Friday, November 9, 2007

Southwest changing strategy

Every business school likes to teach strategy cases based on Southwest because its low fares, frequent flights, and enthusiastic employees unencumbered by rigid work rules seems like the perfect fit between the resources and capabilities of the firm and its external competitive environment.

But now, Business Week reports that Southwest is changing its low-cost strategy by slowing expansion and by trying to wring more revenue out of its business travelers by using what it calls "ancillary services," like priority boarding and in-flight "extras."

Two factors are driving the radical changes: tougher competition and higher oil prices. Many of Southwest's competitors have gone through bankruptcy, allowing them to cut labor costs and shed unprofitable gate and plane leases. The result is that the airline's cost advantage over rivals has shrunk, and its pilots and flight attendants are now the highest paid in the industry. At the same time, the price of oil is nearing $100 a barrel (BusinessWeek, 11/7/07), driving up Southwest's costs.

The outlook this year isn't pretty. Southwest's earnings are expected to decline about 15% in 2007, to $510 million, on sales of $9 billion, even as many of its rivals are reporting profit gains. "Their business model is ten years out of date," says aviation industry consultant Michael Boyd.

1 comment:

  1. The merger with AirTran also ruined their "special sauce." The Southwest "Luv" culture hasn't transferred to AirTran employees. On a recent Southwest flight a woman sitting beside me called out an Soutwest/AirTran employee who was rude and said "you must have come over from AirTran." The employee looked shocked.
    Flexibility does indeed seem to be their new competitive strategy these days not price, but once the service with a smile and a song at take off and landing goes away so will I as a customer.