A Pestel analysis of Southwest Airlines Co.
Southwest Airlines is based in Dallas, Texas. It is a leading US airline with operations across 40 US states and some other international destinations including Mexico, Jamaica, Costa Rica Cuba and some more. Southwest Airlines is known mainly for its customer-friendliness and lower costs. Southwest Airlines is owned by Southwest Airlines Co. or simply Southwest. It started its business in 1971 with just three Boeing 737 aircraft. Rather than the hub and spoke model adopted by most of the US-based carriers, Southwest Airlines provides point to point service. As of June 30, 2018, it was the largest domestic air carrier in the US. Moreover, for the entire 2018, Southwest carried the highest number of total passengers of all airlines operating in the US market. The total number of passengers that Southwest Airlines carried in 2018 was around 163.6 million. During the first three quarters of 2019, the airlines carried around 121.5 million passengers. Among the leading competitors of Southwest are Delta, American and United Airlines.
The airline industry globally has been an extremely volatile industry subject to several challenges of economic, political and technological nature. While on the one hand, it is a highly competitive industry, on the other it is highly regulated and heavily taxed also. The US airline industry is also under constant pressure related to compliance and profitability. There are several challenges to faster growth including pricing, operational costs, high competition, and regulation. In this pestle analysis you will read about the PESTEL factors and the various challenges affecting Southwest Airlines. Read how Southwest is working to overcome these political, economic, technological and other barriers.
Political regulations have a deep impact on the operations and profitability of aviation players in the global airline industry. Prior to deregulation in 1978, the Federal government tightly controlled the aviation industry. However, post-deregulation, the aviation players got some freedom regarding the selection of routes and charges. Even after deregulation, the aviation industry has remained one of the most regulated and highly taxed industries. The level of taxes has also grown a lot during the past two-three decades. According to Airlines for America, the level of taxes grew by more than 400 percent between 1990 and 2016. In 1990 while the industry paid only $3.7 billion in taxes, in 2016, the level of taxes grew to $23 billion.
The main regulatory bodies overlooking the regulation of the US aviation industry are the DOT (Department of Transportation and the Federal Aviation Administration (FAA). Apart from reviewing license applications and issuing economic authority to carriers seeking to serve in the United States, it also issues and enforces consumer protection regulations. The Federal Aviation Administration (FAA) has authority over a broad range of areas including safety-related functions like licensing pilots and flight crew, oversight of the manufacturing, operation and maintenance of aircraft and performing safety certification, surveillance, and oversight of air carrier operations. Other areas where FAA has significant authority include air traffic control, regulation of development of air[orts as well as oversight of registration of aircraft and their parts.
However, airlines have regularly complained of aggressive regulation by FAA and DoT. Moreover, airlines have argued that due to the aggressive regulation by the DoT, they have remained unable to provide their customers with innovative fare programs. DOT does not allow airlines to advertise zero-fare programs. The FAA reauthorization act of 2018 also includes several measures imposing new restrictions on airlines in areas including overbooking, flight charges as well as accommodation for physically disabled. Airlines also complain of legislations that are not just unnecessary but also costly and affect the industry’s ability to create jobs and facilitate growth negatively. Overall, the political regulation of the aviation industry is seen by Airlines as a major impediment to growth. Over the last several years, the tax burden on airlines has continued to grow higher. The tax rates applicable in the case of the aviation industry are also higher than the other industries. Any changes in the U.S. governmental policies on fuel production, transportation, taxes, and marketing can also have a negative impact on the revenues of Southwest Airlines.
Economic factors have a deep impact on the operations and profitability of the US aviation industry. The performance of the domestic and international economies has a direct impact on the sales and profitability of the airline industry in the US. In 2018, modest economic growth continued to benefit the airline industry. Demand in the aviation industry is variable as well as highly unpredictable. Moreover, the fixed costs are high. The industry is also particularly sensitive to changing economic conditions. One factor that has benefited the US airline industry over the past several years is its modest rate of growth. However, economic uncertainty or another global recession could seriously hurt the profitability of the airline in the future. Competition in the airline industry is also a leading factor affecting the growth and profitability of Southwest Airlines. The performance of the US economy over the past several years has remained good and the unemployment rate remained low. Due to higher employment, people are able to spend on leisure activities and travel which bolsters the growth of the US airline industry.
Moreover, most of the sales and revenue of Southwest Airlines come from the US which has proved profitable for the brand. In 2018, its operating revenues grew to around $22 billion from $21.15 billion in 2017 (Annual Report, 2018). The US airline industry is also highly competitive and the level of competition since deregulation has grown. Some of the leading competitors of Southwest Airlines include American Airlines, Delta Airlines, United Airlines, and JetBlue. Apart from the leading competitors of Southwest Airlines, there are some Ultra Low-Cost Carriers (ULCCs) operating in the domestic market which has also led to higher competition. Some of the leading ULCCs in the US market include Allegiant, Frontier, Spirit, and Sun Country. In 2018, the ULCCs acquired significant growth. Higher competition in the airline industry has led to higher operational and marketing costs. The battle for market share continues to intensify, threatening the market share of Southwest Airlines.
The importance of sociocultural factors in the context of business has also kept growing. Demographic factors are affecting businesses in various areas including marketing and domestic and international operations. The propensity to travel is the highest in the millennial group. In a Statista survey conducted in 2019, it was found that 14% of people in the US in the age group 18-29 years, traveled more than 5 times during the past two years for private reasons.
Social factors affect the airline industry in other ways as well. The level of technological and economic awareness in society can affect demand for air travel. Demand patterns also vary from region to region. In the more developed regions of the world, the demand for air travel is generally higher.
The social image of airlines is also an important factor in terms of demand, customer loyalty, and marketing. In order to maintain a strong social image, airline companies including Southwest are investing heavily in social responsibility and the environment. Apart from donating to charities, employees at Southwest volunteer for community projects. The company is also well known for its customer focus, which is a key source of competitive advantage for it.
Technology and technological factors are also playing an important role in the aviation industry, in terms of growth and competitive advantage. The importance of technology in the airline industry has increased due to several factors and mainly because of a higher focus on safety, customer convenience, and increased competition. Apart from fuel-efficient aircraft, increased digitalization and safer flight technology are important for airline businesses like Southwest Airline to succeed in a highly competitive environment. Since its foundation, Southwest Airlines has relied mainly on Boeing 737 aircraft because of its high fuel efficiency.
Apart from other things, the growing use of mobile apps for bookings and customer service has also made it important for southwest Airlines to invest more in mobile technology. In 2018, the company made several improvements to its mobile app and capabilities. Apart from Google Pay enabled Boarding passes, the company also added an iPad optimized version of its iOS platform. Simultaneously, Southwest Airlines also made major updates to its messaging system in order to offer higher customer convenience and a superior overall experience. The company is also using digital technology heavily for marketing. Apart from Facebook and Twitter, Southwest is using Instagram for promotions and customer engagement.
Environmental factors have also kept gaining importance in the context of the airline industry. Apart from emissions related laws, there are more areas where airline operators need to exercise caution and be environmentally responsible. Southwest Airlines is subject to various federal laws and regulations related to environmental protection. Some of the main also affecting its business include Clean Air Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Safe Drinking Water Act, and the Comprehensive Environmental Response, Compensation and Liability Act, and several more local and state laws. These laws cover emissions from aircraft as well as disposal of jet fuel, chemicals, hazardous waste, and aircraft deicing fluid. Some of the key focus areas in the context of environmental responsibility are climate change and aircraft noise. While new laws are also being considered by governing authorities, Southwest voluntarily investigates areas where its operations could have an adverse impact on the environment.
Southwest Airlines has created the image of a socially and environmentally responsible business. The company invests in both CSR and social responsibility to maintain a good image in the society and communities where it operates. Since 2005, the company has continued to improve its fuel efficiency and by 2018, it had recorded a 32.8% improvement in overall fuel efficiency of its fleet. Apart from reducing its fuel consumption, the company invests in controlling greenhouse gas emissions and recycling material to reduce its landfill impact. In 2018, it continued to improve its CO2e intensity ratios for the seventh consecutive year. From 2020, it has committed to purchase sustainable aviation biofuel from Red Rock Biofuels. The company also recycled 3,757 tons of material in 2018 which will reduce its impact on landfills.
While environmental responsibility, on the one hand, helps stay compliant with environmental laws and regulations, on the other, it helps the company project a good image. Southwest also encourages its employees to invest in and volunteer for environmental projects including planting trees.
There is a large and complex web of laws that affects the airline industry in the US. Even after the deregulation in 1978, there are so many laws that affect the US airline industry and carriers. Department of Transportation and Federal Aviation Administration are the main regulatory bodies that oversee airline operations and related laws. Passenger safety is one of the leading legal concerns in the US airline industry. However, apart from passenger safety, there are many more areas including operations, labor, customer service as well as the environment where airline businesses need to remain compliant or risk losing millions in fines.
Following the discovery of a deadly flaw in the Boeing 737 Max 8, Southwest had to ground all its flights of the same model. Southwest Airlines relies exclusively on Boeing 737 models for operations. At the time the order was passed, there were 31 planes of the Max 8 model in its fleet which were grounded. In 2019, the FAA also carried out an investigation against Southwest for baggage related discrepancies.
However, these legal issues are not limited just to the US. Outside the US too, in the regions where Southwest Airlines flies, the laws are vastly different and compliance is important to avoid being fined millions. In the past, Southwest has already paid millions in various types of legal disputes, once in 2009. Compared to most other airline businesses, Southwest has still managed a better market position and image. Legally speaking, it is still among the most compliant airline businesses. The number of laws governing the airline industry has still kept growing and therefore focusing on compliance has obviously good results in both the short and the long term.
Pratap, Abhijeet. “Southwest Airlines Pestel Analysis.” Notesmatic, 14 Dec. 2019, notesmatic.com/2019/12/southwest-airlines-pestel-analysis/.
Pratap, A. (2019, December 14). Southwest Airlines Pestel Analysis. Retrieved from https://notesmatic.com/2019/12/southwest-airlines-pestel-analysis/.