Competitive Strategy Southwest Airlines

Essay by rantiUniversity, Master's November 2004

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The domestic US airline industry has been intensely competitive since it was

deregulated in 1978. In a regulated environment, most of the cost increases were

passed along to consumers under a fixed rate-of-return based pricing scheme. This

allowed labor unions to acquire a lot of power and workers at the major incumbent

carriers were overpaid.

After deregulation, the incumbent carriers felt the most pain, and the floodgates had

opened for newer more nimble carriers with lower cost structures to compete head-on

with the established airlines. There were several bankruptcies followed by a wave of

consolidation with the fittest carriers surviving and the rest being acquired or going out of


Analysis of the airline industry

To determine the profitability of the airline industry, we will do an industry analysis using

Porter's five-forces framework. This industry analysis will help us in understanding the

size of the Potential Industry Earnings (PIE), and how much of this the different

participants can extract.

Rivalry among competitors

There is intense rivalry among different airlines. In the pre-deregulation days, airlines

competed mostly on things like service, meals and in-flight movies etc., since prices

were mandated by the Civil Aeronautics Board. In the post-de-regulation era, this rivalry

has taken on the form of severe price competition, with airlines ruthlessly undercutting

each other with fare promotions.

There are a number of airlines making the airline industry fairly crowded. Even though

the 3-firm concentration in 1992 was 50%, and the 8-firm concentration was 92%, the

fact that the airlines competed on price made the industry much more competitive than

the numbers might suggest.

The service the airlines sell (air transport) is pretty homogenous, and there is not much

product (in this case, service) differentiation. The major differences between the services

offered by different airlines include the total time spent...