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Nashmin Hojatti, Luana Hopkins, Kyle Mann, Jackie Phan, Ben Chin, Anika Milkolay, Gaurav Dhamja, Angelica Opetaia, Issac Ojikutu, Abraham Arias

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TABLE OF CONTENTS

CURRENT SITUATION ............................................................................................................ PG #3

CORPORATE GOVERNANCE ................................................................................................ PG #19

EXTERNAL ENVIRONMENT: OPPORTUNITIES AND THREATS (SWOT) ............................... PG #26

INTERNAL ENVIRONMENT: STRENGHTS AND WEAKNESSES (SWOT) ................................. PG#30

ANALYSIS OF STRATEGIC FACTOR ANALYSIS (SWOT) ....................................................... PG #41

STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY ............................................ PG #50

IMPLEMENATION ............................................................................................................... PG #72

EVALUATION AND CONTROL .............................................................................................. PG #99

APPENDIX (A-Z) ............................................................................................................... PG #103

WORK CITED .................................................................................................................... PG #119

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I. CURRENT SITUATION

1.1 – HISTORY

From Air Southwest to Southwest

In 2011 Southwest Airlines reached its 39th consecutive year of profitability. Founded

by entrepreneur Rollin King who invested in a small air-taxi service, Wild Goose Flying

Service, in 1964 which only flew to Texas cities San Antonio and smaller South Texas

cities such as Del Rio and Laredo. King teamed up with Herb Kelleher and

reincorporated Wild Goose Flying Service in 1967 as Air Southwest and the company

had one objective: “If you get your passengers

to their destinations, at the lowest possible

fares, and make darn sure they have a good

time doing it, people will fly our airline.”

(Southwest.com) Focusing only on three major

cities Dallas, Houston and San Antonio, Air

Southwest differentiated themselves with a “no

frills” approach to flying that they still maintain

today.

Due to intense market competition, Texas

Braniff and Texas International filed lawsuits

against Air Southwest for offering the same

linking flights. In 1970 the Supreme Court ruled

in favor of Air Southwest, upholding their right

to fly in Texas. This lawsuit marked the beginning of the deregulation of the airline

industry. In 1971 Air Southwest became Southwest Airlines establishing their

corporate headquarters in Dallas, TX. The first flight under the new name was out of

Dallas Love Field, Dallas, TX and Southwest has been in LUV ever since.

Revolutionizing the Industry

The first airlines were created to cater to those who could afford to fly. Known as a

visionary, co-founder Herb Kelleher sought to streamline Southwest; rather than

offering top line to top paying customers; Southwest would offer no frills inexpensive

flights. The company has a fleet comprised of only 737 Boeings aircraft and colors of the

aircraft are red, orange, and canyon blue. Kelleher’s visions took him as far as

appearing in Southwest TV commercials in 1992, and bringing a lot of attention to the

company.

“If you get your

passengers to their

destinations, at the

lowest possible fares,

and make darn sure they

have a good time doing

it, people will fly our

airline." – Herb Kelleher

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Southwest’s decision to stay at Dallas Love

Field while other major airlines relocated to

Dallas/Fort Worth International Airport (DFW)

proved to be a good strategic move for the

company. Staying at Dallas Love Field initiated

a huge opportunity because it created a

monopoly at Love Field Airport. The company

had adopted the “love campaign” that served as

a signature for the airline by serving love

potions (drinks) along with love bites (peanuts) to passengers on all their flights (2012,

MacAyeal). Today, Southwest Airlines has saved passengers millions of dollars by

providing convenience, offering flight promotions, no seat reservations, and free

baggage along with low-airfare; serving over 72 cities and more than 37 States.

1.2 - CURRENT PERFORMANCE

Annual Financials for Southwest Airlines Co. – appendix #1

1.2.1 - INDUSTRY COMPARISON

The airline industry was forever changed after the terrorist attacks of 9/11. What once

looked like a surefire profit and one of the safest industries to bank on became an

industry on the verge of collapse. Luckily, the airline industry as a whole managed to

survive the attacks, but not without some serious consequences. Since 2001, the

industry has lost nearly $55 billion and many carriers have cut the number of seats on

flights or stopped flying to certain destinations. The companies attempted to make up

for this lost revenue by increasing the number of fees charged to travelers.

Another major change in the industry in recent years has been the dominance of low

cost carriers. Airlines such as Southwest and Jet Blue saw a significant increase in the

number of travelers who began to choose them over the more high profile major

carriers. In order to avoid going under altogether, some of the giants in the industry had

no choice but to merge in order to remain profitable. The largest such merger occurred

in 2010 when Continental Airlines and United Airlines merged to form United

Continental Holdings.

More than a decade after the attacks, the industry is finally starting to show signs of

reverting to what it once was. In 2011, 720.4 million people traveled on airplanes in the

United States. That number is actually a slight bit higher than the 719.1 million from

2000. However, while an increase in traffic will certainly help the industry, they now

have to deal with other issues. Rising oil prices have hit them just as hard, if not harder,

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than the rest of the world. In 2001, airlines reported that oil costs accounted for 13% of

their total costs. By 2011, this number had nearly tripled to 30%.

Luckily, despite all the hardships that the industry has had to face in recent years, air

travel does not look like it is going anywhere any time soon. The increasing costs may

force more companies to merge in order to remain in business, but ultimately they will

survive.

1.2.2 - RATIO ANALYSIS & COMPETITOR COMPARISON

Gross Margin

Gross margin is commonly defined as the difference between revenue and cost. It is

generally calculated by subtracting the cost of goods sold from the price of an item.

Gross margin is usually expressed as a percentage value. A low percentage indicates

that the company has low markup on their products or services. It is important to note

that this percentage does not account for some costs, such as taxes and overhead costs

that may ultimately cause them to lose money. Over the past 5 years, the gross profit

margin for Southwest Airlines has wavered between 18 to 27 percent. Considering that

the average gross margin for the airlines industry is 5 percent, Southwest is doing

significantly better than their competitors.

Earnings Before Interest, Tax, & Depreciation (EBITD)

As the name indicates, EBITD is calculated by subtracting expenses from revenues

before accounting for interest, tax, or depreciation. This number is normally used by

bankers, venture capitalists, and investors to gauge future cash flows of a company. It i s

the most objective way for them to use current and past data to predict how the

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company may fare in the future. In 2011, Southwest had an EBITD of $1.22 billion. In

comparison to its competitors, it fell in toward the lower half of the spectrum

Operating Margin

Operating margin is a ratio that is used to measure a company’s pricing strategy and

operating efficiency. It is calculated by dividing operating income by net sales. This

number indicates how much revenue the company has left over after paying their

variable costs of production but before paying their fixed costs. Analysts use this

number to determine the quality of a company. A higher number indicates that the

company is earning more per dollar of sale. Southwest’s operating margin ratio in 2011

was 4.53%. In the airline industry, this number is right around the average with the

exception of a few outliers.

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Pre-Tax Margin

Pre-tax margin is a company’s earnings before tax as a percentage of total sales or

revenues. This number gives an idea of how profitable the company is, so the higher it is,

the better. Analysts study the trends in pre-tax margin to provide an indication of

whether the company is headed toward more or less profitability in the future. In 2011,

Southwest delivered a pre-tax margin of 3%, which, although close to that of

Southwest’s competitors, was the lowest of the group.

Net Profit Margin

Calculated by either dividing net income by revenue or net profits by sales, this number

gives the amount of money a company keeps of revenue earnings. A higher number in

this category indicates that the company has good controls over their costs. This is most

useful when trying to compare companies in similar industries. Over the past 5 years,

Southwest has had a net profit margin between -4 and 11 percent. Southwest has been

right in line with the industry average of about 7%. However, after a poor downward

trend in 2011, the company looks to be turning things around in 2012.

1.3 – MISSION

The Mission of Southwest Airlines

The mission of Southwest Airlines is dedication to the highest quality of Customer Service

delivered with a sense of warmth, friendliness, individual pride, and Company Spirit.

To Our Employees

We are committed to provide our Employees a stable work environment with equal

opportunity for learning and personal growth. Creativity and innovation are encouraged

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for improving the effectiveness of Southwest Airlines. Above all, Employees will be

provided the same concern, respect, and caring attitude within the organization that they

are expected to share externally with every Southwest Customer. January 1988 (1)

Southwest has no doubt an original culture that surrounds their transportation

business. Whether it is crew members that will spontaneously break out in songs or the

fact that Southwest Airlines does not have assigned seats and their seat arrangement

are on first come first serve basis indicates that this company does things with flair.

The mission statement of Southwest Airlines does not linger on the flight itself or the

issue of transporting people from point a to point b. For Southwest Airlines it is about

the experience their customers will undoubtedly encounter while flying with the airline;

may it be because of the staff, the atmosphere and spirit that they want the customer to

feel while flying with their airline.

Interestingly enough Southwest Airline is known to be a discount airline that offers

affordable flights and are attractive to many customers for that reason alone. However,

not any of these factors appear in their mission statement. There are customers who

have come to love and embrace Southwest’s culture and fly the airline simply because

they feel at home and well taken care of. These are customers who value Southwest’s

mission statement: “…to deliver the highest quality of customer service with a sense of

warmth, friendliness, pride, and company spirit.”

Repeat customers of Southwest Airline feel this atmosphere and spirit, which portrays

effective management. A team that created a mission statement that shines through

every employee, every flight and every customer experience. Simply having a mission

statement or living by it are two different things, but Southwest Airlines does live and

breathe their mission statement and customer do feel the sincerity and dedication

Southwest Airline puts on the line every day.

Their mission statement also includes a dedication to their employees, which

contributes to the foundation of the company. For Southwest Airlines: “happy

employees = happy customers.” This is one of the reasons why Southwest Airlines offers

“free flights for employees, spouses, eligible dependent children, and parents (…).

Committed/Registered Partners also enjoy travel privileges on Southwest. Space-

available travel is unlimited and starts on day one of employment.” (2) In addition

employees can earn buddy passes to take people that are not mentioned above based on

hours worked.

Here are some recognition’s the company has received over the past years, reflecting

the success of Southwest Airlines living their mission statement:

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Southwest Airlines

was named JD Power 2012 Customer Service Champion for performance in

People, Presentation, Price, Process, and Product. (3)

received the top ranking by Forbes for The Brands American Women and Men

Desire Most. (3)

is the top rated airline in Bloomberg Business Week’s list of “Fifty Most Popular

Employers for College Students. (3)

is recognized by Chief Executive Magazine as one of the 40 Best Companies for

Leaders based on outstanding Company culture and internal professional

development.(3)

The experience of the customers is the top priority to Southwest and one of their major

strategies to affirm themselves as the top short distance, domestic flight carrier. Their

mission statement is clear on that and the actions and behaviors of the staff shows that

it is not merely a marketing tool, but a way of life at Southwest Airlines.

1.4 – OBJECTIVES

Their objectives can be explained by the founder of Southwest in one simple notion. In

1966, Herb Kelleher said “ If you get your passengers to their destinations when they

want to get there, on time, at the lowest possible fares, and make darn sure they have a

good time doing it, people will fly your airline’’(southwest.com). The impact of this

objective has been with Southwest since the beginning and will continue to be their

main part of focus. In his statement, he is actually saying two things; the first one is

offering the lowest prices and the second is to give excellent customer satisfaction.

Kelleher believes by doing this, they will reach their objective to be the number one

airline of choice.

How Southwest Airlines achieves these objectives is by following the Golden Rule. The

golden rule to Southwest is to “Doing the right thing.” They don’t mean to be essen tially

ethical, or moral. What they mean to say is by being strategic. By making this

commitment, their various objectives achieve perfect symmetry and fulfill their

ultimate mission of providing the highest quality of customer service.

Our Planet

Southwest takes on the responsibility of Environmental Stewardship as it works to

manage Greenhouse Gas Emissions both in the air and on the ground. Southwest has

initiated programs like efficient flight profile speeds, aircraft specific performance

monitoring, and installation of winglets on their aircrafts. On the ground, Southwest

has a comprehensive engine wash program, gate services, and a Ground Support

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Equipment electrification program. On top of that, Southwest employees are

encouraged to minimize energy use, save water, and recycle.

Our Communities

Southwest Airlines considers itself as a neighbor in the community and carries pride in

devoting itself to every community it serves by reaching out and providing help where

needed through volunteerism and charitable giving. Southwest has involved itself in

such affairs as the Adopt-A-Pilot program, Ronald McDonald House, and other

Corporate Community Affairs Teams that works to develop relationships to create a

positive impact.

Our People

Southwest works to ensure that all their employees are provided a stable work

environment and are rewarded through recognition programs. Southwest provides

equal opportunity for learning and growth at their University for People and other

programs such as Manager In Training. The Southwest Diversity Council allows for

equal opportunity with “a spirit of inclusion” that brings the company together.

Supplier Diversity Program

Southwest Airlines aims to manage their costs and increase productivity and quality in

order to keep fares low. With their Supplier Diversity Program, equal opportunities are

given to various types of small and diverse businesses. At Southwest Airlines:

All suppliers are treated fairly and impartially during the evaluation and

selection process.

Use of a proven strategic sourcing methodology that includes cross-functional

Teams, identification of total cost drivers and detailed requirements, market

research, competitive bidding where appropriate, and continuous improvement

in quality and processes.

Regular re-evaluate programs, and willingness to consider new suppliers that

provide improved value.

Actively seeking to include qualified Small/Diverse Businesses in all competitive

bid opportunities.

One Report

Southwest Airlines keeps track of its’ “triple bottom line” that focuses on its’

performance, people, and planet with what they call a One Report. Southwest aims to

differentiate themselves from other low-fare carriers by providing exemplary service to

their customers.

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External Assurance

In order to demonstrate transparency with its’ stakeholders, Southwest Airlines uses

the Global Reporting Initiative (GRI) to measure and report their economic, social, and

environmental efforts and the Carbon Disclosure Project that focuses on greenhouse

gas emissions and climate change strategies.

Corporate Governance

“At Southwest Airlines, it is important to set the highest standards of ethics and integrity.

Southwest believes that quality corporate governance can help them achieve long-term

Shareholder, Employee, and Customer value.”

Southwest Airlines Tarmac Delay Contingency Plan

Southwest Airlines aims to avoid onboard delays. In the event that a delay is deemed

unavoidable or in the case of an emergency, Southwest Airlines lays out an extensive

Contingency Plan in serving all other airports by agreeing to share facilities, gates, and

all other resources. Southwest also has a Codeshare agreement with other airlines. A

Codeshare agreement, is a business arrangement between aviation companies where

two or more airlines share the same flight. This means that a seat can be purchased on

one airline but the flight is operated by a cooperating airline. Under the codes sharing

agreement, the airline that actually operates the flight is called the “operating carrier.”

The company/companies that sell tickets for that flight but do not operate are called

“marketing carriers.”

Southwest Airlines Safety and Security Commitment

Southwest Airlines acknowledges its responsibility to its customer by setting a Safety

and Security Culture. Southwest Airlines aims to take preventative measures by

identifying risks to the workplace and to operations and predicting daily scheduling and

operating decisions.

Information and Advisory

Southwest Airlines makes sure to provide the best available information regarding

flight status and schedule information along with further advisory on the possibility of

an en route delay, diversion, unscheduled stop, or cancellation.

Delays and Cancellations

Southwest Airlines does its best to operate their flights as scheduled and accommodates

for any disrupted flight or for any inconvenience. They make it a point to postpone the

boarding process until the time of the delayed flight. If a customer itinerary is disrupted

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by a delay Southwest airlines will accommodate by rebooking a new flight along other

various overnight accommodations.

Other Accommodations

Southwest Airlines also features a carefully configured plan that includes other factors

of customer concern such as fares, reservations and ticketing, overbooking, refunds,

baggage, customers with special needs, and the rapid rewards frequent flyer program.

This overall adds to Southwest’s commitment to customer service.

1.5 - STRATEGIC POSTURE

1.5.1 - CORPORATE STRATEGY

Southwest Airlines was built on one notion made by Rollin King and Herb Kelleher. That

notion was, “if you get your passengers to their destinations when they want to get

there, on time, at the lowest possible fares, and make darn sure they have a good time

doing it, people will fly your airline.” Forty-five years later, this notion still stands and

their strategies have been developed around it.

Southwest Airlines continues to be a leading discount airline. Through their efficiency

and their simple pricing models, they are able to discount their ticket prices better than

other airlines. They have upgraded from the hub and spoke system to the point-to-point

system which allows them to have more non-stop trips. This allows Southwest to pick

and choose the most frequent fly times with the most people. For Southwest to be able

to sell tickets cheaper than other airlines, their operations are simplified and uniq ue.

Southwest doesn’t sell tickets on other websites like Expedia, and Orbitz. They don’t

have a first class or business class, and they don’t have assigned seating. They do not

charge for bags or reservation changes.

1.5.1.1 – DIRECTIONAL

After September 11 demand for air travel had decreased as many people were too

afraid to fly. So, Jim Parker, the CEO at the time, faced many challenges. Because

Southwest had never fired anyone, and never charged for items like baggage, reward

tickets, and ticket fees, Jim Parker’s job to grow the company was difficult. He

implemented a retrenchment strategy due to their position and declining sales. His

needed to turn around the company, so his first step was to find where he could cut cost

by contraction. To stop the bleeding, he resorted to taking away airline meals, and

giving customers peanuts to enjoy for their trip. He then consolidated how he could

move forward. He changed the hub-and-spoke system to a point-to-point system. To

ensure productivity remained higher for Southwest than other airlines, the company

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started giving stock options to its employees. Jim Parker In 2008, another recession hit

resulting in yet another decrease in air travel.

The result of these two back-to-back recessions has left the airline industry in a state of

stagnation. Declining growth has left Southwest Airlines with the challenge of seeking

out new profits, which lead to the decision of Southwest Airlines acquisition of AirTran

in 2011 for $1.4 billion. Southwest chose AirTran because they too are a discount airline

who shared similar strategies with Southwest. The acquisition of AirTran led to the

horizontal growth of Southwest Airlines, giving them operations in Atlanta, Georgia and

bigger presents in Orlando, Florida.

1.5.1.2 – PORTFOLIO ANALYSIS

The majority of Southwest’s business is passenger travel; it makes up 95.6% of all its

operations. The airline industry is currently a slow growth industry. Southwest, has the

second largest market share of 15.6% behind Delta Airlines. Because of its position,

Southwest Airlines is considered a cash cow.

They also do some cargo business, but it only makes up 1.1% of all of its revenues, it is

interesting that the cargo industry is actually a growing industry, 28.1% from 2009 to

2010, but Southwest has no intentions to go in to it.

The remaining 3.4% are all the smaller extraneous things that are in passenger

transport.

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1.5.1.3 – PARENTING STRATEGY

The philosophy of Southwest is simple: “If you get your passengers to their destinations

when they want to get there, on time, at the lowest possible fares, and make darn sure

they have a good time doing it, people will fly your airline.” To be capable of achieving

this, top management needs to build strong relationship with their employees and their

customers. Their corporate structure is built around the idea that relationships are

important. For example, they hire employees that will deliver great customer service,

and have never laid-off an employee.

The synergy that corporate management develops creates a lasting relationship

between top management, employees, and customers. Corporate management firmly

believes in its values on customer service and cheap airfare and they find the resources

to work around those values. These resources usually come from finding greater

efficiencies in operating costs, and the simplifications across the organization.

1.5.2 – BUSINESS STRATEGY

Southwest Airlines centers its competitive advantage on operating differently than “the

other guys” by providing a low and simple to understand pricing and providing the

highest quality of customer service. There are no particular target segments that are

attracted to Southwest alone. It centers on making things simple so that all people can

interact with Southwest.

Customer Service

Part of Southwest Airline’s mission delivers the “highest quality of Customer

Service”. They have shaped it into their company and made it their competitive

advantage. First off, they provide their customers with a user friendly website,

Southwest.com, where customers can find the lowest fares anywhere on the web. In

essence, this allows Southwest to be its customers “one stop shop”. It’s simple, easy, and

they know that they are getting a good deal when flying with Southwest, because they

can’t buy tickets from any other place. Many other airlines advertise on other websites

and give discounts to other particular groups. Customers can find it unfair that they

paid a higher price on other websites. The next is the cabin experience. They put in a

modern cabin design that has a fresh appeal. The new seats are “redesigned low-profile

seats that are more durable, made of eco-friendly products”. The in-flight experience

offers WIFI and a multitude of other experiences. Southwest takes the time to listen to

their customers and provide them with their needs. In 2011, Southwest had the lowest

ratio of complaints per customers, according to the U .S. Department of Transportation’s

Air travel Consumer Report.

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Pricing

Southwest’s ticket pricing is another competitive advantage. Southwest offers many

flights that are lower than most other flights. They are able to do this, because they lack

in services that they find to be the least value to their consumer. Southwest also makes

their pricing easy to understand. They also don’t charge for services that other airlines

charge. If a passenger has to change their plans and need to cancel the flight, their

“Anytime Fare” offer customers 100% of their ticket value as a refund to the original

form of payment when booking this fully-refundable fare. Southwest also doesn’t charge

for bags while others charge $25 per bag. Their simple low price ticket at Southwest

attracts customers.

1.5.3 – FUNCTIONAL STRATEGY

Southwest Airline’s low operating costs allows them provide low fares, while their

mission statement ensures exceptional customer service and a fun environment when

flying. As stated in their mission, Southwest Airlines is dedicated to providing the

“highest quality of customer service with a sense of warmth, friendliness, individual

pride, and company spirit.” In 2011, Southwest Airlines was recognized by MSN Money

and Consumer Reports as the top airline in customer service. With promotions like

“bags fly for free” and “no change fees,” coupled with other discounts such as military,

and its rapid rewards program, which offers frequent flyer, Southwest provides high

quality services that attracts new and guarantees repeat customers.

Financial Strategy

Southwest Airlines financial strategy is to have a relatively low debt-to-equity ratio. It

has been able to keep this ratio low by being highly efficient and creatively cutting cost.

“In 2006, it had the lowest debt-to-equity ratio in the industry of 25.2% compared to

the industry average of 96.7%.” (Jackson) As a result of this financial strategy,

Southwest Airlines has continuously reported profits while other airlines report losses.

R&D Strategy

Southwest Airlines is constantly finding ways to improve the airplane’s performance in

order to help reduce costs and keep its fares low. For example, Southwest added the

Blended Winglets to its fleet of Boeing 737-700’s which improves the airplane’s

performance by extending its range, helps saves fuel and reduces engine maintenance

costs. Recently, it implemented the Required Navigation Performance (RNP). RNP can

keep an aircraft on track and accurately estimate arrival times within 10 seconds to any

point in the flight plan. This technology reduces fuel consumption because it assists in

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determining shorter flight paths, lowers emission, and currently saves Southwest

Airlines approximately $16 million a year. (SW)

Operations & Logistics Strategy

The operational strategy of Southwest Airlines is to reduce costs while providing the

lowest fares possible, in conjunction with decreasing flight time. In order to achieve this

goal, Southwest Airlines aims to reduce its average turnaround time of 25 minutes. To

avoid delays and achieve fast turnaround time, Southwest Airlines strategically flies

through smaller airports rather than larger congested ones. They also implemented

“intentional connecting opportunities”, allowing them to manage and schedule their

flights to reduce long layover times. Another key feature contributing to fast

turnaround times, is the preparedness of employees and their ability to rapidly, and

efficiently handle luggage. Before an airplane arrives, employees have all their

equipment prepared and in position, allowing them to offload and transport luggage as

quickly as possible. While a typical airline has a tug driver collecting the luggage from

an airplane and distributing it to where it needs to be, Southwest Airlines, has multiple

tug drivers who pick up luggage from numerous arriving flights and efficiently deliver

them to specific destinations.

An important factor that can affect the operation of the company is the productivi ty of

the employees. Southwest Airlines allows employees to enhance their skills in various

departments. This cross-utilization of skills creates a culture of cooperation among

departments which translates into lower unit labor costs. In comparison to its

competitors, “the productivity of Southwest employees [is] over 45% higher than at

American and United, despite the substantially longer flight lengths and larger average

aircraft size of these network carriers. Therefore by its relentless pursuit for lowest

labor costs, Southwest is able to positively impact its bottom line revenues.” (Srinivasan)

Other ways Southwest Airlines reduces costs is by having well maintained aircrafts,

secondary airports, and offering point-to-point service which focuses only on short haul

trips. Southwest Airlines’ fleet consists entirely of 737 jets. This strategy reduces their

costs because it simplifies their scheduling, flight maintenance, and operations. It also

reduces pilot, mechanic, and ground crew training costs because they only need to be

trained for one aircraft. (SW)

Purchasing Strategy

Southwest Airlines aims to purchase its supplies at a low cost to keep its fares low. One

strategy the company uses when purchasing jet fuel is anticipating rising fuel costs. To

avoid the rising fuel costs Southwest locks in the prices it pays for jet fuel months or

even years ahead of time. In the event of rising fuel prices, this strategy helps Southwest

avoid raising its fares and distributing the expense to its customers. “Its success at that

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has protected it from run-ups in crude oil prices and dramatically cut its fuel expenses.

Since 1998, it has saved $3.5 billion over what it would have spent if it had paid the

industry's average price for jet fuel. That's equal to about 83% of the company's profits

over the last 9½ years.” (Reed)

Human Resources Strategy

Southwest Airlines uses target selection when hiring employees. The company looks for

people who have an attitude that is compatible to the corporate culture. Southwest

believes skills can trained but they cannot teach the attitude needed to fit into the

company. Once employees are hired they receive training at the Southwest University of

People. This training instills Southwest Airlines corporate and consumer goals.

Southwest Airlines believes that in order to be a successful airlines they must first take

care of the employee because “a happy employee = a happy customer,” offering

generous compensation and benefit packages that are the highest in the industry. In fact,

the Bureau of Transportation Statistics stated that, “Southwest Airlines’ average annual

compensation of $90,669 was higher than all of the network airlines except Northwest.”

(Jackson) Because Southwest offers high compensation and benefits packages, they

reduce employee turnover, giving them the lowest rate in the industry, approximately

4.5% annually. Achieving this low turnover rate then helps reduce training costs.

Information System Strategy

In order to generate cost savings, Southwest Airlines strives to remain on the leading

edge of information systems. It uses information systems to provide easy-to-use online

reservations and sends emails to customers regarding advertised fares. It is constantly

looking for new technology that will help the company run smoother and reduce its

costs. Recently, Southwest Airlines centralized its IT procurement to a designated

number of vendors. This strategic decision allowed the company to reorganize its

operations, improve resource consumption, avoid paying unnecessary overhead, and

more tightly integrate its systems. Southwest Airlines further reduced its costs by

standardizing its mainframe system.

1.6 – POLICIES

The policies that govern both the customer service aspect and employee relation aspect

of Southwest Airlines are comprehensive and, are in line with the company’s

philosophies. Starting with the hiring policies of the company, Southwest Airlines looks

for employees who are in line with both the mission statement they make to their

customers, and the mission statement they make to their employees. In their employee

mission statement, Southwest Airlines pledges to hire with diversity in mind, and even

goes as far to state that it is diversity that is the key to their competitive advantage and

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the formation of their corporate culture. In hiring, Southwest Airlines remains

consistent in its policies for both customers and employees by stating, “above all,

Employees will be provided the same concern, respect, and caring attitude within the

organization that they are expected to share externally with every Southwest Customer.”

It is this belief, in how they treat their employees, that leads to their above industry

average, of great customer service.

Southwest Airlines believes in building relationships with its customers by providing

them a cheap and fun option to fly. This philosophy is most present in their mission

statement: “the mission of Southwest Airlines is dedication to the highest quality of

Customer Service delivered with a sense of warmth, friendliness, individual pride, and

Company Spirit.” Building on this philosophy Southwest Airlines adopts policies that

are in favor of the customer. Some of the most notable policies are that fares are fully

refundable and each passenger may check two bags for free (with specific size and

weight restrictions), whereas most other airlines will only cancel a flight for a fee, and

charge for even one checked bag. Even where passengers sit are decided from the

customer’s point of view, in that, passengers are free to pick their own seats. Southwest

Airlines boards the planes on a first come first serve basis, with respect to check in time.

All the policies that make up the operations of Southwest Airlines are a direct reflection

of its commitment to superior customer service; they are part of a strategy that has

continuously yielded success for this firm.

1.7 – ALIGNMENT

The reason why Southwest exists is because they have the “dedication to the highest

quality of Customer Service delivered with a sense of warmth, friendliness, individual

pride, and company spirit”. They believe that people are their number one asset; and

when they put their focus on people, people will put their focus on Southwest. Their

objective is to be the number one preferred airline and getting there involves offering

the cheapest airline tickets of any other any other airline, and giving customers a

service like no other. Southwest Airlines provides them with the services from fun

entertaining and enthusiastic flight attendants to low fares that are on time.

To keep these objectives alive, Southwest must think strategically on the battle front. In

the book Good Strategy Bad Strategy, Richard Rumelt explains that a “good strategy

recognizes the nature of the challenge and offers a way of surmounting it” (page 3).

Southwest aims to be the number one airline in the industry. The problem for

Southwest was that the airline was being affected by the recession. Less people had

money to travel and all the airlines were being affected. Their corporate strategy

dealing with this was to think differently in their operations. They went into

retrenchment mode, and cut out what they thought their customers found of lease value

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to them. Going back to their mission statement, there was one thing they couldn’t cut.

They knew that offering their customers subpar service and raising fees would diminish

them. They also knew the other airlines were charging fees and raising prices in times

when there was a struggle in the industry. So Southwest not only surmounted the

challenge, they knew that their mission did not have to change in order to overcome it.

For the most part they kept their business afloat by focusing on their customers.

When looking at Southwest business strategy, the question is what needs to be done to

so that people will choose Southwest airlines over all other airlines? Michael Porter

points out two competitive strategies to beat out the competitors, a lower cost strategy

or differentiation strategy. For Southwest, they believed in a differentiation strategy

where they offer people a better service than other people and an all around cheaper

price than their competitors. Their targets are more broaden out to the public where

anyone who likes cheaper prices and better service can go. Their business strategy is

very people oriented. Going back to the mission statement, their quality of service is of

the highest of quality. Where the qualities are the things people value the most.

Their functional strategy is all the nuts and bolts to Southwest business strategy.

Looking at the low price business strategy, the question is how they are they achieving

these goals while they are making money. Their financial strategy is to obtain a 15%

ROIC. So in order to achieve this, Southwest finds cost cutting advantages in their own

operations. One of their operational strategies is to change their business from a hub

and spoke to a point to point business. They also took out most meals during the flights.

Southwest functions in ways only affect their operations without lowering the

customer’s experience or raising their prices. These strategies are aligned to the idea

that they focus on their people.

II. CORPORATE GOVERNANCE

2.1 – BOARD OF DIRECTORS

Southwest Airlines has 10 members that currently serve on the board of directors. In

addition to the board of the directors, there are 2 honorary designations for Herb D.

Kelleher, Cofounder and Chairman Emeritus and Colleen C. Barrett, President Emeritus.

Gary C. Kelly serves as an internal member of airlines and the remaining 9 serves as

external members

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Gary C. Kelly Chairman of the Board, President and Chief Executive Officer Southwest Airlines Co. Dallas, Texas Executive Committee (Chair) Gary C. Kelly is a 24 year veteran, who had the opportunity to work along the side of Southwest’s Cofounder and Chairman Emeritus Herb Kelleher and President Emeritus Colleen Barrett to build what is known to be the most affordable airfare that exist in today’s market. Mr. Kelly initially began his career at Southwest as a controller and slowly worked his way up in the company to CFO, VP of Finance and CEO. In 2008, he was promoted to Chairman of the Board, and CEO of Southwest Airlines. He owns 274,057 shares of the airlines common stock.

David W. Biegler Chairman, President and Chief Executive Officer Southcross Energy Partners GP, LLC Retired Vice Chairman of TXU Corp. Dallas, Texas Audit Committee, Compensation Committee (Chair), Safety and Compliance Oversight Committee David W. Biegler owns 12,804 shares of the airlines common stock and has been a board member since 2006. He has over 45 years in extensive knowledge in energy industry, management, and crude oil industry. He holds a B.S. in Physics from St. Mary’s University and a Masters in Management from Harvard University.

J. Veronica Biggins Managing Director Diversified Search, LLC Atlanta, Georgia Compensation Committee J. Veronica Biggins owns 9,136 shares of the airlines common stock and has been a board member since 2011. She has over 20 years of banking experience and was the most recognized women banker in the industry. She has vast amount of experiences to offer Southwest with skills ranging from her education, political ties to the White House and working with nonprofit organizations

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Douglas H. Brooks Chairman of the Board, President and Chief Executive Officer Brinker International, Inc. Dallas, Texas Nominating and Corporate Governance Committee Douglas H. Brooks owns 17,804 shares of the airlines common stock and has been a board member since 2010. He has over 30 years of experience in restaurant management and gained plenty of success from Chili’s Restaurant. Brooks holds B.S. degree in Hotel and Restaurant Management from the University of Houston.

William H. Cunningham, PhD (Presiding Director) James L. Bayless Chair for Free Enterprise The University of Texas at Austin Red McCombs School of Business Former Chancellor of The University of Texas System William H. Cunningham owns 22,804 shares of the airlines common stock and has been a board member since 2000. He is well respected educator for the State of Texas. Cunningham is heavily invested in Southwest Airlines corporate governance by helping improve the organization’s strategic position and stability within its own environment.

Nancy B. Loeffler Consultant for Frost Bank and member of the Frost Bank Advisory Board Longtime advocate of volunteerism San Antonio, Texas Compensation Committee Nancy B. Loeffler owns 12,934 shares of the airlines common stock and has been a board member since 2003. She holds a position as the Chairman for University of Texas M.D. Cancer Center Foundation, Cowgirl Museum, and San Antonio Lighthouse for the blind.

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Daniel D. Villanueva Partner RC Fontis President of The Villanueva Companies Camarillo, California Compensation Committee, Safety and Compliance Oversight Committee Daniel D. Villanueva owns 12,804 shares of the airlines common stock and has been a board member since 2010. He has a graduate degree from Stanford University School of Business and has over 25 years of broadcasting to Latino Networks. Villanueva’s expertise in broadcasting would be beneficial to Southwest Airlines because of the acquisition of AirTran. The company would be able to attain more International flights to South America region.

Thomas M. Nealon Former Group Executive Vice President J.C. Penney Company, Inc. Dallas, Texas Nominating and Corporate Governance Committee, Safety and Compliance Oversight Committee Thomas M. Nealon owns 12,804 shares of the airlines common stock and has been a board member since 2010

With a board consisting of nine external and one internal member, Southwest Airlines

has a versatile group that specializes in different types of fields including technology

and management which benefit Southwest in the creation of their overall framework

and teamwork for Southwest Airlines.

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2.2 – TOP MANAGEMENT

Gary C. Kelly (Chairman of the Board) Chairman of the Board, President and Chief Executive Officer Southwest Airlines Co. Dallas, Texas Executive Committee (Chair) Gary C. Kelly is a popular CEO amongst the media because of his strong corporate values that emphasize the importance of leadership and team building. His philosophy is based on leadership which in turn is based on “good strategy” because he believes in giving his employees the proper resources they need in order to provide outmost friendly experience for the customer.

Ron Ricks Executive Vice President and Chief Legal Regulatory Officer Southwest Airlines Co. Dallas, Texas Ron Ricks attended Texas A&M University for his bachelor’s degree and holds law degree from George Washington University. He is a veteran of the airline with over 25 years of experience. Ricks duties include managing corporate governance of Southwest and all legal litigations that may come into play. He also oversees the board of directors in any legality issues with shareholders or the public

Greg Wells Senior Vice President Operations Southwest Airlines Co. Dallas, Texas Greg Wells began his career with Southwest in 1981. He is a Southwest veteran and has over 25 years of experience. Wells duties include him reviewing operations for Southwest from check-ins, baggage claim, and routing. He also serves has a director for company emergency response.

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Dave Ridley Senior Vice President & Chief Marketing Officer Southwest Airlines Co. Dallas, Texas Dave Ridley he attended the University of Texas at Austin for his bachelors and holds an MBA from Southern Methodist University. He has over 20 years of experience with Southwest. Ridley duties include overseeing the marketing events and managing revenue for Southwest. He is responsible for building the brand through the use advertising, promotions, and strategizing a target market for the airline to generate a profit.

Jeff Lamb Executive Vice President, Chief People & Administration Officer Southwest Airlines Co. Dallas, Texas Jeff Lamb attended Texas A&M University for his bachelor’s degree. Before he began his career at Southwest he worked for Mesa Petroleum as the Vice President of Administration. Lamb began his career at Southwest Airlines in 2004. His duties include human resource management and assurance in the implementation of Southwest’s Mission Statement and corporate values

Tammy Romo Senior Vice President of Finance & Chief Financial Officer Southwest Airlines Co. Dallas, Texas Tammy Romo holds B.B.A in Accounting from the University of Texas at Austin and she received her CPA from the State of Texas. She has 20 years of accounting experience with the airline. In addition, she is a member of University of Texas at Austin Department of Accounting Advisory. Her career at Southwest Airlines began in 1991. Her duties include evaluating all the financial documentation, serving as the treasurer, and reporting to the various government sectors.

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Daryl Krause Senior Vice President Procurement Southwest Airlines Co. Dallas, Texas Daryl Krause began his career with Southwest in 1979. He has an extensive background in procurement. Krause has worked in ground operations, baggage services, and even served as the vice president for in-flight operations. His model is bringing value to Southwest Airlines.

Teresa Laraba Senior Vice President Customers Southwest Airlines Co. Dallas, Texas Teresa Laraba began her career in May 1984 as a part-time customer service representative. She developed her skills through Southwest Leadership Development program, which lead to promotion as a manager of corporate employment. She worked her way up through the corporate ladder and gain plenty recognition for her diligence of being an advocate for the customer.

Ginger C. Hardage Senior Vice President Culture & Communications Southwest Airlines Co. Dallas, Texas Ginger C. Hardage holds a B.A. degree in Advertising & Public Relations from Texas Tech University, Lubbock. She has over 30 years of experience in the communication industry. Hardage had worked for Southwest for 18 years, before being promoted to her current position in July of 2008. She is responsible for reviewing communication for the consumers that use Southwest for domestic travel. Her model is built around communications and she is a firm believer in providing the adequate resource that is needed to get the job done.

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Michael G. Van De Ven Executive Vice President & Chief Operating Officer Southwest Airlines Co. Dallas, Texas Michael G. Van De Ven has been a part of Southwest Airlines for 18 years. He has held different positions giving him an insight into the internal and external business working of Southwest His former positions include Vice President of Financial Planning & Analysis, Director of Financial Planning, and down to Director of Internal Audit. Van De Ven has held his current position since June 2001. He is responsible for airline operations and management of operating costs. He holds a bachelors degree in Business Administration from the University of Texas and he is a CPA.

III. EXTERNAL ENVIRONMENT: OPPORTUNITIES AND THREATS (SWOT)

3.1 – NATURAL PHYSICAL ENVIRONMENT: SUSTAINABILITY ISSUES

Southwest must prepare for a number of natural factors as a result of being in the

airline industry. Hurricanes, tornados, and other natural disasters can prevent their

flights from being completed successfully. In the case of a natural disaster, enroute

flights that are unable to land either circle the airport until the weather permits them to

make a safe landing or are relocated to nearby airports. Flights that are not enroute will

be delayed or cancelled and customers will be issued vouchers.

Volatile fuel prices are an ever increasing concern for Southwest. They invest millions

every year toward research for alternative fuel prices, plane research and development,

and fuel conservation policies to ensure low fuel overhead. With increasing flights at an

average of 14 flights per day on a single aircraft Southwest is tasked with creating

innovative ways to conserve their fuel while cutting back on fuel expenses.

3.2 – SOCIETAL ENVIRONMENT

3.2.1 – ECONOMIC

Increasing oil and fuel prices are one of the major factors that negatively affect

Southwest’s business. Fuel accounts for 10 to 14 percent of Southwest’s operating cost,

which makes it the second major expense. In order to keep their fares low, despite the

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increase of fuel prices, Southwest has used the technique of hedging its fuel

requirements. According to Gary Kelly, CEO of Southwest, “high fuel costs continue to

pressure the airline with a $478 million increase in the price”(Reed). Compared to its

competitors, Southwest paid approximately 25 percent to 40 percent less for jet fuel

and hedged a higher amount. This is one of the main reasons why Southwest has been

able to remain profitable despite the increase in fuel prices. (Opportunity)

Southwest is expanding into the international market which is expected to increase

their profits. In order to institute their brand internationally, they have purchased

AirTran and are working to incorporate them under the Southwest brand name.

Obtaining AirTran was beneficial to Southwest due mainly to their international flights

to Mexico. With larger AirTran planes, Southwest will have the ability to fly further and

carry more passengers. (Opportunity)

3.2.2 – TECHNOLOGICAL

Southwest’s planes are some of the most advanced in the market. Their navigation

systems and communication systems are state of the art. As a result, they are able to

find the shortest paths to their destinations saving fuel and time. Their communication

systems allow the ground crew, pilots, and air traffic controllers to effortlessly

communicate with each other reducing any lag that could lead to delayed flights.

(Opportunity)

Unlike other airlines who offer tickets through third party websites, Southwest has

chosen to purchase its own equipment and has developed its own website and IT

infrastructure. This can be a threat to Southwest because it may lose the opportunity to

reach particular market segments. Travelers tend to be price sensitive and have no

problem switching to another airline as long as they have a cheaper price. These

travelers tend to shop through third party websites so they can easily compare prices.

Southwest has relatively low prices compared to its competitors, but consumers who

shop solely through third party websites will not know that since Southwest strictly

offers its tickets through its website. (Threat)

3.2.3 – POLITICAL-LEGAL

The terrorist attacks of 9/11 have become a major threat to not only Southwest, but to

the entire airline industry. Immediately after the attacks, the industry experienced a

major decline in demand for air service. People were too afraid to fly and businesses

temporarily reduced non-essential travel for their employees. This led to massive

employee layoffs and forced many airlines to file bankruptcy. Despite the drastic

financial effects, Southwest offset its losses through its purchase of jet fuel at a lower

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price and internal cost reduction initiatives instead of laying off employees. It also

remained true to its belief of never laying off or firing an employee. (Threat)

Like any successful company, Southwest is always involved in a number of lawsuits at

any given time. However, these are usually one of a kind situations such as beverages

being spilled on passengers or travelers being insulted for being told that they are too

large to fit into the seats. The bigger issue Southwest faces is trying to expand into other

airports to offer their passengers more options. While their purchase of AirTran is

helping with this aspect, there is still an opportunity for them to expand even further.

(Opportunities)

3.2.4 – SOCIO-CULTURE

Another major threat to the industry is the recession. The recession has caused many

businesses to close down and leaving massive amounts of people without jobs.

Regardless of numerous airlines’ attempt to offer lower prices, people are not w illing to

travel. The recession has created an environment where people are no longer certain of

their future, therefore they have become more careful with their finances and refuse to

spend money on unnecessary trips. (Threat)

Southwest Airlines is a committed to the environment and is constantly striving to keep

their impact low in their day to day operations. They have been working to reduce fuel

emissions by having more efficient flights, by utilizing the quickest routes to get to their

destinations and by adding fuel saving winglets to their planes. They are also testing out

the first “green planes” which contain mostly recycled materials. They also recycle their

water used to wash their engines so that it can be used for multiple washes.

(Opportunity)

Southwest shows the same high level of commitment to their passengers providing

exemplary customer service. Although their customer service is considered the best in

the industry, they have a great opportunity to expand by offering international flights.

Although international flights are naturally longer than domestic ones, they could

provide more entertainment for their passengers. Some options include playing movies,

an interactive game, or possibly even live entertainment. Through it all the Southwest

crew would continue to provide their trademark humor and quality service in catering

to the needs of their passengers. (Opportunity)

3.3 – TASK ENVIRONMENT

3.3.1 – THREAT OF NEW ENTRANTS

In the airline industry the barrier to entry is high, therefore making the threat of entry

low. In order to penetrate the airline industry a company must have a lot of financial

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resources to invest in airplanes. The costs of breaking into the industry would be too

high to justify since they would be attempting to recoup their initial investment by

competing with Southwest’s low fares. Bankruptcy laws have made it easy for existing

airlines to remain in despite their failing financial situation, therefore making it difficult

for new competitors to emerge. Other factors such as government policies, heavy

regulation and high taxes make entrants think twice about entering the industry.

(Opportunity)

3.3.2 – BARGAINING POWER OF BUYERS

As a result of the recession in the U.S., buyers have become more price-sensitive and

less likely to become loyal to brands. Buyers buy tickets based solely on prices and tend

to focus less on the services airlines offer. Another factor that contributes to the

bargaining power of buyers is the increase use of online shopping as well as online

reservations. This gives buyers the opportunity to compare prices among the various

airlines. Buyers will quickly choose an alternate airline as long as they offer a better

deal. (Threat)

3.3.3 – THREAT OF SUBSTITUTE PRODUCTS OR SERVICES

There are some alternative forms of transportation that can replace flying such as

driving a car, taking a bus, or taking a train. The automobile would be the most

immediate threat because extensive freeways make it possible to travel anywhere.

However, this is not always a feasible option due to the additional time that would be

spent driving as opposed to flying. (Threat)

3.3.4 – BARGAINING POWER OF SUPPLIERS

Airbus and Boeing are currently the only suppliers for aircraft manufacturers. This

gives suppliers the bargaining advantage in prices for the supplies they provide. The

increasing price of crude oil has resulted in an increase in the prices of jet fuel,

therefore forcing airlines to increase the prices of their fares. Since Southwest has no

alternatives to power its airplanes, fuel suppliers have the upper hand in negotiating

the prices of fuel. Their prices determine how much Southwest will spend on fuel, which

can potentially affect the prices of its fares. (Threat)

3.3.5 – RIVALRY AMONG EXISTING FIRMS

Airbus and Boeing is currently the only suppliers for airframe manufacturers. This gives

suppliers the bargaining advantage in prices for the supplies they provide. The

increasing price of crude oil has resulted in an increase in the prices of jet fuel,

therefore forcing airlines to increase the prices of their fares. Since Southwest has no

alternatives for jet fuel, fuel suppliers have the upper hand in negotiating the prices of

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fuel. Their prices determine how much Southwest will spend on fuel, which can

potentially affect the prices of its fares. (Threat)

3.3.6 – THE 6TH FORCE

According to Wheelen and Hunger, the government is neither good nor bad for any

given industry, but it can affect the other five forces. In the case of the airline industry,

the government is definitely a force that has to be accounted for since they have

instituted fiscal policies that improve security around airports. These fees as paid by

the airlines, which inherently pass them on to the customer. Southwest needs to

account for these fees to ensure that even after applying them to their customers’ fares

that they still have the lowest prices around. (Threat)

3.4 – EFAS TABLE – Appendix #2

IV. INTERNAL ENVIRONMENT: STRENGHTHS AND WEAKNESSES (SWOT)

4.1 – CORE COMPETENCIES

Southwest Airlines is a well developed company, with a strong sense of brand image,

and an impressive list of competencies. However, their core competencies are what

keep Southwest in the air. Weelen and Hunger describe core competencies as: “a

collection of competencies that crosses divisional boundaries, is widespread, within the

corporation, and is something that the corporation can do exceedingly well” (Weelen &

Hunger 138). Southwest Airlines has three core competencies: low-cost, efficiency and

customer service. When Jack Welch talks about strategy in his book Winning, he

explains that core competencies are on a list of “theories” that companies spend too

much time creating, and too little time implementing. What makes Southwest an

industry leader is the adoption of the same philosophy that Welch has: “if you want to

win, when it comes to strategy, ponder less and do more” (Welch 166) ; when it comes

to their core competencies, Southwest ‘just does’. With a low cost philosophy,

Southwest succeeds by keeping costs low for their customers in any way they can. They

create value for customers by having the first and second checked bags fly for free

(while most others airlines charge). Other airlines find it difficult realize a profit when

they try to replicate Southwest’s low costs. Efficiency is another philosophy that

Southwest has adopted that contributes heavily to both low-cost and the third core

competency, customer service. An aspect of Southwest’s efficiency philosophy is the use

of a single type of plane, Boeing’s 737-700 aircraft. This requires maintenance and flight

crews to only be trained on one type of aircraft, reducing training and operating costs

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significantly over their competitors who maintain several types of aircrafts. These cost

cutting measures are passed on to the customer, and create the foundation for their

customer service. Customer Service is the third and final core competency. Southwest

Airlines considers itself as being in the customer service industry; they just happen to

fly planes. By not charging for the first and second checked bags, holding the record for

the 10 minute turnaround time and creating a friendly atmosphere are all things that

draws first-time travelers to Southwest, and keeps them coming back.

4.2 – VRIO ANALYSIS

Value Rareness Imitability Organization

Low-Cost YES NO NO YES

Efficiency YES NO YES YES

Customer Service YES NO NO YES

4.2.1 – Low Cost

Having a low-cost philosophy is a distinctive feature of Southwest Airlines. They are the

nation’s largest discount carrier, giving customers an option to pay for only the

amenities they want. Although Southwest offers competitive prices, they do not have

anything close to a monopoly on the discount airline market. JetBlue is number two in

the nation, and has successfully drawn down Southwest’s market share, and has only

been open for 10 years. Low-cost is, however, something that other airlines have had

trouble imitating, at least to the extent Southwest does. By cutting on services and

allowing customers to decide what amenities they choose to pay for, Southwest has

taken a unique position, and it isn’t one many other airlines feel comfortable doing. The

organization of Southwest Airlines is one of the best models in the industry. A highlight

being that Southwest is well established, and thus offers more destinations for their

customers. What’s more, is Southwest’s insight, and their ability to see that if they want

to keep their competitive advantage, they will have to expand into international

markets. Since Southwest lacked experience in this area, they chose to purchase

AirTran and exploit the experience of their knowledgeable managers, along with

purchasing new planes that will open up routes to Alaska, Hawaii and Central and South

America.

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4.2.2 Efficiency

As seen in the VRIO Analysis chart above, efficiency is one of Southwest’s core

competencies. Southwest is one of only a handful of airlines that pass down the savings

from their efficiency models to customers. Although efficiency is not necessarily rare in

the airline industry, what makes Southwest unique is its lack of imitability. While most

airlines fly hub and spoke, Southwest flies point to point, and couples it with creating

and holding the industry standard of the 10 minute turnaround and other time saving

measure that creates an atmosphere of efficiency for its employees to fall in line with.

4.2.3 Customer Service

The importance of above and beyond customer service is not lost on Southwest, in fact,

they consider themselves to be in the customer service industry, and just happen to fly

planes as well. Being focused on the customer, in conjunction with being a discount

airline gives Southwest a tremendous amount of value. Although, that is not to say they

are the only airline who has good customer service, no other airline can imitate what

Southwest has done. Southwest Airlines has gone so far as to create what it calls the

University of People, a training program where employees are brought up to par with

the customer centric corporate culture that governs the company. This type of strategy

affords Southwest the opportunity to exploit its most valuable resource, its employees.

Southwest recognizes that the interaction of front line employees with customers is

what makes up part of their “magic sauce.” Moving beyond that however, Southwest

wants even those employees who may have little to no contact with customers to have

the same philosophy as those front line employees, in that all actions taken, and ensure

that decisions are made in the best interest of the customer. A prime example is

Southwest’s commitment to not charging for the first and second checked bag, despite

the rest of the industry’s implementation of such a fee. Although the folks in accounting

and finance may be able to realize greater profits for the firm, they continue to hold off

charging for the checked bags because it is not in the best interest of the customer.

4.3 – BUSINESS MODEL

Weelen and Hunger describe a business model as being the “company’s method for

making money in the current business environment” (Weelen & Hunger 142).

Southwest Airlines is considered to follow the efficiency business model, however, the

philosophy of Southwest Airlines is completely customer focused, where meeting the

needs of the customers are the main goal, and shareholder value is realized through

building relationships with customers and creating loyalty. Therefore, Southwest

Airlines, although on paper may appear to only follow the efficiency model, blends in

the customer solutions model, creating a very strong competitive advantage, and

successfully addresses all five elements of a business model: 1) Who it serves; 2) What

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it provides; 3) How it makes money; 4) How it differentiates and sustains competitive

advantage; 5) How it provides its service.

4.3.1 Business Model: Who it Serves?

Southwest Airline’s business model, let us call it the low-cost customer service model,

has two main focuses, keep costs as low as possible through efficiency modeling, and

provide industry setting customer service. In their 2007 analysis of Southwest’s

corporate culture and business model, Thomas M. Box from Pittsburg State University,

and Kent Byus from Texas A&M University at Corpus Christi, point out that unlike

conventional corporations where executive’s primary responsibility is taking care of the

shareholders first, Southwest dumps that “on its head.” Instead, the responsibilities of

the executives at Southwest is to take care of the employees, which in turn provide

great customer service, creating brand loyalty and ultimately financial rewards for

shareholders (stakeholders). (Box & Byus 26)

4.3.2 Business Model: What it Provides?

The low-cost customer service model provides a number of benefits to all whom it

serves. First and foremost, it provides a level of customer service that is above any in

the discount airlines industry. This level of service is attained in many different ways,

and by a combination of different aspects of the business. In Box & Byus’ analysis, they

point out that part of Southwest’s low-costs initiative is reducing flight turnaround

times to below an industry average of 20 minutes. This is accomplished by recognizing

that “airlines only make money when they are flying,” so an efficient method of

communication and coordination was established. Even pilots and flight attendants will

help the ground crews when they can (Box & Byus 26). Box and Byus further discuss the

“kinship” established within the corporate culture of Southwest, where employees are

hired based on their personality, and then trained for skill, where all employees are

expected to work hard, and are rewarded fairly for it. This hiring strategy ensures that

all employees first, fit the corporate culture, and second, understand the importance of

working hard for the customer, both keep true to Southwest’s mission. (Box & Byus 24)

4.3.3 Business Model: How it Makes Money

Southwest’s low-cost customer service model is a blend of two separate business

models. First, the efficiency model is when a company “waits until a product (service)

becomes standardized and then enters the market with a low-priced, low-margin

product that appeals to the mass market.” (Weelen & Hunger 143) The second model is

the customer solution model. In this model, money isn’t made from the sales of a

specific amount a product or service, but instead is made off the relationship

established with the customer, along with the quality of its product or service.

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Southwest integrates these two models by giving them equal influence in guiding

corporate strategy (Weelen & Hunger 142).

These two models working together create what we called the low-cost customer service

model. The low-cost customer service model makes money for Southwest by

encouraging efficient operations and creates brand loyalty visa vie outstanding

customer service. Box and Byus mention some of Southwest’s most efficient programs

as being the previously mentioned quick turnaround time, and being an established

point to point airline instead of the tradition hub and spoke (Box & Byus 26). These

kinds of operations allow Southwest to offer more flights with less planes in the fleet,

giving them a larger revenue stream and a larger return on working capital. The

customer service aspects of the low-cost customer service model may not generate

direct revenue, but all contribute to the continuation of Southwest’s success. Since this

has become an industry standard, Southwest could easily start charging, even small fees

and increase their revenue stream by millions, and not lose too many passengers so

long as the price is below their competitors. However, this would violate their mission,

so they have continued to stave off check bagged charges along with fees for things like

sitting next to the window. They have recently introduced the “Business Select”

program, which allows business travelers to purchase an early boarding ticket so that

they may choose their preferred seats.

The low-cost customer service model allows for a larger variety of revenue generating

activities and cost cutting programs than only operating on one business model. This

creates a more stable company with a greater amount of maneuverability during a time

of financial crises.

4.3.4 Business Model: How it Differentiates and Sustains Competitive Advantage?

The successful implementation of the low-cost customer service method is the core of

Southwest’s competitive advantage. The following five-step, resource based approach to

strategy analysis will further explore why this is the case:

1. Resources that Southwest holds that can be classified as strengths include: A)

The utilization of a single aircraft, the Boeing 737 series; B) A staff that is well

trained and has personally adopted the company’s vision and mission, and

knows that the customers satisfaction is the main concern of the company

2. Both of these resources are considered to be core competencies. The first

capability allows Southwest to operate with more efficiency than other airlines

because everyone is only trained for one aircraft. The second capability gives

Southwest an advantage over the competition because customers enjoy being

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treated with respect, and traveling in an environment where the employees are

happy to be there and will bend over backwards to fix a problem.

3. Both of these resources help add to the bottom line, although not in a direct way.

The utilization of a single aircraft keeps a variety of costs down, most notably

training costs. By only using one kind of aircraft, pilots, mechanics, and flight

attendants only need to be trained on that one kind of aircraft. By only employing

people who have the attitude that fits with the corporate culture, which was

build off the mission regarding the importance customer satisfaction, all

Southwest employees have one goal, to attract new and retain current clients by

building a relationship with the brand. This will ensure future growth. A

distinctive competency is a core competency that is superior to those of the

competition (Weelen & Hunger 138). Southwest’s customer service is its

strongest distinctive core competency, as very few airlines are known for

outstanding customer service.

4. One of Southwest’s greatest weaknesses is its lack of presence in international

markets. With the acquisition of AirTran, Southwest positioned itself to expand

into international markets off of AirTran’s established routes. The issue is that

AirTran had only a handful of routes that fly into Mexico established, in order to

maintain their strategic dominance Southwest realized it must expand further

south, into Central and South America. The most effective strategy to overcome

this weakness is going to be Strategic Operations. The strategic operations

strategy would be most advantageous because it will help to establish a system

that will more accurately set up routes to new airports in Central and South

America. Something that Southwest will have to keep in mind when they build

these routes they depend on both intermittent systems (jobs) and the continuous

system (assembly line). The solution to facing the issue, although their plane may

be able to operate close to the continuous system, their intermittent system is

people, who have to do things in steps. If Southwest wants to be successful in

their expansion of Central and South America, then they will have to find the

equilibrium of these two systems, and implement efficiently and in a timely

manner.

5. One resource gap that Southwest currently suffers from is the transition of its

newly acquired AirTran employees not having been screened by Southwest

hiring practices, or trained to appreciate the mission of the company and its

importance in customer service philosophy. The best way for Southwest to deal

with the problem is to implement a program that rotates AirTran Employees

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through training that focuses aligning individual attitudes with Southwest’s

corporate culture and mission.

4.3.4.1 Where do Competencies Come From?

Southwest Airlines built their core competencies into the company when it was started.

Box and Byus state that: “Southwest has been a fun place to work since its inception.”

The first president of the company, Lamar Muse even went as far as to house

headquarters of Southwest at the Dallas Love Field, in order to foster the “LUV”

philosophy that is still a part of their corporate culture today (Box & Byus 24).

4.3.5 Business Model: How it Provides its Services?

Southwest’s low-cost customer service model has built into its core, and how it provides

its services. Focusing on efficiency, the low-cost customer service model provides its

services by creating and sustaining an efficient way in which the business is run. For

example, having the lowest industry average of a twenty minute turnaround time by

having all crewmembers help in the preparations before a flight gives customers added

value, by allowing Southwest to offer more flights, which means cheaper flights.

Customer service provides its products through the employees Southwest hires. As

mentioned previously, Southwest hires people off their personality, and teaches them

skills later on. This creates uniformity in the belief of the corporate culture and the way

people will view the relationships they have with customers.

LOW COST ADVANTAGE

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4.4 – VALUE CHAIN

4.5 – CORPORATE STRUCTURE

Southwest utilizes a divisional corporate structure, whereby each division of the

company operates under a functional substructure. Training pilots and flight attendants

on Southwest aircrafts will be done by one division while training customer service

staff and ticket sales staff is accomplished by a separate division. Through each division

Southwest has the ability to target the customer service division, the maintenance

division, or the flight operations division to satisfy the unique demands of each by

appointing a division manager. This is effective in their corporate structure because

each manager can specialize in overseeing their own division. (Strength)

Being that Southwest sees its employees as its number one asset, it is only natural that

the company encourages employee input. By establishing a divisional corporate

structure Southwest is able to have a decentralized decision-making authority. Each

division has what is known as a worker/management committee where employees are

Primary Activities

Seco

nd

ary

Act

ivit

ies

Southwest’s Infrastructure: Aircraft, ground facilities, operation support vehicles

Southwest’s Human Resource Management: Recruiting, developing and training (AirTran Integration)

Southwest’s Technology Development: The use of winglets to reduce fuel consumption

Southwest’s Procurement: Buying Oil Refinery, Boeing 737-800’s, winglets

Inbound Logistics: Purchasing airplanes and runway licenses

Operations: Constructing flight schedules

Outbound logistics: Finalization of flight schedule

Marketing and Sales: Rebranding AirTran to integrate to Southwest

Service: Successful flight completion

Pro

fit Margin

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given the power to make decisions and share their ideas on policies that shape the

company. (Strength)

Southwest is able to successfully implement their mission into everyday operations.

The divisional structure is clearly understood by everyone in the company. Southwest

promotes a team environment where there is little emphasis on a structure that is

formally organized. The managers uphold corporate values and are encouraged to lead

by example. (Strength)

4.6 – CORPORATE CULTURE

The foremost strength within the company is their united workforce. Treating their

employees as family, Southwest has established a well-defined corporate culture where

each employee is not only a stakeholder but also a decision maker. Active contribution

in a nurturing environment is clearly stated in their commitment to their employees:

“We are committed to provide our Employees a stable work

environment with equal opportunity for learning and personal

growth. Employees will be provided the same concern, respect, and

caring attitude within the organization that they are expected to

share externally with every Southwest Customer” (One Report

2011). (Strength)

Southwest finds environmental sustainability important: “As the hometown carrier that

cares, we believe it’s our responsibility to protect our P lanet and its natural resources”

(One Report 2011). (Strength)

Southwest is unique when in dealing with their employees. Though their employees are

part of a union, Southwest treats their employees like family. “Our People are our

greatest strength and an enduring long-term competitive advantage” (One Report 2011).

Southwest takes pride in their differences and conducts diversity training which serves

to provide an inclusive work environment. Starting in May 2012, due to the acquisition

of AirTran, Southwest created the program Wingmate to foster a unified workforce

among the old AirTran employees. This program pairs one Southwest employee with

an AirTran employee to teach Southwest “family values.” (Strength)

4.7 – CORPORATE RESOURCE

4.7.1 – MARKETING

Southwest has a very straight forward marketing Strategy, keep prices low and flights

simple while offering the highest level of customer service. Southwest is venturing into

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international travel and their new marketing objective is to provide the same quality

service at a competitive low price. (Strength)

Southwest has been successful in marketing their brand (advertisements always picture

a flying plane) which in turn created a strong brand label proving to be beneficial in

customer creation due to brand recognition. They have one product: consumer flights,

which differ from other airlines that also provide cargo shipping. Southwest is a leader

in low cost flights in the United States, and they are currently the largest domestic

carrier. The price aspect of their marketing mix is their strongest point in Southwest’s

marketing strategy. (Strength)

4.7.2 – FINANCE

Southwest’s financial objectives are clearly stated in their investor relations segment of

their website. Their goal is to achieve 15% pre-tax return on investment. Last year’s pre

tax Return On Investment Capital for 2011 was 7%. On average, the investment capital

rate has been increasing 10% year. Assuming that next year’s investment capital

reaches $13,723 million, Southwest’s operational income needs to grow by 240% to

$2,058 million in order to get a 15% pre-tax return on investment. (Weakness)

4.7.3 – RESEARCH & DEVELOPMENT

Southwest has a strong research and development division. They have been

responsible for fuel conservation developments such as the Southwest winglets, auto-

throttle technology, and investments in alternative jet fuel research. “We adopt the

Airlines for America industry-wide goals for fuel efficiency and emissions reductions”

(One Report 2011). Due to the efforts of the research and development division

Southwest has reached the goal of zero environmental violations. (Strength)

4.7.4 – OPERATIONS AND LOGISTICS

Southwest utilizes just-in-time logistics, the most efficient method of operating.

Southwest’s turnaround time between flights is below industry standard, and is sought

after by the most efficient airlines. (Strength)

4.7.5 – HUMAN RESOURCE

Over 80 percent of Southwest’s employees belong to a union. Despite the majority of

their workforce being unionized, Southwest is sure to treat them as their own. “If

they’re happy, satisfied, dedicated, and energetic, they’ll take real good care of the

customers. When the customers are happy, they come back. And that makes the

shareholders happy” (Magretta, 199). Whether they’re union or not, Southwest sees its

employees as their greatest asset and inclusion is their greatest strength. As of the

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acquisition of AirTran, Southwest has been working hard with pre-existing AirTran

unions and policies to help their employees feel included as they transition into

Southwest Airlines. (Strength)

4.7.6 – INFORMATION SYSTEM

With a majority of their revenues coming from internet sales, Southwest relies heavily

on their information systems. From 2007-2011 internet sales grew by 5%, reaching its

peak of 8% in 2010. The importance of Southwest’s information technology is directly

linked to their effort in customer generation. With Southwest’s IT, they are able to

pinpoint their strongest sales areas. Southwest is pulling away from their sales through

customer support services and outsourcing to travel agencies, internet and other

sources. Slowly, Southwest has taken their strong customer service out of their sales

positions. (Weakness)

The mission statement for Southwest clearly states the company’s objective to provide

excellence. By creating online ticket sales, Southwest has made it convenient for their

customers to purchase their tickets and track their rapid rewards online. In early 2011

Southwest revised their rapid reward program aligning with a major credit card

company, Visa, making it easier for customer to earn rewards points. (Strength)

SOURCE OF PASSENGER REVENUES

2011 2010 2009 2008 2007

Internet 81% 84% 81% 80% 76%

Customer Support & Services 4% 5% 8% 7% 9%

Travel agency 12% 9% 8% 10% 10%

Other 3% 2% 3% 3% 5%

(One Report 2011)

4.8 – IFAS TABLE – Appendix #3

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V. ANALYSIS OF STRATEGIC FACTOR ANALYSIS (SWOT)

5.1 – SITUATIONAL ANALYSIS (SFAS TABLE)

Strengths

Dominant in the airline market share in North America

Southwest is the largest carrier in the United States based on the amount of total

passengers boarded. In 2009 Southwest had over 101.3 million passengers. They were

also the second biggest airline based on total number of passengers in North America

right behind Delta. Also in 2009, It had 74,456.7 million in recorded revenue passenger

miles and had 98,001.5 million in available seat miles which comes in at a load factor of

76%.

There are many competitive advantages for having the largest market share. With its

large operations, Southwest can take advantage of economies of scale. Much of their

fixed costs are spread across the numerous amounts of flights. The advantage protects

them in times of industry stagnation. Some airlines survive solely on growth, and when

growth stops, the company ceases to turn a profit. Southwest is protected in the

airline’s stagnant growth. Market share also gives them a good reputation. Southwest’s

market share also gives them a little boost in bargaining power. Suppliers to Southwest

will be at a disadvantage if they choose not to do business with such a power house.

Strong Fleet Performance

The success of Southwest’s fleet is due largely to the exclusive use of Boeing 737

aircrafts. Being the only plane that Southwest flies it takes the greatest advantage of

economies of scale. Not only does having one aircraft save money , but also allows for

timing efficiencies. Many factors, such as scheduling, maintenance and training, become

a low cost standard that Southwest incurs. By simplifying its operations, it is easier to

grasp other information like future cash flows and uncertainty cost. Southwest also is

strong because of its focuses on major cities to take the best of the harvest.

Well Implemented Company Vision

To reiterate the mission statement, “The mission of Southwest Airlines is dedication to

the highest quality of Customer Service delivered with a sense of warmth, friendliness,

individual pride, and Company Spirit.” Many corporations over look their mission

because they aim for incoherent goals. Southwest, on the other hand, looks at their

mission statement as an opportunity. The mission statement creates the desire in

Southwest employees to deliver a quality of customer service that provides love for the

people.

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Part of their responsibility as a corporation is to encourage employees to learn and

grow in an equal opportunity work environment. Part of its corporate governance is

that it “believes being a good corporate citizen means operating with the highest

standards of ethics and integrity.”

Strong Customer Service

Efficiencies in other parts of the businesses allow them to focus on customers to create

a lower cost flight and to increase value. This is one of the key factors of how Southwest

creates an industry benchmark. In 2011, Southwest was awarded for outstanding

Customer Service by many different rating agencies. They were named customer service

champ from JD Power, best online customer experience in Travel, best reward seat

availability in the US. Consumer Reports’ and American Customer Satisfaction Index

ranks Southwest #1 in Airline Customer Satisfaction.

Firm Operating Strategy

Many airlines have a system where planes would be going in and out of a hub and

planes would be docked there until their next flight. This method was called hub and

spoke. Southwest created a to a point to point system which went straight to the

destination rather than reporting to a hub. It saved fuel, time, and money. Revenue per

plane grew because they could choose the time and place where people would most

likely travel. This meant that less passengers would be stuck waiting and more people

would get to their destinations faster. Customers also liked the fact that they did not

have to transfer flights. 73% of customers fly non-stop and there are around 480 non-

stop flights a day.

Southwest orders their planes from Boeing, and they have worked together to build

planes that are fuel efficient. Their partnership on fuel efficiency has lead to: research

on alternative jet fuel sources, energy saving winglets, required navigation performance

(RNP) to create efficient approach procedures, ground support equipment fuel

conservation, and electricity and water conservation.

Weaknesses

Class action lawsuits

Southwest is has had its share of lawsuits. In 2010, various class action lawsuits were

filed by stockholders of AirTran Holdings that challenged the proposed acquisition of

AirTran Holdings by Southwest Airlines. In September 2010, Frederick Leonelli filed a

purported class action lawsuit on behalf of himself and similarly situated AirTran

Holdings stockholders against certain senior management members of AirTran

Holdings and the company. The plaintiffs alleged that the consideration to be received

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by AirTran Holdings' stockholders in the merger was unfair, compensation was

inadequate and that the AirTran Holdings officers and directors, the defendants,

breached their fiduciary duties by approving the merger agreement through an unfair

and flawed process and by approving certain deal protection mechanisms contained in

the merger agreement. The complaint further alleged that AirTran Holdings and

Southwest Airlines aided and abetted the individual AirTran Holdings defendants in the

breach of their fiduciary duties to AirTran Holdings' stockholders. The plaintiffs sought

costs and disbursements of the action, including reasonable attorneys' and experts' fees.

In addition to this, several other similar lawsuits were filed against the company. Any

negative outcome of these lawsuits will have a material adverse effect on the Southwest

Airlines' financial condition, results of operations, or cash flow.

Future Contracts

Southwest has many contractual obligations to future purchases of various most

notably aircrafts and fuel. Future contracts are a useful tool for Southwest. It allows

them to budget with the exact price they will pay in the future. Due to the uncertainty of

fuel prices, Southwest puts much of its time on analyzing the oil markets. This can be

very advantageous when there is a spike in the price of oil. Future contracts are also

useful when realizing their cash flows. With less uncertainty they can more efficiently

distribute capital and cost.

But the problem with these contracts is that they are obligations and they are

committed to buy a certain amount of oil at the agreed up prices, even if the price of oil

right now drops drastically. The volatility of fuel prices is what troubles many investors

and businesses and because of this company like Southwest has to agree with a large

amount of future contracts. So a change in oil prices impacts the company’s bottom line

of their income statement. Their ability to finance future projects is directly affected by

the change in price. The main problem with future contracts is that they are still risky.

The only reason investors are able to come to an agreement is because they think they

can make a profit if Southwest because Southwest is a very profitable company. In the

end, oil is a commodity, and the price will always be controlled by the market. Future

contracts can be useful but much of their contracts is speculation to what investors

think the market will change to. Risk is still a big factor

Declining profits and margins

The airline industry is turning towards more competition. Since 2007, there has been a

decrease of profits and their margins. Much of the growth has turned into stagnation

and many airlines are competing by lowering their cost. The operating profits have

decreased by 42% year over year. They have seen their profits decrease from $791

million in 2007 to $262 million in 2009. Due to the increase of fuel and oil expenses,

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Southwest’s operating expense has increased by 300 million in 2007 and their

operating margin of the company decreased from 8% in 2007 to 2.5% in 2009. The net

profit of Southwest also declined at 61% year over year from $645 million in 2007 to

$99 million in 2009. Southwest has yet to find efficient models for their cost.

Heavy dependence on passenger revenues

Only 1.1% of its revenues are from freight operations, and 3.3% are from other

operations. The rest of the people, 95.6% of them, are for passengers. Southwest has not

leveraged its network towards increasing its cargo, nor is it. , This can be a problem

because they can use this to stabilize to its revenues. According to IATA, demand in

cargo flights are on the rise, up 28.1% in March 2010 and sees continuous growth of 6-

7%. Southwest has the resources to change into a cargo carrier, but management has no

intentions of becoming a cargo carrier. In their mission statement, passengers are their

main focus. The problem this being if passengers find less expensive ways of travel,

Southwest won’t have another source of income to protect them .

Transition of AirTran Employees to Southwest’s Corporate Culture

Southwest’s corporate culture are one of the strongest, and best developed in the

industry. With the acquisition of AirTran, Southwest has to take on the monumental

task of aligning all the AirTran employees with their customer centered corporate

culture. Southwest has proclaimed that they are in the customer service industry, and

just happen to fly plains. Getting the AirTran employees to think in this same way will

prove difficult, and as Southwest starts to visibly convert AirTran aircraft, airports and

employees into Southwest Airlines, the alignment of the culture is paramount.

Inexperience in international flights

Southwest has no experience with international flights, but plans on expanding and

opening routes into Central and South America. To other airlines that already fly

international to those places, Southwest is a huge threat. There is also the concern of

international law and customs because some laws can alter the efficiency of their

logistics. There is also the problem of the language barrier in their own employees.

Opportunities

International Expansion

In order for Southwest Airlines to continue to grow and maintain its position at the top

of low cost carriers, new opportunities must be recognized and acted upon.

International destinations provide a great opportunity for growth. Southwest Airlines

has started capitalizing on their purchase of AirTran – a small airline with an array of

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aircrafts, large and small. This is ideal for short distances and flights into new

international locations such as Mexico and the Caribbean. They are also working on

acquiring a new reservation system that will allow them to handle international flights.

If Southwest Airlines can expand that and maintain its reputation as a low cost carrier,

it is upholding the competitive advantage in this highly competitive environment and is

the first of its kind that offers international flight destinations.

Longer flights

Southwest Airlines can offer longer flights that give them the opportunity to truly show

what Southwest Airlines has been known for: their customer service. A friendly, upbeat

crew that reflects the spirit of Southwest can strengthen their customer relationship on

longer flights. In addition, it gives Southwest Airlines the opportunity to offer

entertainment on these longer flights that other low cost carriers do not offer. The

entertainment could include movies, interactive games or possibly live entertainment.

Through it all the Southwest crew would continue to provide their trademark humor

and quality service in catering to the needs of their passengers.

More flights to more destinations

Demand for flying is beginning to recover. Even though there was a drop in travelers

after 9/11, it’s been over a decade and customers are now more confident about flying.

Over the last year, 742.5 million people utilized an airplane within the United States to

make it to their destination. This number is projected to continue to increase as time

wears on. It is important to recognize customers wants and in response Southwest

Airlines can offer more flights to specific cities and popular destinations to meet the

demands of the travelers.

Expand on advertising

Through clever advertising campaigns and social media, Southwest can capture new

customers and establish themselves with the younger generation that will become an

important market segment within a short time span. Southwest Airlines has actually

been very prominent in social media. Twitter and Facebook are used to interact with

travelers with questions and concerns about possible delays or complications with

connections. This personalized form of advertising is affordable and unique. It is

important to keep in mind that an increase in such advertising won’t conflict with the

prices of the flights. A self promoting campaign, such as their social media outreach, or

an interactive campaign would be the best so that the customer really submerge

themselves in the campaign.

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Offer leisure/business class seating

Another opportunity Southwest Airlines can expand on is offering leisure or business

class seating at a higher price for those who don’t care that much about a small price

difference, but appreciate Southwest Airlines service and flight destinations and flight

times. Southwest Airlines has many routes that are appealing to travelers of all kind;

chances are that people are willing to pay a higher price for a convenient connection

and Southwest Airlines could offer just that.

Threats

Increase in competition

There is a high competition for the low cost carrier market. Although the barrier of

entry is high and not many new companies are joining the competition, big established

companies such as United Airlines and Delta joining the low cost carrier market with

their own brand offering for low cost destinations and flights. Maintaining the

sustainable competitive advantage is the key.

Oil price

The rise in fuel and oil has been a threat that all airlines. Southwest Airlines has been

preventing the biggest price shock through fuel hedging; however it is still one of the

biggest expenses and it’s not in Southwest Airlines control. They have put devices in

place to raise fuel efficiency and through hedging and their efficiency they have been

handling this threat fairly well. There is a chance that fuel prices may decline, and in

that case their fuel hedging agreement might backfire and cripple Southwest Airlines in

the long run. In either case they can’t be influenced by Southwest Airlines policies and

they just have to be anticipated.

Terrorist Attacks

The possibilities of terrorist attacks are always a threat to the airlines, including

Southwest Airlines. Another attack will again lower the numbers of travelers and strike

fear of flying. In addition past terrorist attacks have caused a new string of policies and

safety measures that raised prices and time for procedures for the ground crew

significantly. Also on the plane itself and during flight incidences and protocol are dealt

with in a different way and have raised costs for Southwest Airlines. New policies are

added regularly to protect Southwest from this threat.

Recession

The current recession has made it hard for people to find work and pay their ordinary

bills. Vacation or any leisure travel has not been in many people’s budget since they are

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struggling to stay afloat. It is a threat, because it lowers the numbers of consumer

altogether whether it is a cheap ticket or not. It might be beneficial for Southwest

Airlines, because they are a low cost carrier, however with the high amount of

competition and the reduction in the consumer numbers it is a hard threat to overcome.

Exclusive ticket purchase through Southwest website

Many consumers are purchasing their tickets through search engines that can filter

multiple carriers and different connections with rapid speed. Consumer book through

those sites and compare prices and connections. Southwest Airlines has been mostly

offering their tickets through their own website and are often left out in the search on

sites such as Orbitz, Expedia or Kayak. Consumers love convenience and might overlook

Southwest Airlines cheap offers, because they are not included in the search

connections of those booking sites.

5.2 – REVIEW OF MISSION AND OBJECTIVES

The mission statement of Southwest Airlines is dedication to the highest quality of

customer service delivered with a sense of warmth, friendliness, individual pride, and

company spirit

Southwest’s objective is “doing the right thing”, and they focus doing the right thing for

their people, the planet, and performance.

Strengths

Many companies don’t have a mission statement that can take a course of coherent

actions. Southwest’s on the other hand is able to see where they want to go, and what

company they want to be. People who have been on a Southwest flight will have

firsthand experience of what Southwest is all about. Customer service and getting

people to their destination at the lowest fares has been the key things that Southwest is

addressing. Their well implemented mission statement has also led them to become the

largest discount domestic carrier. Thing like this justify that they are on the right path.

Their customer driven actions have helped in customer retention.

One of Southwest’s objectives is oriented around people. Herb Kelleher once said “If you

get your passengers to their destinations when they want to get there, on time, at the

lowest possible fares, and make darn sure they have a good time doing it, people will fly

your airline”. This has stuck with them since their inception and continues to shine

through as it comes to the end of 2012. They have never had to modify their direction

because their mission statement clearly points it out.

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Weaknesses

Unfortunately, one of the weaknesses is not addressed in the mission statement. Some

form of financial problem always shows up, sometimes it’s minor, sometimes major. In

Southwest’s case, their declining profit margins have been an issue and it is hard to say

if this is a major or minor problem. It is also hard to say that this trend is tied to their

mission and vision or is a trend that will go away. The fact still remains that they have

never had to change their direction. On the bright side, Southwest says they are a

business of people. Dealing with the integration of AirTran’s employees into a great

culture and friendly environment helps keep them going. It is still a problem, because

many have a hard time integrating their culture with others. Southwest has the right

direction to face this culture problem, but it is still uncertain if it will work out. Lastly,

future contracts are used by airline companies to hedge against risk, and any of the

savings are passed down to the consumer, so that they enjoy the cheapest tickets

around.

Many of these weaknesses can be addressed by their performance driven objectives.

But taking a look at their declining profit margins and revenue, it should be Southwest’s

goal to find the problem. Maybe it’s the economy, or maybe it’s the price of fuel. Their

objectives aren't addressing this problem and they must shape objectives so that they

can counteract this problem. Efficiency in price savings will always and forever be part

of Southwest. So future contracts will always be part of Southwest’s objectives.

Opportunities

The mission statement is mostly about the commitment of Southwest Airlines to their

customers through their excellent customer service. In this case Southwest Airlines

opportunity to expand to the international market as well as adding more flight

destinations can serve this mission statement. It includes the main point of keeping the

customers happy and satisfied and has them continuing to fly Southwest Airlines

through the service they have come to love. This is an important opportunity to offer

international expansions and additional destinations to their customers to not only

serve their demand of those new locations but also provide them with Southwest

Airlines industry leading customer service.

The objectives of Southwest Airlines are very performance driven. One being increasing

revenue while maintaining their reputation as a low cost carrier. By expanding to

international destinations and including new routes and flights the demand of customer

is being met and it will increase revenue. They opportunities align with these expansion

plans and go along with maintaining Southwest Airlines at the top of the low cost

carrier chain.

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Threats

The Mission Statement of Southwest Airlines is about customers and their dedication to

their customers. Through an increase in competition Southwest has to perfect and live

and breathe the mission statement day in and day out. It has to come from every unit

within the company, every staff member and every crew member. Facing strong

competition with the risk of losing customers isn’t an option and Southwest Airlines is

doing an amazing job upholding that promise to their customers. Facing rising oil prices

is another factor that can threaten the mission statement. However, Southwest has done

a great job by ensuring, through fuel hedging, that they are getting lower prices on fuel

and with that are able to continue to offer low prices to their customers which in turn

makes them happy. In addition, the current recession puts great importance on

Southwest Airlines to live by their Mission statement. It keeps customers coming back

to the friendly airlines with the great service. Southwest Airlines has to continue with

their way of excellent industry leading customer service and it will ensure that people

prefer flying Southwest Airlines.

The objectives for Southwest Airlines are focused on performance. Competition forces

Southwest Airlines to keep improving, becoming more efficient, faster and more reliable.

It is essential to stay ahead of the competition to remain the leading low cost carrier

and through performance they can achieve that. Fuel efficiency is another important

factor to uphold their objective of performance. Low fuel cost and high fuel efficiency is

the right mix for them to reach their objective. The performance focused airline has to

be more efficient and perform at the top of their game to ensure they meet their

objectives. The recession doesn’t leave a lot of room for revenue and large profit

margins, so it is important to become even more efficient and keep performing at their

best.

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VI. STRATEGIC ALTERNATIVES AND RECOMMENDED STRATEGY

6.1 – TOWS MATRIX – See appendix #5

6.2 – STRATEGIES ALTERNATIVES

6.2.1 – PROS AND CONS / CORPORATE STRATEGY/ BUSINESS STRATEGY /

FUNCTIONAL STRATEGY

Strength- Opportunity (SO) Strategy – (Well Implemented Company Vision – Increased

Flights and Destinations)

Pros:

A Strong vision allows for Southwest to have a clear sense of direction

Catering to customers through “the highest quality of customers service” which

pushes Southwest to expand and provide its customers with the opportunity to

choose from a variety of flights and destinations at the lowest price possible

Allows Southwest to firmly grab its market shares which will enable Southwest

to have a steady flow of revenues

Brand recognition would give Southwest power when they start flights

internationally

Southwest has a well implemented company vision of catering to their customers’ needs

with the highest of quality, at the lowest price. With its recent acquisition of AirTran,

Southwest can now offer low flight and package prices internationally. Customers like

options. Having the capacity/ability to provide more flights routes and destinations

domestically and internationally are a way Southwest can gain a competitive advantage

over its competition. In addition, this can potentially increase revenues with the current

improving global economy, since Southwest’s revenues rely heavily on customers’

ability to choose Southwest Airlines as their service provider.

Cons:

Expensive and time consuming to make employees from a different company

have the same vision that makes Southwest strong

Increased routes and destination need different route networks which could be

too complex and can potentially lead to Southwest’s inability to provide the

lowest flight prices

Bringing in employees that worked for AirTran is going to be expensive because

switching them to a completely different culture can potentially lead to a deleterious

subculture created by previous AirTran employees. This can lead to a less than

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exceptional customer service experience which in turn leads to a tarnishing of

Southwest’s brand name. Thus making Southwest inefficient to compete in the

international market because customers will be reluctant to choose Southwest as their

service provider. This can further lead to a loss on investment and cause Southwest to

potentially have a retrenchment strategy if unsuccessful.

SO (Growth Strategy)

Pros:

Enables Southwest to expand

Southwest strong vision can be used to exploit its new international market by

offering the same exceptional customer service

Through the acquisition of AirTran, Southwest has been able to grow and tap into a new

market in which it has plenty of opportunities to keep expanding. By expanding their

current route network they provide customers with more options, this will cause

satisfaction to go up, bringing more revenues. More destinations offered means that

Southwest will expand to different demographics and different clientele while being the

most affordable airline available.

Cons:

Heavily relies on being efficient and this process takes time and money

Growing too much too fast can lead to Southwest neglecting its current

operations in their domestic market

New employees may not have the same work ethics as Southwest employees

have

Growth requires taking risks, and accumulating more expenses, in the beginning stages

Southwest’s short and long-term debt will increase. Through the acquisition Southwest

has also acquired employees with a different mindset.

SO (Retrenchment Strategy)

Pros:

A temporary retrenchment could have been beneficial prior to the acquisition of

AirTran because it could have temporarily dealt with it domestic issue of declining

profit margins, which would allow for a zero amount of cash to be barrowed and

reducing its risk on investment.

Cons:

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Retrenching would mean that Southwest is unable to be efficient in being able to

provide its customers with a new and better flight network

Customers liked options even before the Air Tran acquisition. It would have been

counterproductive to reduce its routes, flights and operations costs because those

revenue streams (create by its customers) can easily substitute for another provider. In

addition the opportunity cost, such as brand loyalty, can have a negative impact on the

Southwest Airlines brand.

SO (Stability Strategy)

Pros:

No potential pros can come out of Stability because the airline industry relies

heavily in one’s ability of making drastic changes to acquire a competitive

advantage.

Currently Southwest is practicing a growth strategy and is working to hit the ground

running in the international stage.

Cons:

Stability is the inability to adapt and survive, so this has motivated Southwest to

completely reject this strategy and take the risk of a growth strategy. In addition

stability would not have addressed the issue of declining profit margins.

SO (Differentiation Strategy)

Pros:

Southwest’s customer-orientation leads to efficiency and most if not all other

competitors cannot easily duplicate this strategy

Lowest prices, no reservations, and a “fun and easy flying experience” further

distinguishes them leading to Southwest’s ability to get a larger market share

Strengthens the Southwest Airline brand

Strives for zero defects in its value-chain system while trying to be as green as

possible

Prior to the acquisition of AirTran, Southwest strived in differentiating itself through

high quality service at low rates with more destinations and routes than anyone in the

United States. Differentiation will be extremely beneficial because there are more

competitors in the international market. With a differentiation strategy Southwest will

hit the ground running and will be able to grab a large portion of market shares. As a

result, a stronger Southwest Airline brand will emerge, giving Southwest a strong

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position and the ability to exploit other opportunities in which its competitors are

failing in.

Cons:

It’s expensive to offer a distinguished service and will become more complex

because now Southwest is not only competing with competitors on its home turf

Differentiation is expensive and complex especially when expanding to an international

market with tougher competitors. Southwest cannot just give all its efforts to one

market but both domestic and international simultaneously. Differentiation is

expensive because it takes time to formulate a “magic sauce” that will be efficient in an

international market.

SO (Lower of Cost Strategy)

Pros:

Southwest is always striving to have its operating costs as low as possible which

enables them to provide low flight prices

Gives Southwest a superior competitive advantage because they can cater to

more people

Higher revenue streams

Operating at a lower of cost requires for a strong value-chain meaning every aspect of

the business and its supply chain must be extremely efficient. This efficiency equates to

a competitive advantage that cannot be imitated easily. Hence, more customers will be

attracted by their low prices and the highest quality of customer service which will

increase Southwest’s revenues and have the capital to exploit any new opportunities

that may present itself.

Cons:

A lower of cost strategy is going to be expensive and time consuming partly because a

new market means a new set of challenges will arise. Therefore Southwest will

experience different constraints and will have to adjust accordingly.

SO (Functional Strategy)

Pros:

Southwest’s functional strategy allows for them to look at every aspect of the

operation and pushes to maximize its potential at every level through efficient

management

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Makes more routes and destinations options available because Southwest’s is currently

working on maximizing its resource production (flights sold) by acquiring AirTran. In

addition a functional strategy of maximizing the amounts sold makes Southwest more

efficient in its value-chain system.

Cons:

Southwest needs time to properly maximize its production resources (it is not a

quick fix) which will lead to more expenses

There is also a risk factor with having more flights and destinations (flight

network) because external factors will have a greater effect on Southwest ability

to provide flights

If unsuccessful in their functional strategy Southwest will be unable to provide the

lowest flight prices thus losing its international competitive advantage.

Southwest’s expansion into the international market also requires for risk and these

risks are expensive. In addition there are so many variables (uncertainties) that come

into play when expanding. This means more added pressure on Southwest which can be

counterproductive if it cannot handle the added stress.

Strength-Threats (ST) Strategy - (Largest Domestic Carrier – Recession)

Pros:

Southwest’s success in their domestic market will serve as a blue print that they

can use in the international market, thus leading to a good sized market share

within its early years, creating extremely high barriers to entry into the airline

industry for new entrants.

Strong positioning is always beneficial because of the advantage it has on being able to

cope and adapt to any circumstance. Threats cannot be as devastating compared to a

smaller competitor/company.

Cons:

Global economic conditions are full of uncertainties

Global events would have a greater impact on Southwest depending on where

Southwest is locating its flights destinations

Threats such as economic downturns can be unpredictable especially now that

Southwest is going into an international market, conflicts such as wars/terrorism

abroad can and will affect its ability to sell flights regardless of how successful

Southwest has been in its domestic market.

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ST (Growth Strategy)

Pros:

Pasts successes will help Southwest adapt to a different market that might

having similar and different challenges present.

Southwest’s brand is already strong and could intimidate other competitors to

possibly have a cooperative strategy in mind, giving Southwest a competitive

advantage

Growth will push Southwest to continually push for efficiency

Southwest will be able to have a wide range of customers thus leading to an

increase in revenues

Southwest’s success can be linked to how much risk they are willing to take. Southwest

has heavily invested in going international and its return on investment is expected to

increase to 15% which for any airline company would be an exceptional return.

Cons:

New set of challenges and external factors must be considered when trying to

achieve goals and objectives

Higher revenues are never guaranteed

Southwest could fail in the international market because global events, especially those

in countries that Southwest will operate in, they will have a greater negative effect. A

decrease in revenues could lead Southwest to a retrenchment strategy, which can

negatively affect the brand. Uncertainties are always present; however, if Southwest

doesn’t grow its opportunity cost (of expansion) it can potentially leave them behind

the competition.

ST (Retrenchment Strategy)

Pros:

Could benefit Southwest when recession are present, by just making flights that

are completely full and temporarily pausing operations that might be a high

priority

A retrenchment strategy especially in tough economic downturns can be beneficial to

saving a company. Threats can become more manageable when operations are reduced

to basics in order to keep up with tough times.

Cons:

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Could be counterproductive because Southwest has already invested time and

resources into expanding operations (through the acquisition of AirTran) to

serve customers at the international level.

It could also have a negative impact on revenues, during the 9/11 tragedy

Southwest did not use a retrenchment strategy and was able to keep positive

profit margins

After the acquisition of Air Tran a retrenchment strategy would be very

counterproductive because it would mean their expected return of investments of 15%

will be useless due to the fact that Southwest will have to reduce its resource

productivity of flights. Less flights equates to less revenues. Fewer revenues would

mean that their current situation of decreasing margin profits has not been adequately

addressed.

ST (Stability Strategy)

Pros:

Currently a stability strategy is helping Southwest maintain normal operations in

its domestic market, meanwhile it is also currently preparing itself to start

international flying

Additional time will give Southwest the ability to learn the new market and

competitors and strategize to exploit opportunities and others weaknesses

We would all agree that stability has played a positive role in Southwest’s domestic

market because they are the number one airline provider, domestically. From the point

of view of their new international market, stability can contribute greatly, it would

allow for Southwest to use their competitive advantages (low operating prices,

efficiency, and high quality customer service) to exploit it competitors weaknesses.

Cons:

Will only prolong Southwest entry to the international market leading to more

expenses to accumulate

ST (Differentiation Strategy)

Pros:

Being the largest domestic carriers has allowed for Southwest to develop a

strong differentiated strategy which should also help in the international market.

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Differentiation is what has allowed Southwest to have a positive profit margin

during domestic tragedies, which could help Southwest when facing challenges

in their new market

Will allow for increasing its revenues

Differentiation will allow for Southwest to have a steady flow of revenues (through

flights being sold) regardless of any possibilities for a global recession. This can

increase the Southwest Airline brand and in the future can lead to more revenues.

Cons:

Time and costs tend to accumulate

Differentiation can only go so far in terms of technology

Differentiation is expensive regardless of what market Southwest is in because it

requires a level of efficiency. This can create a problem when looking for new suppliers,

mainly because they cannot match the level of commitment that Southwest has for its

customers.

ST (Lower of Cost Strategy)

Pros:

Pushes Southwest’s directional business strategy towards efficiency throughout

the organization

Southwest will be able to keep operation cost low which leads to lower flight

costs to customers, giving Southwest a competitive advantage that is unique

Will make Southwest efficient through the entire organization thus making them

extremely competitive in the international market. Through Southwest’s ability to

provide low cost flights (made available through lower of cost) Southwest will benefit

from higher revenues and further strengthen its brand and customer loyalty.

Cons:

Lower of costs strategy requires time and money to properly diagnose its current

constraints. Employees and suppliers must be on the same page of efficiency.

ST (Functional Strategy)

Pros:

Enables Southwest to analyze its production resources and pushes for the

maximization of the resources to reach objectives and goals

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Keep Southwest focused on its objectives

Strengthens Southwest’s operations that external factors such as recession can

be handled effectively.

Cons:

We do not see any Cons in the use of a functional strategy because revenues are

linked to customers’ ability to choose Southwest. Through efficient maximization

of resources, Southwest will be able to be a competent and competitive airline at

the international level.

Weakness-Opportunities (WO) Strategy - Declining Profit Margins – International

Expansion

Pros:

Forces Southwest to fix its declining profit margins issues by investing in other

ways of acquiring its oil.

New methods of acquiring oil will allow for Southwest to overcome its current

weakness of declining profit margins (although they are still positive).

Southwest will have a great competitive advantage in their international

expansion because they will not depend on fluctuating oil prices

International flights can be sold at a very competitive price which will lead to

more customers and higher revenues

This translates to having sufficient funds to pay off debts/obligations, more

resources to exploit opportunities and it allows for Southwest to invest in new

and innovative ways to become more efficient.

Southwest can accomplish a 15% return on investment which will lead to a

strengthened Southwest Airline brand

Southwest can capture a larger market share than other new entrants to the

international airline, within its first year of its international market debut.

Cons:

Requires higher risks to be taken therefore capital invested is more than likely

borrowed which increases their debt

If unsuccessful Southwest’s credit score can suffer further handicapping

Southwest in terms of being able to efficiently exploit opportunities.

Southwest’s inability to exploit others weaknesses puts Southwest in a very

vulnerable situation an might have to retrench in order to service

WO (Growth Strategy)

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Pros:

Fixing its currently problem of declining profit margins would show that

Southwest is financially stable and it would show Southwest’s adaptability to

adverse challenges

Growing or expanding its current method of acquiring oil will greatly reduce to

risk of oil price fluctuations

Southwest will have a steady/fixed price on oil, making international expansion

affordable to Southwest which ultimately make it affordable to its customers

A growth strategy will strengthen Southwest’s internal operations that will

positively reflect in its external (international) expansion

Efficiently growing into a new market and expanding its operation for example

through the conservation of oil) Southwest is increasing its chances to succeed

and capture a greater market share.

In order for the WO strategy to be successful there must be growth (not just through its

acquisition of Air Tran) in Southwest’s investments such as fuel efficient aircrafts,

multiple methods of acquiring and conserving oil and acquiring a higher range of

suppliers. Consequently this will enable Southwest to have a strong value chain system

where efficiency translates to an increase in profit margins. Positive profit margins

restore the creditor’s faith in Southwest, and customer loyalty through their high

quality of customer service, and it will continue to give Southwest a competitive

advantage.

Cons:

Looking into new methods of acquiring and retaining oil have some costs

associated with it for example storage costs of the oil, transportation costs, costs

to refine the crude oil into jet fuel.

International flights will require a more dynamic strategy, which will include

operations, and investment. Air Tran employees will all play a role on Southwest’s

growth strategy which translates to large amounts of time and capital that will go into

the international market. Southwest will have to deal with more complex problems both

internally and externally which may put time and capital constraints on Southwest.

WO (Retrenchment Strategy)

Pros:

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Would have a positive effect on Southwest’s domestic flights it would allow for

less popular flights to be temporarily reduced which would offset the high oil

prices that are causing Southwest to have decreasing profit margins.

A retrenchment strategy would also help Southwest save money and a portion of

that money can be directed towards into getting its international operations

started

Will help pinpoint any constraints and ultimately make Southwest more efficient

Retrenchment would be very beneficial to pinpoint what areas of the operation

Southwest is failing and a strategy could be formulated to increase profits or keep then

at a steady rate. It would allow for Southwest to efficiently address its domestic issue

and avoiding the possibility of failure in their international expansion.

Cons:

May cause Southwest to stop their international expansion which would mean

that Southwest’s investments in acquiring Air Tran was in a sense useless.

However due to Southwest’s current acquisition of Air Tran a retrenchment would

mean that Southwest would halt operations in their investments (opportunity costs lost)

and would further delay their debut on the international stage. Debt/obligation

interests would be higher because Southwest would take longer to start operations

abroad.

WO (Stability Strategy)

Pros:

A stability strategy would be feasible long after Southwest Airlines is well established in

the international market. Which would allow for Southwest to be among the dominating,

if not, the dominate competitor.

Cons:

Stability would be highly inefficient because growth needs to occur first and second the

airline industry has certain levels of stability (not too much) because a strong company

always has the ability to adapt to unexpected situations. Stability would be expensive

because stability in the early phase of the Air Tran acquisition would keep Southwest at

its current financial situation, declining profit margins.

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WO (Differentiation Strategy)

Pros:

Looking into oil conservation would distinguish Southwest in terms of its ability

to provide the lowest flight prices when oil prices are high

The previous strategy would help Southwest overcome its declining profit

margins

Efficiently eliminating declining profit margins would greatly facilitate in

effectively expanding internationally.

Reducing oil expenses efficiently will allow Southwest to be competitive which

will lead to larger market share and ultimately increase its profit margins

More profits would mean that Southwest can invest heavily in its aircrafts fuel

efficiency

The ability to efficiently and effectively invest in oil conservation will differentiate and

give Southwest a competitive advantage when oil prices are too high or when supply is

low. Southwest will be able to give customers more options and will not effected this

too much by fluctuated oil prices, consequently this will be giving Southwest a steady

revenue stream leading them closer to their 15 percent return on investment objective.

Cons:

Differentiation could lead Southwest to invest heavily on something that is

counterproductive.

Conservation of oil has other expenses and costs associated, meaning it would

not benefit Southwest to invest in such a strategy

More challenges/problem can arise from Southwest inefficiently trying to

conserve oil

Being efficient will be more complex because Southwest is not a domestic only airline,

thus more challenges both internal and external will need time and money to properly

address them.

WO (Lower of Cost Strategy)

Pros:

Overcoming declining profits require and forces Southwest to address its

inefficiencies, not just senseless cutting cost but looking for efficient ways of

operating that will in fact reduce the overall costs of operations

Lower of costs strategy has differentiated Southwest in their domestic market

and can use this strategy for their international expansion

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Efficient implementation of the lower of cost strategy will help Southwest further

differentiate itself from the competition

A lower of cost strategy can greatly help the WO strategy to be successful. Southwest

has been able to efficiently use the lower of cost strategy in their domestic market

which has made the company they are today. This strategy can be an important factor to

Southwest’s success in the international market as well because it pushes Southwest to

be efficient through its entire operation process. In fact because of their efficiency

Southwest Airlines can provide the lowest flight prices and still be able to have positive

profit margins (although profits margins have been decreasing they still remain

positive).

Cons:

Becoming efficient in order to eventually accomplish a 15 percent return on investment

takes time and can become more complex due to Southwest current acquisition.

WO (Functional Strategy)

Pros:

Allows for Southwest to have an efficient operation at all levels

A functional strategy forces Southwest to remain customer oriented, Southwest

ability to efficiently maximize its production resources will ultimately benefit its

customers

Higher revenues streams may lead to further expansion both internally and

externally

Efficiently being able to maximize its productivity resource through its functional area

of investing (through acquisition), hedging (for cheaper oil prices), a strong value-chain

(efficient supply chain management), and strong workforce, Southwest can in fact reach

its targeted return on investment. Being able to maximize productivity resources has

allowed Southwest to spread its LUV to its customers leading them to a positive

revenue. The Southwest LUV will also contribute to reaching its targeted return on

investment and future goals.

Cons:

This will be time consuming and expensive, however it’s through Southwest functional

strategy that they have been able to survive and become the brand they are today.

Weakness-Threats (WT) Strategy - (Integration of AirTran into Southwest’s Culture-

Increased Competition)

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Pros:

Having one culture among all (old or new) employees will greatly influence the

success of Southwest in both markets

Southwest competitors cannot imitate a strong and united workforce

One united and strong culture will greatly benefit Southwest in the international market.

This will give Southwest a competitive advantage in terms of having the ability offer the

“highest of quality of customer service” anywhere around the world. This will further

strengthen the Southwest Airline brand which will allow for Southwest to exploit any

opportunities. One efficient and clear culture will attract more customers to choose

Southwest because Southwest will be able to provide the lowest flight prices. More

customers equate to Southwest having the abilities to capture and sustain a greater

market share thus a greater revenue stream.

Cons:

AirTran culture was completely the opposite of Southwest

May be difficult for previous AirTran employees to adapt Southwest’s culture,

which can lead to the creation of subculture and may hurt the Southwest brand

because the lack of quality customer service in the international market

Previous AirTran employees might have a difficult time adjusting or adapting to

Southwest’s corporate culture. If employees are not fully submerged in their new

culture, customer service will suffer in the international market leaving Southwest at a

disadvantage to its competitors.

WT (Growth Strategy)

Pros:

Strong culture is fundamental in the successful growth and expansion of

Southwest

Opportunities could be exploited because all employees have the same vision

Competitors will be unable to duplicate Southwest’s fundamental advantage

which has a chain effect on all areas of the business

A strong culture is essential for Southwest’s ability to efficiently and successfully grow.

Successful growth can benefit Southwest because all employees at all levels have the

same mission. Opportunities can be exploited which will have a positive effect over

Southwest’s revenues. In order to stay competitive Southwest is always growing or

expanding in some form which has a lot to do with being as efficient as possible.

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Cons:

If Southwest is inefficient at integrating in one culture, competitors will exploit

that weakness

Without one culture Southwest will lack direction and fall short among its new

international competitors

When growing and expanding there are much higher risks and expensive, however a

strong and fundamental culture is essential for Southwest to start building on which

will ultimately lead to its success.

WT (Retrenchment Strategy)

Pros: N/A

Cons: N/A

Retrenchment would not be the strategy to pick because it is irrelevant to Southwest’s

current weakness and threat. It would require for Southwest to cut operations and

move backwards when they have already started addressing the cultural differences

WT (Stability Strategy)

Pros:

Southwest should practice stability to some degree in its domestic market to

fully address the integration issue which would lead to a successful start

Southwest will be able to avoid external problems through a stable and constant

internal improvement

Before operating Southwest should be stable (doing its regular operating functions)

with its domestic market and also temporarily stable with the integration of AirTran

into Southwest’s corporate culture. This will allow for Southwest to fully address the

integration which will reduce its risks of failing in customer service. This will

distinguish Southwest from other airlines and lead to higher revenues.

Cons:

Stability will prolong Southwest’s entry into the international market which will

accumulate more costs

Approaching the integration issue with stability will be time consuming to do this right

the first time. In addition more times leads to more resources that need to go towards

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integration which can lead to a slight neglect in their domestic market because

operations are still operating normally.

WT (Differentiation Strategy)

Pros:

A strong culture shows direction, other companies may not have a clear direction

which helps to further distinguish Southwest

Consequently Southwest’s culture makes Southwest to continually strive for

excellence

Efficiency is the driving force of all of Southwest’s strategies, goals and objectives

which gives Southwest the ability to produce results

Forces Southwest to think about innovative products/services to help customer

have a “fun and easy flight experience”

Having one corporate culture will differentiate Southwest with its increased amount of

competitors. Southwest is very customer oriented which gives them a competitive

advantage because pushes Southwest in always being the lowest priced alternative

airline accompanied by high quality customer service

Cons:

All competitors are looking to have a competitive advantage

Differentiation can be complex because all the other airlines are trying to bring

something different to distinguish them. This means Southwest has to be constantly

thinking ahead of in terms of how they can exploit it competitions weaknesses.

WT (Lower of Cost Strategy)

Pros:

Promotes efficiency throughout the company to operate at a low cost which

ultimately customers benefit from low flight prices

Operating at a lower of cost further distinguishes Southwest

Through the integration process Southwest can effectively use the lower of cost method

which will allow for lower costs while producing an exceptional workforce. Employees

will be able to reflect its new culture through their performance which can lead to

higher revenues. Providing an easy and fun flight experience will give Southwest a

competitive advantage in the international market regardless of how many competitors

exist.

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Cons:

The lower of costs strategy requires for efficiency from all employees at all levels

within Southwest.

Process to implement a lower of cost process is not cheap in term making

senseless cutting of costs

WT (Functional Strategy)

Pros:

In Southwest’s domestic market efficiently managing its operations through

constant improvement will continue to maximize their business/corporate of

selling flights with the minimal amount of impact to the environment

In the current acquisition stages maximizing its time and costs will give

Southwest a competitive advantage: employees need to be one hundred percent

customer oriented.

Striving for high quality customer service while providing the lowest prices on

flights forces Southwest to have eliminate defects within its value-chain system

Southwest is able have strong business/corporate strategies because their functional

strategy which allows for Southwest to fully maximize its productivity resources such

as suppliers, investments, employees and the different types of strategies Southwest

uses.

Cons:

Efficiency requires time and can be expensive to find the production constraints

that keep Southwest from being able to maximize its production resources

Although there are cons present, the rewards of being a tough competitor are much

greater and will allow Southwest to efficiently exploit its opportunities.

Weaknesses-Threats (WT) Strategy- (Futures Contracts - Oil Prices)

Pros:

Minimizing or eliminating its current hedging strategy will reduce the

uncertainty of fluctuating oil prices

Ability to reduce risk factor associated with oil prices can allow for Southwest to

efficiently stop its current declining profit margins.

Investing in buying their own oil company will completely eliminate the risk of

oil prices and the external factors that cause these prices to fluctuate

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Southwest can gain an immense competitive advantage in both its internal and

international markets

Flights prices are going to be very competitive which will permit for Southwest

to capture a greater market share

Ultimately leading to an increased profit margin making its 15 percent return on

investment more than feasible.

Overall Southwest should look into investing in its own oil company which can

ultimately make them a superior company and brand and it could offer even more

variety of services with the same high quality customer service.

Cons:

Extremely high upfront cost which can potentially create excessive debt

High financing cost will make Southwest’s debt imaginable if unsuccessful to

manage the oil company could leave Southwest bankrupt

New challenges and more startup cost will keep accumulating

Realistically this is a high risk investment Southwest would have to strategize and be

100 percent committed which may cause friction with other employees that believe that

the risks are too high. However, these high risks come with high rewards.

WT (Growth Strategy)

Pros:

Enables Southwest to grow and expand to a new industry (opportunity)

Investing in an oil company will greatly reduce the risk of overpaying for its oil.

Can potentially lead to new technologies that will make its jet engines more fuel

efficient

Can allow for Southwest to sell oil to other airlines which can only strengthen the

Southwest brand

Southwest will have an immense amount of new opportunities it can exploit as

well exploiting its competitors weaknesses

Overcoming its current weakness will enable Southwest to have a complete competitive

advantage and without a doubt can become a stronger company as long as Southwest

does not lose their focus, which is to always be customer focused which will always

keep Southwest pushing for efficiency

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Cons:

Growth is not cheap because more factors come into play, such as transportation

costs

Having a synchronized company regardless of where Southwest decides to

expand will extremely difficult because each industry has its own set of

complications that can be easily fixed

Having the right people leading Southwest toward grow is going to be crucial and

ultimately growth means their opportunity costs are going to be extremely high.

WT (Retrenchment Strategy)

Pros:

Could be highly beneficial before Southwest can debut in the international stage,

by momentarily pausing efforts to fully start operating internationally

Can allow for Southwest to direct resources into efficiently buying an oil

company.

Cons:

Southwest is already in the process of going international therefore a

retrenchment strategy means that Southwest cannot efficiently commit to buying

an oil company.

A retrenchment strategy would mean more cost will accumulate

Counterproductive and can handicap Southwest operations

A retrenchment strategy has its pros and cons however it would be unlikely and

realistic to use it because of Southwest’s current situation.

WT (Stability Strategy)

Pros:

Could allow Southwest to focus on either investing in an oil company or focus

going into the international flight market,

Allows for things to run smoothly without drastic changes

Southwest can save money by simply keeping operations as normal and hold off

the investment opportunity until Southwest can get a firm grip on its market

share

A stability strategy relies on how patient Southwest can be, meaning that it forces

Southwest to take one step at a time. Focusing on three (continuing its operation in

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their domestic market, acquisition of AirTran, and investing in an oil company)

operations at once would be highly unproductive.

Cons:

A stability strategy would not have any cons, it would help Southwest have a relative

objective and direction because it will not be able to efficiently do three things

simultaneously.

WT (Differentiation Strategy)

Pros:

Investing in an oil company will most definitely differentiate Southwest and its

brand

Their company would be more divers therefore more able to adapt when

uncertainties arise

Can create a business of supplying other airlines with oil and can make a profit

Objectives and goals such as high return on investments and positive/increasing

profit margins can be obtained

Can fund research and development for new methods of fuel, or fuel efficiency

which would allow Southwest to provide longer distances with a fraction of the

cost

Getting rid of Southwest futures contracts can be very beneficial in multiple ways all

giving Southwest competitive advantage over its competitors

Cons:

An oil company would mean a new industry

Could have a negative effect on their corporate image on their go green initiative

Southwest would be a Supplier to other companies around the world thus

loosing focus on their vision and mission

Constantly heading towards offering a differentiating product/service can sometimes

make a company jump into investment without fully strategizing and run the risk of

losing sight their main business objective.

The ultimate goal is to get rid of the risks caused by fluctuating market prices on oil

which have caused recent profit margins to decline, through the direct purchase of an

oil company Southwest should be able to provide customers with even lower prices.

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WT (Lower of Cost Strategy)

Pros:

Oil prices would finally be steady and Southwest could efficiently compete

regardless of any local or global economic crisis.

Promotes efficiency throughout Southwest’s organization

Lower prices equals more customers which means more revenues

Cons:

This large and risky investment does not come with a low price

Borrowing might be necessary, leading to a higher debt and more expenses for

years to come

Increasing/positive profit margins will not be quickly acquired

In the early stages of the lower of cost strategy cost will not be low however this will

only be temporarily. It’s in Southwest culture to be efficient in order to fully satisfy its

customers therefore a lower of cost will be beneficial in the long run.

WT (Functional Strategy)

Pros:

Enables Southwest to efficiently maximize the productivity resources that it can

control

Pushes Southwest to think about factors that are not controlled and makes it

possible for Southwest to get a hold of them. For example oil price fluctuations

would not impact Southwest because they control their own supply.

Can enable Southwest to strategically continue its expansion through its current

situations and makes buying an oil company realistic

Southwest can take a less risky way of being able to have some control over oil

prices by investing in an oil company enough to have a significant influence

because Southwest own a majority of the company.

Southwest can decrease or eliminate some risks associated with fluctuating oil prices

which involve owning or partially owning the oil company. Through Southwest’s

functional strategy both of these options (aggressive or passive gain of control) are

feasible.

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Cons:

No cons other than the usual risks, time consuming and costs associated with such

strategies. Besides the usual the functional strategy doesn’t have many disadvantages it

forces Southwest to fix its internal operations and carry that efficiency outwards.

6.3 – RECOMMENDED STRATEGY

After taking a close look at all the alternative strategies we did not pick either the SO

strategy and ST strategy because with a company like Southwest, it is their strengths

and the ability to exploit them has kept Southwest in a strong position in their industry.

Also, we did not pick the WO strategy. Although declining profit margins are never good

Southwest has been able to keep their profits margins positive. In addition this

weakness cannot negatively affect its current operations and its international

expansion. Furthermore, we did not choose the second option of the WT strategy,

because it would be risky due to the immense amount of money Southwest would have

to invest, in a completely different industry, but most importantly it would create

variation. Jack Welch said that “Variation is evil” and in Southwest’s case it has the

potential to leave them bankrupt because it has a variety of products/services.

Southwest Airlines is an airline that has a strong functional strategy and if it were to

deviate from that it could mean the end of the company.

Therefore, we selected the first chose of the WT strategy which deals with overcoming

the integration of AirTran into Southwest’s corporate culture in order to deal with the

increased number of competitors in the international airline industry. A strong culture

will greatly benefit Southwest giving them a competitive advantage that other

international competitors will be incapable of imitating.

Justification

After closely analyzing the WO strategy we realized that having a strong culture is the

essence of Southwest’s success in the international airline industry. Therefore,

Southwest must effectively integrate AirTran into the Southwest’s culture. One strong

culture, centered on its customer is the fundamental building block where Southwest

can have an efficient and obtainable functional strategy. A strong culture allows for

Southwest to have a clear sense of direction and purpose, therefore allowing Southwest

to exercise a lower of cost strategy by being able to efficiently maximize its resources.

“To provide the highest quality of customer service with a sense of warm, friendliness

and company spirit” drives Southwest to push out defects/constraints within its value-

chain system which enables Southwest to have an efficient organization. Finally a

strong culture is ultimately going to stop Southwest’s decreasing profit margins.

Furthermore, one strong culture enables Southwest to overcome other weaknesses

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mentioned in the TOWS matrix. For example having more profits (through higher

revenues) will allow for Southwest to have buying bargaining power when looking for

other aircrafts engine supplier (TOWS W3). Southwest can also have the necessary

funds to start its oil conservation which would greatly reduce its dependence on the

fluctuating oil prices (TOWS T2).

Ultimately the WO strategy would be the most beneficial and obtainable strategy with

the least costs and risk associated. A strong culture reflects on Southwest employees

which gives Southwest a complete competitive advantage because a strong and efficient

workforce is hard to imitate.

VII. IMPLEMENTATION

7.1 – IMPLEMENTATION PROGRAM

Southwest Airlines has a bit of a vexing task in front of them, especially with the

acquisition of AirTran. They will have to further implement new ideas and activities to

reach out and obtain value with their customers on a much larger scale. By doing so,

they will be able to continue pursuing their three passions of performance, people and

planet. With their competitive advantage in the market as the lowest priced airline

provider, Southwest has much more to lose if their decisions do not align with thei r

goals and objectives. So far, they have made very little error in their efforts to further

grow and develop their mission toward providing the best quality of customer services

and experiences. There is still quite a bit of room for mistakes, as would be the case for

any company. The problem does not completely affix itself to their current strategies,

but rather the uncertainty behind what is to come. What might be a good idea for

Southwest now may not come to be a desired end result. However, it is up to Southwest

to really take measures that will set them ahead of their competition by a very large

margin. Careful formulation of guiding policies will give Southwest a chance to

anticipate and overcome any obstacles that lie ahead for them. With a proper diagnosis

and analysis of the challenges that Southwest Airlines may potentially face, Southwest

could possibly have the ability to reach a variety of customer bases that they have never

reached before. This would be its next step in its master plan of expanding itself further

as the lowest priced airline provider on a more global scale. AirTran’s integration into

Southwest has come to open many new doors for Southwest to take coherent actions

that carry out these plans but only if implemented correctly.

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Learning and Growth

Objective: Maximize potential for growth

1. Local Flights

Southwest will look into expanding the amount of local flights that they provide by

looking into high traffic markets. With the rising costs of oil, flying on an airline can

sometimes prove to be significantly cheaper than taking a road trip in a vehicle. The

time savings and the added convenience that it provides give more incentive to choose

an airplane as a mode of transportation. By presenting more short distance route

options, Southwest will be able to gain customers that fly more frequently. Opening up

more time slots in the day in high traffic areas, Southwest Airlines will give new and

existing customers a variety of options that best fit their schedules adding value to their

brand. In order to implement that program Southwest will review the amount of flights

offered in high traffic areas, and if that region would benefit from an increase in flights

offered then Southwest will incrementally increase daily time slots until they have

maximized their profit in the region.

Southwest doesn’t have a specific time horizon to achieve this goal, as it rotates based

on season and economic conditions. However, having the ability to accurately predict

when the optimal time for increased and decreased flights offered is something

Southwest will accomplish by 2015. This gives Southwest time to experience the

varying demand of different seasons multiple times to ensure accuracy.

2. International Flights

One of the biggest setbacks that Southwest has been experiencing for quite some time is

its lack of coverage when it comes to its international travel routes. Initiatives to

expand Southwest will include all new routes both on a short distance scale and an

international scale. As Southwest goes through the process of acquiring AirTran, they

will be taking advantage of AirTran’s already available routes. Since the acquisition,

Southwest has already gained access to various parts of the globe. This marks the

beginning of a new program dedicated to flight expansion, but it will not stop there.

Southwest will aim to provide access to as much as the world as they can, leaving no

corner unturned. They will have to map out all new routes to make sure that no AirTran

routes overlap with theirs. In doing this, they will also be able to incorporate new and

different routes from AirTran that they had never had before and add it to their

itineraries. Any unnecessary routes will then be omitted and brand new routes that

have never even existed for neither Southwest nor AirTran will be added to the map

giving Southwest much more flexibility in the way it can offer its flights. This added

availability of routes will gain more consideration from customers in deciding on what

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airline to fly due to the convenience that it offers. Customers will automatically choose

Southwest since it will offer more flight options at the same great price and will gain

loyal customers who will pick Southwest as their default airline to fly.

It has already been estimated to take approximately two to three years to fully integrate

AirTran as part of Southwest. As flight expansion will come at a more gradual pace, a

possible five years is the amount of time it should take to fully establish effective flight

routes that cover much of the world. Southwest will slowly build different routes over

the course of the two to three years that they will be working on integrating AirTran.

Upon full integration, Southwest will aim to cover much of the globe, and will begin to

focus more of their efforts on creating alternative routes for the two years that follow.

They will then have a fully established routing system that will require little

maintenance depending on market trends and demand for trips to certain destinations.

3. Efficiency of Profit Maximization

There are two main functions Southwest will undertake to reduce costs and achieve

profit maximization. The first is going to be the release of new stock and bonds to raise

money to purchase an oil refinery. Purchasing a refinery will give Southwest a more

stable fuel cost, which is the largest supply cost they currently incur. This increases

their efficiency by allowing them to more accurately budget for fuel costs and reduce

their overall fuel expenditures, giving them the ability to reallocate those resources to a

division that can use it more efficiently. The second method of profit maximization

Southwest will undertake is the reduction of gates operating at airports where both

AirTran and Southwest operates. By combining operations, and reducing fees paid to

operate gates, Southwest Airlines will still be able to handle increased passenger load

from added daily flights, but in a more efficient manner.

On the horizon, Southwest Airlines will have released enough stocks and bonds to raise

the money to purchase the refinery by the year 2014. The reduction of gates operating

in overlapping Southwest/AirTran airports will be accomplished by 2015, along with

the rest of the AirTran integration into Southwest.

4. Fuel Production Self-sufficiency

In attempt to save on fuel costs, Southwest has set forth a strategy of purchasing fuel

years in advance in anticipation of the rising cost of fuel. Unfortunately, this has

resulted in some loss in funds since the purchase of the fuel is done under contract

meaning that Southwest must pay the set price for the duration of the contract no

matter what the price of fuel is at the time. Although it may prove beneficial when the

price of oil is higher than contract price, it is also detrimental when the price of fuel is

lower than that of the contract. To hone in on the risks behind playing in the field of oil

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markets, Southwest will seek to acquire its own source of fuel without much

interference. With the cost of fuel being as volatile as it is, predicting how much

Southwest will spend proves a challenge. By purchasing their own refinery Southwest

will cut out one of the middlemen and reduce their costs, allowing them to redistribute

their resources more efficiently. They will be able to self-sufficiently supply oil for

themselves making them less dependent but not fully independent on fuel prices. By

owning the means of production Southwest will be able to see a significant drop in fuel

costs that will give Southwest the boost that they need to offer their low priced fares. A

hefty investment will still be involved in order to acquire an oil refinery large enough to

fuel Southwest.

Southwest should be able to come up with a sum of about $100 million in capital by the

year 2015. They will use these funds to make their purchase in an oil refinery within

about a year and should expect to begin production of fuel in 2017. By then, they will

have the capability to fuel a majority of the Southwest fleet.

Internal Business Process

Objective: Acquiring AirTran and sources of goods

1. Organizing Resources

In managing the current acquisition of AirTran, Southwest will have to put together

large scale logistical operations to really allocate resources where they are needed. For

Southwest, it will be quite a process to move resources in and out between AirTran

locations and Southwest locations. Lack of resources will not be the issue here, but

rather making sure that every location has the adequate amount of resources to keep

operations consistent within each airport. This gives customers the same type of access

to resources in any location that they choose to fly. Since Southwest will be receiving a

large amount of aircraft as a result of the merger, they will be able to coordinate which

aircraft will be attributed to which flight plan. For each route there must an aircraft

available to carry out that route and with more aircraft come the flexibility to add more

routes to the map. Any other aircraft that is left over can then be used for the new

routes that will be laid out and will therefore be a deciding factor in what routes may be

offered.

As part of a function in the acquisition process of AirTran, organizing resources will be

done within two to three years. By the end of the first year Southwest should have a

grasp on what resources they have and how much of it is needed or not needed. Some

resources will have already been transferred to where it needed to be or sold off if

deemed unneeded. During the second and possibly the third year, the transfer process

will have occurred and set in place where needed.

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2. Merging Locations

As new routes will be formulated for Southwest, deals with different airports will have

to be made. For airports that have gates for both Southwest and AirTran, decisions on

which gate to keep and which gate to give up will have to be made. For the number of

gates that they cut back on, they can open a new gate at another airport where it would

be most beneficial for Southwest especially with the new routes that they will be

establishing. They can also choose to keep more than one gate at any establishment

depending on the size needed for that specific location. In keeping only one gate per

airport, Southwest can really intermix all operations into one cohesive unit. The

redevelopment of each location will have to take place as well so that the operation of

each facility can provide a simple and easy to follow procedure. Customers who are

already loyal to Southwest will be able to really familiarize themselves with how

Southwest operates at every location. The customer will in turn feel a level of comfort in

flying with Southwest and will want to stay a loyal customer due to the ease of the

flying process that Southwest will be able to offer. On top of that, new customers will

want to become more frequent customers due to the smoothness in operations.

Merging locations will be considered as a part of the acquisition of AirTran, meaning

that configuring locations will take two to three years. Southwest will have successfully

closed down all the gates necessary within the first year all while opening new ones in

areas that are included into the new routes. By the second year, Southwest will have

picked all its locations and by the third year new and old locations should be fully

established and running according to new operations.

3. Oil Distribution

Southwest will seek to obtain fuel from their own oil refineries. By cutting back on

middleman fees that come with purchasing oil from other companies, Southwest is able

to save a significant amount on fuel costs. Once an oil refinery is obtained, the next

course of action is to find a way to get the oil to the several aircrafts that they will need

to supply. They will need to construct different internal networks as guides to set

where, when, and how oil will be distributed and the transport of oil will need to be

regulated to ensure that the right amount of oil is allocated to the right locations.

Developing a model that can accurately determine where to send the fuel, and how

much to send is paramount for the strategic advantage of Southwest’s oil refining

implementation and the most efficient ways will save large amounts of time, energy,

and money.

It is expected for Southwest to have appropriate fuel distribution on the domestic level

by 2015. It could take approximately one year to establish daily transport routes for the

oil and another year or two to get into the routine of oil deliverance. From there, fuel

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can be distributed internationally. For another year, international route will be

established and will be fully assimilated by 2017.

4. Unifying Staff

As an addition to the Southwest family, all staff from AirTran will be welcomed into the

fun and loving culture that Southwest is highly known for. Working closely with

employees will be crucial in creating a more unified organization. Ideally, Southwest

will want to compile a whole new training program that will put all employees on the

same page. As a result, operations will then be run the same in every airport giving

customers a top quality experience that is consistent no matter where they choose to

travel to. Every employee will have to assimilate to all the new changes that will be

made so that Southwest may contain its congruence in all aspects of the flying

experience that it offers. Employees will be relocated periodically to really give them a

sense of how to run operations in differing environments. This will also create a sense

of variation in the workplace which will give employees a sense of excitement in the

workplace. Employees will feel much more connected to Southwest’s idea of a fun flying

experience since most will truly feel like they are having fun on the job. Employee

output will increase due to this morale booster which will also help to boost employee

ability to market Southwest further.

Although the acquisition is estimated to be two to three years, getting employees to

work as one single unit will take a bit of time. To even put forth a set of standards and a

training program to accompany them will take a year or two. Going through every

employee and putting configuring all the teams that will work together effectively will

also be done within the year. To actually train every employee will require the full two

to three years alone. There is still the factor of whether or not employees can fully

accept all the changes that are being made in terms of management the people of the

company. It could take several more years to build a staff where a majority of them can

and will follow the changes to Southwest.

Customer

Objective: Altogether appeal to quality in service

1. Lifting Brand Image

The integration of AirTran into Southwest will require a brand new look for Southwest

as a mark in history of such a pivotal moment. A new brand image will be required to

appeal to the acquisition and help to lure in more customers. New customers will want

to fly with Southwest just to see what the entire hype is all about, and existing AirTran

customers will be curious enough to give Southwest a try. Since Southwest already

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carries a reputation for providing high quality customer service at a low price, th is new

angle will show to existing Southwest customers that an already great airline has only

gotten bigger and better at what it does. It will be made known that Southwest has

taken AirTran under its wing as one of its own and that Southwest will “LUV” and

nurture AirTran as one of its own. Not only does this contribute to Southwest’s

whimsical image, but it shows how caring Southwest can be in its efforts to expand.

Southwest has so far utilized online social media to connect to customers pertaining to

the acquisition. This along with the other various modes of mixed media will be utilized

to create a significant amount of buzz about the AirTran acquisition. With all the money

saved from acquiring AirTran and its resources with the ability to generate more

income, Southwest will also be able to stick to its reputation as the lowest price airline

provider.

Only one year is needed to spread the word about the acquisition. That will also be

about how long it would take for the campaign to eventually die down. After the fact, it

will no longer be news to customers. It will also take several more years to fully build

new clientele through advertising.

2. Mission Statement

With its already strong mission statement of “dedication to the highest quality of

Customer service,” Southwest has quite of bit of a reputation to uphold. Since customer

service is one of their strongest suites, passing it on to employees at AirTran and other

future employees will come out to be a very simple yet beneficial task. A training

program would have to be made to maintain the quality control of the customer service

that they provide. This will help in getting employees from both Southwest and AirTran

to be on the same level in terms of philosophy and corporate culture. With a stronger

and more established corporate culture, Southwest will be able to reel in loyal

customers with their transparent way of setting a unified system for their employees. In

turn employees will feel much more connected to the company as a whole and therefore

will feel more responsible in contributing to the success of Southwest. Customers will

appreciate the efforts that the employees put into making their experience one that is

unique and will want to continue in flying with Southwest for just that reason alone.

Immediate action will have to take place as AirTran assimilates itself into Southwest.

Corporate culture can easily be established on the very first day that employees meet.

That is why a training program will have to be put together in a matter of weeks before

any employee transfers are made. Once a fully fledged training program has been

established, Southwest and then go on to put together a corporate culture that really

welcomes all the AirTran employees. By 2015, all employees should be up to date on

training programs and should have a sense of where they stand within the company.

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3. International Customer Expansion

With its expansion into the international markets, Southwest will have the opportunity

to reach a more wider variety of customers. Their initiatives to provide more flight

routes that travel to international destinations will give them the chance to market to

people in all different facets of the world. Southwest will gain more “sticky” customers

as they attract them with their corporate culture and mission statement. For them to

achieve customer loyalty on an international level would be a great measure of their

ability to reach out and gain value in the customer mind. They will really need to know

their market pretty well, otherwise campaigning in another country would be pointless

and inefficient. Having such diversity to work with will also open doors to many

opportunities

Global expansion is not the easiest feat. It usually takes some companies years to even

penetrate the international market. Ideally for Southwest, global economic reach will be

achieved at the very least within five years. For the first two years, Southwest will have

to work to establish domestic expansion. For about two to three years after, Southwest

will slowly begin to trickle into international domains and begin to connect with

customers to become one of the top discount carriers.

4. Customer Retention

Southwest has an already well established customer base that has helped them to gain

their reputation as one of the lowest priced airline providers around. To remain as the

number one discount airline carrier, Southwest must not forget about the customers

that have gotten them to their current position. In efforts to retain customers who tend

to choose Southwest as their first airline provider, Southwest must let customers know

that they are still going to be the same high quality airline service provider even with

the acquisition of AirTran. If anything Southwest will be able to instill their core values

to show that they will only be a better version of themselves. Southwest will utilize

their frequent flyers program to give incentive for existing customers to so that they

will keep flying with Southwest. This will also give them a chance to appeal to AirTran

customers who would be looking to find a new default airline provider. Southwest will

let AirTran customers know that they are not completely abandoned and that

Southwest will do what it can to provide the experience and comfort that they once

knew from AirTran. Incentives will also be set aside specifically for AirTran customers

to help influence their decision on who to fly with.

This will be an ongoing effort since they have been able retain customers for as long as

they have. They will expect to see a growth in frequent flyers at the very least within a

year to a year and a half. A bulk of that influx will be AirTran customers who will have

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grown to like and become loyal to Southwest. By 2015, stability on a larger scale should

be achieved through the efforts of Southwest Airlines to retain their customers.

Financial

Objective: Finding ways to be the most profitable

1. 15% ROI

The first largest cost being incurred by Southwest Airlines is going to be the integration

cost of AirTran’s employees to their corporate culture and the rebranding of AirTran

facilities and planes to Southwest. One activity Southwest will implement to mitigate

these costs will be the creation of a training program that efficiently trains AirTran staff

with as little time away from work as possible. Another activity Southwest will start is

the cross utilization of veteran Southwest on AirTran flights to set an example to the

AirTran staff, along with using AirTran staff on Southwest flights to learn firsthand the

expectations of Southwest staff. The other part of this financial burden is the

integration of AirTran capital to the Southwest brand. The main activity Southwest will

undertake is the selling of any planes are not Boeing 737 series planes, since part of

Southwest’s strategy is the exclusive use of this aircraft. The second activity will be a

conversion of facilities that will be used by Southwest and a selling off of those that will

not.

The time horizon for Southwest’s ROI returning to 15% ROI is to achieve that goal in the

year 2017. At this point, the AirTran integration will be completed, the oil refinery will

be online making and they will be well established in their international routes making

a 15% ROI easily achievable.

2. Reducing Fuel Expenditures

Buying a refinery is probably the most expensive than all the other implementations

combined. For any other implementation program, the costs allocated to them are very

low meaning that a surplus of funds will be available to fund Southwest’s plan to

acquire an oil refinery. Delta’s purchase of Conocophillip’s refinery for 150 million

dollars gives a good indicator on how much a refinery may cost. Due to the uncertainty

of oil, Southwest can add value in the same way that Delta has provided value.

Refineries do not obtain the final product; they take raw material and make the oil that

is used on our vehicles today. Based on recent prices of oil, owning a refinery will add

efficiency to the business without any added middleman costs or markups.

The big question now is how Southwest is going to pay for this. The first couple of

overhead costs and can be allocated with the cash that is on hand. They can also pay for

the programs that are needed to be done to unify the employees together. But a

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purchase of a refinery will need capital that Southwest might not have. The money that

Southwest has right now can buy a refinery, but the risks of having very low amounts of

cash on hand carry a very big risk. In order for Southwest to raise capital, they will issue

more stock the capital markets and aim to raise at least 100 million dollars. Southwest

will also take a role in selling bonds which is a great way to finance projects over a very

long period of time. Since this investment will last for years, bonds would be good for

that purpose. The remaining costs will be paid out of pocket in cash if absolutely

needed. This will leave Southwest enough to finance any other project that they choose

to implement, such as a new possible marketing campaign. They may even have enough

to prepare for situations of financial emergency, such as possible bottleneck financial

situations.

Building up financial stability will probably take an upwards of seven years to complete.

Although Southwest has lived through financial stability before, the implementation of

new programs will require a bit of temporary financial risk. The first two to three years

will involve a great amount of cutting back on extraneous costs. Two years following,

will be dedicated to finding creative ways to generate more profit. Once funds become

more established, it will take another two years to regain the stability that Southwest

once had. Only this time, they will be making more than they had ever had before.

After Southwest ends it futures contract with investors, they will have to go in search of

more fuel for their aircrafts. As they wait for their contract to end which is typically

around five years, they will be saving up and making deals with outside sources to

acquire an oil refinery of their own. Once acquired, it will take around two to three

years following the five years for Southwest to integrate fuel operations from the oil

refinery to the aircrafts and the operations that they entail.

3. Control Costs of Integration

Building off of the AirTran cost controlling methods discussed in the ROI portion,

Southwest’s approach to constructing an efficient transition program will allow them to

reallocate those resources to other aspects of the business. Providing on the ground

training, using the experience of veteran Southwest personnel is a cost effective method

of training AirTran employees. Also, the liquidation of overlapping AirTran operating

facilities and aircraft will help to raise cash for Southwest and move their operations

towards profit maximization

Southwest will have a complete integration of AirTran by 2015. The training of the

employees will be completed at the end of 2014 so that as the integration of AirTran

facilities and aircraft will run more smoothly. The integration of AirTran facilities and

aircraft will be completed at the end of 2015.

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4. New Profit Frontiers

The rebranding of AirTran aircraft to Southwest that service already established

international routes, coupled with a continued expansion into Central and South

America gives Southwest an entirely new revenue stream. The utilization of point to

point operations will serve as the backbone of the expansion, providing customers

consistency in operations no matter where they choose to travel on Southwest. Also, the

continuous expansions and retraction of domestic routes to maximize profits in all

markets they serve keeps adding to Southwest’s competitive advantage.

Southwest will establish the international routes over the next 5 years, with the goal of

have fully established itself in Central and South America and the first of the reaching a

point of profitability by 2017. Domestic flight adjustment is an ongoing program that

fluctuates with the seasons. Southwest’s strategy is to determine the most flights they

can put in a market in a day and maximize profit by offering as many flights as possible

without undermining themselves.

7.2 – WHO IMPLEMENTS STRATEGY

Gary Kelly, Chairman of the Board, President and Chief Executive Officer of Southwest

Airlines; will be the main overseer in following through with the efforts to expand

Southwest further as the lowest priced airline provider. Ultimately Kelly will have to

approve every decision and every move that is made. A big bulk of the weight rests on

his shoulders to carry out Southwest in the direction that it needs to go. Work will be

distributed among the board of directors so that every program is properly

implemented the way that it was intended. Each member will play a crucial role in

ensuring that the acquisition of AirTran will run smoothly and prove to be a worthy

investment. If any, one operation comes out with negative results, shareholders will

look to Kelly to justify reasons for failure. On the other hand, if all goes well in the

implementation of the all new programs, the members of Southwest will have much

more to gain in the long run. Employees from both Southwest and AirTran will all be

playing a role in the implementation process.

Learning and Growth

To carry out the extensive expansion plan for Southwest, the Chief Operating Officer,

Mike Van de Ven, will be in charge of approving all new flight routes. Him, along with

Vice President of Flight Operations, Chuck Magill, will work together in putting together

all the flight routes that will expand the horizons of Southwest. Chuck Magill will then

be in charge of working with the operations staff to ensure that flight plans are properly

carried out.

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Daryl Krause, the Senior Vice President of Procurement, would be the main field leader

in handling fuel affairs including the acquisition of an oil refinery. He will work with his

Vice President of Procurement, Rob Myrben, to come up with ways to be self-sufficient

and efficient in obtaining fuel. They will report back to Executive Vice President and

Chief People and Administrative Officer, Jeff Lamb, who will then collaborate with Mike

Van de Ven to come up with final decisions.

Internal Business Process

Mike Van de Ven will have to communicate directly with Jeff Lamb since he will be in

charge of up keeping all logistics. The distribution of all aircraft that is accounted for

will be Jeff Lamb’s personal responsibility meaning that his decisions on which planes

are available will play an important role in putting together new routes. Jeff Lamb along

with Daryl Krause will make sure that an adequate amount of resources will be set in

every location to allow for quality control of operations.

Executive Vice President and Chief Legal and Regulatory Officer, Ron Ricks, will be put

in that ring of communication as well since he will be making final decisions as to which

airports are needed in each location. Working together with Mike Van de Ven and Jeff

Lamb, Ron Ricks will collaborate with them to pinpoint locations that Southwest will

need to inhabit. With Vice President of Airport Affairs, Bob Montgomery, Ron Ricks will

work to oversee that the closing down of some gates and opening of others is

implemented.

As the very core of the company, being able to get employees to work together to

achieve company goals and objectives will entail a great amount of managing human

resources and training programs. Executive Vice President and Chief Commercial

Officer and President AirTran Airways, Bob Jordan, will be just the man for this task.

Not only will he decide on ways to promote togetherness within the two companies, he

will be an advocate for employees. He will help employees to understand why certain

changes had to be made and he will be the voice of reason when employees disagree

and feel the need to address an issue at hand. Randy Babbitt, the Senior Vice President

of Labor Relations, will be working closely with Bob Jordan as well as Mike Van de Ven

to figure out ways to increase employee benefits that will help to increase employee

output.

Senior Vice President of Operations, Greg Wells, along with Mike Van de Ven will have a

bit of work in front of them. They will also need the help of Daryl Krause and Bob

Myrben to work as a team. Acquiring all new sources of fuel on top of an ongoing

acquisition of another company will prove to have its obstacles. A synergy among the

operations staff will be imperative to configuring all new operations as to management

of fuel and its distribution to Southwest’s many locations. Gary Kelly himself may have

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to personally take care of some elements of this acquisition of an oil refinery. That is, he

will have to serve as the spokesperson for Southwest to strike a deal with owners of

this type of means of production.

Customer

Dave Ridley, Senior Vice President and Chief Marketing Officer, will be in charge of

restructuring Southwest’s entirely new brand image. Dave will have to divide design

teams to cover all aspects of promoting the company as one single unit. From company

logo to company uniforms, everything must be strategically put together to appeal to

the customer mind.

Senior Vice President of Customers, Teresa Laraba, will be working with Dave Ridley to

help give feedback on customer preferences and behaviors. By understanding the needs

of current customers Dave Ridley can more effectively build a more marketable and

versatile brand.

Both Dave Ridley and Teresa Laraba will discuss all final ideas with Bob Jordan, to get a

final decision approved and implemented. They will then work with the marketing and

customer relations teams to physically start building the brand by getting out into the

market and actively promoting the new but not so new image of Southwest.

Financial

These new programs will involve a lot of attention from Senior Vice President of

Finance and Chief Financial Officer, Tammy Romo, and her team of financial experts.

She will need to carefully watch the funds that go in and out of every operation and

function. This will allow her to calculate what programs will prove to be worth funding

in the long run. As Southwest attempts to acquire its own oil refinery, Tammy will need

to find more creative ways to constantly fund the operations of the oil refinery without

losing a significant amount of company profit. Careful management of stocks and bonds

will be needed to maintain shareholder stability.

7.3 – WHAT MUST BE DONE

7.3.1 – PROGRAMS

To accomplish Southwest Airline’s goal of further expansion as the lowest price

provider on a global scale, Southwest will have to implement programs in flight

expansion, organizing resources, merging locations, unifying staff, marketing advantage,

fuel cost saving, and financial return on investment. Each program is guided by an array

of activities that can complement or conflict with one another. These programs will

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ensure proper integration of AirTran activities and allow for long term management of

resources and funds. Program activities will include:

Learning and Growth

1. Local Flights

2. International Flights

3. Efficiency of Profit Maximization

4. Fuel Production Self-sufficiency

Internal Business Process

1. Organizing Resources

2. Merging Locations

3. Oil Distribution

4. Unifying Staff

Customer

1. Lifting Brand Image

2. Mission Statement

3. International Expansion

4. Customer Retention

Financial

1. 15% ROI

2. Reducing Fuel Expenditures

3. Control Costs of Integration

4. New Profit Frontiers

Their Existing Programs include:

Customer Service

1. Quality Service

2. Fun Loving Culture

Pricing

1. No First-Class

2. Eliminate Flight Meals

3. Hedge Fuel

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Efficiency

1. Decrease Turnaround Time

2. Two Bag Check In

3. Upgrading Aircraft

7.3.1.1 – MATRIX OF CHANGE

A matrix of change is a tool designed to gauge to “how quickly change should proceed,

in what order changes should take place, whether to start at a new site, and whether the

proposed systems are stable and coherent.” The matrix of change for Southwest Airlines

reflects how the new programs can contribute to a smoother acquisition of AirTran and

sets forth what is holding Southwest back from expanding.

Practices that have a positive sign linked toward one another indicate that those

practices are complementary. Positive outcomes will be welcomed if integrated

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together. Practices that have a negative sign linked toward each other are considered to

be interfering or conflicting with one another. Use of one practice will not be valuable in

the use of the other practice. Blank cells have no interaction and indicate that ne ither

practice really have to cross paths.

All target practices are regarded as important because they all serve a purpose in the

betterment of Southwest. International flights, efficiency of profit maximization, fuel

production self-sufficiency, unifying staff, customer retention, reducing fuel

expenditures, and controlling costs of integration were rated of the highest importance

since they play key roles in expanding Southwest and keeping costs low. Local flights,

organizing resources, merging locations, oil distribution, lifting brand image, mission

statement, international expansion, and gaining a 15% ROI were rated as important, not

as important because they are more supplemental the the key practices. New profit

frontiers were put as irrelevant since it is more of an opportunity that can come and go.

Existing practices have varied ratings since some practices are good enough to keep and

others may not be very necessary. Having no first class and eliminating meals were

rated as having no importance since they are small extra accommodations that were

only taken away to reduce fare costs. Two bag check in is only somewhat important for

its ability to decrease clutter and increase flight efficiency, but it can be limiting to

customers. Quality service, a fun loving culture, hedging fuel, and decreasing

turnaround time were rated as most important because they are attributed to saving

customers money and providing them with a top notch customer experience. Upgrading

aircraft was deemed irrelevant because it is just there to make Southwest look pretty,

which neither benefits nor hurts Southwest.

7.3.2 – BUDGETS

In 2011, Southwest generated more than 400 million in free cash flow. They also have

800 million in cash-in-bank. These amounts of cash they have allow them to have the

flexible room to invest in what they need to put capital to.

Learning and Growth

The first on the agenda is to boost capacity of short distance flights. To increase the

capacity, cost goes up with more flight attendants, higher airport fees, and other extra

overhead cost. The 400 million in free cash flows should easily cover the change in

flight paths. We should estimate that the cost of changing flight paths initially should

cost upwards of $10-$20 million. This is taken to account of all the employees and

airport fees while discounting the opportunity cost of normal flights By 2015 we should

be able to allocate our resources to increase local flights. Southwest is then going to

expand into Central and South America. Expanding into new locations always has the

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uncertainty passengers not flying with south west. In order with the new expansion,

Southwest needs to buy new airplanes. In the 2011 annual report, Gary C. Kelly says

there is going to be an“ order for 150 Boeing 737 MAX airplanes, with the first delivery

expected in 2017” (pg 3). These planes will be efficient when dealing with these new

locations. These activities can be expensive and that is why Southwest needs to raise

capital by issuing new stocks and bonds to pay for them. To streamline gate operations

and being fuel independent, Southwest needs to be financially ready to tackle these

issues. Concerning the oil refinery, we hope by 2017 we can refine our own fuel and can

save us money. Our largest cost right now would be the 150 planes that we purchased

and the oil refinery. We expect that our 400 million in free cash flow and the extra

capital we intend to get from issuing more stock and bonds will allow us to achieve all

these activities.

Internal Business Process

We believe that these activities will be part of the $400 million in Airtran’s synergies

that Southwest wants in achieve. Review and reallocate resources to necessary parts of

the organization are would be our first objective Training Airtran’s employees can be a

timely activity and $80-$100 million is a heavy price tag, but it has a very big synergic

value to it. The next step is to build a logistical routing system that mixes gates with

Airtran and Southwest. A R&D team should be able to come up with the system and

shouldn’t cost more than 10 million to implement. Training employees and coming up

with a route map should be obtained by 2015. Efficiently constructing an oil

distribution network to international and domestic locations would finish by 2017 and

2015 respectively. We see these models to be worked on with our R&D department

these activities shouldn’t be too expensive and should be part of Southwest overhead

cost.

Customer

Due to Southwest’s $400 million in free cash flow, advertising and brand improving

activities should be easily funded by southwest. These smaller initiatives are able to see

having positive cash flows. Employee training and customer recognition activities will

be implemented in 2013 and we will allow upwards of 80 to 100 million in cash in these

programs. Our goals are aimed at Airtran’s existing international customers. In the

2011 Southwest’s annual report, the CEO Gary C. Kelly also explains that replacing their

“reservation system with one that provides Southwest the capability to serve

international destinations, along with other revenue management and customer service

enhancements” (pg 3). Changing their reservation is one of the many actions taken to

make it easier for international customers to interact with Airtran. Continuing thei r

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brand improvement will be a never ending process and will continue as long as

Southwest sees value in advertising to new or existing customers.

Financial

Southwest is currently trying to control cost of Airtran’s operations; most of the

operations are in the integration of employees. In the 2011 Southwest’s annual report,

the CEO Gary C. Kelly explains “on the labor front, Pilots, Flight Attendants, and Flights

Instructors from both airlines successfully negotiated….Southwest will continue the

process of transitioning AirTran Employees to the family”(pg 2). Through schedule

optimization, revenue management, and frequent flyer program integration, they are

aiming at a $400 million in annual pre-tax synergies. These synergies and the $400

million in additional free cash flow allow them to invest into Southwest’s next project,

an oil refinery. We believe that due to the rising cost of jet fuel by refining petroleum,

there will be a positive discounted cash flow in buying an oil refinery. Even though we

have enough cash on hand to buy an oil refinery, we believe that it would be safer to

raise capital by issuing new stock. This allows Southwest to be able to be able to protect

itself from unexpected risk. Southwest should buy an oil refinery in 2016 and should be

starting to see positive cash flows by 2017. These investments will help Southwest

reach a 15% ROIC by 2017. Due to their short term financial goals, many uncertainties

arise and might not a 15% roic for a while. Their 2011 Investment Capital was 12.6

billion dollars, and their Adjusted Operating Income was 863 million coming to a ROIC

of 7%. To get to 15% ROIC, either Investment Capital needs to come down or Adjusted

operating Income needs to go up. Southwest should continue looking for investment

opportunities in the future. Their expansion into international flights should be

Southwest future goals.

7.3.3 – PROCEDURES

Each program that will be implemented will be designed in a way to complement the

functions of one another. The number one thing that every person involved will have to

do is use whatever leverage they can use to reach the goal at hand. That is, if Southwest

wants to grow as big as it does, company involvement must be set to high standards.

There must be a mutual willingness to make things happen the way that they are

planned. In attempts to integrate AirTran, the process that must be followed does not

quite have to occur in a sequential order. They can be simultaneously done to maximize

efficiency in accomplishing a set of objectives.

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Learning and Growth

Local Flights

a) Providing more flights out primary locations such as Los Angeles to Las Vegas, Los

Angeles to San Francisco or New York and etc

b) Last minute getaway flights giving the customer the opportunity to travel out to any

place they want for a reasonable air fare during non peak seasonal flights

c) Offering more flights that are nonstop to selected destinations

d) Develop a schematic time horizon that would allow Southwest to capture on

obtaining more customers

International Flights

a. Increase the amount of international flights out of various airports and acquiring

more terminal gates in different countries around the globe.

b. Offering flight incentive programs to attract more consumers to airline flights

c. Designing vacation packages so consumers have the opportunity to select

destination of choice that is in South America region or Central America region.

d. The acquisition of AirTran would allow Southwest to capture loyal customer base in

international countries like Europe, Asia, and other countries.

Efficiency of Profit Maximization

a. Acquiring an oil refinery to help minimize the cost of the rising fuel.

b. By acquiring their own oil refinery this would help Southwest be more efficient and

allowing them to maximize their profit in other areas where needed.

c. Combing AirTran and Southwest into one terminal gate that is more efficient this

would help in reducing the cost of operations.

d. Southwest can look forward to seeing a profit, if they are successful in acquiring oil

refinery and also expect a a boost in stocks or bonds that would attract more

investors to invest in the airlines.

Fuel Production Self-Sufficiency

a. Southwest trying to acquire their own fuel refinery this would help in saving the

airlines millions of dollars from prepayment of fuel in advance.

b. The downside of purchasing fuel is that price is already set in the contract even if

the price drops significant low the airlines would have to pay the set price.

c. The benefits of owning their own fuel production would allow them to more self

reliable and productive without relying on other companies to supply them with

fuel.

d. Southwest would be able to cater to more fleets which would equal more routes and

this would create more profit for the airline.

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Internal Business Process

Organizing Resources

a. Southwest would have to find ways how both airlines can take full advantage of the

resources that are available at airports.

b. The airline would to evaluate the resources that are being used by both airlines to

make sure they are being used efficiently.

c. After evaluating the resources that being used the airline can then focus on

eliminating those that are not efficient.

d. The rewards associated with organizing the resources would be to serve the

customer better.

Merging Locations

a. The formulation of the two airlines into one would be good idea because this would

reduce operating cost significantly.

b. This would help the airline by allowing them to flood more locations into area that

has a high demand.

c. The purpose of merging locations it because of the acquisition of AirTran and airline

wants to avoid overlapping between the two.

d. Southwest would to pick the locations they want the mergers to take place.

Oil Distribution

a. Once Southwest successfully acquires an oil refinery this would help in getting rid of

the middleman.

b. Southwest would save millions of dollars that could be used for other operations.

c. The airline would have to develop a way of transporting the oil to various airports

location locally and international.

d. The airline plans on fully implementing this strategy by the year of 2017.

Unifying Staff

a. Southwest wants to create a uniform program that would help with the transition

process of AirTran fleet, employees, and their whole corporate structure.

b. Relocation for employees to experience the different departments of the airline

giving them a broader approach to doing things.

c. Hiring more crew members and flight attendants to help with the new routes that

are expected to be added to gain more profit.

d. Southwest estimate it would take roughly about two to three years to have this

program fully develop and having a unified program.

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Customer

Lifting Brand Image

a. Southwest is strategically lifting their brand image from the recent acquisition of

AirTran by providing international flights.

b. Using the "luv" campaign to enrich AirTran image that would develop a buzz luring

customers to see what’s so special about the brand.

c. Southwest would have to advertise heavily to spread the word about its acquisition

of AirTran.

d. The benefits of lifting the brand create awareness that company is doing its best to

attract more customers.

Mission Statement

a. Southwest prime objective is to have AirTran employees uphold their mission

statement to the highest level possible this would strengthen the airline from within

since everyone on the same page when it comes to providing quality self to the

customer.

b. AirTran employees following Southwest philosophy this would help by

enriching the corporate culture and management.

c. Southwest unified system would embrace the comfort zone of the customer locally

and international by the execution of its mission statement.

d. Southwest predicts by 2015 all the employees should be update with the company

procedures.

International Customer Expansions

a. Southwest would get the opportunity in having a global presence by offering more

international routes.

b. The airline would have to work diligently to create a footprint international market.

c. Southwest looks forth to gaining more recognition in the international market by

becoming the top low cost airline carrier.

d. Having a diversify airline creates many opportunities and opens doors.

Customer Retention

a. Southwest already has a high customer base due to affordable pricing in the

industry.

b. The number one low cost carrier doesn't come easy, therefore Southwest must

always but their customer first.

c. Southwest has to implement their strong core values in attracting more customers

to their airline through the use flight incentive programs like frequent flyer and

reward points that would create loyal customer base.

d. The airline is looking to incorporate more flight incentives for potential customers.

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Financial

15% ROI

a. Southwest incurred its largest cost due to the acquisition of AirTran.

b. The airline is has to completely restructure the whole process of how AirTran

conducts its business by changing the facilities, airplanes, moving employees over to

Southwest culture.

c. Creation of a training program that efficiently trains AirTrain staff with as little time

away from work as possible.

d. Selling of any planes are not Boeing 737 series planes

Reducing Fuel Expenditures

a. By Southwest looking into acquiring its oil refinery there are many risks that may

come into factor.

b. Southwest has to make sure they have enough capital in running their own refinery

since they come cheap.

c. In order for the airline to raise more capital they need to issue more stock out this

would help in raising capital for the airline.

d. The airline could look into purchasing more fuel efficient aircrafts after their

contract ends.

Control Costs of Integration

a. Using veteran personnel of Southwest Airlines to lead training program of AirTran

employees.

b. Southwest expects to be done with the training of AirTran employees by 2014.

c. The integration of AirTran facilities over to Southwest would be completed by 2015.

d. The airline can look into liquidating some AirTran assets to raise capital this would

lead to profit maximization

New Profit Frontiers

a. The rebranding of AirTran aircraft to Southwest that service already established

international routes

b) b)A continued expansion into Central and South America

c) The utilization of point to point operations will serve as the backbone of the

expansion

d) Providing customers consistency in operations no matter where they choose to

travel on Southwest

e) The continuous expansions and retraction of domestic routes to maximize profits in

all markets they serve keeps adding to Southwest’s competitive advantage.

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7.3.4 – SYNERGY

New Product Line/Innovation

Southwest Airlines already has a well laid out plan of upgrading all of their aircra ft and

systems to more top of the line technology. Their new aircraft will feature sleek fuel

efficient designs that will help in Southwest efforts to hedge fuel. That includes more

efficient reservation booking systems, Wifi capability onboard the aircrafts and updated

interior cabin designs. These upgrades will also prove to be very marketable in

Southwest’s endeavor to create a new brand image. Procurement, marketing, and

operational divisions would work together to cover all the aspects in the research and

development process. Procurement takes care of dealing with suppliers to get resources

needed. Marketing looks into features to see if it helps to boost brand image. Operations

determine whether it is beneficial to the organization to have certain things.

Merger and Acquisition

Southwest has seen quite a bit of success due to its well planned price strategy, and it

will be able to pass on some of its success to parts of the AirTran organization. It will

take AirTran in and make it part of its own corporate culture. As a result, this unified

company will see a large amount of growth. The corporate staff of AirTran will have to

incorporate themselves into the corporate staff of Southwest so that they can become a

cohesive unit.

Global Expansion

With an abundance of resources that Southwest will be obtaining from AirTran, costs

will be kept very low for quite some time. This will give Southwest a good amount of

funds to put toward other implementation programs and additionally will help in

Southwest’s efforts to expand on a more global scale. That is, they will have much more

coverage in terms of routes to areas around the world. Much of the communications

team will be involved in international affairs and will serve as the bridge that will link

all the functional areas of the organization to whatever aspect of the market that is

needed.

Improved Customer Service

Southwest has a corporate culture that dedicates itself to the “highest quality of

customer service.” They will pass this culture on to AirTran to integrate them as part of

Southwest and create a more unified company. Training programs will instill this

culture to maintain consistency throughout the organization. As a result, employees will

be able to provide consistent customer service which will upkeep customer loyalty. All

staff must work together in order to accomplish organizational goals and objectives. It

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will be a synergy of everything combined to ensure the greatest all around customer

experience.

Total Quality Management/Six Sigma

At Southwest, very little error is made in their strategies, that is why they have done so

well in becoming the lowest priced airline provider. They have most likely practiced

some type of quality management to identify and work on some of their weaknesses.

Southwest’s corporate structure is organized in a simple and efficient way so that roles

are clearly and concisely laid out this will allow for quality control since the higher up

you go in role, the more decisions have to be made that require competent management.

7.4 – ORGANIZING FOR ACTION

7.4.1 – CORPORATE STRUCTURE

Southwest already has a very well organized corporate structure that covers all

functional areas of the Southwest organization. It is no wonder that they have been

doing so well all this time since their top management has been consistently working in

synergy to carry out all the right moves and decisions.

In response to the efforts in obtaining a new oil refinery, a Vice President of Resource

Management will be created to be in charge of and make decisions pertaining to fuel

management.

Southwest Corporate Structure

7.4.2 – JOB CREATION

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Learning and Growth

Each fleet will be broken down into two teams, one that will handle the local short

distance flights and one that will handle the longer international flights. Positions in

local flights will be set aside for those who prefer to stay near home more often. For

those who would like to travel the world more, international flight positions will be set

aside for them. Since there will be plenty of staff coming from both companies, no hiring

or firing of employees will be required until further expansion of Southwest. In that

case, new hirees will be recruited from outside the organization who would fit in well

with the Southwest culture. That is happy and fun loving people would have great

attitudes about helping others.

For the procurement team, a resource management division will be formed to handle

fuel operations pertaining to the oil refinery that Southwest will be obtaining. Positions

from management of transport to management of distribution will be created to carry

out decisions pertaining to fuel management. A transport staff will be required to

deliver all fuel to every airport location. Experienced aircraft drivers will be hired from

outside the companies since they will not be piloting aircraft that are heavy on

passengers. Leaders who know the oil industry pretty well will be hired to take on

management positions to run oil operations. They must also be able to fit in with

Southwest culture all while having a firm but fair hand.

Internal Business Process

Employees from both AirTran and Southwest will take part in organizing resources,

merging locations, oil distribution, and unifying staff. Much of this will come from the

operations team from human resources to logistics. Employees from the resource

management team will be collaborating with the operations team to ensure that fuel

operations go according to plan. With the combination of the two organizations from

AirTrans and Southwest, no further hiring or firing will be needed since there will be

plenty of staff that are experienced in the airline industry. This experience is needed in

order to help integration run smoothly. New and inexperienced people will only slow

down and hinder things at this point.

The communications team will be in charge of running the training programs for

employees to make sure employees get proper training. They will be able to figure out

the best way to conduct trainings and make sure employees know clearly what is

expected of them. They are fully staffed with capable workers who can help in the

training program. Creative staff will help in making the learning experience much more

memorable and easy for employees to learn.

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Customer

The marketing team will be divided into subsections to focus on different aspects of

marketing. There will be teams for social media, mixed media, field marketing, research

marketing, and any other field that needs attention. These teams will work to appeal to

markets of Southwest, AirTran, international customers, and other prospective

customers. Southwest’s team of marketers will be enough to run marketing operations.

The most creative people will be strategically distributed amongst the different

marketing teams. Each team will also have a representative that will speak for each

team to collaborate with one another and make sure that the marketing campaigns

match up. The marketing team will have more flexibility in the required skillset. This

variety will help to come up with the most innovative marketing ideas.

The operations team will make sure operations run accordingly to make sure customer

experience is what is expected from Southwest. They will work with the

communications team to make sure that their staff is properly trained to have necessary

skills needed for the smoothest flight operations.

Financial

The financial team will be kept simple so that all members can congruently work with

all figures that are involved with the company. Too many people would make too many

complications. AirTran and Southwest already have a capable staff that is familiar with

the type of figures that Southwest produces. These employees will have to have some

type of degree that certifies that they have been properly trained to prepare such

figures.

An investment team will be formed to put together numbers for possible investment

opportunities. This team will not be making decisions but will look for market trends

that could contribute to Southwest investment practices. Some existing staff from

financial operations will be brought onto this team, and new talented staff will be

brought from outside of the firm who have fresh takes on how to invest funds.

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7.5 – ACTION PLAN

Program Objective: Finding ways to be the most profitable Program Activities:

1. 15% ROI 2. Reducing Fuel Expenditures 3. Control Costs of Integration 4. New Profit Frontiers

Action Steps Responsibility Start-End 15% ROI a) Southwest incurred its largest cost due to the acquisition of AirTran. b) The airline is has to completely restructure the whole process of how AirTran conducts its business by changing the facilities, airplanes, moving employees over to Southwest culture. c) Creation of a training program that efficiently trains AirTrain staff with as little time away from work as possible. d) Selling of any planes are not Boeing 737 series planes Reducing Fuel Expenditures a) By Southwest looking into acquiring its oil refinery there are many risks that may come into factor. b) Southwest has to make sure they have enough capital in running their own refinery since they come cheap. c) In order for the airline to raise more capital they need to issue more stock out this would help in raising capital for the airline. d) The airline could look into purchasing more fuel efficient aircrafts after their contract ends. Control Costs of Integration a) Using veteran personnel of Southwest Airlines to lead training program of AirTran employees. b) Southwest expects to be done with the training of AirTran employees by 2014. c) The integration of AirTran facilities over to Southwest would be completed by 2015. d) The airline can look into liquidating some AirTran assets to raise capital this would lead to profit maximization New Profit Frontiers a) The rebranding of AirTran aircraft to Southwest that service already established international routes b)A continued expansion into Central and South America c) The utilization of point to point operations will serve as the backbone of the expansion d) Providing customers consistency in operations no matter where they choose to travel on Southwest e) The continuous expansions and retraction of domestic routes to maximize profits in all markets they serve keeps adding to Southwest’s competitive advantage.

Tammy Romo Tammy Romo Tammy Romo Tammy Romo

2013-2017

2013-2018

2013-2015

2013-2017

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VIII. EVALUATION AND CONTROL

8.1 – MEASURING PERFORMANCE

LEARNING AND GROWTH

Southwest Airlines has four Activities that will facilitate Learning & Growth, all of which

contribute to Internal Business Process:

The fist is the Boosting the capacity of short distance flight operations - This contributes

to Reviewing and reallocating resources for optimal business efficiency by providing

Southwest a way to use its resources in a more efficient way, and increase its revenue

stream.

The second, Unlocking Central and South American markets connects to two Internal

Business Process:

Reviewing and reallocating resources for optimal business efficiency by using

Southwest resources in a more efficient way, one that both increases revenue

and opens up new markets.

Consolidating Overlapping operations from the AirTran accessions by absorbing

AirTrans routes in Mexico as part of Southwest, so that Southwest has a leg to

stand as they start to move into Central America.

This also connects to Increasing customer base through an expansion in

international markets in Customer because unlocking Central and South America

is a more specific growth plan resulting from recognizing the need for growth.

Seeking efficiency for profit maximization connects to all four Internal Business

Processes:

It connects to Reviewing and reallocating resources for optimal business

efficiency through a common goal, both are related to profit maximization

through efficient operations. By recognizing the importance of seeking efficiency

Southwest can then better approach the task of resource review and allocation

Consolidation of overlapping operations from the AirTran acquisition reduces

the fees Southwest has to pay for operating an excessive amount of gates. This

does not mean there will necessarily be a reduction in flights offered out of a

specific airport, unless it would add to efficiency and profit to do so

Efficiently constructing a fuel distribution network is one of the major programs

Southwest will undertaking to be more efficient and profit maximizing. It will

reduce fuel costs due to high volatility in the market, which will help add to

Southwest’s profits per flight

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Training AirTran employees in Southwest corporate culture is another major

project Southwest is undertaking where costs can quickly get out of control.

Keeping costs down, by implanting an on the job training program will keep

AirTran employees working reducing overtime and other related costs.

Becoming self sufficient in fuel production by 2017 only connects to Efficiently

constructing internal fuel distribution networks because this is the recognition of

an issue, and the construction of a plan of attack to over the issue.

INTERNAL BUSINESS PROCESS

Southwest Airlines has four activities that will contribute to internal Business Process,

all of which contribute to Customer:

The first is Review and reallocate resources for optimal business efficiency, which

connects to three activities from Customer:

Implementing a marketing campaign targeted at lifting the Brand image of

Southwest to AirTran customers recognizes the importance that resources do

need to be allocated to other divisions than business, and Brand building and

maintenance is an important division.

Increasing the customer base through expansion in internal markets is an

important program that will keep Southwest competitive in the domestic market.

Maintaining the loyalty of current customers throughout the integration and

expansion is an important one, and one that deserves a lot of attention because it

is these loyal customers that helped grow Southwest to the NO. 1 discount

carrier in the nation.

The second, Consolidating overlapping operations from AirTran accession connects to

one activity from Customer and one from Financial:

For Customer, Maintaining loyalty of current customers throughout integration

and expansion is important because as Southwest integrates AirTran flight, they

need to be sure to not disrupt already existing, and well established Southwest

routes.

From Financial, Controlling costs of integration of AirTran staff and facilities is

paramount, as these costs can quickly add up if they are not monitored at all

levels of the integration.

The third, Efficiently construct an internal fuel distribution network also connected for

one Activity from Customer and one from Financial:

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For Customer, Increasing customer base through expansion in international

markets gives Southwest a more stable predicable fuel cost, but more

importantly, making sure that the correct amount of fuel is sent to every airport

is key for maximizing efficiency. This gives a more stable price point for

customers in these developing markets which will help in building Bran loyalty.

For Financial, Raising enough money to purchase an oil refinery and reduce

expenditure on fuel is a major component of Southwest’s international expansion

strategy. A reduction, and increased stabilization of the price of fuel allows

Southwest the ability reallocate those saves resources to other areas of the

international expansion development.

The forth, Train AirTran employees in Southwest Corporate Culture, connects to

maintaining loyalty of current customers throughout integration and expansion is

critical to the continued success of Southwest in the domestic market. If the AirTran

staff are not properly trained, it could cost Southwest the competitive advantage they

hold in customer service.

CUSTOMER

Southwest Airlines has four activities that contribute to the objective of Customer, all of

which connect to the Financial objective they have set:

The first, Implementing a marketing campaign targeted at lifting the Brand Image of

Southwest to AirTran customers connects to two goal from Financial:

The first, Reaching and sustaining a 15% ROI by 2017 highlights the importance

of Brand Management in contributing to customer loyalty, and this sales.

The second, Searching out a new profit frontier by expanding available

international flights by 2017, again shows the importance of the role marketing

plays not only in customer retention, but expanding customer base to break into

new markets.

The second, Maintain Southwest’s Mission Statement connects to only one goal in

Financial:

Controlling costs of integration of AirTran staff and facilities will be important

because if costs get out of hand Southwest will have to raise its prices, which

detracts from the value customers are suppose to be receiving, according to the

Mission Southwest has out forward.

The third, Increase customer base through expansion in international markets also only

connects to one Financial goal:

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Searching out new profit frontiers by expanding available international flights by

2017 is going to keep Southwest a competitive firm. As Southwest expands into

Central and South America, people will be able to take Southwest the entire

length of the journey from one of those locations to the United States, this opens

up profits that Southwest was currently missing out on.

The forth, Maintaining the loyalty of current customers throughout the integration of

AirTran and international expansion connects to two Financial goals:

The first, Controlling the costs of integration of AirTran staff and facilities will

allow Southwest reallocate those resources and expand their domestic routes

and continue to allow customers to get the first two checked bags for free, all

these sustain customer loyalty in conjunction with attracting new customers.

The second, Searching out new profit frontier by expanding available

international flights by 2017 gives current customers the option to do their

international traveling to on an airlines they are already comfortable traveling

with.

8.2 – BALANCE SCORE CARD

See Appendix #6 & #7

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IX APPENDIX

APPENDIX #1: ANNUAL FINANCIALS FOR SOUTHWEST AIRLINES ...................................... PG #104

APPENDIX #2: IFAS TABLE .................................................................................................. PG #110

APPENDIX #3: EFAS TABLE ................................................................................................. PG #112

APPENDIX #4:SFAS TABLE .................................................................................................. PG #114

APPENDIX #5: TOWS MATRIX .............................................................................................. PG#116

APPENDIX #6:BALANCED SCORE CARD ............................................................................... PG #117

APPENDIX #7:STRATEGY FRAMEWORK/MAP ..................................................................... PG #118

104

APPENDIX 1: ANNUAL FINANCES

Income Statement

Fiscal year is January-December. All values USD millions.

2007 2008 2009 2010 2011

Sales/Revenue 9.86B 11.02B 10.35B 12.1B 15.66B

Sales Growth - 11.78% 6.11% 16.95% 29.36%

Cost of Goods Sold (COGS) incl. D&A 4.42B 5.85B 5.28B 5.99B 8.47B

COGS excluding D&A 3.87B 5.25B 4.67B 5.36B 7.76B

Depreciation & Amortization Expense 555M 599M 616M 628M 715M

Depreciation 555M 599M 616M - -

Amortization of Intangibles - - - - -

COGS Growth - 32.24% 9.68% 13.31% 41.50%

Gross Income 5.44B 5.17B 5.07B 6.12B 7.19B

Gross Income Growth - -4.85% 2.07% 20.74% 17.49%

Gross Profit Margin - - - - 45.91%

SG&A Expense 3.19B 3.34B 3.47B 3.91B 4.61B

Research & Development - - 0 0 0

Other SG&A 3.19B 3.34B 3.47B 3.91B 4.61B

SGA Growth - 4.77% 3.83% 12.63% 17.97%

Other Operating Expense 1.43B 1.39B 1.34B 1.22B 1.64B

Unusual Expense (335M) 20M (170M) 102M 459M

EBIT after Unusual Expense 335M (20M) 170M (102M) (459M)

Non Operating Income/Expense (68M) (72M) (116M) (4M) 16M

Non-Operating Interest Income 44M 26M 13M 12M 10M

Equity in Affiliates (Pretax) 0 - 0 0 0

Interest Expense 69M 105M 165M 149M 182M

Interest Expense Growth - 52.17% 57.14% -9.70% 22.15%

Gross Interest Expense 119M 130M 186M 167M 194M

Interest Capitalized 50M 25M 21M 18M 12M

Pretax Income 1.06B 278M 164M 745M 323M

Pretax Income Growth - -73.72% -41.01% 354.27% -56.64%

Pretax Margin - - - - 2.06%

Income Tax 413M 100M 65M 286M 145M

Income Tax - Current Domestic 117M 33M (25M) 217M 17M

Income Tax - Current Foreign 0 0 0 0 0

Income Tax - Deferred Domestic 296M 67M 90M 69M 128M

Income Tax - Deferred Foreign 0 0 0 0 0

Income Tax Credits 0 0 0 0 0

Equity in Affiliates 0 0 0 0 0

105

Other After Tax Income (Expense) 0 0 0 - -

Consolidated Net Income 645M 178M 99M 459M 178M

Minority Interest Expense 0 0 0 0 0

Net Income 645M 178M 99M 459M 178M

Net Income Growth - -72.40% -44.38% 363.64% -61.22%

Net Margin Growth - - - - 1.14%

Extraordinaries & Discontinued Operations 0 0 0 0 0

Extra Items & Gain/Loss Sale Of Assets 0 0 0 0 0

Cumulative Effect - Accounting Chg 0 0 0 0 0

Discontinued Operations 0 0 0 0 0

Net Income After Extraordinaries 645M 178M 99M 459M 178M

Preferred Dividends 0 0 0 0 0

Net Income Available to Common 645M 178M 99M 459M 178M

EPS (Basic) 0.85 0.24 0.13 0.62 0.23

EPS (Basic) Growth - -71.76% -45.83% 376.92% -62.90%

Basic Shares Outstanding 757M 739M 741M 746M 774M

EPS (Diluted) 0.84 0.24 0.13 0.61 0.23

EPS (Diluted) Growth - -71.31% -44.54% 359.96% -62.62%

Diluted Shares Outstanding 768M 739M 741M 747M 775M

EBITDA 1.37B 1.05B 878M 1.62B 1.65B

Balance Sheet Assets

Fiscal year is January-December. All values USD millions.

2007 2008 2009 2010 2011

Cash & Short Term Investments 3.85B 1.8B 2.59B 3.54B 3.14B

Cash Only 2.21B 1.37B 1.11B 1.26B 829M

Short-Term Investments 1.64B 435M 1.48B 2.28B 2.32B

Cash & Short Term Investments Growth 53.14% 43.82% 36.44% 11.14%

Cash & ST Investments / Total Assets 22.94% 12.82% 18.17% 22.88% 17.40%

Total Accounts Receivable 279M 209M 169M 195M 299M

Accounts Receivables, Net - 209M - - 299M

Accounts Receivables, Gross - 209M - - 299M

Bad Debt/Doubtful Accounts - - - - -

Other Receivables - 0 - - 0

Accounts Receivable Growth - 25.09% 19.14% 15.38% 53.33%

Accounts Receivable Turnover 35.34 52.74 61.24 62.07 52.37

Inventories 259M 203M 221M 243M 401M

Finished Goods 0 0 0 0 0

Work in Progress 0 0 0 0 0

Raw Materials 259M 203M 221M 243M 401M

106

Progress Payments & Other 0 0 0 0 0

Other Current Assets 57M 438M 375M 303M 501M

Miscellaneous Current Assets 57M 438M 375M 303M 501M

Total Current Assets 4.44B 2.65B 3.36B 4.28B 4.35B

2007 2008 2009 2010 2011

Net Property, Plant & Equipment 10.87B 11.04B 10.63B 10.58B 12.13B

Property, Plant & Equipment - Gross 15.16B 15.87B 15.89B 16.34B 18.42B

Buildings - - - - -

Land & Improvements - - - - -

Computer Software and Equipment - - - - -

Other Property, Plant & Equipment 626M 380M 247M 230M 456M

Accumulated Depreciation 4.29B 4.83B 5.25B 5.77B 6.29B

Total Investments and Advances 1.32B 162M 146M 93M 350M

Other Long-Term Investments 1.32B 162M 146M 93M 350M

Long-Term Note Receivable 0 - - 0 0

Intangible Assets - - - 61M 1.13B

Net Goodwill - - - - 970M

Net Other Intangibles - - - - 155M

Other Assets 137M 213M 131M 452M 121M

Tangible Other Assets - 213M 131M 452M 121M

Total Assets 16.77B 14.07B 14.27B 15.46B 18.07B

Assets - Total - Growth - -16.12% 1.43% 8.37% 16.85%

Liabilities & Shareholders' Equity

2007 2008 2009 2010 2011

ST Debt & Current Portion LT Debt 41M 163M 190M 505M 644M

Short Term Debt 0 0 0 0 0

Current Portion of Long Term Debt 41M 163M 190M 505M 644M

Accounts Payable 759M 668M 746M 739M 1.06B

Accounts Payable Growth - 11.99% 11.68% -0.94% 43.03%

Income Tax Payable 370M - - - -

Other Current Liabilities 3.67B 1.98B 1.74B 2.06B 2.83B

Dividends Payable - - - - -

Accrued Payroll 296M 383M 352M 513M 520M

Miscellaneous Current Liabilities 3.37B 1.59B 1.39B 1.55B 2.31B

Total Current Liabilities 4.84B 2.81B 2.68B 3.31B 4.53B

Long-Term Debt 2.05B 3.5B 3.33B 2.88B 3.11B

Long-Term Debt excl. Capitalized Leases 2.01B 3.46B 3.31B 2.88B 3.07B

Non-Convertible Debt 2.01B 3.46B 3.31B 2.88B 3.07B

Convertible Debt 0 0 0 0 0

Capitalized Lease Obligations 36M 39M 11M 0 37M

107

Provision for Risks & Charges 88M 101M 0 0 0

Deferred Taxes 2.54B 1.9B 2.21B 2.49B 2.57B

Deferred Taxes - Credit 2.54B 1.9B 2.21B 2.49B 2.57B

Deferred Taxes - Debit - - - - -

Other Liabilities 320M 806M 595M 553M 985M

Other Liabilities (excl. Deferred Income) 214M 701M 493M 465M 910M

Deferred Income 106M 105M 102M 88M 75M

Total Liabilities 9.83B 9.12B 8.8B 9.23B 11.19B

Non-Equity Reserves 0 - 0 0 0

Total Liabilities / Total Assets 58.62% 64.79% 61.69% 59.67% 61.94%

Preferred Stock (Carrying Value) 0 0 0 0 0

Redeemable Preferred Stock 0 0 0 0 0

Non-Redeemable Preferred Stock 0 0 0 0 0

Common Equity (Total) 6.94B 4.95B 5.47B 6.24B 6.88B

Common Stock Par/Carry Value 808M 808M 808M 808M 808M

Retained Earnings 4.79B 4.92B 4.98B 5.4B 5.4B

ESOP Debt Guarantee 0 0 0 0 0

Cumulative Translation Adjustment/Unrealized For. Exch. Gain

0 - (580M) (250M) (183M)

Unrealized Gain/Loss Marketable Securities 1.22B (992M) (19M) (34M) (66M)

Revaluation Reserves 0 0 0 0 0

Treasury Stock (1.1B) (1.01B) (963M) (891M) (324M)

Common Equity / Total Assets 41.38% 35.21% 38.31% 40.33% 38.06%

Total Shareholders' Equity 6.94B 4.95B 5.47B 6.24B 6.88B

Total Shareholders' Equity / Total Assets 41.38% 35.21% 38.31% 40.33% 38.06%

Accumulated Minority Interest 0 0 0 0 0

Total Equity 6.94B 4.95B 5.47B 6.24B 6.88B

Liabilities & Shareholders' Equity 16.77B 14.07B 14.27B 15.46B 18.07B

Cash Flow Statement Operating Activities

Fiscal year is January-December. All values USD millions.

2007 2008 2009 2010 2011

Net Income before Extraordinaries 645M 178M 99M 459M 178M

Net Income Growth - 72.40% 44.38% 363.64% 61.22%

Depreciation, Depletion & Amortization 555M 599M 616M 628M 715M

Depreciation and Depletion 555M 599M 616M 628M 715M

Amortization of Intangible Assets - - - - -

Deferred Taxes & Investment Tax Credit 328M 56M 72M 133M 123M

Deferred Taxes 328M 56M 72M 133M 123M

Investment Tax Credit 0 0 0 0 0

108

Other Funds (156M) (98M) 135M (236M) 271M

Funds from Operations 1.37B 735M 922M 984M 1.29B

Extraordinaries 0 0 0 0 0

Changes in Working Capital 1.47B (2.26B) 63M 577M 98M

Receivables (38M) 71M 40M (26M) (26M)

Accounts Payable 1.61B (98M) 59M 193M 253M

Other Assets/Liabilities (98M) (2.23B) (36M) 410M (129M)

Net Operating Cash Flow 2.85B (1.52B) 985M 1.56B 1.39B

Net Operating Cash Flow Growth - 153.46% 164.76% 58.48% 11.27%

Net Operating Cash Flow / Sales 28.85% -13.80% 9.52% 12.90% 8.85%

Investing Activities

2007 2008 2009 2010 2011

Capital Expenditures (1.33B) (923M) (585M) (493M) (968M)

Capital Expenditures (Fixed Assets) (1.33B) (923M) (585M) (493M) (968M)

Capital Expenditures (Other Assets) 0 0 - 0 0

Capital Expenditures Growth - 30.65% 36.62% 15.73% -96.35%

Capital Expenditures / Sales -13.50% -8.37% -5.65% -4.07% -6.18%

Net Assets from Acquisitions 0 0 - 0 0

Sale of Fixed Assets & Businesses 0 0 - - -

Purchase/Sale of Investments (198M) (55M) (986M) (772M) (48M)

Purchase of Investments (5.09B) (5.89B) (6.11B) (5.62B) (5.36B)

Sale/Maturity of Investments 4.89B 5.83B 5.12B 4.85B 5.31B

Other Uses 0 0 0 0 (35M)

Other Sources 0 0 2M 0 0

Net Investing Cash Flow (1.53B) (978M) (1.57B) (1.27B) (1.05B)

Net Investing Cash Flow Growth - 36.04% -60.43% 19.38% 16.92%

Net Investing Cash Flow / Sales -15.51% -8.87% -15.16% -10.45% -6.71%

Financing Activities

2007 2008 2009 2010 2011

Cash Dividends Paid - Total (14M) (13M) (13M) (13M) (14M)

Common Dividends (14M) (13M) (13M) (13M) (14M)

Preferred Dividends 0 0 0 0 0

Change in Capital Stock (862M) 63M 0 55M (205M)

Repurchase of Common & Preferred Stk. (1B) (54M) 0 0 (225M)

Sale of Common & Preferred Stock 139M 117M - 55M 20M

Proceeds from Stock Options 0 0 - 0 0

Other Proceeds from Sale of Stock 139M 117M - 55M 20M

Issuance/Reduction of Debt, Net 378M 1.44B (45M) (199M) (621M)

Change in Current Debt 0 491M - 0 0

Change in Long-Term Debt 378M 945M (45M) (199M) (621M)

Issuance of Long-Term Debt 500M 1B 538M 0 0

109

Reduction in Long-Term Debt (122M) (55M) (583M) (199M) (621M)

Other Funds 5M 168M 388M 8M 74M

Other Uses (23M) (5M) (14M) - (2M)

Other Sources 28M 173M 402M 8M 76M

Net Financing Cash Flow (493M) 1.65B 330M (149M) (766M)

Net Financing Cash Flow Growth - 435.50% -80.05% -145.15% -414.09%

Net Financing Cash Flow / Sales -5.00% 15.00% 3.19% -1.23% -4.89%

Exchange Rate Effect - - - - -

Miscellaneous Funds 0 0 0 0 0

Net Change in Cash 823M (845M) (254M) 147M (432M)

Free Cash Flow 1.5B (2.46B) 387M 1.06B 403M

Free Cash Flow Growth - -263.80% 115.75% 172.61% -61.80%

Free Cash Flow Yield - - - - 6.07%

110

APPENDIX 2: IFAS

STRENGHTS Weight Rating Weighted

Score Comments

Largest Domestic Carrier

0.18 4.8 0.864

Southwest has been able to undercut competition as a low cost carrier. Their advantage is their ability to move around and be flexible.

Strong Fleet Performance

0.07 3 0.21 Well coordinated fleet with their point to point flights and single aircraft airline.

Well Implemented

Company Vision

0.15 3.5 0.525

From the boardroom to the flight deck, Southwest’s employees understand and believe in the company vision. The vision can lead a company to large growth.

Strong Customer

Service 0.08 3.3 0.264

Southwest must put the customer first because their business is primarily consumer based flights, unlike other airlines who receive part of their income from transporting freight.

Firm Operating Strategy

0.12 4.3 0.516

Focusing on the customer, the firm focuses on short flights to smaller airports to avoid congestion of hub airports such as LAX

WEAKNESSES Weight Rating Weighted

Score Comments

Future contracts

0.08 4 0.32

Southwest Airlines buys many future contracts dealing with oil. The purpose of the contracts is so it can defend itself from rising prices of oil. The problem is when prices of oil go down; Southwest would lose out in the opportunity to buy oil for a cheaper price.

111

Declining Profit Margins

0.1 4.5 0.45

A significant raise in fuel costs, along with the economic recession is proving a challenge for Southwest. In Q! Of 2012 they posted a loss due to increased fuel costs.

inexperience In International

Market 0.04 3 0.12

Southwest recently acquired AirTran, who have established routes in Mexico. Southwest has no experience with international flights, but still plan on expanding, and opening routes into Central and South America.

Heavy Dependence On

Passenger Revenues

0.06 2.5 0.15

Southwest has not yet taken advantage of cargo transportation, and relies instead heavily on passenger revenues. Despite a predicted increase of 6%-7% in air cargo transportation, Southwest has not announced a plan to capitalize on the market.

Integration of AirTran into Southwest’s

corporate culture

0.12 4.5 0.54

Southwest Airlines is guided by one the strongest, and well implemented corporate cultures in the industry. With the acquisition of AirTran, they face a challenge in bringing AirTran employees up to that same standard.

Total 1 3.959

112

APPENDIX 3: EFAS

OPPORTUNITIES Weight Rating Weighted

Score Comments

International Expansion

0.2 3 0.6

Southwest has been incredibly successful as a domestic airline. But growth has slowdown. Maybe it’s time to look outside the United States

Longer Flights 0.05 2 0.1

Longer flights would allow Southwest to do more of what they do best - entertain their customers with unmatched customer service. In addition to in flight meals, the airline could also look to add various forms of entertainment to their flights.

Increase flights & destinations

0.1 4 0.4

Southwest is currently picking routes that will make the flights at full capacity. This limits their potential of gains. They have a good brand, and will do good in other places

Expand on Advertising

0.05 2.5 0.125

Social media advertising is growing by the day and Southwest could benefit by jumping on the bandwagon. Offering discounts or sales for a certain number of "likes" on their Facebook page or "follows" for their Twitter would allow them to increase their overall reach through social media.

First Class Seating

0.05 1 0.05

By adding premium seating, Southwest could increase their profit margin at very little cost while also broadening their appeal to higher class travelers who previously would not have considered Southwest.

THREATS Weight Rating Weighted

Score Comments

Increase in competition

0.15 4 0.6

Despite the intense competition in the industry, Southwest has remained competitive by continuing to keep their fares low.

Increase in Oil & Fuel Prices

0.15 4.5 0.675

In recent economic times, the price of fuel has jumped. This is dangerous to the airline because it eats up their profit margins

113

9/11 Terrorist Attacks

0.06 3.8 0.228

Terrorist attacks caused a decline in the industry, but Southwest was the only airlines that remained profitable every quarter since the attack.

Recession 0.14 4 0.56

Recession caused a decline in travel, but Southwest was able to remain profitable as well as stick their belief of never letting an employee go

No third party websites

0.05 3 0.15 Refraining from using third party websites avoids broker fees, but it can also prevent Southwest from increasing its growth.

Total Scores 1 3.488

114

APPENDIX 4: SFAS

Weight Rating Weighted

Score

I

Comments

N

T

E

R

M

E

S D

H I L

O A O

R T N

T E G

STRENGHTS

Largest domestic

carrier (S1) 0.13 4.8 0.624 x x

Southwest has been able to undercut competition as a low cost carrier. There has been many advantageous to being a dominate player

Well implemented

vision (S3) 0.11 3.5 0.385 x x

The important factor in a strong vision is the follow-through. Southwest has been able to use its vision in a coherent active approach.

WEAKNESSES

Future contracts (W1)

0.06 4 0.24 x x x

Future contracts are a good way to hedge. But since the volatility of oil erupted, prices can drop and airlines are forced to buy oil for a higher price than it is right now.

Declining profit margin(W2)

0.07 4.5 0.315 x x

A significant rise in fuel costs, along with the economic recession are showing on the income statement. It is the factors that they don’t control that are hurting them the most

115

Integration of AirTran into Southwest’s Corporate

Culture (W5)

0.09 4.5 0.405 x x

Southwest has a history of treating their employees fairly, but they didn’t buy AirTran just for their employees. This can be a challenge in dealing with the integration.

OPPORTUNITIES

International expansion (O1)

0.15 3 0.45 x x

Southwest is currently experiencing declining profit and margins, yet they are the number one domestically. Maybe one of the problems is in United States and they need to expand into the world

Increase in flights &

destination (O3) 0.07 4 0.28 x

Southwest has formulated itself to only pick profitable routes where most people fly. Southwest might not know its full power, because they are a powerful brand and can use it in places they might not see profitable.

THREATS

Increase in competition

(T1) 0.11 4 0.44 x x

Competition in the airline industry is near pure competition, as other airlines are dropping their prices, customers of Southwest are changing

Increase in Oil & Fuel prices

(T2) . 11 4.5 0.495 x x

Recession causes most airline companies to experience lower profit. Southwest is in a good position to fight it

Recession (T4) . 10 4 0.4 x

In recent economic times, the price of fuel has jumped. This is dangerous to the airline because it eats up their profit margins.

The ones who are better position in markets will have an advantage.

Total 1 4.034

116

APPENDIX 5: TOWS

MATRIX Internal Factors

Strength (S) Weakness (W)

External Factors

S1 Firm Operating Strategy S2 Well Implemented Company Vision S3 Largest Domestic Carrier S4 Strong Fleet Performance S5 Strong Customer Service

W1 Integration of AirTran into Southwest’s Corporate Culture W2 Class Action Lawsuit W3 Single Aircraft and Engine Supplier W4 Futures Contract W5 Declining Profits/Margins W6 Heavy Dependence on Passengers Revenue

Opportunities (O) SO Strategies WO Strategies O1International Expansion O2 Longer Flights O3 Increased flights and

Destinations O4 Expansion on

Advertising O5 Leisure/Business Class

Seating

* Southwest's well implemented company vision (rooted in providing the highest quality of

customer service) can be highly useful when increasing the number of flights and destinations.

Being customer focused allows for Southwest to be efficient in its operations thus allowing customers

more flights and destinations can potentially increase revenues and customer loyalty.

* Overcoming declining profit margins can be done by investing into different sources of acquiring oil and increasing their aircrafts fuel efficiency. Having the ability to reduce its flying costs will help

in its international flights because they are expecting higher revenue streams which will help Southwest reach its 15 percent

ROI objective.

Threats (S) ST Strategies WT Strategies T1 Increase in Competition T2 Oil Price T3 Terrorist Attacks T4 Recession T5 No Third Party Website

* Having the capacity of being the largest domestic carrier (and soon to be competing internationally)

will enable Southwest to efficiently overcome threats of any possible economic downturn.

* Through intense employee training and by cutting unproductive employees Southwest will fully and efficiently overcome an

integration of AirTran into Southwest’s culture will effectively help in being able to compete in the international market. Having

one strong culture will come into play when competing with a new group of competitors.

* Southwest can overcome its current weakness; their futures

contract (hedging) strategy by investing in the conservation of oil

and eventually look into investing in acquiring their own oil

company. Consequently this will allow for Southwest to extremely

reduce that risk factor associated with fluctuating oil prices.

117

APPENDIX #6: BALANCE SCORE CARD

Managing Strategy:

Four Processes

Translating the Vision:

Continue to operate #1 discount airline

Build customer loyalty through execution of mission and vision

Satisfy shareholders by attaining all financial goals

Communicating and Linking

Train AirTran staff on Southwest Corporate Culture

Create timeline for when training should finished

Reward Employee Success

Feedback and Learning

Showcase relationship between financial goals and customer service

Provide feedback on performance in relation to Vision

Review and Revise (if necessary)

Business Planning

Set performance goals for all departments

Alignment of all sectors Allocate resources for goal

completion Inform on completion

Balanced

Score Card

118

APPENDIX #7: STRATEGY FRAMEWORK/MAP

Reach and Sustain 15% ROI by 2017

Raise enough capital to buy oil

refinery and reduce

expenditure on fuel

Control costs of integration of

AirTran staff and facilities

Search out new profit frontier by

expanding available

international flights by 2017

Implement marketing

campaign targeted at lifting the

Brand Image to AirTran

Customers

Maintain

Southwest Mission Statement

Increase customer base through expansion in international

markets

Maintain loyalty of current customers

throughout integration and

expansion

Review and re-allocate resources

for optimal business efficiency

Consolidate overlapping

operations from AirTran

acquisition

Efficiently construct internal fuel distribution

network

Train AirTran employees in

Southwest Corporate Culture

Boost capacity of

short distance flight operations

Unlock Central

and South American markets

Seek efficiency for

Profit Maximization

Become self

sufficient in fuel production by

2017

Fin

anci

al

Cu

sto

mer

In

tern

al

Bu

sin

ess

Pro

cess

Lea

rnin

g an

d

Gro

wth

119

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Chris - Redlands