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Weaknesses Of Southwest Airlines Essay

974 words - 4 pages

Southwest Airlines was founded in “1964, when Rollin King purchased a charter airline company called the Wild Goose Flying Service” (Lauer, 2010). The idea of Southwest Airlines began in “1967, between King and Herb Kelleher” (Lauer, 2010). After winning “legal battles against their rival competitors Southwest was ready for operations in 1971” (Lauer, 2010). The CEO of Southwest Airlines is “Gary Kelly, who was hired to work in 1986” (Lauer, 2010) He started by working in the financial department, got promoted to the CFO, and then became the CEO. Gary Kelly’s “total compensation was $4 million” (Forbes, 2013).
Southwest Airlines has been in business for about 50 years, and has been very ...view middle of the document...

The high contractual obligations may also lead to a diversion of cash flows from operations and expansion plans to service and fixed obligations.
Southwest’s profit margins have declined significantly. “Their operating profit margin has decreased from 8% to 2.5%, and net profit margin has decreased from 6.5% to 0.9%” (Hauck, 2010). This shows that the company has not been able to manage its cost structure effectively. This may also impact their long-term financial position. The declining profit margins are a result of heavy dependence on passenger revenues. “The company has only derived 1.1% of its revenues from freight operations, compared to 95.6% and 3.3% from passenger transport and other operations, respectively” (Hauck, 2010). The company tremendously relies on revenues through passenger transport, and this is a major weakness in their business plan. They have not yet leveraged their strong domestic network towards increase cargo revenues. Increasing cargo revenues may lead to more stability in revenues.
They rely on one single producer of airplanes. “Southwest Airlines is currently the largest single purchaser of Boeing 737’s” (Hauck, 2010). Their single aircraft strategy makes them dependent on Boeing. This frame of mind may not help them attract new potential customers. The single aircraft strategy with “no segmented seating options” (Hauck, 2010) can lead to Southwest losing its customers. They do not offer any first class seating on their planes, and this may cause them to lose customers that like to fly first class. First class passengers pay more, and this may hinder their ability to attain higher profits. The Boeing 737 has “limited freight and cargo carrying space” (Hauck, 2010). Southwest’s flights can only carry small amounts of freight and cargo, because of “regulation of how much their planes are allowed to carry” (Hauck, 2010). This reduces the revenue they could generate from freight and cargo transport. The Boeing 737 does not allow Southwest to offer “international flying” (Hauck, 2010) options, which could lead to higher...

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