CLC – Environmental And Industry Analysis For Strategic Management Class

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Environmental Force

Concept to research

Trend / Issue

Impact for Corporation

Impact for Business Unit

Why exactly Does Company care

Economic

Market Share

18.5% domestic market share April 2020-March 2021 (1)

Market Leader in 22 of top 50 US metro areas (1)

Room for improvement in their business strategy. (0)

Impacts of the 2008 recession

Rapid increase in fuel costs (2)

Fuel costs rose from 10% to 35% operating budget (2)

Must change strategy or risk reduced profits (2)

Business model of keeping costs low to pass the savings onto customers was challenged. SW Airlines has a flexible strategy to cope during difficult times (2). The recovery efforts influenced their recovery from Covid-recession (0).

Reduced demand (3)

First quarterly loss in over 17 years

Strategy change needed without impacting the consumer (2)

Net losses can be difficult to recover from and require changes to the business strategy.

Impacts of COVID travel restrictions

Grounded flights through the industry (4)

$3.1 Billion in losses (4)

First annual net loss since 1972 (4)

Passenger volume dropped 60% in 2020 (5)

All airlines saw significant losses, but a Southwest is primarily domestic, they were able to find other avenues to make up lost profits. (4)

Voluntary Separation Programs (4)

Reduced annual 2020 Salaries, Wages, Benefits expense by $565 Million (4)

These programs helped employee retention, as well as reduced the cost of training new hires. (0)

No furloughed employees (4)

Increased employee loyalty, retention and lower costs

Cargo-only chartered flights (4)

Earned revenues while other carriers didn't (4)

International travel restricted longer than domestic

Flights to Mexico and the Caribbean halted

International flights were added to SW Airlines business strategy in 2014, and had plans to expand, which were put on hold. (4)

Infrastructure

Investment in maintenance complex (10)

Supports long-term growth (10)

Maintains rank as nation's largest domestic air carrier (6)

Competitive strategy (0)

Growth rate

Revenue Growth Y/Y

160% revenue growth (7)

Maintaining growth will require entry into new markets (22)

Operating Income Y/Y

$733 M compared to an Operating Loss in Q3 of 2020 (7)

Achieved the best operating income growth in the airline industry (8)

U.S. unemployment rate

5.20%

Increased SW Airlines minimum wage to $15

Stimulation of local economies (5)

People are part of the tripple bottom line.

Demographics of Employees

2020 Gender Demographics of Employees

58% Male (9)

Diversity helps drive innovation amongst a broader level of skill and increases productivity of the company (10)

By supporting innovative ideas from their employees, along with increased productivity results in higher profits, thus higher earnings for their shareholders.

There is a clear underrepresentation of minority ethnic groups upon which the company can improve (0)

42% Female (9)

2020 Ethnic Composition of Employees

60.2% White (9)

16.3% Black or African American (9)

14.8% Hispanic or Latino (9)

3.9% Asian (9)

2.6% 2+ Raced (9)

1.5% Native Hawaiian or Other Pacific Islander (9)

0.7% American Indian or Alaskan Native (9)

Physical/Sustainable

Sustainability

Attitude toward renewable energy sources

Sustainable aviation fuel initiatives (11)

Reducing reliance on traditional jet fuel (11)

Corporate social responsibility

People, Performance, and Planet initiative (8)

Meets Greenhouse Gas emissions target (11)

Environmental, Social, Government efforts (8)

Commitment to sustainability attracts travelers that are also eco-consious (0)

Renewability of resources

Downstream impacts

Sociocultural

Stakeholders

Employees (9)

Customers (9)

Suppliers (9)

Non-Governmental Organizations (9)

Airports/Government (9)

Investors (9)

Regulators (9)

Communities (9)

Work culture

Fostering a fun/healthy work environment

96% employee retention rate (12)

The cost of turnover is high, so employee retention is crucial to maintain their bottom line (8)

Happy Employees = Big Profits (7)

Skill level of workforce

Incredible Customer Service

Job Security

SW hires "Rockstars" (7)

SW has NEVER laid off or furloughed employees (7)

Happy Employees keep customers coming back (7)

Higher stockholder value (7)

Unionization

Approx. 83% employees are represented by unions (4)

SW works with unions with the intent to improve employee compensation and work flexibility (8)

Satisfied employees dedicated to the companies’ vision and mission (8)

Higher stockholder value (7)

Global

Worldwide operations

Legal framework for contracts

Contracts with suppliers

Intellectual property protections

Wage legislation

Unions (4)

Anti-trust laws regarding Regional Airlines

Political trends

Political instability in other countries

Weather

Delayed/canceled flights

Dissatisfied customers (0)

Need to reroute or reschedule flights is costly

Severe weather events not only affect flight schedules but can also prevent employees from making it to work.

Reduced profits (0)

Runway maintenance

Political/Legal

Industry Safety Regulations

Federal Aviation Administration (17)

Safety Regulations (17)

Department of Transportation (17)

Service trade regulations and tariffs

Outsourcing regulation

Technology

Modernizing aircraft fleet

Reducing carbon emissions

Shift from Boeing 737 MAX which has been grounded since 2019 (22).

This will release some funds for investments that generate positive returns

Increased shareholder wealth

Key technology: Company systems:

Aircraft maintenance, planning, and record keeping

Crew scheduling

Human resources management

Technology infrastructure

Technology adoption

75% Air travel is booked online (6)

Shorter lines

Efficiency increases profits

Cell Phone check-in a available 24 hours prior to flight (15)

Increased productivity

E-Ticket Kiosks (15)

Increased customer satisfaction

PORTER 5 FORCES

Threat of new entrants

Economies of scale

Top 10 airlines account for 90% total U.S. air traffic in 2004 (16)

SW serves a niche of point-to-point service to unserved destinations, at a low cost with exemplary customer service. Although air travel is such a large market, and the current reports of long lines would have us believe there is more demand than supply, market entry isn't easy.

Product differentiation

Little differentiation within the airline industry (16)

High startup costs (16)

Capital markets are typically wiling to fund new entrants (17)

It's been more than 10 years since the entrance of Virgin America, the last successful launch of a scheduled jet airline in the U.S.

Regulation by FAA and DoT

Pass Safety Checks est. $10 M

Reduced risk of incoming competition

Increased market share

Access to distribution channels

Government policies

Threat of substitute products

Switching Costs

High value creates high switching costs

Customer loyalty

Technological Advances

Research and Development

SW Airlines must continue to innovate their service with technology to continue to meet the needs of customers, which increases costs

Customer desires

Affordable, convenient, safe air travel

Cultural /Sociocultural

Rivalry among existing firms

Number of competitors

9 primary competitors: Delta, American, United, Jetblue, Skywest, Alaska, Spirit, Frontier, Republic

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Rate of industry growth

Revenue 5-year growth is -14.52% compare with airline industry of -11.88%

Product or service characteristics

Fixed / variable cost

Salaries & employee benefits biggest fixed costs and fuel costs biggest variable cost.

Capacity

Exit barriers

Diversity of Competition

Bargaining power of buyers

Large purchasers

Flight mileage points (7)

Increased loyalty (7)

Backward integration

Price discrimination (17)

Established as a low-cost carrier (17)

Alternative suppliers

International airline companies that serve the U.S.

Low switching costs

No penalty fees for switching flights

Increased bargaining power of buyers

Customers are more likely to reschedule within Southwest, increasing loyalty. (7)

Improved customer experience increases loyal customers. (7)

Significance of product to buyer

Bargaining power of suppliers

Primary Supplier: Boeing

Boeing is primarily used in SW Airlines fleet

Boeing has higher bargaining power - but purchasing power of Southwest helps to limit it

Although they have increased bargaining power Boeing and jet fuel suppliers are not likely to forward integrate into providing air travel

Uniqueness

Fuel Efficiency

Boeing offers a product more efficient than its' competitors

Lack of substitute

Jet Fuel Suppliers (17)

Use of hedging to cover fuel costs (17)

Jet fuel prices don't correlate with oil prices (17)

Ability to forward integrate

Rising fuel costs increasing cost per available seat mile (CASM) (17)

SW Airlines maintains long-term relationships with suppliers, which requires mutual trust. (18)