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Use your own words, do not copy any sentences or phases from the case; do not use outside sources, only use the information from the information. 

Each question answers 1-2 sentences and must include some bullet points. 

Southwest Airlines:

What are the four components of strategy?
(Chapter 1)
b. Internal and external analysis: SWOT (strengths,
weaknesses, opportunities, threats)
c. Porter’s five forces industry analysis.
Attractiveness of an industry (external analysis)
d. Components of corporate level strategy
e. Understanding of cost leadership strategy
f. Understanding of differentiation strategy
g. Barriers to imitation (how to sustain competitive
h. Capabilities and resources (Internal analysis;
VRIO analysis to see if competitive advantage is
i. International expansion
j. Horizontal and vertical analysis of financial
statements and commentary on analysis


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Southwest Airlines: Flying High With Low Costs

Southwest Airlines sent its first flights aloft in 1971. After almost 45 years, Southwest was so successful that the company was
considered, in many ways, the crown jewel of the airline industry. The company had achieved the longest continuous stretch of
profitability in the history of the airline industry and was consistently ranked in the top 10 on Fortune’s list of “Most Admired
Companies,” a list that spanned all industries. Southwest’s executives liked to say that they strove toward a triple bottom-line of
People, Planet, and Performance.

In 2021 Southwest was on strong financial ground, despite the fact that the prior 20 years had been some of the most difficult in
aviation history. The airline industry had been particularly hurt by the 9/11 terrorist attack, the “great recession” of 2008-2009, and
the pandemic of 2020. The company had shown strong and steady growth in revenues and profits over the years (See Exhibits 1
and 3). Southwest achieved its strong financial performance in large part by having a high “load factor,” the airline industry’s
measure of the percentage of seats that are filled on an airline’s flights. In 2010, Southwest hit the highest load factor in its history:
79.3 percent. Following its highly successful “Bags Fly Free” ad campaign, Southwest also saw its domestic market share increase by
almost 2 percent. Southwest was known for high levels of both customer service and employee satisfaction. Southwest not only
rated as the top airline in a Consumer Reports survey of passengers1 but also reigned at the top of the United States Department of
Transportation’s customer satisfaction rankings. Overall, Southwest had an enviable record of performance.

EXHIBIT 1 Southwest Airlines Selected Financial & Operating Figures

(1)Revenue passenger miles divided by available seat miles

(2)Includes leased aircraft

Source: Southwest Airlines Annual Reports

Financial Data: (In Millions except per share) 2020 2017 2015
Total Operating Revenues: 9,048 21,171 19,820
Operating Expenses:
Salaries, wages, and benefits 6,811 7,319 6,383
Fuel and oil 1,849 3,940 3,616
Maintenance materials and repairs 750 1,001 1,005
Aircraft rentals 198 238
Landing fees and other rentals 1,240 1,292 1,166
Depreciation and amortization 1,255 1,218 1,015
Other operating expenses 1,926 2,688 2,242
Total Operating Expenses: 12,864 17,656 15,704
Operating income: -3,816 3,151 4,116
Net Income: -3,074 3,488 2,181
Net income per share, basic -5.44 5.80 3.30
Total assets at period-end 34,588 25,110

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Southwest also limited the commissions it paid to ticketing services and booking agents by refusing to pay fees for any third-party
ticketing services except the SABRE system. These fees had historically run 5-10 percent of the price of a ticket, but had moved to a
lower flat fee in recent years. Instead, Southwest developed an online ticketing system of its own and in 1995 it became the first
airline to sell tickets directly from its own website. In 2010, 79 percent of Southwest’s tickets were purchased online.13 In contrast,
only 35 percent of Delta’s tickets were purchased online during the same period.14

While Southwest saved significant money on its operations, it was spending more than the average airline on marketing. In its first
year of business, the airline spent ten percent of its budget on advertising. The company had continued to emphasize marketing
throughout its history, even increasing its marketing during difficult years. As Kelleher explained, “When do you need advertising
the most? When times are bad.”15 When Southwest achieved record profits and load factors in 2010, CEO Gary Kelly credited the
company’s highly successful “Bags Fly Free” ad campaign for the success.16 The campaign cost Southwest $159.5 million to
produce, which was nearly the same as the combined advertising budgets of Delta, United, American and Continental.17

Although multiple cities were clamoring for Southwest’s business, the airline made an early decision to grow slowly. Even in the
best years, Southwest restricted increases to its capacity to 10-15 percent and added only 2 or 3 new cities per year. In 1996,
Kelleher’s reflected, “Southwest has had more opportunities for growth than it has airplanes. Yet, unlike other airlines, it has
avoided the trap of growing beyond its means.”18 Following the devastating effects of the 9/11 terrorist attacks, Southwest
explained in the opening statement to its 2001 Annual Report that, “Southwest was well poised, financially, to withstand the
potentially devastating hammer blow of September 11. Why? Because for several decades our leadership philosophy has been: We
manage in good times so that our Company and our People can be job secure and prosper through bad times.” In fact, the airline
recession after 9/11, the U.S. “great recession” of 2008-2009 and the pandemic all had a strong negative impact on industry
profitability (see Exhibits 9 and 10).

EXHIBIT 9 Profitability (Operating Profit/Revenues) by Airline Over Time

Positive economy growth periods: 1996-2000, 2006-2007, 2010-2017; Challenging economy periods: 2001-2005 (Airlin

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