in 15 states. Southwest Oakley, but methodically, moved Southwestern states into California, the Midwest, and the Northwest. It added new destinations in Florida and on the East Coast. With its low prices and no-frills approach, it quickly dominated the market it entered. In some markets, southwest entered, competitors soon withdrew allowing the airline to expand even faster than they projected. For example, Southwest entered the California market in 1990; it quickly became the second largest player, with over 20% of the interstate market. Several competitors soon abandoned Los Angeles-San Francisco route because they were unable to match Southwest $59 one-way fare. Before Southwest entered this market, fares had in as high as $186 one-way. California offers a good example of the real dilemma facing competing carriers, which to refer to Southwest as a 500 pound cockroach that was to be stamp out. While airfares were dropping, passenger traffic increased dramatically. Competitors, such as American Airlines and US Airways, were losing money on several key routes segments, even though they cut service drastically. In the late 1994 United began to fight back by launching a low-cost high frequency shuttle service on the West Coast. But it found that even a shuttle could not win against Southwest in a head-to-head battle. So United airlines repositioned its shuttle away from Southwest routes and even abandoned some routes altogether. According to the Department of Transportation, eight airlines surrendered West Coast routes to Southwest; at the same time, one-way fares fell by over 30% to an average of $60, and traffic increased by almost 60%. The major problem for the larger airlines was that many of these was cost rows were critical for feeding traffic into their highly profitable transcontinental in transpacific routes, and Southwest was cutting into that market. Southwest is currently before the larger domestic area in terms of customer boarded. Airline has transformed itself from a regional carrier operating out a Dallas, Texas into a truly national carrier. At year end 2002, the airlines surged 58 cities in 30 states and operated more than 2800 flights a day with its fleet of 375 Boeing 737s. In 2002, Southwest flew 45.4 billion revenue passenger miles compared with 44.5 alien revenue passenger miles in 2001. The most remarkable in its 30th year in a row of profitable operations, with total operating revenues in 2002 of $5.52 billion a decrease of 0.6% over 2001. Operating income in 2002 fell by 33.9% into the Houston one. Net income fell by 2.9% from $511.1 million in 2001 to $241.0 million in 2002 (Southwest annual report, 2003). Nonetheless, Southwest was the only profitable major US airline in 2002.

Management

Lamar Muse led Southwest its climb to profitability; but, in a dispute the board, he was ousted in 1978. With Muse out, Kelleher moved into the top position, and ran the airline until June 19, 2001. On that date, Kelleher was succeeded as CEO by Southwest vice president and general counsel, James F. Parker, 54. Col***** C. Barrett, 56, who started her collaboration with Mr. Kelleher 34 years earlier as his legal secretary, would-be president and chief operating officer. Mr. Kelleher is slated to remain as chairman for three years. Mr. Parker has been the airlines taught labor negotiator, making him well known to the Company employees, and, according to Mr. Kelleher, he has had a say in every important decision for long long time. Ms. Barrett, the unsung hero of Southwest, has been the keeper and crusader of Southwest*****s culture, and she has success indoctrinated thousands of new workers in southwest*****s ways. Parker*****s plan as CEO is to stay with the cheap southwest below cost, low fare, no-frills airline it has always been. There will be no change in our core philosophy and our base business model, he says. It is a model he helped shape as general counsel for 15 years. Southwest Management team drives home the feeling that all of XP or part of one big family. Southwest culture committee, formerly headed by Barrett, has unique ways to preserve the Company under dog back ground and can do *****. She constantly reinforces the message that employees should be treated like customers, and continually celebrates workers who go above and beyond the call of duty. Barrett also regularly visited each of the company stations to reiterate the airlines history and to motivate employees. As keeper of the company culture, Barrett commemorates all employees are a special events with cards signed Herb and Col*****. Employees know the culture and expect others to live up to it. Donna Conover, another longtime Southwest employee who also understands and supports the company culture, will succeed Barrett as president and COO.

Strategy

Southwest operation under Kelleher has a number of characteristics that seem to contribute to its success. It has always been able to quickly seize strategic opportunity whenever one arises. Other key factors are at its conservative growth pattern, its cost containment policy, and the commitment of its employees. Kelleher always resisted a chance to expand too rapidly. His philosophy was to expand only when there were resources available to go into a new location with 10 to 12 flights per day not just one or two. For years, he also resisted the temptation to being transcontinental operations or to get into a head-to-head battle with major carriers are long-distance routes. But even with a conservator approach, Southwest expanded any vigorous pace. Its debt has remained the lowest among US carriers, and, with an A-rating, Southwest has the highest Standard & Poor*****s credit rating in the industry. Southwest has made its mark by concentrating on flying large numbers of passengers on high frequency, short hops (usually one hour a less) at bargain fares. It has avoided the hub and spoke operations of its larger rivals, taking its passengers directly from city to city. Southwest also tends to avoid the more congested major airports in favor of smaller satellite fields. Kelleher revealed that niche strategy of Southwest when he know and where rents other airlines a hub and spoke systems in which passengers on a shuttle to a few major hubs from which they are transferred to other planes going to their destination, we wound up with a unique market niche: we wound up with a market segment that is peculiarly ours, and everything about the airline has been at that to serving the market segment in the most efficient and economical way possible. However, the strategy may be changing. Southwest has begun to introduce longer, nonstop trips on such routes as Baltimore, Maryland to Las Vegas, Nevada (2099 miles), and Austin, Texas to Los Angeles (1234 miles). Even one-stop trips are being added through central cities such as Nashville and Kansas City coast-to-coast travel. The prospect of Southwest going long haul on a grand scale is what the genie rivals always hoped would not come out of the bottle, says analyst Kevin C. Murphy of the Morgan Stanley Dean Witter. He believes Southwest will continue its expansion and that it will really rewrite the economic of the airline industry. This shifting strategy is downplayed by the fact that Southwest still flies about 80% of its flights on routes that are shorter than 750 miles. In 2002, the average flight was 548 miles and had duration of 1.5 hours. We are built for the short-haul markets, and we know that, says chief financial officer Gary C. Kelly. Kelleher explains the jump into routes that are 1000 plus miles as a way to deal with the changes in the 1997 federal ticket tax, which was pushed by the bigger carriers. The incorporation of that new tax replaced a percentage tax with a tax that included a flat, per segment fee, which hits the low-fare carriers harder.

Competitors believe southwest would have moved strongly into the long-haul flights market despite the altered tax requirements. They have dug all a shallow hole, says Rona J. Dutta, senior vice president for planning at United Airline Inc. He also replied that other low-fare units are increasing the competition and South West core markets. As all other major airlines have performed poorly since the 2001 terrorist attacks, many are expanding for developing a low fare program in an effort to increase profit. Short-haul lines such as JetBlue, ***** Airlines, ATA Airlines, AirTran Airlines, SkyWest Airlines and Frontier Airlines, as well as Delta Song and Continental*****s JetExpress, maybe affecting Southwest probability, but with its lower cost and impressive balance sheet, Southwest still prevails. Nonetheless, some low-fare lines have ended operations because they were unsuccessful in competing with existing low-fare lines. These include US Airways MetroJet, shuttle by United, Vanguard, and national airlines. Southwest continues to be the lowest cost airline in its markets. Even when trying to match Southwest cut rate fares, the larger carriers could not do so without incurring substantial losses. Southwest continues to operate with the lowest cost per available seat mile (the number of seats multiplied by a distance flown) among all major airlines, what an average of 15 to 25% below its rivals. One of the major factors in this enviable record is that all of its planes used are of a single type Boeing 737s which dramatically lower the Company cost of training, maintenance, and inventory. Because of Southwest crews know the 737 inside and out, they could substitute personnel rapidly from one flight to another in an emergency. In addition, Southwest recognized that planes only earn you money while they are in the air, so the company worked hard to achieve a faster turnaround time on the ground. Most airlines take up to one hour to unload passengers, clean and service the plane, and board new passengers. Southwest has a turnaround time for most flights of 20 minutes or less. Thorough knowledge of 737has helped in this achievement. Southwest has also caught cost in the customer service area as well. Because of its flights are usually one hour or less, it does not offer meals-only peanuts and drinks. Boarding passes are reusable plastic cards, and boarding time it saves since the airlines has no assigned seating. Airline does not subscribe to any centralized reservation service. It will not even transfer baggage to other carriers: that is the passenger*****s responsibility. Even with this frugality, passengers do not seem to object, since the price is right. The ability to turn planes around rapidly, surprisingly, has not jeopardized by the events after 9/11, but this did not happen without incurring added expenses. Initially, new government mandated security procedures did not cause delays and longer check-in times. Since then Southwest has added new automated systems and technologies that have streamlined the check-in process. This includes computer-generated baggage tag and boarding passes and self-service rapid check-in kiosks. Because of these new additions, Southwest reports that check-in times are almost back to normal. Southwest has achieved team ***** that others can only envy.one of the reasons for this team ***** is that the company truly believes that employees come first, not customers. Southwest is known for providing its employees with tremendous amount of information that will enable them to better understand the company, its mission, its customers, and its competition. Southwest believes that information is power. It is a resource that enables employees to do the job better. Armed with this knowledge, they are able to serve the customer better, and customers will deal with Southwest rarely get the runaround. Even though unionized, Southwest has been able to negotiate flexible work rules that enable it to meet the rapid turnaround schedules. It is not unusual for pilots to help flight attendants cleaned airplanes or to help the ground crew the baggage. Consequently, employee productivity is very high, and the airline is able to maintain a lean staff. In good times, Kelleher resisted the temptation to over-higher, and so avoided lay offs during lean times.

Southwest has only laid off three people in 25 years and it immediately hired them back. The airline industry as a whole has furloughed approximately 100,000 employees as a result of the 2001 attacks. Not only did Southwest lay off no one, it also hired employees in 2002 and increase overall salaries, wages, and benefits. This was made possible by reductions in other areas: new plane deliveries were delayed, renovations to the company headquarters was scrapped, but layoffs were not considered. Said CEO Parker, we are willing to suffer some damage, even to our stock price, to protect the jobs of our people. This employee we change in policy has contributed to employees feeling of security and a fierce sense of loyalty. The people of Southwest see themselves as crusaders whose mission is to give ordinary people the opportunity to fly. Maximizing profitability is the major goal at Southwest. This leads to a drive to keep costs low and quality high. The airlines ideal service consists of state, frequent, low-cost flights that get passengers to the destination one-time and often closer to the destination and the major airlines do, because its competitors use larger airports farther from the cities. Southwest uses Dallas*****s Love Field, Houston Hobby Airport, and Chicago*****s Midway, which are closer to their respective downtown areas, are less congested, and are, therefore, more convenient for the business traveler. This also helps Southwest*****s on-time performance. In its marketing approach, Southwest always tries to set itself apart from the rest of industry. It also plays up its fun-loving, rebel reputation. In the early years, when the big airlines were trying to run southwest out of business by undercutting its low fares, Southwest made its customers an unprecedented offer. In response to a Braniff ad offering $13 fare to fly between Houston and Dallas, Southwest place an ad that read, nobody*****s going to shoot Southwest Airlines out of the sky for a lousy $13. It did offer to passengers the opportunity to purchase a ticket from Southwest the same price, which was half the normal fare or to buy a full fare ticket for $26 and received a bottle of premium whiskey along with it. The response was unprecedented. Southwest planes were full and, for short time, Southwest was one of the top liquor distributors in the state of Texas. Southwest ads always try to convince the customer that what the airline offers them is of real value to them. It also believes it is in the business of making flying fun. With its ads, the company wants customers to know that when they fly Southwest Bay will have an experience unlike any other. It promised a safe, reliable, frequent, low-cost air transportation that is topped off with outstanding service. By keeping its promises, Southwest has earned extremely high credibility in every market it serves.

e-Business

Southwest has been aggressively marketing its services on the Internet, and it was the first airline to establish a home page on the Web. When Fortune magazine asked experts which businesses have web sites that work, the answer to got was not many. However, Southwest was one of the Jim side as a business doing it right. In the Internet travel rays, many observers think the West has lost the battle to a subsidiary of American Airlines, Travelocity. Yet while Americans have been getting most of the attention, Southwest has been getting the business. According to a Nielsen/Net Ratings***** survey 13.8% of the people visited Southwest site booked a flight. The company looked to book ratio is twice that of Travelocity and higher than that of any traditional retailer on the Web. Southwest, it seems as being a success in turning browsers into buyers. In March 2002 Internet week reported that Southwest experienced Internet traffic gain 16%.Southwest reports that approximately 50% of its passenger revenue is generated by online bookings. It costs per booking via Internet is about one dollar; in comparison, the cost per booking via a travel agent is about $10. Southwest web site has also been named the top ranking web site customer satisfaction among major travel sites, according to research conducted Harris interactive. The Southwest side scored a rating of 8.62 out of 10, with its web site attracting 4 million unique visitors during March 2001. In the June 11, 2001, issue of Internet week, Southwest web site was named as one of the top 100 ebusinesses in United States, as determined by the publications survey.

Competitors

Since September 11, 2001, competition for Southwest Airlines has yet to our major airline to low-fare airlines. This happened mainly because major airlines incurred losses and 2002. Before September 11, 2001, United Airlines, the second largest airlines with over 100,000 employees, was one of Southwest most formidable competitors. Since then, the company has downsized to approximately 85,000 employees. Because of financial losses, United airlines filed for bankruptcy in December 2002. Since United shuttle service ceased operation shortly after September 11, 2001, direct competition with Southwest Airlines has diminished. Following September 11, 2001, Delta Airlines, the third-largest US carrier, cut 21% of its workforce and in 2003 was operating with approximately 70 5000 employees. Delta Airlines flies to about 225 US and foreign locations, and remained particularly strong throughout much of the southern tier of the United States, where two of its major hubs Atlanta and Dallas/Fort Worth are located. In the summer of 2003 Delta Air Lines replaced its low-fare regional carrier service Delta express with Song, in an effort to better compete with low-fare airlines like Southwest. Delta airlines have also acquired a minority stake in three regional airlines which can feed passengers into its several hubs, and has established an alliance with Continental Airlines and Northwest Airlines. A third past competitor, American West Airlines, is faring better than both Delta Airlines and United airlines. In July 2002, American West Airlines recalled virtually all employees furloughed after the September 11, 2001, attacks. Despite net income losses of $388 million in 2002, American West airlines expects to restructure its finances with the of federal loan guarantees totaling $380 million. It has about 1100 employees and serves 144 cities in United States with foreign locations in Mexico and Canada. American West Airlines has a strong position in its hubs, Phoenix and Las Vegas. These locations put it into direct competition with Southwest. With Continental airlines and Mesa airlines, which have small stakes in American West Airlines, America West Airlines has formed alliances which give it access to another 35 destinations.

The low-fare carriers are doing better because they do not rely on high business fares and do not of frill the major carriers offers. They tend to gravitate toward secondary airports where less congestion and lower fees keep cost down. Many also fly point-to-point without stops, and in general have relied on highly efficient e-business. Most importantly, low-fare airlines have succeeded in appealing to the customer in ways that major airlines never could by using creative market strategies in promoting individualism. As a result, customers are intrigued by this new mode of transportation after trying it, are convinced that it is a new way to travel. In 1994, revenues earned by low-fare carriers represented 5% of the $76 billion US air travel market. By 2003, their share was over 20%, according to CFO magazine, up from just 10% in 2000. Experts predict that low-fare airlines will have 25 to 35% of market share by the end of 2004, an increase that may restructure the airline industry forever. JetBlue airline is one of Southwest newest and possibly most noteworthy competitors. In 2002, JetBlue was the only airline to report profits, with $55million on revenues of $635 million. In 2003, despite geopolitical tensions, JetBlue was hiring an average of six new employees a day to accommodate growth. JetBlue founder and CEO is ***** Neeleman, who was employed in the inner circle of Southwest for over a year. Thus it is no surprise that JetBlue is structured similarly to Southwest: a low-cost, low-fare airlines with high employee productivity, a laid-back attitude, and a single aircraft model. Perhaps these are the reasons that JetBlue continues to grow and earn profits. It may also explain why Southwest CFO Gary Kelly stated, we have got to be prepared for intense competition. In fact, Southwest gave model JetBlue planes to its executives with a note: know your enemy. Currently, the two airlines do not compete in many of the same markets, but being the only two airlines experiencing significant growth, they are certainly affect each other*****s potential growth. All of the competitors have calm into head-to-head competition with Southwest on several occasions. Southwest always walk with competition and firmly believes it can come out ahead in any of those situations. Kelleher when asked about his thoughts on facing a competitor such United shuttle head on, stated, I think it*****s good to have some real competitive activity to get your people stirred up and renews their vigor and their energy in their desire to win.

Long-haul success for Southwest will put pressure on the profits realized by its bigger competitors. A cost advantage of Southwest includes a rat 20 minute gate turnarounds; an efficient all-Boeing 737 fleet, including new 737*****“700s that can fly cross-country nonstop; and a more productive workforce. Even if longer flights increase the cost, Southwest still realizes a significant competitive advantage. Roberts, Roach& Associates Inc., an airline consultant in Hayward California says that Southwest has at least 59% cost advantage over a bigger rivals at flights of 500 miles, as well as a 35% lead for flights at 1500 miles. It is a huge threat, says a rival airline executive. Already, a quarterly to an estimate by analyst Samuel C. Buttrick from PaineWebber Inc., nonstop flights longer than 1000 miles account for more than 16% of Southwest capacity. Southwest is not the only low-fare airline that has expanded long-haul services in recent years. According to report from the Department of Transportation, AirTran Airways, ATA Airways, Frontier airlines, JetBlue Airways, and ***** Airlines, along with Southwest, had expanded long-haul services by 26% between 2000 and 2002. Will longer flights or these airlines also mean a lost in profit due to increased cost, or could low-fare airline win an even larger portion of the market to reign in the American skies? For now, consideration serious expansion had to put on hold as many airlines are still trying to recover from losses over the past two years. Southwest will continue its strategy to capitalize conservatively and increased growth steadily. It is capitalizing on the schedule cutbacks other airlines have made, but as a result, the door is also open for other low-fare carriers to profit.

The Future

Today, Southwest provide services to only eight cities, so there are tremendous opportunities for expansion. The problem: competitors have learned from Southwest Airlines and its unique management strategies, and they are using these tactics as well as unique ones to win over consumers. Southwest has always utilized conservative growth tactics, but this may hurt it if new competitors opt for faster growth strategies. Over 100 cities have asked Southwest Airlines to begin service in their communities because of positive impact the Company has had when it began operations in a new location. But if Southwest does not do it, another low-fare airline will.