Case Study southwest-airlines
Leadership and Management Issues facing Southwest Airlines


Structure of the Report

In this report, the several leadership and management issues facing Southwest Airlines in the near future will be discussed. To perform this, an external analysis on Southwest Airlines will firstly be performed. Under this section, PESTEL and Porter Five Forces Framework will be applied. After the external factors are analyzed, the report will continue to investigate the internal factors related to Southwest Airlines. For this, the SWOT analysis framework, McKinsey 7S Model, as well as a financial statement analysis for Southwest Airlines in the recent financial years will be performed. Later, results or issues discovered from these analyses will be summarized, and outlined. Specifically, the issues related to leadership and management for Southwest Airlines will be articulated. Then, several recommendations aim to addressing these leadership and management issues will be suggested.

External Analysis

External analysis is important for the analyst because such analysis will provide critical information on the macro-environment facing an organization. In fact, in the context of business management, an accurate understanding of the business environment is critical as the firm’s ultimate strategy, operations and any other activities will surely dependent on these findings. For this, two famous and widely used frameworks will be applied to analyze the macroenvironment facing Southwest Airlines, namely PESTLE and Porter Five Forces framework.

PESTLE Analysis

Under the PESTLE framework, there are 6 critical external forces to be investigated by a company. These forces include: political, economic, social-cultural, technological, environmental and legal forces. The PESTLE analysis of Southwest Airlines is presented as follow.

Political factors. As Southwest Airlines is a company operating only in the United States, the main political challenges facing the company will be coming mainly from internal political environment in the United States. Unfortunately, the political conflicts of United States to the other countries, particularly those from the Middle East are not uncommon. One of the greatest threats from such situation is the rising threats of terrorism in the last decades. Although the situation is largely under controlled, such a situation is placing certain degree of financial burden to companies such as Southwest Airlines because more safety related systems and policies are imposed upon the airline operators to safeguard the lives of the many passengers (Amernic & Craig, 2004).

Economic factors. Up to date, the economic situations around the world remain volatile. Generally, the world is moving gradually towards recovery, but the economic system is susceptible to external shocks. In other words, the economy recovery process is fragile, and can suffer a double dip recession due to any unforeseen circumstances. In the west, there are issues of over-spending by governments. Particularly in Europe, there are serious sovereign debt issues to be handled. The unemployment rates in the Europe region remain sluggish. In fact, there are sayings that if the governments in various countries in the Europe region cut fiscal spending, the economy may suffer as demands due to government spending dry up and some government servants may lost their jobs (Schmidt-Hebbel, 2010). The situation looks more promising in Asia, but these countries have their issues to solve as well. For example, there are talks that assets bubbles are forming in many countries in the east of Asia. Inflation is pretty serious, and the rise of oil prices due to crises in Middle East had compounded the problems. The rise of food prices is argued may cause political instability among the poor people in these emerging countries. If the inflationary pressures are not curtailed, the economy of China and other countries may face a risk of hard landing in the future (Evans et. al., 2010). Overall, turbulent economic situation may means volatile future for airline operators, even if the operations are concentrated only in United States, as during uncertain times, people travel less due to financial burdens and stresses.

Socio-cultural factors. There are several changes in social cultural factors that can affect airline operators in the recent years. Firstly, as the lifestyle of people are becoming more busy and packed, people are found to be more willing to fly from a place to other, to save time (Flouris & Walker, 2005). Secondly, the low cost airlines are shaping people perceptions on travelling from a place to another (Hofer & Eroglu, 2010). Consistent with such a trend, the tourism industry is also booming around the world (Jackson & Jackson, 2008). Apart from that, due to the globalization process, people are travelling from one nation to another to do business, gain more exposure as well as to visit to different tourism attraction places around the world. All these contribute to a rising demand for airline services.

Environmental factors. Overall, global warming is a critical issue haunting people around the world. For this, people are getting more conscious on environmental issues. The public now demand corporations to exercise greater care to take care of the environment, and may even act against those socially irresponsible corporations. Governments are also getting stricter in implementing policies, rules and regulation for the corporations. There is also a trend of green movement by consumers, whereby people now tend to support those corporations that are more environmentally friendly. With this, it is not unreasonable to expect that the public may place high pressure to airlines operators to adopt green and clean technologies.

Technological factors. The changes of technological forces are fast, and can lead to the success or failure of an airline operator. In today world, the technological changes that will affect the future prospects of airlines operators include: the rise of e-commerce, the proliferation of internet services, the changing habits of people in buying things online, the rise of information system such as Customer Relationship Management, Revenue Management System, Yield Management System, Enterprise Resources System, and the emergence of importance of internet marketing in the recent years (Post, 2010). Due to the technological changes, the business landscape for the airlines industry is becoming more competitive, as successful airlines operators must be responsive and yet able to operate in a low cost manner, flexible and able to deliver mass customization products or services to the market.

Porter Five Forces

In order to understand the competitive forces shaping the airline industry structure around the globe, particularly focusing on the context of airlines industry in United States, Porter Five Forces framework will be used. Such a framework can complement well the analysis generated from the PESTLE framework, as it offer a different perspectives to look at the external factors that may affect the profitability and viability of a firm from the specific industry perspective.

Rivalry among existing competitors. Specifically in the airline industry in the United State, the rivalries among existing competitors are very intense. It is perhaps the most competitive industry around the world, as it is not hard to remember how many of the airlines operators were going bankruptcy during times of financial crises. The many airline operators that had globe bankruptcy were those of the legacy airlines operator. For example, just to name a few: United Airlines, Delta Airlines, Continental Airlines, US Airways as well as Northwest Airlines had all declared bankruptcy before, at least for once, while some for twice (Tanguay, 2010). In the entire industry, only airline players with a low cost no frills business model able to grow in such an intense market. This is perhaps a very fortunate fact for Southwest Airlines. However, as the rivalries among industry peers intensified, it is hard to judge if Southwest Airline able to escape from the curse of competition given industry peers is copying some part of the Southwest strategies in the recent years.

Bargaining power of buyer. Overall, the bargaining power of buyer is great, a situation where it is unfavorable for Southwest Airlines. This is because there is essentially no switching cost for buyers to buy from a single airline operators to the other (Tierney & Kuby, 2008). Buyers are largely price-conscious (as can be seen that people are choosing low costs carriers over those expensive airline services). Apart from that, due to the increasing popularity of internet, buyers can also easily compare prices offered by the different airline operators. Such a scenario is clearly not benefiting the many airline operators in the long run (Tanguay, 2010).

Bargaining power of suppliers. The bargaining power of suppliers are great, another situation highly unfavorable to the airline operators. For example, there are only two famous aircraft manufacturers in the world, namely Boeing and Airbus (Pratt et. al., 2005). However, the amount of airlines operators are too many, and in many times, producing a situation of oversupply in the market. Besides, the key raw materials required for airline operators, namely, the fuel, is a commodity suffering from volatile prices as well as inflationary pressures in the recent years. Overall, these two factors often create huge troubles for the airline operators, as it is easy to see the profit margin of airline operators to turn from black to red whenever oil prices shoot up tremendously due to crises in the Middle East.

Threats of substitute products. The threats of substitute services for the airline industry is low, a situation that is pretty favorable to the airline operators. This is because, for most of the airline operators, there is no good substitute for the fast, efficient and time saving airline services to move from one place to another. However, perhaps for short haul airline operators such as Southwest Airlines, cars or trains can be moderate substitute for the low cost no frills services. Nonetheless, considering the price offered by Southwest Airlines is low, and the speed of transport is faster, it is reasonable to expect that customers will likely to prefer to travel with airplanes.

Threats of new entrants. Due to the already intense airline landscape, the threats of new entrants are moderate. This is because to set up such a wide network of airline route, as well as viable distribution channels can require a long time, and the system to manage the business required huge investment outlay. Not only is that, it is also not easy to build a strong and new brand name in the highly competitive and pricing sensitive industry. Rational businessmen will understand that it is not easy to compete with the existing powerful and deep-pocketed players (Liu, 2009). All these will deter potential competitors to ponder for some times before they are sure that they are willing to take such a huge risk to compete in the hypercompetitive industry.

Internal Analysis

In this section, the internal conditions of Southwest Airline will be identified and analyzed. Internal analysis is critical as it is important to understand what the resources the firm possesses, the relative competencies of the firm, as well as the strengths and weaknesses of the firm. For this, SWOT analysis, the Seven S Model, as well as financial statement analysis of Southwest Airline will be performed.

SWOT Analysis

In order to understand how the organization internet resources fit or can be utilized to take advantage on the external forces in the business environment, SWOT analysis can be performed. Under the SWOT framework, external forces can be separated into opportunities or threats; while internal forces can be divided into strengths and weaknesses. The following paragraphs will discussed all these four dimensions in details.

Strengths of the company. One of the strengths of Southwest Airline is the cost-efficient flight network around the United States. Coupled with the low costs no frills business model, as well as the reputation of good customer services (i.e., for example, use of single type of aircraft, no-frills services to provided to customers and highly efficient operations), all these effectively enables the firm to achieve economies of scale in the airline industry landscape (i.e., lowering the various costs and enable the firm to pursue a low cost leadership in many areas the firm is operating on) (Prince & Simon, 2009). Besides, Southwest Airline also enjoys a high level of customer satisfaction (Bailey et. al., 2009). Not only is that, the Southwest Airline position in United States is dominating. That will serve as a strong base for Southwest Airline to expand its operation to the international context. Apart from that, the company is also well known for able to produce happy, satisfied, committed, responsible and responsive workforce. The satisfied employees in turns able to deliver better services to the customers, and indirectly produce satisfied customers. The brand name of Southwest Airline is also well-know (D’Aurizio, 2008). This will enable the company to expand easily as customers tend to trust the reputable brand name in making purchasing decisions.

Weaknesses of the company. The key weaknesses of the firm are that it had apparently reached a bottleneck in term of possible achievement from its low-cost no frills business models. This can be seen as the company suffered losses as well in the recent financial crises. In the past, Southwest Airline is a company that was able to remain profitable despite recessionary economy. The second weakness is that the company apparently is lacking of renewal or viable strategies to bring the company to greater heights. The company has less room for expansion, as the economy of United States is not expected to grow fast, and yet the company has only operations in the nation.

Opportunities in external environment. There are a lot of opportunities to be reaped by Southwest Airline if the strategy is correct. As the economic power and growth has shifted to the East, especially to countries such as China and India in Asia, Southwest Airline will be able to enjoy high growth rate through partnership with certain airline operators from these countries. This is because the people is enjoying high standard of living, and have more purchasing power when the economy grow. Besides, there are also changes in the consumer purchasing behaviors, and apparently, Southwest Airline has been taking initiatives to leverage on such a trend. The consumers are becoming more comfortable to purchase things online, and Southwest Airline is providing such services to cater for such trends (Gal-Or, 2011). Besides, the demographics in the western countries are changing as well, whereby the population is aging, and the retired group of people is demanding different products, services and lifestyles. All these means it is possible for Southwest Airline to offer new value offerings to the market provided the company can do it correctly.

Threats in the external environment. The biggest threat in the environment is due to the still gloomy economic environment. As discussed in the PESTLE section before, the economy recovery process in the United States is fragile, and can suffer a double dip recession due to any unforeseen circumstances. From the industry context, as had been discussed under the Porter Five Forces Framework, the airline services industry around the world, particularly in the United States is competitive. That will be some real challenges to Southwest Airline to continuously winning over the struggling and aggressive competitors in the future.

McKinsey 7S Model

One of the widely used framework to consider the company as a whole is the Seven S model, in which an organization is being analyzed and described by several dimensions as follow: strategy, structure, system, style, staffs, skills, and super-ordinate goals. With better understanding on the organization from several perspectives, the organizational problems (if any) can be diagnosed. In this section, the Seven S Model will be applied to analyze Southwest Airline.

Strategy. The key strategy of Southwest Airline is to employ a low cost no frills business model. Such a strategy is made possible as the airline tend to stay away from congested airports, to avoid expensive charges and wastages of fuel spend while hovering the airplanes on the air when waiting for other carriers to leave the airports. This is also made possible via the point-to-point airport system (Ball, 2007), usage of single type of aircraft, providing single types of sitting arrangement, as well as using simple and straight-forward fares structure (Greco, 2001). Apart from that, another important strategy of the company is to focus on customer satisfaction. This can be achieved through strategic human resource management of the employees working in Southwest Airline. The Luv culture is instilled to develop caring, friendly and helpful workforce (Hardage, 2006).

Structure. Organizational structure in Southwest Airline can be considered a highly decentralized one. Many of the supervisors are empowered to do what is right, according to Southwest Airline set guidelines and direction, as long as they see it fit to the specific context. The decision making process is largely decentralized. This can be seen from the flat organizational culture of Southwest Airline (Bailey et. al., 2009).

System. There are a lot of systems being implemented in Southwest Airline. For the yield management as well as revenue management system, there are a few IT/ IS infrastructure and system being used to manage the flow of information and customer data (Pest, 2010). To manage the employee performance, Southwest Airline has its differentiated human resources policies, practices and systems as well. Overall, there are many systems in place to facilitate the operations of Southwest Airline.

Style. The organizational culture of Southwest Airline is famously a customer centric culture. In Southwest Airline, customer satisfaction is a very important aspect to be managed and handled by the managers as well as the workforce. In fact, a series of customer relationship management plans and strategies are carried out by Southwest Airline to enhance customer loyalty. According to researchers, the corporate culture of Southwest Airline can be categorized as one of (a) fun, (b) love, (c) hard work, (d) family, (e) superior customer services, (f) individuality, (g) simplicity and (h) altruism (Smith, 2004).

Staff. It is hard to argue that the main reason Southwest Airline able to achieve high flying success in the competitive business environment is due to the success of people management in the corporation. This is agreed by researchers that the most prized assets of Southwest Airline are its people. In Southwest Airline, people is the integral part of the overall business plan, as Southwest Airline is practicing strategic human resources management to engage the workforce towards the successful implementation of Southwest Airline strategies, missions and visions (Czaplewski et. al., 2001). In Southwest Airline, the strategic human resources management started with the hiring of the very best talents available in the marketplace. The selection criteria are tough so that Southwest Airline able to ensure the people being hired is suitable to the corporation’s culture.

Skills. There are several skills possessed by Southwest Airline. Firstly, the most remarkable is the ability of ensure highly efficient value delivery process to the end users. Secondly, the company is highly skillful in providing excellent customer services to the customers.

Super-ordinate goals. Although the super-ordinate goals of Southwest Airline are not explicitly mentioned in the corporate annual report, it can be seen that Southwest Airline has been emphasizing that the firm is committed to deliver great values to the customers. Apparently, customer satisfaction is a key mission of Southwest Airline, as many of the investment in Southwest Airline is to enhance customer satisfaction and loyalty.

Financial Statement Analysis

In order to understand the financial picture or status of Southwest Airline, the financial statement of the firm will be analyzed. In Figure 1, the important financial performance for Southwest Airline is presented.


Figure 1: Underperformance of Airline Industry


Source: Southwest Airline’s Annual Report 2009




Figure 2: 5-Year Performance of Southwest


Source: Annual Report 2009


Figure 3: Income Statement for Southwest


Source: Annual Report 2009


As shown from the financial performance of Southwest Airline in Figure 1, 2 and 3 above, it can be seen that although the financial performance of Southwest Airline is superior to that of the competitors, the company performance is lagging behind the broad market average performance. Not only is that, the net income per share for the firm is also decreasing, and dropped significantly during the year 2009 (the year of world financial crises). All these means that the company suffer badly in recessionary economy.

Conclusion: The Challenges Ahead

In short, it is found that the entire airline industry landscape is highly competitive. This can be seen from the deteriorating financial in Southwest Airline, particularly during recessionary economy. Besides, it can also be seen that the external environment in United State is challenging in the future. The economy recovery is turbulent, while the United States is troubled by increasingly huge budget deficit. There are also talks of depreciation of USD in the recent years. All these will definitely negative affect the growth potentials and the profitability of Southwest Airline in the future. However, as discussed in the external environment analysis, there are opportunities in the emerging countries such as China and India. For this, it is possible to export the expertise of Southwest Airline to these countries, finding relevant strategic partners to launch low cost no frills businesses in the other countries. This is indeed the most viable way to grow the company, as the market in United State is essentially matured and saturated. Besides, as the economy growth of the world is expected to be led by emerging countries such as China, it is can be concluded that Southwest Airline has not much options but to take the challenges to expand to these countries. However, the cultural and social factors affecting businesses in these countries are widely different. It is thus necessary for the company to formulate new best practices to operate in these countries.


Judging from the negative external business environmental trend in United States, it can be seen that Southwest Airline must step out from its comfort zone of doing business in China for better growth prospects and profitability. The company urgently required to make investment and strategic partnership in other countries, as the economy growth prospects have essentially shifted from the west to the east. This will be the main challenge for Southwest Airline in the next few decades. Thus, in this section, the discussion will focus on how the company can expand to emerging countries, such as China will be discussed.


Assuming that Southwest Airline will expand to the global market for higher profitability and growth, Southwest Airline will essentially become a diverse business, in a diverse geographical location. Thus, leadership can become more important. For this, it is critical for the management to manage the human resources in a more effective manner. The employees should be empowered, and be trained and developed, so that they can achieve important skills in managing the daily operations and strategic directions of Southwest Airline. Decision making processed must be further decentralized. This is important as the organizations had become too huge to be managed. Rather, in such a complex organization, trusting, motivating, and empowering the workforce is more important. The workforce will be given the responsibilities to take responsive actions towards satisfying customers’ needs and demands, according to the different needs, cultural and social factors of the local market. For this, it is important for senior management to focus on training local talents to deal with the local complexities in the global airline arena. Instead of directing the managers from different countries to follow a set instruction by the headquarters, it is important to allow the local managers to take certain degree of risk to adjust accordingly to response to the local culture. The new Luv culture of Southwest Airline can be altered and adjusted accordingly to suit the local culture. Only through such method can Southwest Airline fulfill the different demand and expectations of the customers in culturally different countries such as China, India or Brazil.

Cultural Web

The differences of social cultural factors between developed country such as United State and emerging countries in Asia can be very huge, causing it may not relevant to fully transfer the best practices or Southwest Culture from US to countries such as China. Thus, this section will employ the concept of cultural web to innovate for a new Southwest Culture in emerging countries.

In the foreign countries, to purely focus on developing customer centric culture in Southwest Airline is no longer sufficient. To be able to compete effectively, it is important for Southwest Airline to instill an innovative culture in the organization, by treating the workforce as knowledge workers. In order to instill such an innovative culture in Southwest Airline, the Cultural Web framework is used. Suggestion on how the organization can develop an innovative culture in the firm is presented as follow.


Figure 1: Cultural Web


            Stories. In order to enhance the innovative culture in Southwest Airline, it is critical for management to create or highlight several stories on how innovations had brought Southwest Airline to greater success. For example, a particular innovation, suggested by an employee, that had bring forward great benefits to Southwest Airline shall be communicated and shared among the diverse workforce. The workforce must be told how the person that can bring good and creative ideas, and how he is rewarded, and how the organization had benefited from such creative ideas. It is then important for the organization to encourage people to perform in the similar way as well. These stories can also be told to the new employees when they just join the organization.

Rituals and routines. Several routines should also be set. For example, Southwest Airline employee must be taught to smile whenever facing with customers. The managers may be required to remind how important customer satisfaction as well as innovation is to Southwest Airline success. The practices that can encourage Southwest Airline to become an efficient (i.e., to achieve as lower costs as possible), customers centric (i.e., currently, the core competencies of Southwest Airline), and innovative (i.e., a critical element to bring Southwest Airline great success in the competitive industry) organization must be implemented in the firm.

Symbols. Symbols can also be used to further enhance innovative behaviors of people in Southwest Airline. For example, certain symbols or perhaps diagrams or figures on how to think creatively and continuously improvement the workplace effectiveness can be put around the office.

Control systems. The control systems should be redesign. This is because as the organization get bigger, tight control is not longer relevant. Employees must be empowered to deal with daily complexities, applying their personal matured judgment, and being guided by only a set of Southwest Airline values. For example, in order to ensure the culture of creativity, customer satisfaction and efficiencies are widely adopted and practiced, it is critical for Southwest Airline to put these as the corporate values, and employees are to put these as the priorities when making decision in workplace.

Organizational structures. The organizational structures must be designed to become flatter. This is because hierarchical organization structure is no longer relevant in the dynamic market place. Today, businesses must become more responsive to market changes, consumers demands and preferences. Thus, a lot of decision making process must be decentralized. Organizations structures must be designed to support and facilitate the decision making process so that a truly responsive, dynamic and changeable organization can be formed.

Power structures. As argued above, it is important for Southwest Airline to delegate the tasks to the employees, particularly to those local managers in other region. That is true as well to delegate the task to the managers from the respective strategic business units.

Strategic Human Resources Management

It is also highly critical for Southwest Airline to continuous train the many level of management in the organization. Currently, it is acknowledged that Southwest Airline is performing this well, and is treating this seriously. However, it is worth to reiterate that a continuously focus on enhancing the capabilities and competencies of the employees is really the route to success in the every challenging business environment in the future.

Final Conclusions

Overall, under the competitive business environment, it is managerial imperative for Southwest Airline to expand to the international market. Under such theme, it is important for Southwest Airline to change and to lead innovative and huge improvement process in the firm. A customer centric and a focus on efficiencies are no longer sufficient, as organization must become more innovative to change and adapt to new market requirements, as well as to move ahead of competition. This is particularly true when the company is to expand to new business environment in the foreign countries. The workforce and management must learn fast, becoming more responsive and aware of the cultural differences, as well as to utilize the knowledge workers to perform in a way that suit the cultural settings of customers in countries such as China or India, that have significantly distinctive culture compared to the United State.

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