Southwest Airlines - External Environment Analysis - Research Paper Example

Southwest Airlines – External Environment Analysis External Environment There are a number of factors which may affect Southwest Airlines in their external environment. The external environment comprises of three major segments: remote, industry and operational. The remote segment would be analyzed as follows: Political Factors With respect to the internal political arena in which Southwest Airlines operates i.e. United States of America, it can be easily concluded that the company does not face any major issue. Southwest Airlines have kept a low profile lobbying approach when it comes to addressing national political affairs (Moran, 2012). Though the local political affairs are usually kept under control, there are numerous other issues that do not lie within the company’s hands. The perpetual rise in the fuel prices has always remained a major issue for Southwest. The unpredictable nature of the fuel prices is hugely attributed to several external factors which are usually not within the control of the company. The fuel prices are hugely driven by political agendas of the oil supplying nations and it may have varying results for the airline industry since oil is the major expenditure that an airline company has to endure in order to operate effectively and efficiently. Economic Factors The aviation industry within the United States of America has been a major contributor towards improving its country’s economy. According to a study issued by the International Air Transport Association (IATA) in May 2012, the airline industry has almost contributed $669.5 billion (4.9%) to the U.S. economy. Of this amount, almost 31% was contributed by airlines, airports and airline concerned services. The current era in which Southwest operates, fuel is presumably the main issue for not only Southwest airline but the entire aviation industry. According to the financial statements of Southwest Airlines, oil and jet fuel prices have remained at around 37% of total operating expenses both in the year 2011 and 2012 (Investor Relations, 2012). Social Factors Travelling has remained an important aspect of people normal living and with the dynamism in the economy, commuting has increased rapidly during the last four to five decades. People who usually travel from one place to another would always want to travel with low cost, high quality service. Hence it may be argued that such services are, based on their cheapness, are usually available via rail or road transport but this issue may be reduced to a greater extent since Southwest operates a low cost airline service and people would prefer it considering the low cost which it offers. Ecological Factors Environment friendliness has always remained an important feature for Southwest Airlines. The company has always focused on purchasing fleets that are both cost efficient as well as environment friendly. In a bid to prove it environment friendly nature, the company ordered the purchase of almost 150 Boeing 737 MAX aircraft which it considers to be more environment friendly than its present aircrafts (Annual Report, 2011). Southwest also uses environmentally responsible products within its aircraft fleet in order to help providing better atmosphere for its customers. In order to display its commitment towards improving the environment, the company issued its “Southwest One Report”. The report addresses several ecological issues and also provides strategies which would be adopted by the company to help reduce environmental hazards (Annual Report, 2011). Technological Factors The aviation service industry is technology intensive with an upward shift required at frequent intervals in order to remain competitive. Southwest Airlines has continuously kept up its foot on the accelerator with respect to technologically upgrading its services. The company has improved its website and its frequent flyer program in order to attract more customers. The company has also improved its fleets by providing Wi-Fi services to its customers on board. Almost every Southwest aircraft is now equipped with the Wi-Fi technology (Annual Report, 2011). The company currently has an enhanced SAP Enterprise Resource Planning (ERP) application, which has helped the company in automating and improving its accounting information. This improvement has helped the company in looking at its operation via a broader and accurate perspective (Annual Report, 2011). Industry Environment The industry environment for Southwest Airlines can be examined via Porter’s Five Forces Model. Threats of Entry The airline industry is a capital intensive industry. New companies usually find it difficult to initiate their business within the industry because of the high capital injection. Hence, the threat that a new entrant may enter the airline arena is minimal. Besides this, Southwest Airlines has kept a low-cost structure which helps the company to enjoy a cost leadership status within the industry. New entrant would certainly not be able to compete head-on with Southwest because of this. Southwest has maintained a great goodwill amongst its customers and it would certainly be difficult for a new entrant to pull that customer portfolio from established company. Supplier Power Southwest employs all its aircrafts from Boeing (supplier) and this makes the company too much dependent over his supplier. Southwest is dominantly reliant on Boeing for the supply of the fleets and many other equipment, hence it can be concluded that the company may face adverse issues if a mechanical or a regulatory issue erupts with the equipment or the aircrafts supplied by Boeing. In 2011, Southwest had entered into an agreement to buy new aircrafts 150 Boeing 737 MAX from Boeing. The first of these aircrafts is all set to be obtained by Southwest Airlines in 2017. This scenario clearly suggest that Southwest’s supplier enjoys a powerful position as Southwest would be tangled up with the contract and it would be difficult for the company to switch to alternate supplier if any discrepancy occurs. Buyer Power Customers are usually powerful and can impact a business if they form a huge group but considering the fact that this may not be possible, Buyer Power in this case is a bit too low. The other thing that makes Southwest Airlines enjoy an upper hand over its customer is that the company offers a distinctive low cost model which has attracted numerous customers over the years. Southwest has continued to offer various customer satisfaction deals and it has been ranked within the Fortune magazine’s list of the World’s most admired company (Annual Report, 2011). Substitute Products Southwest Airlines has had to face a stiff competition from several of its competitors over the years. The company in a bid to reduce that competition acquired one of its competitors AirTran but then even the company had to face a tough test from its other remaining competitors. United Airlines, Delta Airlines and JetBlue Airlines are considered to be its major competitors with other competitors also operating within the United States and that too with a similar low cost structure. Hence it can be said that the customers can easily switch the airlines if they are, at any point in time, not satisfied with the services of Southwest Airlines (Annual Report, 2011). Industry Competitors Southwest faces intense rivalry from its competitors operating within the airline industry. With the likes of United, Delta and JetBlue Airlines, Southwest needs to keep up on its toes when formulating future strategies. Operating Environment Though Southwest Airlines enjoy a good position, it faces a rigid competitive position within the industry. There are several direct competitors of Southwest Airlines. The competitors are not only operating within the airline industry within the U.S. but they are also following a similar low-cost strategy while offering their services to their customers. Southwest’s strong link with its suppliers (Boeing) is an influential matter which has always remained pivotal in providing an enhanced financial performance for the company. The company has adopted a policy of only employing Boeing aircrafts in order to reduce its costs. The company has maintained a good position within the airline industry and proved a threat for its competitors. The company attributes its success to its employees and was also ranked 8th within the top ten list of safest airlines in 2009 (Terminal U, 2009) Work Cited Annual Report. Southwest Airlines Co. 2011. Print. Chris Moran. Hobby lobby: Dueling airlines' political operations take off. Chron. 2012. Web. 3 Apr 2013. Investor Relations. Southwest Annual Financial Statements. 2012. Web. 3 Apr 2013. Pearce, John A, and Richard B. Robinson. Strategic Management: Planning for Domestic & Global Competition. New York: McGraw-Hill/Irwin, 2013. Print. Terminal U. In-depth: world’s 10 safest airlines – your questions answered. 2009. Web. 3 Apr 2013. Read More