Case Analysis “Southwest Airlines 2008”
The University of Iowa
Case Analysis “Soutwesth Airlines 2008”
U.S. Airline Industry Overview
Ever since the Wright brothers successfully flown the first airplane in 1903, air travel had become one of the most popular means of long distance travel. From 1937 to 1978, air transportation was part of public utilities and was regulated by the federal Civil Aeronautics Board in the U.S. Airfares, routes, schedules, and number of airlines, were all regulated; airlines were guaranteed to have a reasonable return of investment. It was an attractive industry because of the high return and few competitors. In 1978, the Airline Deregulation Act was passed and signed by President Carter. The deregulation would allow the airline industry to operate under market forces. Attractiveness of U.S. Airline Industry
Michael Porter (1979) argued that the attractiveness of an industry is determined by five basic forces, “The nature and degree of competition in an industry hinge on five forces: the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products or services (where applicable), and the jockeying among current contestants.” Before deregulation, the barriers of entry to the airline industry were very high. The airline industry was operating as public utility, any new airlines entering the industry must be approved by the U.S. government, and bureaucracy made it very difficult to enter. Deregulation lowered the barriers of entry for the airline industry. The threat of new entrants becomes a high force for the airline industry. The bargaining power of customers is very strong in the airline industry since there is little differentiation between one airline and another besides the ticket fare. Consumer loyal is low because they can easily compare and choose from different airlines on the internet. Fuel, engines and employees are the important suppliers in the airline industry, and yet, airlines hold very low bargaining power over them. Fuel cost remains the biggest operating cost of airlines, Boeing and Airbus are the only engine suppliers, and unionized aviation workers hold strong bargaining power. Although the force of threat of substitute products is not very high, they do exist. For business travelers, the more economical, time-saving, and convenient substitution for air travel is video-conference. For personal leisure travels, trains, cars, even cruise ships can be substitutions for air travel. The threat of competition was not in the equation until the deregulation. Guaranteed return on investment vanished, existing airlines were driven into price wars to survive, competitive became intense. Adding to the five forces, high operating costs, fuel crisis, unstable economic climates, natural disasters, terrorism and war, and the Open Skies agreement which allows foreign airlines to enter the U.S. market are all threats to the industry. Despite the five forces and the external environment all working unfavorably against the airline industry, there are still new entrants. The new airlines see customer dissatisfaction with airline service and trending increase demand in air traffic as opportunities in the airline industry. Most of the started airlines aim for markets that are ignored or abandoned by major airlines. Weighing threats against opportunities listed, the U.S. airline industry is considered an unattractive sector to compete in. Southwest Airlines
After deregulation, the airline industry was flooded with new entrants by its high profit margins. Many did not survive, in fact, more than 150 airlines filed for bankruptcy in the first decade after the deregulation. Incorporated in Texas, commenced service in 1971, today Southwest Airlines is one of the largest airlines in the U.S. It flies to 72 cities in the U.S. with more than 3,400 flights a day. Southwest offers nonstop flights in 503 roundtrip...
References: Porter, M. E. (1979). How competitive forces shape strategy. Michael E. Harvard Business Review, 57 (2), 137-145.
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