Opportunities – External factors that may help Southwest strengthen its position in the market.
Threats – External factors that may weaken Southwest’s position in the industry.
Let’s begin with the strengths.
What are Southwest Airlines’ main strengths?
The main strengths of Southwest Airlines are its low-cost business model and point-to-point routes. In addition to these, Southwest Airlines has taken aggressive measures to increase its liquidity. As a result, it has added a strong balance sheet to its arsenal of strengths.
Here’s an overview of Southwest’s strengths:
Low-Cost Business Model: Southwest Airlines uses three main measures to reduce its operating costs. The first of these measures include implementing a point-to-point route structure rather than a hub-spoke route structure. In addition to this, Southwest flies only one type of aircraft. Lastly, Southwest improves operation efficiency by reducing the headcount and increasing the efficiency of employees needed to run operations.
Point-to-Point Routes: Traditionally, airline companies operate the hub-spoke model. In this model, the airline concentrates its resources on major cities – the hubs. Southwest Airlines breaks this model. Instead, it operates scheduled flights between secondary or downtown airports. These airports are less congested, leading to high asset utilization.
Single Aircraft Policy: Southwest exclusively flies the Boeing 737. The single aircraft policy simplifies the operation of the fleet and training of the staff. This decision reduces operational expenses and improves efficiency.
Strong Balance Sheet: Despite a net loss of $3.1 billion, Southwest has maintained its investment-grade credit rating with Moody’s and Standard & Poor. Southwest increased its liquidity to a record high of $14.3 billion with the help of cost-cutting measures and government aid. Southwest’s liquidity exceeds its long-term debt of $10.3 billion.
Network and Schedule Optimization: Southwest airlines routinely adjusts frequencies in its existing routes while adding new routes and itineraries. The company also eliminates less profitable routes. The ongoing optimization of existing routes, adding new routes, and eliminating unprofitable routes create a winning formula for maintaining low operating costs and high operational efficiency.
Southwest airlines managed to pull through 2020 without eliminating any of the destinations it serves. The company also absorbed the impact of the downturn quite well with an adjusted balance sheet leverage of 56% at the end of 2020.
However, the airline industry is hyper competitive. Therefore, its success in the years to come will not only depend on how well it leverages its strengths but also on how well it addresses its weaknesses.
In the next part of the article, I’ll explain major weaknesses of Southwest Airlines.
What are Southwest Airlines’ weaknesses?
The biggest weakness of Southwest Airlines is its inability to remain competitive in the face of other airline companies adopting cost-cutting measures because of the pandemic. In addition to this, Southwest’s destinations and passenger amenities are falling short of those its competitors offer.
Here’s an explanation of Southwest’s weaknesses:
Route Structure: Southwest Airlines has a strong network of point-to-point routes in the US. However, its competitors have more extensive routes within the US and in the international markets. At the end of 2020, Southwest served 107 destinations. However, its rival Delta and its alliance partners serve 900 destinations in 140 countries.
Commercial Alliances: Many of Southwest’s competitors have formed commercial relationships. These relationships allow Southwest’s competitors to provide more destinations to their patrons than Southwest can.
Passenger Amenities: Southwest’s single aircraft policy limits passenger amenities to what the Boeing 737 can offer. Other airline companies operate aircrafts that have a larger carrying capacity and better passenger amenities. For instance, Southwest flights don’t offer premium seating facilities such as first class or business class.
Supply Chain: Southwest relies on Boeing for spare parts. The reliance on a single company creates supply chain bottlenecks. The prolonged delays in restoring Southwest’s fleet of grounded Boeing 737 MAX highlights the problems of Southwest’s sole reliance on Boeing.
Limited Cost-Reduction Possibilities: Prior to the pandemic, Southwest’s low-cost business model gave it an edge in the airline industry. However, after the pandemic, several airline companies resorted to similar measures to remain operational. As a result, Southwest lost its advantage. What’s worse, the company is struggling to find further opportunities for cost reduction.
While it may take a decade for the airline industry to return to normal, airline companies must face intense competition on the road to recovery. However, the future isn’t bleak. These turbulent times present several opportunities for Southwest. Capitalizing on these opportunities could give Southwest a significant edge in the industry. We will discuss these opportunities next.
What are Southwest Airlines’ major opportunities?
Some of the major opportunities for Southwest Airlines are expanding its routes and upgrading its fleets. In addition to this, Southwest can also re-think its cost structure so that they offer more amenities and compete with ultra-low-cost airlines.
Here’s an overview of Southwest’s opportunities:
Expand Routes: The pandemic has disturbed the existing order of flight routes. In the emerging new order, Southwest can find many gaps for under-serviced routes and expand its network.
Upgrade Fleet: The airline industry is not the only victim of the economic recession. Aircraft manufacturers such as Boeing and Airbus have been hit hard as well. These companies are looking for increasing their liquidity. Given Southwest’s financial position, now is the best time for Southwest to acquire new aircrafts for relatively low costs.
Re-Think Cost Structure: At this time, the airline industry as a whole is recovering from a severe setback. Since Southwest got back on its feet more quickly than other airlines did, this recovery window is the perfect time for the company to make bold moves such as re-thinking its cost structure to compete with emerging ultra-low-cost airline companies.
Offer More Amenities: The tight competition and rigid operation locked Southwest into offering limited amenities for its passengers. In the years to come, the company anticipates the competition to increase. Before the race picks up and intensifies, Southwest can upgrade its fleet to offer more passenger amenities.
Ultra-Low-Cost Airlines: Ultra-low-cost airline routes are becoming increasingly more popular. Ultra-Low-Cost Carriers or ULCC unbundles the fare. In other words, the whole fare is broken into components that the passengers can choose to eliminate. Unbundling leaves anything over the base fare optional. Although Southwest offers low fares, it is a low-cost carrier and not an ultra-low-cost carrier. Therefore, Southwest can explore opportunities in the ULCC niche.
Traditionally, the biggest threats to Southwest airlines are fluctuating fuel prices, heavy regulation, and intense competition. In addition to these threats, Southwest airlines are also facing new threats such as COVID-19 restrictions and growth of remote work.
Let’s look at Southwest’s threats in more detail:
Covid-19 Pandemic: After nearly 50 years of profitable operation, the pandemic led Southwest to its first loss. Southwest’s operating revenue fell from $22.4 billion in 2019 to $9 billion in 2020. As a result of this 59% drop, the company had to take aggressive measures to stay relevant.
Volatile Fuel Prices: Last year, Southwest spent $1.8 billion on fuel. This expense is 14% of the total operating costs. So, fluctuations in fuel prices have a big impact on Southwest’s operating costs and profit.
Heavy Regulation: The airline industry must satisfy the requirements of many operational and economic regulatory bodies such as the FAA and DOT. In addition to this, the company must also comply with many operational, health, and safety regulations. With the emergence of online commerce, the company must also address informational technology and data privacy regulations.
Intense Competition: The pool of fliers shrank because of the global health crisis. As a result, the competition to acquire patronage has increased. In 2020, American Airlines, Southwest Airlines, Delta Airlines, and United Airlines accounted for nearly 66% of the market share in the United States. However, the individual market share of these companies was close.
Growth of Remote Work: Lockdowns and social-distancing norms has accelerated work-from-home culture. Online video conferencing platforms such as Zoom has reduced the need for travel. The increase in online collaborative tools has also reduced the need for people to work under one roof. As a result, the segment of income from business travel has been severely hit. Airline companies fear that this behavior shift would be permanent.
In today’s scenario, the biggest threat to Southwest is the competition to acquire patrons and the decline in business travel. The silver lining for Southwest in this scenario is that it has been able to rapidly raise cash. It has also survived the pandemic without canceling any of its destinations.
Southwest Airlines SWOT Table
The SWOT table summarizes SWOT analysis for Southwest airlines in an easy-to-read grid. Here’s the SWOT table for Southwest airlines:
If you want to learn how to make a SWOT table for another company, you can read our in-depth guide on how to make a SWOT table.