Assessing and Managing Risk

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1 Assessing and Managing Risk Grand Canyon University-BUS-485 Professor Thomas November 13, 2022

2 SWOT Analysis Starting in 1971, Southwest Airlines is one of the leading airline companies in the United States, operating in 40 states and 15 international destinations in 12 countries (About Southwest., n.d.). Southwest’s mission and vision is to connect people wo what’s important in their lives through friendly, reliable, and low-cost air travel while being the world’s most loved, most efficient, and most profitable airline. Southwest Airlines uses a point-to-point service model that enhances their mission to deliver unparalleled hospitality and low-cost air fares, serving 130 million customers annually (About Southwest., n.d.). Strengths Southwest Airlines focuses on a low-cost business model, its three key performance indicators aim to reduce operating costs and increase efficiency. The three key performance indicators include single aircraft policy, point-to-point routes, and schedule optimization. Since the start of the company, Southwest Airlines exclusively uses Boeing 737s in its operations (Southwest Airlines adds, n.d.). Using a single type of aircraft is cheap and effective as it allows ease in training staff, ground crew, pilots, and lowers cost of maintenance because the planes are interchangeable across the fleet (Boon, 2019). The single craft policy reduces operational expenses and improves efficiency. Southwest Airlines’ point-to-point service model allows scheduled flights between secondary airports that are often less congested, allowing a higher asset utilization, or more flights than focusing on flying to only major cities like its competition. Southwest routinely modifies its route frequencies and adds new routes by monitoring route performance and eliminating less profitable routes. The analyzing and optimization of routes allows Southwest to make strategic decision to remain profitable by focusing on maintaining low operating costs and high operational efficiencies.

3 Weaknesses Because of Southwest Airlines’ strengths of single aircraft use point-to-point routes and schedule optimization, is has created the biggest weakness for the airlines, inability to remain competitive with other airlines. Southwest’s point-to-point route methos has led to much success among its competition of other low-cost fare airlines, but it cannot compete with other airlines that formed commercial alliance relationships in order to route to secondary airports and major city airports. As the competition create alliances to service hundreds of destinations and countries, Southwest only served 100 destinations. Southwest’s point-to-point model gave it a strategic advantage prior to the pandemic, its competition utilized the same model causing Southwest to lose its advantage and has been struggling to find other opportunities to reduce costs. Southwest’s single aircraft policy and using only Boeing 737s limits passenger amenities like premium seating for business or first class. The single aircraft policy also causes a weakness as Southwest relies on Boeing for parts, causing a supply chain issue. Opportunities In order to recover from its weaknesses and loss of competitive advantage, Southwest Airlines has a lot of opportunities to regain its advantage. Southwest is spending two billion dollars to upgrade the customer experience through upgraded WIFI, charging ports in chairs, larger overhead bins, new fare category, and self-service capabilities in order to compete with its competition after losing its advantage and further reduce costs (Southwest Airlines outlines two billion., n.d.). Southwest is upgrading its fleet from the 737 to the 737 MAX, this allows for continued low operational costs as it reduces carbon emissions and increases the customer satisfaction of more space and additional comfort options (Southwest Airline adds 100 firm orders, n.d.). Other opportunities for southwest includes expanding its routes and to rethink its

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4 point-to-point model as other airlines have adapted this. Southwest should analyze gaps in routes or underservices routes and expand its network to compete with its competition in the airline industry. Threats The Covid-19 pandemic was a major threat to Southwest Airlines and other airline companies due to flying and working restrictions (Bouwer, et al, 2021). The pandemic caused Southwest’s first loss as revenue fell from $22.4 billion to 9 billion, resulting in the first year of no shareholder dividends, aa 100% decline from the year prior (Isidore, 2021). The pandemic affected all airline companies, many of which have adopted Southwest’s model of point-to-point route model which was its competitive advantage. The competition has also intensified as the larger airlines have alliances with low-cost fare companies, making the need for innovation and opportunities for Southwest demanding. The need for in-person meetings and conferences have dwindled due to the pandemic as well, thus affecting the need for air travel and potentially permanently affecting the industry (Bouwer, et al., 2021). Southwest’s increase in capacity with its fleet using the Boeing 737 MAX poses a threat as there are supply chain problems, labor shortages, and backlogs that are causing a delay in Southwest’s plans due to the delay in inventory. Strategic Alternatives Strategic Alternatives are necessary strategies that businesses use to develop direction to achieve specific goals. Due to the changing climate of competition, technology, and customer satisfaction, Southwest Airlines continues to create strategic alternatives to stimulate the efficiency of its mission and vision despite the challenges the company faces. With change in industry trends like high fuel prices, change in customer expectations and decline in profitability,

5 Southwest Airlines has opportunities to be innovative when it comes to strategic alternatives and strategic competitive advantage. Alternative strategies for Southwest Airlines would be to expand its fleet by using other types of airplanes that provide more leg room, additional comfort, and added conveniences for customers. In addition to adding planes other than various Boeing 737s, Southwest Airlines should expand their routes internationally to achieve further growth outside of its current domestic market. A complete expansion of planes and operations would be the only viable strategic alternative Southwest can make to further grow as it has lost its competitive advantage. Decision Matrix to Identify the Best Alternative Southwest Airlines will need to come up with alternative strategies to promote growth and analyze which would be the best decision by using a decision matrix to understand the factors and probability of success. Using a decision matrix will help the company make complex decisions, prioritize tasks, and problem solve on the chosen decision. Southwest Airlines made a decision to spend billions to upgrade their fleet with better WIFI, comfortable seats with additional leg room and storage space, and charging ports, but they failed to mention the upgrades would only apply to the newer Boeing 737 MAX airplanes being purchased and added to the fleet. With the marketing of their new features for client satisfaction, Southwest received backlash as customers are pointing out the lack of love that Southwest boasts to have for their employees. Southwest failed to understand that with the changing climate in the industry, the change in customer satisfaction includes employee treatment. The decision matrix should include various criteria including customer satisfaction in all decisions and thus problem solving for said various decisions in implementing alternatives. Because Southwest’s competitive advantage of its point-to-point route is now being utilized by other airlines who have more routes

6 and destinations than they do, the only alternative strategy to take is to expand its routes internationally. Avoiding risk is not always possible so management will need to understand the risks a company faces. The risk assessment matrix is a tool used to depict the potential risks affecting a company. When utilizing risk matrix, the unique risks associated with Southwest’s strategic alternative to expand internationally to add value to its company include marketing risk, competitive risk, change risk, regulatory risk, reputational risk, politic risk, governance risk, financial risk, economic risk, and operational risk. If Southwest Airlines chose the strategic alternative to expanding its international market, it may face economic risk and operational risk. I believe that economic risk can impact the company in its expansion to increase its international market because the international economy is different that the domestic economy that Southwest is used to. The economic risk can affect Southwest’s business strategy through supply chain sustainability, especially if they stick with Boeing 737s and only rely on Boeing for spare parts as they are currently facing supply chain issues domestically. Operational risk is another critical risk that may affect Southwest in its strategic decision to expand its international routes outside America and its neighboring international destinations if the company’s operations and business processes are not up to standard. Operational risk is an area that Southwest can have more control over than the other risks as it is internal. Southwest currently has issues with contracts with pilots and other employees that are disrupting its daily business activities, expanding routes would mean more employees to manage and focus on as they need to revert back to their focus on people, which includes their employees. Conclusion

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7 Southwest Airlines has been successful as one of the leading airline companies, focusing on customer satisfaction and low-cost airfare since its start in 1971. The recent Covid-19 pandemic caused business disruptions for all airlines, but primarily Southwest (Bouwer, et al., 2021). While other airlines cut costs and moved to a point-to-point route model, a model that Southwest used as a competitive advantage, Southwest was unable to find ways to further cut costs which led to a 100% decline in dividends. Southwest has taken measures to compete with other airlines by upgrading its planes for further enhance the customer experience, but due to the limitations of the Boeing737s, the improvements are only for newer planes being added to the fleet. In order to further compete in the airline industry, Southwest will need to evaluate its opportunities and take steps into expanding its international routes beyond the destinations it currently has.

8 References About southwest: Southwest Airlines . About Southwest | Southwest Airlines. (n.d.). https://www.southwest.com/about-southwest/ Boon, T. (2019, April 13). Why low cost carriers stick to one plane type . Simple Flying. https://simpleflying.com/why-low-cost-carriers-stick-to-one-plane-type/ Bouwer, J., Saxon, S., & Wittkamp, N. (2021, September 14). Back to the future? airline sector poised for Change Post-covid-19 . McKinsey & Company. https://www.mckinsey.com/industries/travel-logistics-and-infrastructure/our-insights/back- to-the-future-airline-sector-poised-for-change-post-covid-19 Isidore, C. (2021, January 28). Southwest Airlines reports first loss in 48 years | CNN business . CNN. https://www.cnn.com/2021/01/28/investing/southwest-loss-american-airlines Matyszczyk, C. (n.d.). Southwest Airlines has a new idea for customers. some are already angry about it . ZDNET. https://www.zdnet.com/article/southwest-airlines-has-a-new-idea-for- customers-some-are-already-angry-about-it/ Southwest Airlines adds 100 firm orders for the Boeing 737 MAX 7 . – Southwest Airlines. (n.d.). https://www.southwestairlinesinvestorrelations.com/news-and-events/news-releases/ 2021/03-29-2021-114536729 Southwest Airlines outlines two billion-dollar plan to transform the customer experience, bringing more simplicity and speed from the ground up: Airline to connect customers with faster WIFI, new in-seat power, larger overhead bins, and more . – Southwest Airlines. (n.d.). https://www.southwestairlinesinvestorrelations.com/news-and-events/news- releases/2022/05-11-2022-160129095 Josephs, L. (2022, October 27). Southwest says travel demand still strong, warns Boeing delays could continue into 2024 . CNBC. https://www.cnbc.com/2022/10/27/southwest-luv- earnings-3q-2022-.html

Assessing and Managing Risk

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