SOUTHWEST AIRLINES 2011 case study
I believe that a company’s biggest problem is the major airlines will become efficient and compete on cost with the company - SOUTHWEST AIRLINES 2011 case study introduction. In short-term, they enjoy success in low fare position with low cost for few years with the competitive advantage. In long-term, the competitors will learn how to decrease their cost so that the company will lose their position. In other words, they can not enjoy the competitive advantage. Finally, the problem can cause the company about a slowdown in entire company’s growth or they would downsize their business without proper preparation.
The reason why Southwest Airlines would lose their low cost advantage is that their operating costs are high. For example, the company’s labor cost per available seat mile moved from the lowest to second highest for during 2002 to 2009 . As the case mentioned, labor cost of the company have increased rapidly. In addition, the labor cost is a main part of costs, which is about 33 average percent for 2008 to 2010 of the total operating expense (labor costs divided by total operating expense) . Delta, one of the major competitors, has only 20 average percent for 2008 to 2010 of the total operating expense compared to the company . Also, the company has higher ratio of fuel/oil costs than its competitor’s. For example, it has 33 average percent of fuel costs (fuel costs divided by total operating expense) for 2008 to 2010 compared to 25% in Delta. In this way, the competitors are getting lower costs while the company’s operating costs are increasing. As a result, they will lose their competitive advantage with low cost.
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As I mentioned in Analysis, labor costs constituted approximately 33 percent of the company’s operating expenses during 2010 . However, the company’s ability to control labor costs is limited by the terms of its collective bargaining agreements, and increased labor costs have impacted the company’s low cost competitive position.
The company should reinforce their quality of service if they rarely decrease their labor costs. It is time to prepare to get a new position. If the flight fares are similar among the airlines, customer would choose an airline with better service. For example, flight attendants serving customers with special kindness makes customers happy. Then, the customers want to travel with the airline again. They also need to improve their risk management to prepare for increase in fuel price with proper hedge portfolio.
If the company acts on my recommendations, I expect that the company can maintain their competitive advantage in low cost position for many years if they strengthen their risk management for fuel price. They can grow up with better quality of service with rational fares in the future.