Table of Contents
Southwest Airline is a company that deals with air transport. The company is classified among the largest in the world. The company’s exemplary growth and performance is associated with its capability to offer good customers services. The company does not embrace any discriminatory services as it offers services that are affordable to all its customers. For example, it may offers services that are deemed to be equal and same for all travelers. Provision of Wi-Fi services is deemed one of the services provided to all customers so that they can remain connected to the rest of the world. Apart from that, they are also provided with other entertainment services such as being able to watch movie and various television programs. However, it is worth noting it incurs various costs during its operations, which are related to activities such as maintenance, fuelling, and advertisement. Briefly, it is worth noting that various microeconomic forces related to Southwest Airline are deemed very important in enhancing services delivery. Therefore, the whole paper revolves around carrying out an intensive analysis and determining effective of the microeconomic factors of the airline.
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The History of Southwest Airline
Southwest Airline is a company that deals with air transport. It is known to be among the world’s largest air travel company. It was established in 1967 by Herb Kelleher and Rolling king whereby it was to serve just three cities – Dallas, Houston and San Antonio – with the name incorporated as Air Southwest Co. In 1971 the airline adopted the name Southwest Airline. There was a recommendable customer service in this airline whereby by in 1984 it made a mark a celebrated a period of offering quality customer services since its inception (Southwest Media, 2017). It is worth noting that it was not founded on a simple or soft platform. A legal action was initiated by the known airlines of 1970’s so as to make it remain on the ground but later it was allowed to operate regularly (“LUV Annual Income Statement – Southwest Airlines Co. Annual Financials,” n.d.). In 1998 it could offer services to customers not less than 50 million in a single year in the United States and globally. In addition, it has been celebrated severally in overtaking biggest known airlines such as Morris Air. As a result, this became its stepping stone which ended up boosting it in the market. Since its foundation, southwest airline has grown in from one simple airline to a point of being known to be the largest air carrier in United States as well as in the whole world. Basically the airline offers air transport services to customers to different parts of the world.
Supply And Demand Conditions
In every organization, it is necessary to do an evaluation on the trends in demand over a given period of time. It is therefore important to take into consideration of Southwest Airline’s information and data that are related to the demand and supply before coming up with the action plan for the organization.
The airline has not specialized on specific clientele line rather it exists to ensure that every customer can be able to access its services and afford their flight. In so doing, the organization has different category of aircrafts that can serve customers of all races and according to affordability. One distinct categorization is what is common to many airlines, which is travelling in different classes. However, some of the services are generalized to all travelers. For instance, they offer Wi-Fi services to all travelers allowing them to access gate-to-gate connectivity with their devices. As a result, customers have the ability to access movies and television services through 20 free channel and live TV connectivity (“LUV Annual Income Statement – Southwest Airlines Co. Annual Financials,” n.d.). Therefore, because of this services, students, parents, sophisticated, the rich and the middle class prioritize travelling with this airline.
Consequently, it is possible to do a sales analyses of Southwest Airline from its annual sales to indicate on how much its services is demanded in the airline industry. The graph below shows the total revenue and the percentage increase on sales.
As shown in the graph, the last 5 years have had the demands of the Southwest Airline’s services demand generating revenue in an increasing manner. However, the increase in demand was commendable until 2015. However, the organization had a slower demand on the services in the mid and end of 2015 showing a slight reduction on demand of its services (“Southwest Airlines: Slowing Capacity Growth in November – Market Realist,” 2016.). The company’s income by the closer of 2016 was 20.43 billion USD which was an increase from 2012 revenue of 17.09 billion. This shows a positive change in demand of its products which has been a good sign for the organization in general.
Southwest Airlines has been able to induce effective ways of supply its services. The airline has come up with exceptional services that helps to improve its performance. This is one of the best properties that has helped to improve supply of its services. For example, in the year 2016, it was able to realize an increase of 6.4% in terms of YTD, which is also called year-to-date aspect. This was compared to the previous year’s records, which was recorded to be 5.8% in terms of capacity growth. The rise can be highly associated to the rise in the demand of its products, an aspect that has compelled it to improve on its supply chain. Apart from that, the company also recorded a rise in the RPM, which is also called ‘revenue passenger mile. The airline had a significant rise in the level of the passenger revenue in relation to the overall distance travelled by them. For example, Southwest Airlines experienced a significant and a positive start in the year 2016 (“Southwest Airlines: Slowing Capacity Growth in November – Market Realist,” 2016.). The percentage growth was recorded to be 7% and this was the highest growth in terms of supply of its services since the year 2012. In short, the airline has experience a smooth and a positive growth in terms of supply of its services to the esteemed customers. Its capability to offers wide range of services has acted as an important booster to its supplying aspect. For example, it is able to offers carrier services, an aspect that has enhanced its growth.
PRICE ELASTICITY OF DEMAND
Cost of Production
Southwest Airline incurs a number of costs in its operation. For instance, there are maintenance costs, fuelling cost and advertising cost. Despite the costs that the airline faces it is clear that it is still moving on an upward trend. The cost incurred in advertisement can be looked at as an input because at the end of the day the number of customers increase (“About Southwest – Southwest Airlines,” n.d.). As a result, this leads to high profit which in return gives the company a good reputation. Different costs are used in different ways in the market. However, the results are always as contribution of all the costs. As such, this is the reason why the trend over time has been changing because different areas of costs usage differ from time to time (“LUV Annual Income Statement – Southwest Airlines Co. Annual Financials,” n.d.). In southwest airline the costs acts as one way of bringing the profit to the firm. Every single cost incurred is aimed at making the airline better hence much profit can be the result.
According to Brandon Battles, fixed and the variable cost only vary in behavior especially when they are expressed as units of measure. Fixed and variable cost in this airline have been used together to ensure that there is the realization of profit. Although the two differ in some ways, when an organization understands on how to maximally utilize them, they become source of income to the company (“LUV Annual Income Statement – Southwest Airlines Co. Annual Financials,” n.d.). However, this has been possible through ensuring that overhead costs over a period of time in comparison to income has at the end resulted to profitability on the organization.
The market share of Southwest Airline is basically recommendable. The airline has a big share in the market compared to its competitors. This is because of the various ways and measures that have been adopted to project the firm’s services and to keep the customers on check (“LUV Annual Income Statement – Southwest Airlines Co. Annual Financials,” n.d.). For a long period of time the market trend of the airline has marked an upward trend. After the legal action that was set to bring the company down in 1970, the company has even overtaken the well-known airlines the market (“About Southwest – Southwest Airlines,” n.d.). It has been ranked the best for fairly along time. Therefore, it can be said that the company has taken a bigger share in the market compared to its competitors. Currently southwest airline can still be ranked among the best in air transport with the high number of customers (“About Southwest – Southwest Airlines,” n.d.). The following table shows the market share in the past five years.
There are various things that translate to barriers including cost, knowhow, location and state power (Karakaya, 2002). One of the barrier that may hinder the development of Southwest Airline is some of its locations. It is in an area that has high number of competitors which may affect its production because all competitors are targeting same clients that the organization is targeting (“About Southwest – Southwest Airlines,” n.d.).
Southwest airline operates in an intensive ground of competition. As a result, this is because there are other companies that offer the same services to the same target clients. It is surrounded by different airlines of which some were founded earlier and have been operating with the customers the firm is targeting. However, Southwest Airline has created a platform with customers in such a way that its services are distinctive from those of the competitors. Most important, their products package is different and hence that comes in handy when it comes to been one step ahead of the competition. In this regard, the firm has made its products and services farer. It has low flight cost and basically all the things the customers would want to enjoy as they fly to different places. Southwest is the only airline with mathematical sense which has the strongest score in customer based services (Steklá & Gryčová, 2015). The market structure of the firm has therefore helped in keeping the customer and projecting the name of the airline above its top competitors.
Southwest Airlines should be able to uphold some of its strengths as well as device mechanisms that can improve on its weakness as a way of maintain a competitive microeconomic sector. First, it is worth noting that the company has a huge experience and expertise in the field given that it was established in 1967 (“About Southwest – Southwest Airlines,” n.d.). Therefore, the prolonged time it has remained operational can be used as one of the major strengths that can be used to improve on its performance. The company has already an established name, which can be help to entice more target customers to make use of its services. A strong brand name is deemed one of the major strengths in each and every organization. Secondly, the company should aim at specializing in a specific line of clientele as a way of making its services more effective. Specialization may lead to perfection and the eventual improve performance of a company. Southwest Airlines is deemed a famous company in the airline field, a factor it can be able to take advantage of as a way of marketing the area of specialization during the delivery of its services. However, it should be able to maintain services that are affordable to all economic classes, as well as on other bases.
The company should also device specialised ways that can help to lower the cost of production. It should have its own team that can take care of maintenance of its airplanes as a way of cutting down on maintenance costs due to the outsourcing of such services. It should also seek at investing more on social media marketing as it is cheaper than the use of mainstream media (“Microeconomic Analysis Goes to Market,” 2011). It has been determined that use of social media is very effective as it is usually faster while at the same time being able to reach a huge target audience (“Microeconomic Analysis Goes to Market,” 2011). As a result, adoption of such mechanisms can help to maintain an effective microeconomic environment for Southwest Airlines while at the same time improving on its overall performance (Steklá & Gryčová, 2015).
In supposition, the paper has discussed various things in southwest airline. According to the research, the airline can be termed as one of the best in air transport. This is as a result of different cultures that the firm has embraced so as to make it successful in its environment. There is a recommendable trend of growth in all sectors of this airline .There it can act as role model to many industries. Unlike other firms, southwest has come up with measures of making it more of customer centered. This has made it do better than other airlines in the United States and also in the world.
- About Southwest – Southwest Airlines. (n.d.).
- LUV Annual Income Statement – Southwest Airlines Co. Annual Financials. (n.d.).
- Microeconomic Analysis Goes to Market. (2011). Micro Markets, 131-186.
- Southwest Airlines: Slowing Capacity Growth in November – Market Realist. (2016).
- Steklá, J., & Gryčová, M. (2015). The Relationship between Capital Structure and Profitability of the Limited Liability Companies. Acta Universitatis Bohemiae Meridionalis, 18(2).