Arkon Consulting Firm:Nadia Sultana

Andrei Bruno

OmarPavel

Reva Chopra

Kasper Jensen

Mengqiu Liu (Kim)

Taking Off• Key Issues• Problem Statement• Recommendation• Industry Analysis• Internal Analysis• Alternatives• Financial Forecasting• Implementation Plan• Risks and Contingencies

2

Key Issues

Acquisition of AirTran

Intense Rivalry

Reduce Operating Expense

3

Problem Statement

With the acquisition of AirTran, what

strategy can Southwest employ to

maintain its corporate

culture, improve its margins, and

promote growth in order to maintain

its competitive advantage and

remain a leader within the industry?

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Recommendation

• Implement an HR strategy to maintain

corporate culture

• Firm wide wage freeze for 3 years

• Implementation of a route and profit

maximization software system

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Industry Analysis

• StandardService

Demographic

• Extensive security check

Socio-cultural

• Open Sky Agreement

• Customers dissatisfaction

• Aircraft safety maintenance

Political/

Legal

• Air-traffic delay

Technological

• Taxes on airline emissions

• Debt load

• Flying restriction for older aircrafts

Economic

• Increasing trade with USA

• Fuel price

Global

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Economic • The average Debt load of the industry in the year 2012

was 1.52billions

Technological

Source: US Department of Transportation

• The average Fuel Expense in the industry is 36% of of

total Revenue Global

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Member States of the Treaty on Open Skies are in light blue. Depository countries (Canada and

Hungary) are in dark blue. Kyrgyzstan, in yellow, has signed but not yet ratified this agreement.

Open Sky Agreement

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Industry Analysis-Porter’s 5

Moderate• New Entrants: high capital requirement, switching cost, high risk

High• Rivalry: high fixed cost, high exit barriers, unstable industry

High• Suppliers: limited suppliers, Labor Unions, contracts, fuel suppliers

High• Customers: switching costs, information, low brand preference

Low• Substitutes: lower performance, lower quality, inferior product

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Moderate• New Entrants: high capital requirement, switching cost, high risk

• The profit margin in the year 2009 was -13.5

• During the period 1994 to 2004 66 new carriers were certified but

48 of the airlines shut down by 2004

• The intense effect of the fuel price, recession, and terrorist activities add up to

• the undesirability of the industry

• Although the operating profit margin is low, the improved revenue

environment allows new companies to enter the industry.

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• The fixed cost is approximately 80% of the total cost

• Chapter 11 Bankruptcy

• the average load factor in all sectors in the year 2012 was 83%

and the range for the companies varied from 80% to 89%.

High• Rivalry:high fixed cost, high exit barriers, unstable industry

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• Only 2 Aircraft Manufacturers (Airbus and Boeing) and 3 Major

• Engine manufacturer (Pratt &Whitney, Rolls-Royce, GeneralElectric Company)

• Chapter 11 Bankruptcy

• The average load factor in all sectors in the year 2012 was 83%

and the range for the companies varied from 80% to 89%.

High• Suppliers:limited suppliers, Labor Unions, contracts, fuel suppliers

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High• Customers:switching costs, information, low brand preference

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Industry Analysis-Porter’s 5

Moderate• New Entrants: high capital requirement, switching cost, high risk

High• Rivalry: high fixed cost, high exit barriers, unstable industry

High• Suppliers: limited suppliers, Labor Unions, contracts, fuel suppliers

High• Customers: switching costs, information, low brand preference

Low• Substitutes: lower performance, lower quality, inferior product

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Strategic Group Map

High

Price

Low

Domestic Geographic Coverage Multi-National 17

Internal AnalysisStrengths

-One of largest US Airlines & in the world

- Consistently profitable with low-cost model

- Strong leadership philosophy

- Organizational culture/Employee loyalty

- Effective HR policies and procedures in place

- Low rates of customer complaints,

employee turnover

Weakness- High employee salaries

-Unions

Opportunity- Two new states (Maine and Kansas)

- Seven new cities in the US

- 30 new markets due to AirTran acquisition

- International expansion

Threat- Mega-mergers > Legacy carriers becoming more

efficient

- Competition from smaller companies

- Rising operating costs

- Clash between cultures of AirTran and Southwest

- Industry factors

Low-cost model can be duplicated

SWOT

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Stakeholder AnalysisGovernment

Press

Community

Senior Managers

Shareholders

Employees

Suppliers

Customer

Small Shareholders

Competitors

High

Power

Low

Low Interests High 19

Financial Analysis

Southwest Y/Y Rev. growth of 9.13%

5 year Rev. CAGR of 53.65%

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Financial Analysis

Southwest CASM

12.85 cents

Industry average

CASM 13.10 cents

Year Operating Profit

Margin

Southwest Industry

Avg.

2012 4.7 7.3

2011 5.3 5.9

2010 8.2 8.2

2009 2.5 7.3

2008 4.1 3.7

2007 8.0 8.3

2006 10.3 8.1

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Financial Analysis$1,113 M in cash and

Cash equivalents

FCF of 1,027M

Liquidity Ratios

Ratio Southwest Industry

Avg.

Current 0.9 1.1

Quick 0.7 0.8

Cash 0.6 0.7

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Decision Criteria

Revenue

GenerationLow Cost

Strategy

Brand

Image

Corporate

Culture

Challenge1 Challenge 2

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Challenge 1- Employee Integration

Establish a Change Management team

Identify strengths of both existing cultures, not just the weaknesses

Build the employee brand with a view toward how it will be understood by employees

Leverage existing training and HR programs

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Challenge 1- Job Position Integration

Plan

• Establish new business plan

• Review job descriptions

• Identify overlapping positions

Options

• Redeployment: fit, reasons, support, training

• Overlapping: create new positions, succession planning, recruit internally

Key

• Communication

• Southwest’s long-term goal

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Challenge 2 –Alternative 1Code Sharing With International Airlines

Pros Cons

Access tointernational markets

leading to increased revenues

Negative effects on brand

Increase amount of routes without

capital expenditure on new planes

No operational control of routes

ran by code sharing partner

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Challenge 2 -Alternative 2Implementing Profitability Software

Pros Cons

• Understanding cost factors Initial investment

•Understand most profitable

routes

• Short-term decrease in

productivity during

implementation phase

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Challenge 2 - Alternative 3Freeze Wages For 3 Years

Pros Cons

Reduce Operating Cost Controversy with unions

• No need to lay off employees • Possible decrease in morale

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Decision MatrixRevenue

Generation

Brand Image Corporate

Culture

Low Cost

Strategy

Code-sharing

Profitability

Software

Wage Freeze

HR Integration

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Financial Forecasting

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

2013 2014 2015 2016 2017

Salary Wage & Benefits Expense Under Normal & Wage Freeze Conditions (in Millions)

Salary Wage & Benefits Expense

Salary Wage & Benefits Expense (freeze)

Profit Margin under normal

conditions 2.46

Profit Margin under wage

freeze 3.43

Total savings of $1.6 B

NPV of $763 M

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Implementation Plan

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Risks and Contingencies

•Renegotiate with Union

leaders

•Package off employees who

aren’t a “good fit”

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Summary

Integrate AirTran with existing culture

Freeze all salary for next 3 year

Implement Profitability Software

- Successful integration will provide $400 Mil in synergy

- Freezing salary will save $1.4 Bil in operating cost

- Successful software implementation will ensure future

profitability

Training, Implementation and Negotiation Timeline

24-30 months

Key issues to consider：

Employees are the prime factor

Competitors are catching up

Recommendation

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