Competitive Strategy Southwest Airlines Essay

2059 words - 8 pages

The domestic US airline industry has been intensely competitive since it wasderegulated in 1978. In a regulated environment, most of the cost increases werepassed along to consumers under a fixed rate-of-return based pricing scheme. Thisallowed labor unions to acquire a lot of power and workers at the major incumbentcarriers were overpaid.After deregulation, the incumbent carriers felt the most pain, and the floodgates hadopened for newer more nimble carriers with lower cost structures to compete head-onwith the established airlines. There were several bankruptcies followed by a wave ofconsolidation with the fittest carriers surviving and the rest being acquired or going out ofbusiness.Analysis of the airline industryTo determine the profitability of the airline industry, we will do an industry analysis usingPorter's five-forces framework. This industry analysis will help us in understanding thesize of the Potential Industry Earnings (PIE), and how much of this the differentparticipants can extract.Rivalry among competitorsThere is intense rivalry among different airlines. In the pre-deregulation days, airlinescompeted mostly on things like service, meals and in-flight movies etc., since priceswere mandated by the Civil Aeronautics Board. In the post-de-regulation era, this rivalryhas taken on the form of severe price competition, with airlines ruthlessly undercuttingeach other with fare promotions.There are a number of airlines making the airline industry fairly crowded. Even thoughthe 3-firm concentration in 1992 was 50%, and the 8-firm concentration was 92%, thefact that the airlines competed on price made the industry much more competitive thanthe numbers might suggest.The service the airlines sell (air transport) is pretty homogenous, and there is not muchproduct (in this case, service) differentiation. The major differences between the servicesoffered by different airlines include the total time spent on an airplane and the number ofconnections. While time-sensitive business travelers may prefer shorter, direct flights,most leisure travelers don't see this as a big differentiator when the price is factored in.Buyers (both business as well as leisure travelers) have low switching costs and there isvery little relationship-specific investment that travelers make. Although the airlinesmade an effort to create customer loyalty by offering frequent flyer programs, most of thecompetitive advantage this provided was quickly eroded by almost all airlines offeringsuch programs. Moreover, leisure travelers are motivated to shop around for the bestprice.The airline industry is also characterized by very high fixed costs. The majority of theoperational costs (labor, landing fees, cost of aircraft etc.) are fixed regardless of how fullthe planes are, and the marginal cost of adding an extra passenger is almost negligible(just the cost of food plus an insignificant amount of extra fuel). Thus, on the margin,every extra seat sold contributes directly to...

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