Southwest Airlines Co., [LUV] is a publicly traded company based in the United States. The Company’s primary business is providing air transportation within the US. Southwest Airlines Co. was incorporated under State law on March 15, 1967, and became a public company trading on the New York Stock Exchange (NYSE) on June 8, 1971.
During its IPO, Southwest sold 650,000 shares at approximately $11 per share. As of October 2021, Southwest Airlines Co. had a market cap of $30.638 billion and reported a 2020 price-earnings ratio (P/E) of -8.31. On July 22, 2021, Southwest announced its Q2 results, reporting operating revenues of $4 billion, increasing 297.6 percent year over year. Southwest also reported an operating cash flow of $2 billion and a net income of $348 million.
The Company’s business model features a low-cost structure and innovative logistics that focus on point-to-point service. Analysts consider it the only large but low-cost airline traversing the American airspace. Southwest boasts a fleet of more than 730 aircraft and is one of the major carriers in the United States with a 17.4 percent market share.
Southwest Airline Business Strategy
The COVID-19 pandemic resulted in disruptions to the airline industry. The whole sector felt the impact, with reports from the International Civil Aviation Organization (ICAO) indicating a $371 billion loss in operating revenues. Southwest Airlines wasn’t spared either, as it saw a loss of $3.1 billion in 2020.
But executives and the entire Southwest leadership built the Company’s business model to be flexible and adaptive, allowing it to respond well when faced with such challenges. Southwest survived without compromising its core values and business strategies. The Company is strong from both a financial and operational perspective.
From its pure low-cost model to the point-to-point flights, their very efficient network planning, and logistics, the Company has continuously demonstrated its capacity to adapt. It focuses on customer service through its employees. The Company understands that giving excellent service is not just about getting passengers from A to B in the cheapest possible way. It’s also about the experience of flying with them.
A targeted marketing approach that began as a PR initiative has become an integral part of the Company’s strategy. By focusing on middle-class families, young people, and those traveling short distances, Southwest created a strong brand image.
Southwest has a low-cost structure, keeping its costs down and prices low. This, in turn, enables the Company to offer lower fares than its competitors, resulting in it attracting cost-conscious customers. Southwest can charge as low as $45 for a one-way ticket from one point to another.
A very efficient network:
Southwest’s most successful offering is its point-to-point flights. This is an attractive model for many customers, who appreciate not having to make any stops on the way, and it provides excellent revenue generation opportunities. With point-to-point flights, the Company doesn’t have to worry about empty seats and maximize its revenue.
Strong brand value:
Southwest is known for its customer service and has built a loyal community of customers that love to fly with them. Their motto, “low fares, nothing to hide,” has created a solid customer base, with a large percentage of people re-booking with the Company for their next trip.
A high number of daily flights:
Southwest Airlines can run up to 4000 daily flights in peak seasons. Its fleet of more than 730 planes gives it a high degree of flexibility and a strong response capacity that is very helpful in periods of high demand. Not all airlines can manage this increased number of daily flights.
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Dependence on the US market:
There’s certainly a limit to how much Southwest can expand within the US air space. Even with point-to-point flights, the solution only makes sense in some instances and isn’t necessarily cost-effective. The Company can potentially look at new markets abroad, but it has its challenges: foreign currency fluctuations and more international competitors on the same routes.
Its business model and service offers are not easily transferrable and replicable to other sectors and markets. It means that Southwest Airlines is dependent on the airline sector as a whole, which has its ups and downs. This lack of diversification might put the Company in a difficult position if it faced another pandemic like COVID-19 or another oil crisis in 2008.
Airline industry consolidation:
The financial troubles in the airline industry could provide Southwest with opportunities for mergers and acquisitions. In the current market, Southwest Airlines has a good position among large carriers to acquire struggling airlines that might need additional support financially or through their route network.
The Company could expand its network to other countries. It already has a good understanding of the US market and how it works, which would make it easier to extend its services abroad. They can use their online presence to connect with international customers looking for flights within the US or across the Atlantic. Notably, this could be a leveraging point in Europe where low-cost carriers are still a niche market.
Growing low-cost competition:
Low-cost carriers like Frontier and Spirit Airlines are growing fast and pressure Southwest Airlines. They’re able to offer more competitive fares that attract potential customers away from Southwest. To stay ahead of its competitors, Southwest needs to differentiate and innovate its creative marketing strategies.
Boeing 737 MAX problems:
Southwest Airlines uses the Boeing 737 MAX planes to operate its flights. The grounding of this fleet due to safety concerns is a significant threat for the Company, especially in terms of costs and image damage. Boeing 737 Max planes have had other safety issues in the past, such as issues with their engines and hydraulic systems.
Southwest Competitor Analysis
Southwest Airlines competes in a highly competitive industry. This section analyses some of Southwest’s competitors, looking at their finances, market share, competitive advantages, market cap, and why they may be Southwest’s biggest threat.
1. American Airlines
American Airlines [NASDAQ: AAL] is an American multinational airline holding company headquartered in Fort Worth, Texas. It started its operations in 1936, and according to Statista, it is the largest airline by fleet size with over 881 aircraft. American Airlines is also one of the world’s largest airlines by scheduled revenue passenger miles.
As of October 2021, it had a market cap of $13.137 billion with a 2020 PE ratio of -1.03. American Airlines incorporates cross-selling tactics into its overall marketing strategy. It guarantees maximum benefits and an impressive experience for its customers. These efforts allow it to uphold a competitive advantage and offer a high-quality service.
In July 2021, American Airlines announced its Q2 results, reporting $7.5 billion in operating revenues, an increase of 87 percent from Q1 2021. In 2020, American Airlines had the leading domestic market share with 19.3 percent, followed by Southwest Airlines with 17.4 percent. It offers an average of 6700 daily flights with more than 350 destinations in 50 countries.
Its competitive advantage over Southwest is its expansive worldwide network and significant business and corporate accounts in its major markets. Southwest must maintain a competitive edge to counter the threat of American Airlines’ strength in global markets by developing its route domestic route network and strategically introducing low-cost international flights.
2. Delta Airlines, Inc.
Delta Airlines, Inc. [NYSE: DAL] is an American legacy carrier headquartered in Atlanta, Georgia. It started as a crop-dusting business in the Great Mississippi Delta and became an airline in 1928. It operates a fleet of 750 aircraft in all commercial segments and boasts a market cap of $27.862 billion.
Its 2020 P/E ratio was -4.5 but forecasts a growth rate of 62.02 percent by the end of 2021. Delta Airlines, Inc. is no stranger to competition; it is one of the most fought-over companies in American commercial aviation. In 2020, it controlled 15.5 percent of the domestic air travel market, third to American Airlines and Southwest airlines.
To stand out, Delta fosters vertical integration, meaning it controls every aspect of its business, from production to service. This allows the Company to have the upper hand over customers by offering lower rates and enhanced user experience. It also purchases used aircraft and advocates for low unionization of labor.
Delta Airlines announced its July quarter financials, recording total revenues of $7.1 billion and adjusted operating revenue of $6.3 billion. The reports indicate a liquidity of 17.8 billion, which also includes undrawn revolving credit facilities, cash equivalents, and short-term investments.
3. United Airlines, Inc.
United Airlines, Inc. [NYSE: UAL] is a major American airline holding company headquartered in Chicago, Illinois. It commenced operations in March 1931 and currently operates a fleet of 849 aircraft. As of October 2021, it had a market cap of $16.074 billion with a 2020 PE ratio of -1.8.
United Airlines incorporates a mass-market business model where it targets every market segment with no specific differentiation. However, it still provides options to price-sensitive customers through its Basic Economy Fares.
It serves 111 international destinations in 74 countries with 79 domestic destinations across the United States. United Airlines also boasts partnership agreements with carriers in Asia, Europe, and Latin America. In July 2021, United Airlines released its Q2 results for 2021, recording total revenues of $5.5 billion, down 25 percent from 2019. The airline had a net loss of $0.4 billion with available liquidity of approximately 23 billion.
United Airlines’ competitive advantage over Southwest is its large fleet of aircraft and international flights. Its focus on promoting green travel also makes it a strong contender. The Company’s commitment to innovation by promoting a more digitized travel experience leaves it most likely to be the next major airline.
4. Spirit Airlines, Inc.
Spirit Airlines, Inc. [NASDAQ: SAVE] is an American ultra-low-cost carrier (ULCC) headquartered in Miramar, Florida. Founded in 1983 as Charter One, a Michigan-based charter airline, the Company changed its name to Spirit Airlines in 1996 and commenced a discount carrier.
It currently operates a fleet of 168 Airbus aircraft. As of October 2021, it had a market cap of $2.803 billion and a 2020 P/E ratio of -3.05. It competes for market share in the US domestic airspace with a customer-centric approach that emphasizes low fares, flexibility, and fast check-in options. The Company also incorporates additional costs for customizable itinerary changes and carry-on baggage.
In 2020, Spirit Airlines controlled 5.8 percent of the domestic air travel market. The Company reported $859.3 million in operating revenues from its Q2 2021 reports and an adjusted net income loss of $36.3 million. The Company’s Q2 2020 liquidity report included $2.2 billion in cash and short-term investments.
To stand out against Southwest Airlines, Spirit Airlines must differentiate its services from mainstream airlines by implementing a more aggressive pricing strategy. To compete with low-cost carriers, Spirit Airlines also needs to focus on improving cost efficiency and enhancing its digital customer experience.
5. Alaska Airlines, Inc.
Alaska Airlines, Inc. [NYSE: ALK] is a major American airline based in Seattle, Washington. Founded in 1932 as McGee Airways, the Company commenced operations in 1944 as one of the United States’ first prominent post-war carriers. It boasts a fleet size of 321 aircraft with 115 destinations and approximately 1200 daily flights.
As of October 2021, Alaska Airlines had a market cap of $7.31 billion and a 2020 PE ratio of -5.75. Alaska’s strategy of focusing on business travelers, providing highly customizable options for personal travel, and improving the customer experience enabled it to secure a strong position. The Company will add 17 new jets to its fleet between 2021 and 2023, increasing its fleet size to 338.
In 2020, it held 5.5 percent of the domestic market share. The Company’s Q2 2021 reports presented $1.527 billion in total revenues and a 56 percent debt to capitalization ratio. As of June 30, 2021, it held 4.0 billion in marketable securities and unrestricted cash.
It competes with Southwest Airlines by providing a personal, customized experience through its Alaska beyond Fares. A strong digital customer service strategy also secures the Company’s position among low-cost carriers. However, it will need to improve revenue per seat mile and cost efficiency to stand out.
How Southwest Airline Stands Out Against Its Competitors
Southwest Airlines maintains its position as one of the top low-cost carriers. The Company derives a competitive advantage from the low-cost business model, superior customer service, and first-mover advantage among low-cost carriers.
Despite its strong position, its continued focus on employing the right people, providing a relaxing atmosphere, and maintaining a commitment to its core values further its market standing. Not only is the Company an industry leader, but it also competes against its reputation.
Its flexible policies make flying with Southwest Airlines convenient, allowing customers to travel without the inconvenience of hidden charges. Passengers can cancel the flight 10 minutes before departure without incurring any fees. Such customer-friendly policies set the Company apart from its peers.
Southwest Airlines’ dedication to the environment through eco-friendly practices also enhances its value proposition. The Company’s reusable water bottle and biodegradable cleaning products contribute to its effort of reducing waste. The Company will continue to stand out against competitors by prioritizing environmental sustainability.
Southwest Airlines Competitor Analysis (FAQs)
Question: Who are Southwest Airlines’ main competitors?
Answer: Southwest Airlines’ main competitors include Delta Airlines, American Airlines, JetBlue Airways, Alaska Airlines, and United Airlines. Others include Frontier Airlines, Spirit Airlines, and Sun Country.
Question: How does Southwest Airlines compete?
Answer: Southwest Airlines has a low-cost business model with an open seating policy, which is unique among airlines. The Company’s agility provides the opportunity to capitalize on emerging opportunities in niche markets. Southwest Airlines also improves its customer service by hiring the right people and providing benefits for its employees.
Question: Why is southwest airlines more successful than its competitors?
Answer: Southwest Airlines’ low-cost business model, superior customer service, and first-mover advantage among low-cost carriers differentiate it from its competitors. The Company maintains a high degree of flexibility, which allows customers to travel without the inconvenience of hidden fees. It also positions itself as an industry leader by capitalizing upon emerging opportunities such as its strong digital customer service strategy and eco-friendly practices.
Southwest Airlines maintains its reputation as one of the most successful low-cost carriers. Its firm brand name and a very efficient network give it a competitive advantage. On the other hand, low-cost carriers are highly dependent on fuel costs.
The Company’s strategy of cutting operating costs will enhance its cost efficiency and stand out against competitors with high pricing strategies. However, it must prioritize reducing fuel consumption before implementing stringent cost management policies. On an aggregate level, Southwest Airlines will continue to compete successfully against its competitors.