Southwest: Evaluating The Purpose Of Transformational Leadership

According to Tully (2015), Southwest plans to expand into a newer market of making longer haul trips in order to capitalize on business travelers. Kelly is quoted as saying that, “Southwest service levels are the best in the business, their costs are the lowest of the major airlines, and their brand puts us in a prime position to grow faster than they will” (Tully, 2015). This change in direction or strategy could prove to be a great decision for Southwest or could derail them causing decreased revenue and profits.

Southwest's competitive advantage in providing low cost is of the primary reasons which their competitors couldn’t match. The airline has the lowest costs on a per mile basis among all the major airlines as they used single aircraft type and the highly efficient, high-frequency ad point-to-point route scheme. Due to this commoditization of the industry, passenger profiles have changed with business and first class seat demand in great decline. This correlates perfectly with Southwest's position of no assigned seats or class designations. Competing companies have been forced to introduce low fare options in attempts to regain lost market share from low priced air carriers. Because Southwest's strategy has always been low cost, and standardized travel, they have not had to change strategy. This has saved them what could amount to millions on restructuring costs. Also, some of the competitors tried to increase no of flights which resulted in operational ineffectiveness

Southwest Airlines is one of the most successful airlines in America today. Although it was established much later than other airlines, the airline experienced numerous challenges, which negatively affected its performance. Established in 1967, Southwest Airlines could not operate for four years. They had a rough start following legal battles that derailed the start of their operation. Since the beginning of their regular operation in 1971, this airline has had the most consistent profitable record in the world. Their success highly depended on the management’s decision to embrace advanced management and operational strategies. Over the years, the airline has come up with various measures that have made them the leading carriers in the United States (Gittell, 2003). Several other companies in the world have since adopted their model of operation to increase their productivity. Their flexibility and willingness to try new methods has transformed the airline into the most popular airline in America today.

Southwest has based their original strategy on maintaining low fares, high frequency of flights, on-time arrivals and focusing on the customer experience. However, Southwest has altered their strategy, which previously made them unique in the industry, due to a rising amount of competition from larger airlines that have developed alternative low-cost carriers, essentially diminishing that competitive advantage the “Southwest Effect” once had. Kelly notes that there is “new competition from leaner, larger airlines, low-cost carriers as JetBlue Airways Corp. and Spirit Airlines Inc.”7, making the competitive advantages that Southwest offered less and less sustainable.

These tactics will impact the financial and operational implications of Southwest Airlines. In terms of finance, this strength wouldn’t be a heavy change, but perhaps a change in budgeting. Money should be less spent on billboards and TV commercials as they are declining. That money should go into improving Southwest’s app service.

Southwest Airlines has high growth and high profitability. However, its cost advantage is not as big as in prior years.

Southwest is operating in a very tough environment during this time period. Oil prices start at $65 dollars a barrel in 2006 and rise all the way up to $140 a barrel by mid 2008. Then in mid 2008 Oil prices come crashing from $140 to $43 a barrel at the start of 2009. This volatility is very bad for a company like Southwest that has a huge portion of it’s operating cost tied to the price of oil. This is why we see a huge loss in the derivative hedging line in the Operating Cash Flow Statement. Also, the economy was in a major recession due to failure of many mortgagee-backed securities. As people’s discretionary income was eaten away they began to

An effective strategy Southwest could adapt to inflict damage to its competitors is to further slash its already low prices. This “squeezing” would be particularly effective because most of the airlines are already at or have filed for bankruptcy.

Southwest Airlines, the nation’s largest carrier, employs more than 53,000 people and service over 100 million customers a year (Southwest Airlines Honored, 2016). They differentiate themselves from other airlines with the level of customer service that they offer those who chose to do business with them. Southwest entices customers with its policy of not charging for the first two checked bags. They also do not charge change fees for flights that a customer may need to change, however, the fare may be a different price based on timing of the flight. The company has shown a profit every year since its inception (Ross, 2015). After 9/11, when no other carrier was profitable, Southwest was able to make a profit (Southwest Airlines Honored, 2016). According to their website, “the airline’s performance and productivity is directly affected by its triple bottom line approach and its focus on the people and communities they serve, as well as their overall commitment to efficiency and the planet” (American Airlines, n.d.).

One of the strategies Southwest used was utilizing less congested airports. This allowed them to reduce delays and increase efficiency as well as convenience for customers. Another strategy was using only one type of plane to reduce maintenance costs and increase standardization. The third strategy was to use a point-to-point system. This helped reduce turn-around time and customers enjoyed not having to connect flights. Fourth, they were adamant about creating an unforgettable experience for the consumer. They hired a staff with great personality and attitude. Finally, they hedged against fuel costs in order to keep cash flows and profitability stable as prices fluctuated.

There are many models of leadership that exist across a range of fields (e.g. social work, education, psychology, business, etc.). The ability to transform an organization successfully requires a different set of attitudes and skills. Transformational leadership is an approach where a leader utilizes inspiration, charisma, individualized attention, and intellectual stimulation with their employees (Iachini, Cross, & Freedman, 2015, p. 651). Transformational leadership helps to clarify organizational vision, inspires employees to attain objectives, empowers employees, encourages employees to take risks, and advocates the seeking of alternative solutions to challenges in the workplace (Transformational Leadership, 2015). It allows the leader to engage and motivate each follower identify with the organization’s values and goals.

Within every industry, there will be threats. In the airline industry, there is the threat of terroristic violence, and technological issues. Also, governmental interference and social acceptance will continue to shape how the industry operates. Southwest Airlines will need to predict and adapt to all possible threats in the industry. Currently Southwest Airlines’ strengths in the industry are their ability to keep fares low due to the Airline Deregulation Act of 1978. However, their weaknesses are competitors trying to copy their model.

It is quite known that the airline industry has very high barriers to entry. This means it is somehow difficult for new companies to enter such industry. Aside from the fact that there are already so many established airlines that have good names and reputations, the vulnerability of the industry to economic cycles somehow add difficulty for new entrants. Such vulnerability means that if the economy is doing well, more people will have the money to pay plane tickets and travel. But if the economy is not doing well, then people will have less money to fly and will use more cost effective means of transportation. This difficulty for new entrants to penetrate the industry is an opportunity for Southwest to minimize the likelihood of additional competition, thereby sustaining its current share in the market. They may now focus more on their current competitors for market share rather than worrying much about others entering the industry.

Southwest Airlines has been a strong growing company over the last 4 decades. Using its low-cost, no-frill, customer friendly, point-to-point operational strategy, Southwest has been able to sustain considerable growth over the years and reported straight profits since its inception. Southwest Airlines now has a market capitalization of $9.1 billion and is positioned as one of the strongest airlines in the struggling airlines industry. Over the last decade, many airlines have reported record losses in the US while many have filed for bankruptcy. However, Southwest has been able to remain profitable and continued to grow. However, with the airline reaching its maturity, it remains to see whether this growth can be sustained for the upcoming years. This external and internal analysis is aimed to guide the strategic management of company in understanding the environment its business operates in, and how it can respond to that environment by realizing its internal resources.

Q1. What is Southwest’s strategy? What is the basis on which Southwest builds its competitive advantage?