Southwest Airlines Report PDF

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Individual Assessment
PESTEL and Porters 5 Forces Analysis of Southwest Airlines...

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Executive Summary The primary function of this report was to critically analyse the implication of the internal and external factors circulating Southwest Airlines entering the Australian domestic airline market. In addition, PESTEL and Porter’s Five Forces Analysis were conducted to conclude market potential and industry performance to identify critical success fa Furthermore, these analytical tools were used to illuminate rip prospects and detriments to identify two strategic issues within the Australian domestic airline industry. Key issues identified were the threat of predatory pricing in the domestic market and the future uncertainty of COVID-19 implications. The purpose is to identify two key recommendations promoting distinction in Southwest’s entry into the Australian domestic airline market. The report recommends Southwest utilise its strengths in economies of scale, cost-leadership strategy and differentiate its service on quality and flexible policies. Incorporating the suggested recommendations will manipulate consumer preferences, influencing the demand and success of the industry.

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Table of Contents 1. Introduction……………………………………………………………………………4 2. Southwest Airlines…………………………………………………………………….5 3. Justification of Frameworks…………………………………………………………...6 4. PESTEL Analysis……………………………………………………………………...7 a. Political……………………………………………………………………..….7 b. Economic………………………………….………………………………..….7 c. Social………………………………….………………………………..……...8 d. Technological………………………………….………………………………8 e. Environmental…………………………….………………………………..….9 f. Legal………………………………….……………………………..…………9 5. Porters Five Forces Analysis…………………………………………………………10 a. Threat of Entry……………………………………………………………….10 b. Threat of Substitutes………………………………………………………….10 c. Bargaining Power of Buyers…………………………………………………11 d. Bargaining Power of Supplies………………………………………………..11 e. Extent of Rivalry Between Competitors……………………………………..11 6. Strategic Issues………………………………………………………………………13 a. Predatory Pricing…………………………………………………………….13 b. COVID-19 Uncertainty……………………………………………………...14 7. Recommendations…………………………………………………………………...15 8. Conclusion…………………………………………………………………………...17 9. References……...……………………………………………………………………18 10. Appendix…………………………………………………………………………….21

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1. Introduction The purpose of this report is to analyse the external and internal environments within the Australian domestic airline industry to excavate the critical strategic issues and recommend what Southwest Airlines must do to enter and thrive in the industry. The Australian domestic airline industry is characterised by an oligopoly market structure, dominated mainly by Qantas Airways. As a result, the domestic services are highly competitive, with much of the sector’s activity centred on the Sydney-Melbourne route, the fifth busiest in the world (Harrington, 2014). An American airline company, Southwest Airlines, will expand to the Australian domestic airline market. This report dissects the diverse opportunities and threats the industry faces using PESTEL and Porters Five Forces Analysis to evaluate the sector Southwest Airlines will be entering.

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2. Southwest Airlines Southwest Airlines Co. is a major passenger airline that provides scheduled air transportation in the United States and near-international markets. King and Kelleher's aggressive and innovative pricing model dominated the market, eliminating most other start-ups in the deregulated US airline market. Southwest Airlines revolutionary vision turned the company into a consistently profitable airline (Knorr, 2005). Since 1971 Southwest has grown into the third-largest airline in the USA and worldwide, in terms of revenue passengers (RodríguezGinorio, 2011).

Southwest's innovative business strategy exploits Porter's cost-leadership school of thought (Tanwar, 2013). Thus, the company minimised operating costs, optimised profit margins and maintained low prices while charging industry-average prices to increase market share. Southwest's economies of scale strengthen and allow Southwest to sustain the cost-leadership strategy. Furthermore, Southwest is effective in maintaining low costs yet maintaining a high level of customer satisfaction due to its point-to-point transit and flexible policies. The organisation's proficient point-to-point transit system involves Southwest's planes directly travelling to a destination rather than going through a central hub, offering more versatile travel options and increasing brand loyalty. Southwest additionally fortifies its brand faithfulness by eliminating cancellation fees until 10 minutes prior to the flight. Southwest Airlines' effective utilisation of Porter's cost-leadership strategies illuminated their competitive advantage and the resulting brand loyalty.

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3. Justification of Frameworks PESTEL Analysis is a strategic framework that analyses the macro-environment by arranging them into Political, Economic, Social, Technological, Environmental, and Legal factors. This allows a strategic and systematic evaluation of a business's prospects, risks and opportunities in a new environment. This framework analyses the background and qualitative information to predict situations and circumstances for future encounters (Yüksel, 2012). Applying PESTEL Analysis on the Australian domestic airline industry would allow Southwest to form conclusions of industry attractiveness, the market potential to determine current market and industry performance to predict market or industry key success factors and trends for future growth (Perera, 2017).

Porter's Five Forces Analysis is a strategic management tool that identifies and analyses five competitive forces that shape every industry and helps determine an industry's weaknesses and strengths. The five forces that represent the critical sources of competitive pressure within an industry are competitive rivalry, supplier power, buyer power, the threat of substitution and the threat of new entry (Porter, 1998). This framework analyses and understand the level of competition and the underlying levers of profitability. Porters Five Forces Analysis will benefit Southwest Airlines by understanding factors influencing profitability and strategy development for enhancing Southwest Airlines' competitive advantage and long-term profitability in the Australian domestic airline market.

PESTEL and Porter Five Forces Analysis are appropriate to the Australian domestic airline industry due to the oligopoly and highly competitive market. Understanding the external environmental factors of the Australian Domestic Airline industry and the competitive forces are vital for Southwest Airlines to succeed.

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4. PESTEL Analysis on the Australian Domestic Airline Industry a) Political The Australian government imposed the Domestic Aviation Network Support program to support airlines on domestic routes during the COVID-19 pandemic. Qantas received $206 million under the program (ACCC, 2020). Hence, the political involvement and support benefit the domestic airline industry and provide companies with a safeguard for unpredictable future misfortunes. However, the internal political environment in Australia is unstable between states and often involves abrupt border closures. Passenger numbers plummeted to 23% of pre-pandemic levels in July 2021 due to border closures (ACCC, 2021). Implications of this in the future provide uncertainty for domestic flights and could continue to restrict passenger numbers and increase cancellations.

b) Economic The Australian airline industry is still in recovery stages after the COVID-19 pandemic. The airline sector is a high fixed-cost industry, and they still cover high costs of getting planes in the air despite the reduction in passengers. Pre-pandemic, 5.91 million passengers were carried on Australian domestic commercial aviation in October 2019 compared to 1.33 million passengers in October 2021 (BITRE, 2021). The impact of another recession could be a significant threat to airlines rebuilding from COVID-19. Despite this, there is pent-up demand now that borders are re-opening. This provides an opportunity for airlines to capitalise on the high demand for travel and will spark revenues.

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c) Social A negative social perception towards air travel has arisen due to concern with health and abrupt border closures. Consumers are most afraid of catching coronavirus while on the plane (40%), followed by airport terminals (17%). Furthermore, Australians are shifting towards digital contact over face-to-face, reducing the need for business flights. Nevertheless, airlines can provide a hygienic and safe environment on planes to reduce anxiety towards travelling. Generation Z and Millennials are more eager to travel and less likely to adjust their travel plans and behaviour considering the virus (OAG, 2021). As long the Australian airlines follow health and safety protocols, the overall customer demand is expected to increase as Australia navigates the pandemic recovery.

d) Technological A threat to the industry is the new technologies to facilitate online communication, reducing domestic business travel in Australia. Airlines need to adapt to the shift in behaviours by reducing business class travel for economy seats on planes. Despite this threat, an opportunity arises due to the improvement in aircraft technology to allow more fuel-efficient flights, which ultimately reduces fixed costs. Additionally, improvements in app developments for airline bookings have significantly reduced check-in times and human touchpoints, which address concerns with health and safety for post-pandemic flying.

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e) Environmental The airline industry worldwide is a significant contributor to carbon emissions, and it has been increasing rapidly. In prospect to reduce emissions, Australia signed the CORSIA agreement to improve global fuel efficiency by 2% per year until 2050 (Quicke, 2020). Despite this, Australia’s technological development in the airline industry has caused a decreasing trend in fuel consumption and emissions intensity (Figure 2). There are environmental opportunities within the domestic airline industry to adopt ‘green flying’ by supplying sustainable services to reduce carbon footprint. Australian airlines are starting to invest in Boeing aircrafts that can run off 100% sustainable fuels (Santos, 2021). Airlines need to adopt sustainable practices to be successful and receive support in the future.

f) Legal COVID-19 laws and regulations are easing in Australia despite the Omicron strain developing. Domestic travel within Australia is now open; however, there are laws surrounding testing before departure. In Australia, all passengers must provide a negative accepted COVID-19 test result (Australian Government, 2022). The border re-openings and easing of regulations can be seen as a major opportunity for the Australian domestic airline industry to capitalise on. In 2022, there will be a significant increase in domestic travel within Australia (Hermawan, 2022). Despite these opportunities, there are many legal obligations and threats surrounding the airline industry. Under the Australian Consumer Law, there have been many changes regarding cancellations, refunds, change of dates and border restrictions to ensure equality for consumers during COVID-19 (ACCC, 2021).

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5. Porters Five Forces a) Threat of Entry The Australian domestic airline industry is an oligopoly with high barriers to entry that reduce competitors' threats. The low threat to entry to the industry attributes to the need for economies of scale and investment in infrastructure. The requirement of high investment establishes a high risk to enter the industry. These entry barriers need to be overcome by Southwest to compete in the industry. Despite this, Southwest has the capital requirements to enter the Australian market due to the economies of scale and infrastructure established in the US market.

b) Threat of Substitutes There are immediate transportation substitutes for the airline industry where consumers can easily switch to car, train, bus, or ship to travel within Australia. Many Australians may choose this substitute due to the potentially high cost associated with the airline industry. However, despite the availability of substitutes and cost-savings, the threat to the airline industry is moderately low due to the geographically dispersed cities within Australia. Domestic flights are more convenient and efficient modes of transport. For example, flying from Sydney to Melbourne takes approximately 1.5 hours, whereas driving takes approximately 9 hours. Thus, substitutes to the Australian domestic airline industry exist, however, the threat is relatively low which is beneficial for Southwest entering the market.

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c) Bargaining Power of Buyers The bargaining power of buyers in the Australian domestic airline industry is high due to the low switching costs between companies. The resultant price wars between companies benefit buyers by increasing their purchasing power. Furthermore, the airline industry depends on consumer demand, and the government imposes tight regulations to protect consumers. Despite this factor, Southwest already competes in the US market with similar environments and is well equipped to these conditions.

d) Bargaining Power of Suppliers The bargaining power of suppliers in the Australian domestic airline industry is high due to their dependence on suppliers to provide their services. The airline industry depends on airplane manufacturers, fuel suppliers and labour suppliers and they are all affected by the external environment. For example, fuel price is subject to fluctuations in the global market which can gyrate extensively due to external factors. Southwest is well experienced in the similar market of the US and will be well equipped to adapt to bargaining power of suppliers.

e) Extent of Rivalry between Competitors The Australian domestic airline industry is highly competitive because the limited number of firms dominate the industry. There is intense competition between low-cost carriers and fullservice carriers demand is reflected by experience quality, brand image and perceived value. While parts of the domestic airline industry have become more competitive, the Qantas Group has further extended its dominance in regional areas (ACCC, 2020). Southwest will be

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entering an oligopoly with direct competition and threat of rivalry with Jetstar because they are both low-cost carriers.

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6. Strategic Issues a) Predatory Pricing Predatory pricing is a strategic issue that may damage competition and airlines in the Australian Airline Industry. Predatory pricing is a two-step strategy to secure monopoly profits and lessen competition. Predatory pricing is defined as “a company charging a price below its costs in the hope of driving its competitors out of the market by forcing them to sell at a loss as well” (Leslie, 2013). If successful, the market becomes a monopoly, and the nowdominant firm charges a monopoly price to recoup its sustained losses. However, while selling services at below cost is legal, the act is illegal if it aims to eliminate substantially damaging a competitor (ACCC, 2021). Since the COVID-19 pandemic, there have been price wars between significant airlines, REX, Qantas, and Virgin competing in the Sydney to Melbourne route. The ACCC stated that predatory pricing is a current threat to the competition in the Australian domestic airline industry. However, it is difficult to distinguish between predatory and genuine competitive behaviour (Dodgson, 1996). Hence, Southwest’s cost-leadership strategy already operates under low-cost principles and entering a market that is under threat to predatory pricing could be an unsuccessful endeavour.

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b) COVID-19 Uncertainty The most significant problem in the Australian Domestic Airlines Industry is the uncertainty and potential for future impacts of COVID-19. The COVID-19 virus has mutated to various variants since the alpha variant beginning in China and will continue to do so. Whether the virus morphs into another common cold or something more threatening is uncertain. Following the Delta variant outbreak in Australia, Qantas, Jetstar, Virgin, and Rex combined were forced to cancel one in three flights in July 2021, which is the highest cancellation rate since April 2020 (ACCC, 2021). Furthermore, the uncertainty with border closures and the risk of infection has caused people in Australia to be less inclined to travel. Weekly passenger numbers in Victoria fell by 91% from mid-May to early June, and in NSW, they dropped by 97% between mid-June and the end of July (ACCC, 2021). Qantas received $1.1 billion in government aid in 2020-21 financial year through multiple financial aid programs, including $558 million in JobKeeper wage subsidies (ACCC,2021). Despite receiving government support, Qantas announced a $1.8 billion loss. The Australian Domestic Airline Industry COVID-19 recession has caused airlines to rely heavily on government support. Now, as we navigate post-pandemic, airlines need to support themselves and facilitate a policy to be sustainable because government support is only temporary.

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7. Recommendations a) Recommendation 1 To eliminate the threat of predatory pricing, we recommend that Southwest responds to the price war by competing on quality of service, forming partnerships, and deploying simple price actions (Rao, 2000). To differentiate Southwest's service from low-cost providers, we recommend Southwest focus on its customer service. If Southwest maintains a high level of service quality, it will meet customer needs while remaining economically competitive in the Australian domestic airline industry. Furthermore, strategic partnerships by operating cooperative or exclusive deals with suppliers, resellers or providers of related services will differentiate Southwest from competitors to ultimately eliminate the power of predatory pricing. Finally, the ultimate recommendation to Southwest is to deploy simple price actions. Southwest will have the ability to provide lower prices and greater economies of scale by the company's size. Southwest Airlines fleet size is approximately six times the size of Qantas. Due to Southwests sheer size in comparison to Australian airlines, there is no way Australian companies could compete with Southwest if there were a price war. Despite this, we recommend Southwest lower their prices to compete, however still within range of other companies to abide by the ACCC and government regulations.

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b) Recommendation 2 To successfully enter and thrive in the Australian domestic airline sector, Southwest must combat the return to travel post-pandemic with low prices to be competitive. We recommend that Southwest utilise Porter’s cost-leadership strategy to gain brand loyalty whilst entering a consumer market cautious of COVID-19 and travel. Historically, Southwest adopted this strategy to enter the US market and became one of the “big four” (Nielsen et al., 2020). In addition to its principal business strategy, we recommend Southwest adopts health and safety procedures and facilities flexibility for passengers. Southwest airlines current policy in the US involves no fees to change or cancel. We recommend they implement this policy when entering Australia and utilise this as a competitive advantage over the Australian airlines. Qantas allows for flexible changes; however, they require a change fee and a difference in fare fee for the cheapest ticket. Hence, we recommend that Southwest combat priceless flexibility and adopt its successful low-cost strategy to win market share and thrive in the Australian domestic airline sector.

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8. Conclusion To conclude, this report analysed Southwest’s current business strategy and the externalities Southwest will experience within the Australian airline industry using a PESTEL and Porters Five ...