Porter's Five Forces Analysis of Southwest Airlines
Southwest Airlines Five Forces
Southwest Airlines is a leading airline company based in the United States. While the United States aviation industry is marked by intense competition, Southwest has continued to maintain its leadership position with a firm focus on customer safety, convenience, and service. Based in Dallas, Texas in the United States, the operations of Southwest Airlines span 40 US states and some international destinations. The company started its operations in 1971. However, since then it has seen a lot of growth ad has been able to build a strong competitive advantage. Apart from its lower costs, the company is also known for its customer friendliness. In 2018, Southwest carried around 163.6 million passengers which makes it the largest domestic carrier in the US. In 2019, it carried 121.5 million passengers during the first three quarters. The competitive strength of any airline company depends upon several factors including its pricing strategy and efficient operations.
Read a porter’s five forces analysis of Southwest airlines highlighting how these forces affect its competitive position in the US aviation industry.
Bargaining power of suppliers:
The main suppliers in the aviation industry are aircraft manufacturers like Boeing, Airbus, Embraer, and Bombardier. They are the suppliers with the highest bargaining powers and the leading two including Boeing and Airbus mainly. Southwest Airlines uses only Boeing 737 aircraft in its fleet which is mainly because of their higher fuel efficiency. Southwest focuses on keeping prices low for its customers. However, that also requires controlling the operational costs. Southwest has 750 Boeing aircraft in its fleet (Southwest Annual Report, 2018).
As a leading supplier for Southwest, Boeing enjoys high bargaining power. Overall, the bargaining power of Boeing in this case if moderately high. To some extent, the higher purchasing power of Southwest airlines helps control the suppliers’ bargaining power. However, apart from the aircraft, there are also more raw materials or parts and technology required for the successful operation of an airline company. There are several more suppliers too which provide the equipment, technology, and other necessary items for the efficient operation of Southwest Airlines. However, their bargaining power is much lower which is because most of the suppliers are replaceable and Southwest does not depend on single sources for raw material, equipment or technology. The fuel suppliers may have slightly higher bargaining power compared to others.
Bargaining power of customers:
The bargaining power of customers in the aviation industry has kept growing because of several factors. Every year the number of air travelers traveling to and from the United States is growing. In 2018, the total number of air travelers carried by the airline companies including the US-based and international airlines serving the US market crossed 1 billion which was 4.8% higher than 2017 and 8.5% higher than 2016. However, while the number of customers in the airline industry has consistently grown on the one hand, on the other their bargaining power has also increased. Apart from the increased competition, the rise of Ultra-low-cost carriers is also an important factor that led to growth in the bargaining power of customers.
Apart from the ten leading airlines operating from the United States, there are several international airline companies that also serve the US market. So, while there are several players in the US aviation industry on the one hand, on the other, the rise of ultra-low-cost carriers has also led to higher price competition in the industry. Southwest Airlines has focused on both lower prices and higher customer convenience which is also an indicator of the higher bargaining power of customers. Apart from lower prices, the company also offers several rewards for regular customers in order to attract and retain air travelers. Lower switching costs have also added to the bargaining power of passengers. Overall, the bargaining power of customers in the airline industry is moderately high. Some of the factors moderating the bargaining power of customers include lower prices, focus upon customer service, and operational efficiency.
Threat of substitutes:
The threat of substitutes in the airline industry arises from several sources but mainly from the rival companies. Apart from Delta and American Airlines, there are 6 to 7 more leading US-based competitors of Southwest Airlines. The rise of ultra-low-cost carriers (ULCCs) like Allegiant, Frontier, and Spirit has also escalated the threat arising from substitutes. In 2018, Frontier carried more than 19 million people while Spirit carried more than 28 million passengers throughout the year. Since Southwest is mainly a domestic carrier operating across 40 US states, the threat of substitutes also arises from other sources of transportation including cars and trains. The overall threat of substitutes is moderate. One of the leading factors that have helped Southwest control the threat from substitutes is its pricing strategy. Lower prices have led to higher customer loyalty and a stronger competitive advantage.
Threat of new entrants:
The threat of new entrants for Southwest Airlines is absolutely minimal. There are several kinds of barriers preventing new players from entering the industry. Apart from the legal and regulatory barriers which are remarkably high, there is also a need for large capital investment to start a new airline company. Other kinds of risks include the high taxes and the aggressive regulation by FAA and DoT. Technological know-how and talented staff are also an important requirement for any company trying to enter the US aviation industry. To build a strong enough market position and image takes time and the returns might take even longer to start flowing.
All these factors discourage new players from entering the US industry. Most of the new players in the US airline industry have a low market share including the ULCCs. The level of competition has also grown quite high and the incumbent players are employing various strategies to attract and retain customers. Overall, the threat of new players entering the market and stealing market share is very low.
Intensity of rivalry:
The level of competitive rivalry among the incumbent players in the US aviation industry is very high. Apart from the three or four leading US-based competitors, there are more airline companies that have built a strong position in the market. Delta and American are among the leading competitors of Southwest Airlines. However, other companies like United, JetBlue, Skywest, and Alaska have also acquired a significant market share.
ULCCs have also experienced a rise in market share based on lower prices. To expand its market share, Southwest Airlines has focused on competitive pricing and customer service. Ferocious competition in the US airline industry has also led to growing price wars which has escalated further with the arrival of ULCCs. While the intensity of rivalry among existing players continues to grow, Southwest and Delta have emerged as leaders with higher profit margins.
Southwest Annual Report 2018. (https://investors.southwest.com/financials/company-reports/annual-reports)
Pratap, A. (2020, December 3). Porter's Five Forces Analysis of Southwest Airlines. In Notesmatic. Retrieved from https://notesmatic.com/2020/01/porters-five-forces-analysis-of-southwest-airlines/
Pratap, Abhijeet. "Porter's Five Forces Analysis of Southwest Airlines." Notesmatic, 3 Dec. 2020, notesmatic.com/2020/01/porters-five-forces-analysis-of-southwest-airlines/.