Table of Contents
Southwest Airlines Economics Case Study
Instructions
The case study is based on Southwest Airlines
Submit a draft of the Costs of Production (Section IV), Overall Market (Section V), and Recommendation (Section VI) of your research paper, including all critical elements listed below. You will review your firm’s financial reports and other relevant data sources to collect and analyze cost information for your firm over the past five or so years. Using real data and the economic tools developed in Module Four, you will analyze your firm’s profitability and how costs impact its growth. Additionally, you will find data on your firm’s competitors in order to detail your firm’s place within the market currently and over the past five or so years. Lastly, you will develop a recommendation for how the firm can manage its future production.
Specifically, the following critical elements must be addressed:
IV. Examine the costs of production for your firm.
a) Analyze the various costs a firm faces, their trends over time, and how they have impacted your firm’s profitability.
b) Apply the concepts of variable and fixed costs to your firm for informing its output decisions. For instance, analyze how different kinds of costs
(labor, research and development, raw materials) affect the firm’s level of output.
V. Explore the overall market for your firm.
a) Discuss the market share of the firm and its top competitors by providing details on current percentages for each firm and describing the trend
over time. You might consider presenting the data graphically.
b) Analyze the barriers to entry in this market to illustrate the potential for new competition and its impact on your firm’s future in the market.
c) Describe the market structure for this firm and analyze how this affects the firm’s ability to influence the market.
VI. Recommendation
a) Develop a recommendation for how the firm can manage its future production by synthesizing the data presented.
b) Suggest how the firm’s position within the market and among its competitors will allow it to take your recommended action.
c) Describe how the firm can sustain its success going forward by evaluating the findings from demand trends and price elasticity.
Rubric
Solution
Southwest Airlines
Cost of production
Southwest Airlines has registered an increase in its profitability over the last five years. In 2015, the company registered an annual net income of $2.4 billion or $3.52 per diluted share, without special items (Hill, Schilling, & Jones, 2016). As such, the company beat 2014’s record in terms of profit per share by a high of 75.1 percent, thus recording an ROIC of 32.7 percent. This could be attributed to the company’s cost control initiatives, including fuel hedging. The company recorded a decrease of $1.3 billion in terms of fuel costs from 2014 to 2015 (Hill, Schilling, & Jones, 2016). Modernization of the fleet has also greatly contributed towards a reduction in the costs. Cost reduction contributes to an increase in the profit margin.
Overall market status
Southwest Airline is the largest airline company in the US, holding a market share of 18.2 percent (Collier & Evans, 2015). Its major competitors include Delta Airlines, American Airlines, and United Airlines, which hold market shares of 16.0 percent, 16.1 percent, and 14.7 percent respectively. While Southwest Airlines had an operating margin of 20.3% in in the Fourth Quarter of 2015, American airlines had 18.7%, Delta Airlines 19.9%, and United Airlines 18.4% (Collier & Evans, 2015). Southwest has continually edged out its competitors for the previous five years, an aspect that has made it the most profitable airline for the past five years. The company’s key competitive advantages include low operational costs, quality customer services, and their distinctive Human Resource practices.
Recommendation
This paper recommends that Southwest Airlines should
utilize its profitability and financial stability to extend its operations into
new territories and buy additional aircrafts. This would allow them to reach
out to a wide part of the market and to increase their market share, thus
increasing their profitability. In addition, the company should consider
upgrading its facilities to provide more accommodating aesthetics. As much as
these may be costly ventures for the organization, they will expose the
organization to a larger market.
References
Collier, D. A., & Evans, J. R. (2015). OM 5. Boston, MA: Cengage Learning.
Hill, C. W., Schilling, M. A., & Jones, G. R. (2016). Strategic Management: Theory: An Integrated Approach. Boston, MA: Cengage Learning.
Southwest Airlines Finance and Accounting Case Study
Instructions
Prepare a 500-word financial analysis (excluding tables, figures, and addenda) of a chosen company following the nine-step assessment process detailed in Assessing a Company’s Future Financial Health.
In this topic, apply the next two steps of the nine-step assessment process to develop a 500-word analysis of your chosen company: SOUTHWEST AIRLINES
STEP 3 – Investments to Support the Business Unit Strategy or Strategies
STEP 4 – Future Profitability and Competitive Performance
use the template given as a guide for format
Solution
Southwest Airlines Investment Strategy
Southwest Airlines Company is one of the most famous low cost carrier flights entities in the United States of America. Recently, the entity has openly stated its ambition to expand its operations to increase its market share in the airline industry and eventually increase its profitability. The company intends to seek equity finance from willing and potential investors in order to achieve its long-term strategy. Southwest Airlines pose a good and stable future financial health that investors can rely on making their decisions to invest in the company.
Southwest Airlines Company has identified three broad market segments for its services. The company has categorized its market along geographic lines, psychographic lines, and behavioral lines. Along geographical lines, the company has different customers that take international flights and those that operate in the domestic flights. These two groups of flight services have been distinguished to serve the purpose of the specific segment they operate. The international flight customers require flights that can cover a long distance with ease. Customers taking international flights pay more travel fees than other flight users. The company also recognizes the customers taking domestic flights and ensures it has services that serve their needs. Domestic users of the flight services take flights for relatively shorter distances as compared to their international counterparts. The company offers airline services that cover short distances within the country at affordable costs. The entity also offers extra services such as immediate booking and late cancellation of tickets to facilitate the efficiency of traveling on the users in this segment. Along psychographic lines, Southwest Airlines Company has segmented its markets into the customers taking flights for leisure activities and those that make for business purposes. The company offers immediate bookings and last minute cancellation of tickets to the business category. Along behavioral lines, the entity has segmented its market into segments that are result oriented. These segments include the seasonal or occasional customers and the rapid reward customers (“Forbes Welcome”, 2016).
As a low-cost carrier cost Flight Company, the company’s target market is the business class customers. This group of customers constitutes the largest portion of the company’s revenue. Business class customers are the most frequent users of the airline services in the company and concentrating in the group would increase the entity’s profit. The company’s competitor such as Delta Airlines does not concentrate in this group of customers implying that targeting the group will give the company a comparative advantage. The company has been long in the airline industry making it have sufficient resources to serve this group of clients. The concentration of the business class customers will serve as a service differentiation I the company making the increase the demand for its services (Milisavljevic, 2013).
The airline industry is an aggressive industry requiring frequent innovations to meet the industry standards. The entity should not allocate all its resources in the new target market but also allocate to its existing target market to do a multi-segment marketing. The airline service industry is a delicate industry and overconcentration in one target market may lead to the downfall of the existing targets. Southwest Airlines Company should combine both the new target markets and existing target markets to facilitate an overall growth of the company (McGee, 2015).
References
Forbes Welcome. (2016). Forbes.com. Retrieved 6 April 2016, from http://www.forbes.com/sites/stanphelps/2014/09/14/southwest-airlines-understands-the-heart-of-marketing-is-experience/#27f97e886060
McGee, T. (2015). Southwest Heart Flies On Social. Target Marketing. Retrieved 6 April 2016, from http://www.targetmarketingmag.com/article/social-worked-southwest-airlines-got-new-heart-ground/
Milisavljevic, M. (2013). Value oriented strategic marketing. Marketing, 44(4), 299-309. http://dx.doi.org/10.5937/markt1304299m