Monday, April 30, 2012

Southwest's Competitive Advantage

To reach its highly competitive position, Southwest Airlines has focused on four main strategies: being low-cost, employee-driven, future-minded, and differentiated.

As mentioned previously, Southwest is a low-cost airline that focuses on fast, no-frills service. It has never served meals, does not have advanced seat reservations, and flies only Boeing airplanes. These decisions have helped Southwest be flexible in the face of the recent decreases in airplane passengers caused by the 9/11 terrorist attacks and the world economic crisis. The company did not have to make the drastic changes seen in its competitors’ services because it was already operating as a low-cost carrier. While other airlines cut back costs by reducing their services and firing large portions of their employees, Southwest was able to get by with nothing more than pay-cuts - no employee was fired because of economic issues. Although a company-wide pay-cut is nothing to sneeze at, Southwest employees agreed they would rather have their jobs for less pay than try to find work elsewhere. Through this loyalty, Southwest was able to recover much faster than its competitors and maintain its strong customer base.

In the last entry, we discussed Southwest employees in detail, so I will mention them only briefly here. Southwest’s employees are incredibly loyal, and they are a key part of the company’s overall strategy. Having happy employees means a company is more likely to have happy customers. Southwest knows this and uses it to its advantage. The company knows how to use motivation tactics that work for their employees. In line with Douglas McGregor’s Theory Y employees, workers at Southwest enjoy their jobs and see them as a natural part of their lives. They don’t need to be coerced with threats or promises. Southwest’s employees genuinely enjoy their jobs and want to pass that enjoyment on to their customers. This attitude is reflected in Southwest’s employee retention rate of 92.3% (a key indicator that employees love Southwest and want to work there). And an employee who loves their company will make customers love that company, too.

Customers can easily see Southwest’s low-cost, employee-driven strategies, but what they can’t always see is Southwest’s internal strategy. One of the company’s main focuses is on differentiation. This is an interesting strategy choice because differentiation is usually seen in high-price and/or unique product companies (such as BMW or Starbucks). Still, this is one of Southwest’s key choices, and they are making it work.

One of their key differentiation strategies is their Rapid Rewards frequent flyer program. According to their financial statements, Southwest has revamped their system so “...members are able to redeem their points for every available seat, every day, on every flight, with no blackout dates; and...points do not expire so long as the Rapid Rewards Member has points-earning activity during a 24-month time period.” Many airlines have similar, but much more complicated rewards systems, so Southwest’s emphasis on flexibility separates them from the rest of the pack. They also make use of their Chase® Visa credit card to help their customers earn and redeem points. This system brings in new customers, increases business from existing customers, and strengthens Rapid Rewards partnerships within its various divisions. Southwest has already seen this new rewards plan pay off by meeting and passing all of their expected growth goals. They’ve increased their overall business and given customers what they want. This company excels at being attuned to customer needs - they know that if you give people what they want, they will give you what you want.

Southwest’s other key differentiation strategy is what they call “aggressive promotion.” They take their key messages, put them into easy-to-understand commercials, and let the strategies themselves do the talking.
Here is a commercial from their Bags Fly Free® marketing campaign: 

Southwest sets up all of its strategies in that commercial. It shows its low costs (bags fly free!), emphasis on employees, and its differentiation (even going so far as to call out other airlines for charging baggage fees). This sort of campaign sets the company apart from competitors and makes potential customers aware of Southwest’s unique policies.
The fourth key strategy is Southwest’s focus on its future. Everything it does progresses the company, and every decision is made with long-term benefits in mind. Their recent acquisition of AirTran shows how Southwest is thinking of ways to expand its services and grow its market share. In their Annual Report, Southwest listed the strengths of this integration. “It allows...more low-fare destinations by and diversifying into new markets....” It also “...increases Company’s share of current domestic market share capacity (as measured by available seat miles or passengers.” And “it provides access to near-international leisure markets in the Caribbean and Mexico...and provides firsthand and meaningful insight expansion opportunities.” Essentially, Southwest is working to expand its services, steadily increase its market share, absorb prior competition, and prepare for future growth. These steps will help the company be successful both now and in the future. In the current economy, companies must be more flexible and prepared than ever before, so plans like Southwest’s are essential.
In line with their future-minded goals, Southwest is updating its aircraft fleet to lower costs and increase customer capacities. The company purchased new Boeing 737-800s in the first quarter of 2012. These planes have increased their customer capacity - and more customers of course means access to more profits. Although adding customers means more money, it can also mean more costs. Southwest has prepared for this; 737-800s have better fuel efficiencies than previous models and can reduce unit costs. The planes are also larger, so Southwest can add seats without adding flights. This increased efficiency will help cover fuel costs and contribute to the company’s operating margins. In the 2011 Annual Report, Southwest said these new planes “...will enable Southwest to profitably expand to new destinations and potentially fly to more distant markets such as Hawaii, Alaska, Canada, Mexico, and the Caribbean.”
In addition to these new planes, Southwest has made a deal with Boeing to purchase 150 of their newly designed 737 MAX planes. These new models are more fuel efficient and environmentally friendly. These benefits factor into both Southwest’s low-cost and customer-minded strategies. Fuel efficiencies cut costs, and environmental considerations are essential to stay on the public’s good side. A green company is much more respected than its less environmental competitors.
According to the company, these new planes will allow for replacing “...certain Boeing 737 and/or Boeing 717 aircraft.” Southwest is planning for the inevitable time when their current fleet becmes outdated. By being the first customers for this new aircraft, the company is taking a risk, but it is necessary to stay innovative. They claim that the “...717 aircraft does not fit within [Southwest’s] long-term overall fleet plans,” so they must replace these models with ones that better serve the company’s needs. In spite of these changes, Southwest is maintaining its strategy of having one type of airplane. They keep strictly to their promise of flying only Boeing models. This both serves the company by lowering costs and by showing a consistent face to their customers. Those who fly with Southwest could become disillusioned if the company suddenly changed its aircraft fleet. Customer loyalty is essential in volatile markets, and Southwest won’t risk alienating anyone.
Southwest is a people-oriented company and uses that orientation to leverage its advantages. It cuts costs by having employees who work for a company they love, instead of for a simple paycheck at the end of the week. The company also plans for the future and is not afraid to take the risks necessary to stay ahead of the competition. As seen with their integration of AirTran and the new Boeing planes, Southwest is focused on expanding its services and increasing its market share. They plan far ahead and make sure their plans are sustainable for current and future competitive advantages.

For more information about the 737 MAX purchase, check out this Financial News Network clip: 

And watch this video for a look at the new plane:


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